Why You May Not Want A La Carte Cable Pricing

It seems like a great idea, but it may actually cost you.

Daniel B. Kline
Daniel B. Kline
Dec 6, 2014 at 8:47AM
Consumer Goods

On the surface, the end of forced cable channel bundles seems like it would benefit consumers. In reality, putting an end to the practice of selling various tiers of service with pre-determined channel packages, might lead to people paying more and getting less.

And even though Comcast (NASDAQ:CMCSA)Time Warner Cable (UNKNOWN:TWC.DL), Cablevision (UNKNOWN:CVC.DL) and even satellite providers DISH Network (NASDAQ:DISH) and DirecTV (NYSE:DTV.DL) have resisted offering a la carte pricing, it may actually benefit them in the form of higher cable bills. It seems counter-intuitive that choice might be a bad thing for consumers, but the current system has people paying for cable subscriptions essentially subsidizing content they may not watch. 

How the current system works
Cable providers pay carriage fees for the channels they offer. These range from $6.04 for ESPN to pennies for lesser channels with a median cost of $0.14 per channel, according to The Wall Street Journal. Those fees help keep some of the less popular channels afloat and many of those channels would not be able to charge enough to its viewers to make up for the lost revenue that would come in a world where it only gets paid by people who actually choose to subscribe.

Take a lightly viewed network like Cooking Channel or Lifetime Movie Network -- channels which have dedicated fans and casual viewers alike. If you remove carriage fees from the equation, both of these networks would need to charge more on an a la carte basis than they currently charge for each subscriber under the current forced system. Fewer paying subscribers is also a double-edged sword that could lead to lower ad rates as stations shed casual viewers who watched but aren't willing to pay on an a la carte basis.

That will almost certainly lead to a poorer TV universe for all of us and everyone losing networks they at least casually enjoy. It could also lead to people paying more for their favorite stations or seeing them cut beloved shows due to budget shortfalls.

With cable and satellite as they currently exist, what channels you receive are determined by which package you buy. Source: Comcast 

If you spend less, you will get less
A la carte does make it possible to lower your bill, but doing so will require going without. It's easy to lower your bill at a fancy steakhouse -- simply substitute chicken for steak and water for wine -- but the savings come at a price. Because some people are going to opt out of each channel, the a la carte price for each station will be higher than the price paid under the current carriage fee system. That means that paying what you pay now and keeping the same amount of service will be impossible.  

In order to pay less, you will likely have to choose a much smaller package of channels. That's fine if you only watch a very limited amount of programming, but in most cases, having a lower bill will mean going without.

Chances are many will spend more
A single person with focused interests might be able to pick and choose channels in an a la carte world in order to save money but families are the true beneficiaries of the current package system. Multiple people of varying ages will likely have varying interests and that would require buying more channels to meet those needs.

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"All these things are so much more expensive when you separate them out," David Bank, an analyst at RBC Capital Markets told The Wall Street Journal. "You are going to have to pay more for less choice."

Timothy Lee explained the likely result in The Washington Post's WonkBlog:

It's true that cable companies pay per-subscriber fees to content providers like Disney and Fox. In principle, an a la carte model would reduce those fees. But that creates a new problem. Disney (NYSE:DIS) and FOX (NASDAQ:FOX) also spread the costs of producing their content across a broad base of consumers. If an a la carte regime allowed millions of users to opt out of their channels, content companies would likely jack up per-customer fees in order to recoup the lost revenue.

He sees that leading to a system where, at best, people pay the same amount for dramatically less channels. It is possible that competition for viewers keeps the channels from raising fees too high but that leads to the next problem.

Some channels will go away, others will get smaller
In an a la carte cable world channels will only survive if they attract users. Without the revenue guarantee that currently comes from being forced into people's homes a number of channels will fold. Others, even hugely successful ones like ESPN, will face declining revenue.

Using the "Sports Leader," as the example, it's easy to see the problems which a la carte would create. ESPN was the top cable network for the week ending November 23, according to TVByTheNumbers.com, with an average of a little over 3.5 million primetime viewers each night. Even if you assume half of those 3.5 million viewers are different each night (a generous assumption) then ESPN is only watched by a relatively small percentage of the 95 million homes The Wall Street Journal  reported it was available in as of September, 2014.

If viewers had to choose to pay for ESPN an awful lot of them would decide it's not worth the cost. That would force the network to charge more which would likely cause even more people to decide they can live without it. The network would survive, but it would take in less money and would as a result be smaller, with less spent on programming (which might cause more subscriber defections).

It's a mixed blessing
In an a la carte world, you may only pay for the channels you want but you may pay more for lesser versions of what you already like. The current system does force people into paying for stations they never watch, but it also forces people to pay for networks you watch that they don't.

A la carte likely means either paying less for much, much less or paying more and still getting less than what you do now.