Saturday, November 24, 2007

Thinking About Buying Cable a la Carte

The Federal Communications Commission is making serious noises about new regulations for cable television, including allowing subscribers to buy channels one at a time. This idea is likely to have strong superficial appeal for anyone paying for channels that they never watch -- a group that may include most cable subscribers.

But, as Joe Nocera points out in his New York Times column, if a la Carte programming becomes a reality, subscribers are likely to regret it on the morning after. He writes artfully about the politics and likely effects of a la Carte, but leaves some larger questions untouched.

The proposal is supported by consumer groups, groups worried about sex and violence, and FCC Chairman Kevin J. Martin. This is one of several major regulatory changes being considered. The FCC is also revisiting rules on cable ownership, access to cable channels for producers of independent programs, and rules barring companies from owning newspapers and broadcast stations in the same market.

But the change in subscriptions would have the most immediate effect on consumers. Nocera does a nice job explaining why a la Carte programming would leave many subscribers paying more than they do now.

Fewer Subscribers Will Increase Cable Prices

Networks charge cable operators a fee based on the number of subscribers. Cable operators can spread the cost of, say, The History Channel across everyone who pays for the bundle that includes this channel, even if many don't watch programs about history. That keeps each subscriber's cost below the amount that would be charged if only those who watch The History Channel subscribed. This is true even for for channels with wide appeal, Nocera reports:

"Take, for instance, ESPN, which charges the highest amount of any cable network: $3 per subscriber per month. (I’m borrowing this example from a recent research note by Craig Moffett, the Sanford C. Bernstein cable analyst.) Suppose in an à la carte world, 25 percent of the nation’s cable subscribers take ESPN. If that were the case, the network would have to charge each subscriber not $3, but $12 a month to keep its revenue the same."
The proposal faces stiff opposition in congress. This is probably because legislators don't want to risk the wrath of voters if predictions like the one for ESPN prove correct.

Do Market Economics Favor a la Carte?

But what is good for cable subscribers and good for congress may not be good economics. A basic principle of market economics holds that people should only pay for things they want. If people have to pay for things they don't want, it creates distortions in the distribution of goods and the use of resources to produce those goods. Consumers end up getting more than they really want of some things, and not enough of others.

This argument suggests we may be getting too much programming about history, and too much programming about sports. (You decide which networks we don't get enough of.)

Sophisticated supporters of a la Carte are likely to make this argument, and it will carry some weight. That is because the argument holds true unless cable programs fall into the category of goods that are exceptions to some general rules of market economics.

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