Changing the Channel on Cable

The introduction of cable television into American homes brought with it the choice of dozens of channels, instead of the eight or nine that used to be broadcast over the airwaves. And ever since, American homes have echoed with a single complaint: "A hundred channels... and there is still nothing on."

Which begs a couple questions: Why are we paying for all these channels "with nothing on" them? Why can't we just pay for the channels we actually watch?

Those were the kinds of questions being asked in the U.S. Senate Commerce Committee last week. American consumers have been complaining about cable rates (up 53% on average since cable deregulation in 1996), and, this being an election year, legislators are all ears. As Sen. Trent Lott (R-Miss.) put it while speaking to cable industry executives: "There is a point where people will rebel. They're going to holler at us, and we're going to take it out on you."

The big cable providers, from Charter Communications (Nasdaq: CHTR) and Comcast (Nasdaq: CMCSA) to bankrupt Adelphia Communications, say that the issue is both a technical and a financial one. On the technical end, charging customers $29.95 a month every month for a 25-channel basic cable "package" is much easier than charging $0.99 for E.W. Scripps' (NYSE: SSP) Food Network, $2.99 for Disney's (NYSE: DIS) ESPN, $15.99 for Time Warner's (NYSE: TWX)'s HBO and other rates for 22 other channels. In short, à la carte programming is an accounts receivable department's nightmare.

On the financial side, when channels are grouped together in packages, each channel has a better chance of selling advertising time. With secure advertising revenue, the channels do not need to charge the cable companies as much for their programming. Conversely, if channels have to fight for viewership individually, less popular channels with fewer viewers will have to sell themselves more dearly to the cable companies -- which will pass the costs on to consumers.

Still, à la carte programming is "where the industry is going to go," according to Cox Communications (NYSE: COX) CEO James Robbins. In fact, Robbins thinks the industry will ultimately move past its current business model toward one dominated by "video on demand" (VOD), although he does not see either move occurring in the immediate future.

Consumers should perhaps not hold their breath waiting for congressional imposition of à la carte programming. But on the other hand, investors may want to plan even further ahead, and keep an eye out for companies that demonstrate capability in rolling out VOD services.

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Fool contributor Rich Smith has no interest in any of the companies mentioned in this article.