FCC: Friend to Cable Companies

On Friday, the Federal Communications Commission reported to Congress on its study of consumer groups' plea to force cable providers to offer "a la carte" service.

The consumer groups, including Consumer Reports publisher Consumers Union (CU), want cable companies to permit their customers to pick and choose which channels they want -- and want to pay for. For example, an economical and family-values-oriented customer might pay $4 a month for Fox (NYSE:FOX) News, $5 for the Disney (NYSE:DIS) Channel, and $1 for the Weather Channel, and call it a day. That's as opposed to the current system, where a customer must fork over $40 a month to Cablevision (NYSE:CVC) or Comcast (NASDAQ:CMCSA) for 100 channels, of which she watches, on average, just 17.

According to the FCC, it's actually cheaper to subscribe to 100 channels and watch just 17 of them, than to pay for the 17 channels individually. In fact, the FCC determined that you need to cut back to just eight channels under an a la carte system, to save any money at all. That may be true. It may not be true. Either way, the CU argued that consumers should be given a choice here: to buy a package if they want to; to pay more for the right to pick and choose individual channels (for example, a parent might be willing to pay a premium to banish Viacom's (NYSE:VIA) MTV from the house); or to accept fewer channels to save money. In support of its position, the CU proffered a survey finding that two-thirds of cable customers would prefer a la carte over the current "package" system.

Cable companies respond that in addition to raising costs, an a la carte system would reduce the variety of programming available to viewers. Media providers use the profits from popular channels to subsidize less popular channels, often "bundling" the former with the latter, requiring cable companies to buy both for resale to consumers. With a la carte, that practice might fall apart, as viewers refuse to buy BET Jazz or the Home Shopping Network. At which point, channels with marginal viewership would be revealed for what they are -- unprofitable money pits -- and die off in consequence.

To which this Fool says: Great! Because the current system is a travesty of price-opacity. If Time Warner (NYSE:TWX) decides to jack up its price for HBO (a premium channel), a consumer has the option of canceling HBO, figuring "heck, I can get my Sopranos fix in a few months by renting it from Netflix (NASDAQ:NFLX)." But if Disney ups the cost for ESPN or ABC, a customer who wants to dodge that bullet pretty much has to cancel his cable service altogether.

In this Fool's opinion, that's no way to run a market economy. We let unpopular companies go bankrupt and die all the time. We should do the same with unpopular cable channels -- not keep them on perma-life support, at our expense.

Read more about America's regulatory wonderland in:

• Verizon Catches the NextWave
• Senate's Cellular Stand
• No, Seriously: Do Not Call!
• FCC Gives TiVo the Go

Fool contributor Rich Smith owns shares of Netflix, but has no position in any of the other companies mentioned in this article.