You're Stuck With the Cable Bundle, and That's Not so Bad

With the Breaking Bad finale upon us, what would you pay just to be able to watch AMC? Maybe $5 a month?

Sports fans, how much would you pay for a cable TV service that only provided ESPN? Ten bucks? Maybe $15?

For fake-news junkies, what is your nightly fix of Jon Stewart and Stephen Colbert worth? Would you pay $3 for your Comedy Central?

Unfortunately, these a la carte cable prices aren't even half of what you'd pay for these channels if John McCain's Television Consumer Freedom Act of 2013 compels pay-TV providers to get rid of the cable bundle.

Sen. McCain seems to be missing something in his analysis that an a la carte TV service would benefit consumers. In fact, doing away with the cable bundle would likely result in higher prices for most households, fewer viewing options, and less quality programming. So, although a la carte cable pricing seems like it's a consumer friendly concept, the cable bundle model is here to stay. At least for now.

Picking and choosing

With about 100 million cable TV subscribers in America, everyone pays for a similar set of channels, even the ones they don't watch. So, while I'm paying to watch Kornheiser and Wilbon bicker on ESPN, I'm also paying for your kids to watch Dora, Spongebob, and Phineas and Ferb.

In a world where I can subscribe to only the channels I want, I wouldn't be subsidizing your kids' favorites and you wouldn't be subsidizing my sports fanaticism. As a result, we'd pay higher prices for the channels we want, but nothing for the channels we never watch. Everything seems great!

But a funny thing happens when you give consumers this choice. Prices increase much more than people expect.

Without the cable bundle, ESPN likely would see its subscriber base fall from 100 million to closer to 20 million super-fans. As a result, it would increase its fee fivefold, to about $30 per month. That's just its cut.

Take into account that cable providers have fixed costs in delivering the feed and that they're out to make a profit as well, and you're already paying roughly the same you do for the entire bundle you get now.

In fact, out of the average $80 cable bill, about $30 goes toward programming. So, those 20 million sports fans will undoubtedly see their cable bill go up. And maybe they should -- sports is the costliest content.

Oh, the drama!

But for the non-sports fan, things don't get much better. Say you love AMC's Mad Men, Breaking Bad, and The Walking Dead. Currently, $0.35 of your cable bill goes toward carrying that channel -- chump change compared to ESPN's $5.54 affiliate fee.

But that number soars in the a la carte world. Even if every one of the 5.9 million viewers who tuned into the Breaking Bad premiere this year chose to subscribe, AMC's affiliate fee would need to balloon to well more than $5 to maintain its revenue. Add a few more channels with similar audience sizes into your lineup, and things add up quickly.

But that's just part of the hit for networks. If AMC has a maximum of 5 million viewers for a show, advertisers aren't going to pay as much for a spot during The Walking Dead premiere next month. They're not going to pay ESPN as much for a spot during Monday Night Football. The networks will have to make up this revenue somehow -- say, through higher subscription fees -- or they'll see profits fall.

So, in the event that consumers are provided "freedom" from the cable bundle, you'll likely pay more for your TV package. And what do you get in return for your higher priced television? Less quality programming.

A la carte cable will kill the best shows

The best television shows are no longer on broadcast television. Cable networks won more Emmys than broadcast networks last year. You probably watch some of them, and you have your cable bundle to thank for them.

Although these critically acclaimed shows don't attract the largest audiences, they attract devoted audiences. If you've had a conversation with a fan of Breaking Bad, the show sounds more addictive than the crystal meth Heisenberg cooks.

The cable network business is much different from the broadcast network business. Broadcast networks make most of their money from advertising while cable networks make much more from affiliate fees. Therefore, broadcast networks produce shows intended to attract wide audiences, resulting in some of the most boring television.

Cable networks are looking for a spot in the bundle so 100 million subscribers pay their carriage fee whether they watch the channel or not. Thus, they produce great television shows that attract devoted audiences. The rest of the schedule is filled up with cheap programming and syndicated shows.

Without the bundle, every channel will resort to appealing to the lowest common denominator. They'll want to attract as wide an audience as possible because they can't rely on every cable subscriber to pay their fee. This means more bad TV and less quality programming.

Moreover, Laura Martin, an analyst at Needham & Co., suggests that fewer than 20 channels would survive in an a la carte cable model. In all likelihood, your family watches at least one channel that wouldn't make the cut.

Martin estimates that half of most cable channels' revenues is derived from advertising, and advertisers are relatively uninterested in stations with less than 25% penetration. No more than 20 channels have the pricing power to maintain a significant audience while raising prices.

In short, unless you only watch Two and a Half Men, the cable bundle is critical to your television watching experience. Quality shows will become even rarer, and you might not even have a chance to subscribe to a favorite channel.

The cable bundle is the worst ... except for all the other options

If you love television, and it's hard not to with all the great shows these days, then the truth is the bundle is your best friend. Cable still offers one of the best values in entertainment on a per-hour basis. A family of four can go to two movies a month for the same price as the average cable bill.

While you may not need the breadth of entertainment cable allows, the only way it survives is through the bundle. Otherwise, the enterprise unravels: TV shows cease to take chances, channels go out of business, and you're still paying the same price. The bundle keeps anyone from paying too much and supports quality entertainment. Is that so bad?

The Next Generation of TV

Americans reportedly spend nearly 34 hours a week watching television! With television viewing taking up almost as much time as the average work week, the potential for profits in the space is enormous. The Motley Fool's top experts have created a new free report titled "Will Netflix Own the Future of Television?" The report not only outlines where the future of television is heading, but offers top ideas for how to profit. To get your free report, just click here!


Read/Post Comments (9) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 17, 2013, at 6:05 PM, malclave wrote:

    Maybe you're stuck... I don;t really care for most of the current TV offerings. I just use an antenna for OTA broadcasting, and a Roku box for Netflix and other video streaming options.

  • Report this Comment On September 17, 2013, at 8:05 PM, SuntanIronMan wrote:

    Doesn't necessarily have to be "either this or that" situation. I have no idea if this will work, but I'll just throw it out there:

    Allow bundles for people who want to bundle and a la carte for people who want to a la carte. A la carte will be more expensive per channel, but the cheaper per channel bundling will still be around to subsidize the smaller channels. Maybe some lesser known channels will fall by the wayside this way as a la carte people stop paying for bundles (like MTV 14 or Nickelodeon 9 or whatever tiny channels Viacom creates to get more fees), but hopefully the best of the best will remain.

    (And yes, I did just use "a la carte" as a verb, lol.)

  • Report this Comment On September 17, 2013, at 8:26 PM, Robdog2013 wrote:

    What the cable providers is a middle man. Most of the money goes to the cable provider. If we were to pay direct it would be half as much money. Meaning the tv networks could subscribe half of the people at the current rate they are paid.

    A lot of money for the middle man

    How can we get rid of the middle man?

  • Report this Comment On September 17, 2013, at 11:14 PM, don1941t wrote:

    ah the fool. ... why do I keep coming back here? the future of television is that there is no television. Content will be delivered on demand, when people want to watch it. Content is king and content creators with the best content will be rich. Networks? Who needs them? Want to watch mad men or breaking bad, put it in your watch list and watch them when YOU are ready.

    LIve sports? Not really. I still DVR NFL games because of the commercials and other delays.

    Revenue? It will come from the second screen or enhanced screen experience. Ads will be present 100% of the time beside the content that is playing. no commercials to skip.

    Like that sweater Monica's wearing? Buy it now!

    Want to visit the land of Narnia, the Shire or NYC? Get your tickets here, stay in the same hotel.

    English not your first language? who cares!

    This is the future.

  • Report this Comment On September 18, 2013, at 8:35 AM, KombatKarl wrote:

    LESS quality programming? How could it get any worse?

  • Report this Comment On September 18, 2013, at 10:29 AM, watson14 wrote:

    Bundles - so I can watch home shopping, religion, and infomercials - all the junk I don't want. Amazon Prime and Netflix work just fine for me. I agree with Karl - the programming (or news) couldn't get worse. Did you hear Miley broke up with her bf?

  • Report this Comment On September 18, 2013, at 12:50 PM, adamlevy wrote:

    Hey everyone,

    Thanks for your comments!

    @malclave Yes, there are a lot of cable alternatives, but that's not the focus of this article. Netflix, Amazon, Hulu, etc are not replacements for cable for most households. They don't offer nearly as much breadth, and in some cases there are huge voids in programming - eg sports.

    @WhichStocksWork I don't think having a bundled/unbundled option would work. The prices for individual channels will likely be prohibitively expensive under this model, so why would anyone choose anything besides the bundle?

    @Robdog2013 Yep, the cable company is a very good middle man. It takes a big cut out of your cable bill. Perhaps, as don1941t suggests, we're moving toward on demand content, but the fact is that content makers rely on cable companies nearly as much as cable companies rely on content makers. Think about it, cable companies are much better customers than a bunch of individuals. Perhaps this is a topic for a future article.

    @KombatKarl and @watson14 I love TV. Sure, there's a lot of crappy stuff out there, but television, in my opinion, offers better stories than movies these days. It's the golden age of television!

  • Report this Comment On September 19, 2013, at 10:11 AM, ejclason2 wrote:

    If cable channels were unbundled, prices would not go as high as you suggest. As prices rise, the number of buyers decrease. Cable channels would seek the maximum revenue (buys X price). I believe this price level would be considerably lower than you suggest.

    If cable channels were unbundled, many less popular channels would go away. But I think 20 remaining channels, is a worse case scenario, used as a scare tactic.

  • Report this Comment On September 19, 2013, at 3:56 PM, adamlevy wrote:

    @ejclason2

    Maybe you're right, which means that a lot of content creators would be struggling to generate revenues even close to what they see with the bundle. Pricing power is something only channels like ESPN and HBO have.

    They get a significant amount (up to 50%) of revenue from advertising. Even if channels are maximizing subscribers with a lower than equilibrium price (compared to the bundle), there's no way they'll make up the revenue lost from affiliate fees in advertising dollars. This will put a huge number of channels out of business.

    So, I don't think 20 channels is a scare tactic. I think it's quite feasible. You'll have broadcast channels (Fox, ABC, NBC, CBS) -- which get the majority of their revenue from advertising already and are offered for relatively low prices (technically you can get them for free) -- the premium channels (Showtime, HBO, Starz) -- which are already essentially a la carte -- ESPN will probably survive, and then you have to struggle to name 12 more that will likely survive a huge drop in both ad revenue and carriage fees. Can you name them?

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2641319, ~/Articles/ArticleHandler.aspx, 8/30/2014 2:37:41 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement