Tuesday, March 13, 2012

Cable A la Carte and Economic Efficiency


          In preparing updates to the loose leaf treatise All About Cable and Broadband, I reviewed the FCC’s latest report on cable television prices.  See  http://hraunfoss.fcc.gov/edocs_public/attachmatch/DA-12-377A1.doc.  The Commission reports that cable operators consistently raise rates well in excess of the Consumer Price Index, a broader measure of prices.  On the other hand the per channel cost per month has declined slightly in light of expanding inventories of channels offered in each program tier.   So bundling enhances the value proposition, or does it?
         Looking at the FCC’s report and my Comcast bill, I could not help but think about a la carte pricing.  Cable operators and content suppliers hate this option and have refused to pursue it even though cable networks have the addressability and other technological features able to provide it economically. One can appreciate why: who would give up a guaranteed payment from each subscriber, regardless of their interest and viewership, in exchange for perhaps higher payments from the smaller number of viewers actually interested in watching a particular channel?  Most cable and satellite subscribers opt for a handful of program sources with little regard for most offered channels.

         Of course it would support both consumers’ specific content demand and economic efficiency to offer al a carte, but who will emphasize this point?  On the contrary sponsored economists come up with transparently bogus rationales ostensibly proving that a bundle is both cost-effective and efficient.  So cable subscription enhances my welfare and offers a better deal when the operator lards the tier with shopping channels and when proven brands, such as HBO and Discovery expand their number of channel options?  Hardly.
        A la carte would provide consumers the opportunity to customize the number and type of channels.   But just as allowing consumers to pick and pay for selected tracks in a music recording, a la carte would reduce cable operator and programmer revenues.  Pull out all the channels you never watch and then divide that number by your ever increasing monthly video bill.   That represents your true cost per channel.