Americans think they want Comcast (NASDAQ:CMCSA), Time Warner Cable (NYSE:TWC), DIRECTV (NASDAQ:DTV), DISH Network (NASDAQ:DISH) and the rest of the pay-television providers to offer a la carte pricing.
Under the current system, cable customers must buy packages of channels that include ones they want alongside ones they don't. For example, you might pay for a more expensive tier in order to get a regional sports network that telecasts your favorite team's games. Paying for that more expensive tier might also give you access to other sports programming -- perhaps the Golf Channel, NFL Network, and Tennis Channel.
You might not care about golf, tennis, or football -- you just wanted to watch your favorite hockey team -- but you have to pay for the whole package to get the one thing you want.
This system benefits cable systems and countless niche channels that collect carriage fees from the cable companies for subscribers who might never actually watch their programming, Your subscription dollars support networks you don't watch, which sounds like a terrible deal. In reality, however, it's a form of TV socialism in which I pay for stuff you watch, you pay for stuff I watch, and we're both richer for it.
Without bundles that force customers to subsidize stations they don't watch, a whole lot of channels would go away. Furthermore, if we only pay for the stations we want, the cost of those networks would rise dramatically.
It's a case of a la carte seeming like a good idea but coming with a hidden cost that could raise your bill and make the TV universe far smaller.
What will happen?
If cable companies stop forcing people to buy packages, then every channel would have fewer subscribers and make less in carriage fees (and potentially ad dollars if viewership numbers dropped). This would mean that to continue delivering the existing level of programming, channels would need to charge more on an a la carte basis than they get from current subscribers.
MoffettNathanson analyst Michael Nathanson ran some projections of the per-subscriber payout for some popular channels, and the numbers are stunningly high, according to Fierce Cable. Disney's (NYSE:DIS) ESPN is a prime example in Nathanson's study. The sports network is currently distributed in the vast majority of pay-TV homes and commands a per-subscriber fee averaging out to roughly $6.10 per month, the website wrote.
Nathanson estimated that in an a la carte setup, only about 16.81% of TV homes would subscribe to ESPN. That would lower its audience and ad rates, and each user would need to pay $36.30 a month for the network to maintain its current profit margin, according to the researcher. Using the same math, Nathanson speculated on rates for other networks: TNT would cost $8.95 per month, Disney Channel $8.25, USA Network $5.45, and Nickelodeon $4.99.
"If we use the reach and monthly affiliate fees for each individual cable network to figure out what the implied a la carte pricing would have to be for the network to capture 100% reach, we can easily see that most of these top networks would be prohibitively expensive," Nathanson wrote.
|Network||Est. Sub Fees (now)||Reach||A La Carte Price|
Be careful what you wish for
A la carte pricing seems like it would be good for the public, but it would come at a heavy cost. You would be able to pay for only the channels that you want, but the cost would be exorbitant. Furthermore, it seems likely that in an a la carte world, many channels would cease to exist.
Thus, an a la carte TV universe could paradoxically result in less choice, and at least for some it would not come with a cost savings (quite likely just the opposite, in fact).
Meanwhile, if Disney could not charge $36.30 a month for ESPN, that network would almost certainly have to cut its budget. That could be bad for sports leagues as it could lower the prices paid for rights. It also might tip the balance back in favor of the big broadcast networks because they would have the largest possible audiences by far.
In any case, consumers would be forced to choose between paying an exorbitant rate for ESPN or going without it. Viewers would also have to make the same choices across various other cable networks.
Unbundling could benefit consumers, perhaps in the form of more packages and more premium channels being offered purely a la carte. But if the whole cable world becomes pay for what you want, per-channel prices will skyrocket and we may all end up with a whole let less.
Daniel Kline has no position in any stocks mentioned. He would not pay $36 for ESPN unless SportsCenter was taped in his living room. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney. 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.