Last week, Canada became the first country to mandate a pick-and-pay TV system, in which operators must offer a basic television service and allow consumers to add specific networks a la carte. Those who like their existing bundles are able to keep them if they wish. The mandate goes into effect in December of 2016.
Similar legislation has been proposed in the U.S. before, including a bill from Senator John McCain in 2013 that didn't pass. With the news coming out of Canada, a new hope for a la carte TV has sprung up in the states. But should Americans hold out hope for the U.S. to pass legislation similar to the mandate that will go into effect in Canada next year?
How does Canada's new law impact cable operators?
Cable operators in Canada such as BCE (NYSE:BCE) and Rogers Communications (NYSE:RCI) will be compelled to offer a maximum C$25 basic bundle that includes local channels. On top of that, they'll have to offer additional channels either through small bundles or individually.
Assuming the mandate has the desired effect on consumers -- lowering their pay-TV bills -- it could have a negative impact on BCE and Rogers if they can't make up for the lost revenue. Both companies also offer Internet service, so the decline in the average cable bill could show up in an increase in Internet access costs. Cable operators are also notorious for sneaking service fees -- seriously, $10 per month to lease a cable box? -- into customers' cable bills.
On the flip side, the new a la carte options might attract customers who previously cut the cord or never subscribed in the first place. An influx of new subscribers might offset consistent yearly subscriber losses at Rogers and several other cable operators or a decline in the average cable bill.
Regardless, I'm convinced the cable operators will pursue strategies to offset any negative impact the government mandate could have.
But the impact on media companies could be worse
Media companies have long relied on cable operators to push their content into the bundle and get millions of subscribers to pay a small carriage fee to foster the channel and grow its audience. That option isn't viable under the pick-and-pay model, where consumers are largely in charge of deciding what's in their bundle. Media companies will have to spend more money to market their own networks.
What's more, instead of every subscriber paying a small fee for every channel -- thus cross-subsidizing everyone's taste -- only a small group of customers will pay for each channel. As a result, the cost per channel will necessarily go up. How much it rises will be dictated by the market, but if the average cable bill declines -- as is the goal of the mandate -- that means media companies as a whole will receive less revenue. Some channels might see revenue shrink so much that they're unable to remain in business.
The reality of a la carte
In about 20 months, Canada will begin one of the first real experiments in a la carte cable economics. It will be fascinating (for nerdy cable industry watchers like me) to see the impact on subscription rates and average revenue per user for companies like BCE and Rogers Communications. I'll also be interested to see the impact on price per channel.
All of this information will give American consumers and legislators a better view into how a la carte television works, and whether the U.S. should follow a similar model with pay-TV operators.
My guess is that most Canadian consumers' cable bills won't decline, and many will be better off with their current bundles. In fact, consumers could see a negative impact as the prices for Internet access and other complementary services increase to offset the decline in the average cable bill. Some consumers' favorite networks might even disappear.
I guess we'll see how things go in Canada.
Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Rogers Communications. 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.