For years the Federal Communications Commission has operated as if it was owned by the cable television industry. Now FCC Chairman Tom Wheeler, who was once a cable lobbyist, has asked the commission to consider a proposal that would disrupt the current cable model enjoyed by Comcast (NASDAQ:CMCSA), Time Warner Cable (NYSE:TWC), Cablevision (NYSE:CVC), and others.
Wheeler last week issued a formal proposal asking the rest of the commission to consider new "technology-neutral" rules which would update the FCC's definition of what counts as a pay TV service or a "multichannel video programming distributor." The rules would give digital services the same access to channels that cable and satellite companies have at market-rate prices. The rules would extend a practice that began in 1992 when Congress forced channel owners to provide the same broad access for satellite companies.
"Congress mandated access to cable channels for satellite services, and competition flourished," Wheeler wrote. "Today I am proposing to extend the same concept to the providers of linear, Internet-based services; to encourage new video alternatives by opening up access to content previously locked on cable channels."
If the rules pass it would pave the way for Internet-based cable providers to offer alternatives to the current cable and satellite model. Think of those potential services as pick-what-you want cable products delivered like Netflix (NASDAQ:NFLX).
Wheeler's proposal is shocking not only for how it could disrupt the current pay television business model, but for the fact that it's coming from the chairman of the FCC. It's a fervently pro-consumer idea that could pave the way for companies to offer cord-cutters digital access to whatever channels they want and only those channels.
Is this the end of forced bundling?
Currently, cable and satellite companies offer bundles of channels at various price points. To get the channels you want you also have to pay for some you may never watch. Consumers have never liked this practice and it has led to rising cable bills. The average household now pays about $64.41 per month for cable, nearly triple what they paid in 1995, according to an FCC study.
One way to bring that cost down would be to allow customers to purchase cable packages on an a la carte basis. Cable companies have been resistant to that idea in some cases because they own channels that are being forced on people and in others because they don't want to add a pricing plan which would lower bills. Wheeler specifically cited the creation of a la carte offerings in his proposal:
Consumers have long complained about how their cable service forces them to buy channels they never watch. The move of video onto the Internet can do something about that frustration -- but first Internet video services need access to the programs. Today the FCC takes the first step to open access to cable programs as well as local television. The result should be to give consumers more alternatives from which to choose so they can buy the programs they want.
The end of forced bundling would be a boon for most consumers, but it would also have some unintended consequences. A lot of smaller channels would either go out of business or have to charge a high price per user. In addition, some of the stations cable currently pays the most for, including ESPN, would cost even more on an individual basis as the channels would lose the subsidy from people currently forced to pay who would now be able to opt out.
Wheeler's proposal would give consumers what they want and if digital services offer a la carte pricing, traditional cable would have to follow. That would mean lower cable bills for most and more choices for all.
An end to collusion?
One of Wheeler's goals is creating competition, something that cable has not had even in markets where there are multiple providers. In its annual FCC survey of cable rates the commission found that since 2009 prices for cable services have been growing faster in areas with "effective competition." This means that even when there are two or more cable companies operating in the same market, prices don't come down.
That's because the cable companies, the phone companies that sell pay TV, and the satellite providers all use the same business model built around forced bundling.
Wheeler's proposal would end the good-old-boys club and break what has been an unspoken policy of maintaining the status quo to keep prices high. If it gets adopted, it would force cable companies to change or risk being overtaken by digital services, which would give customers exactly what they want.
Daniel Kline has no position in any stocks mentioned. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.