Everyone I know hates cable bundling. Why should they pay for the soap opera channel when they never watch it?
They are envisioning, of course, paying something like 1/100th of their current cable bill for each channel. But this is not right, for a number of reasons. If you are now willing to pay $45 to get the five channels you actually watch, you will be willing to pay $45 for those five channels, which the cable company knows; they will price the most popular channels accordingly. There's no reason they have to lower their prices to make it cheaper for you to buy cable. Apple has succeeded in forcing 99 cent downloads of unbundled songs, but that's because Apple has market power that it is using to sell expensive iPods. I see no similar market force in cable. Moreover, the transaction costs of maintaining millions of individual channel lists might well push up the overall cost of cable.
CoyoteBlog offers another reason that unbundling won't work the way people hope:
I see that the drive to force cable companies to offer their basic cable package a la carte rather than as a bundle is gaining steam again. This is the dumbest regulatory step imaginable, and will reduce the number of interesting niche choices on cable.For some reason, it is terribly hard to convince people of this. In fact, supporters of this regulation argue just the opposite. They argue that this is a better plan for folks who only are passionate about, say, the kite-flying channel, because they only have to pay for the channel they want rather than all of basic cable to get this one station. This is a fine theory, but it only works if the kite-flying channel still exists in the new regulatory regime. Let me explain.
Clearly the kite-flying channel serves a niche market. Not that many people are going to be interested enough in kite flying alone to pay $5 a month for it. But despite this niche status, it may well make sense for the cable companies to add it to their basic package. Remember that the basic package already attracts the heart of the market. Between CNN and ESPN and the Discovery Channel and the History Channel, etc., the majority of the market already sees enough value in the package to sign on.
Let's say the cable company wants to add a channel to their basic package, and they have two choices. They have a sports channel they could add (let's say there are already 5 other sports channels in the package) or they can add the Kite-flying channel. Far more people are likely to watch the sports channel than the kite flying channel. But in the current pricing regime, this is not necessarily what matters to the cable company. Their concern is to get more people to sign up for the cable TV. And it may be that everyone who could possibly be attracted to sports is already a subscriber, and a sixth sports channel would not attract any new subscribers. It is entirely possible that a niche channel like the kite-flying channel will actually bring more incremental subscribers to the basic package than another sports channel, and thus be a more attractive addition to the basic package for the cable company.
But now let's look at the situation if a la carte pricing was required. In this situation, individual channels don't support the package, but must stand on their own and earn revenue. The cable company's decision-making on adding an extra channel is going to be very different in this world. In this scenario, they are going to compare the new sports channel with the Kite-flying channel based on how many people will sign up and pay for that standalone channel. And in this case, a sixth (and probably seventh and eighth and ninth) sports channel is going to look better to them than the Kite-flying channel. Niche channels that were added to bring greater reach to their basic cable package are going to be dropped in favor of more of what appeals to the majority.
The real problem with cable pricing is not bundling; it's that cable companies have cozy local monopolies because of a combination of political influence, and the natural reluctance of municipalities to tearing their streets up.
And the fixed costs have to be allocated somehow. The person purchasing five channels would probably cause as much of the physical/ hardware/ personnel costs as the person purchasing 80 channels. Wouldn't he?
Actually, Cable companies have been getting some good competition from the satellite TV systems. Cable still overcharges in the long run, but if you are a new customer, or haggle by threatening to move to Satellite, you can get a better deal for a period of time.
I agree that in theory bundling is a good idea. But the real problem comes when a disproportionate cost of a few channels dominates the cost of a bundle.
That's happening now with sports channels, especially ESPN. As it stands now, sports channels are subsidized heavily by people who don't watch sports. Cable systems bicker every now and again, threatening to drop various sports channels, or demand that they become optional premium stations (like the movie premium channels)
I could go on about how major league sports' growth is currently driven by forcing the non-fan to pay in many different ways, but that's a bit too much of a thread drift.
You're essentially negotiating a 95% cut in the number of channels you receive, for the same price.
Here's an idea, while we're at it, I only actually view a tiny fraction of the trillions of web pages available through my internet connection, so my bill actually should be some small fraction of a penny.
In general, it seems that bundling is preferred over a la cart payments anytime the choices are relatively trivial or the prices are very low. Micropayments are a good example of an un-bundling system that never seems to work very well. Telephone service and ISPs are another area where small payments (per minute) are/were replaced by lump sums for bundles of time and/or services.
There are so many channels out there that no one really wants to go through and figure out which ones they want to add for 50 cents or a nickel a month or whatever (this assumes that they are still available, which they probably wouldn't be as noted above).
EI
Actually, Cable companies have been getting some good competition from the satellite TV systems. Cable still overcharges in the long run, but if you are a new customer, or haggle by threatening to move to Satellite, you can get a better deal for a period of time.
Perhaps this is just my experience, but local cable monopolies are further reinforced by the availability of high speed internet connections. If you don't like your local DSL, you are (in most municipalities) forced to go to the cable company - which can then offer discounts if you also go with their television service. Going satellite thus tends to cost far more if you want both high speed internet and more than basic channels.
The problem with all of this seems to boil down to the significant barriers to entry. The solution that seemed to work in the dialup era is common carrier status for networked resources, but failing that, I would probably support government control (gasp) of networks. Similar to roads, water systems, and transmission lines, cable/fiber/phone lines are pretty textbook natural monopolies.
Joel Bernstein wrote: Here's an idea, while we're at it, I only actually view a tiny fraction of the trillions of web pages available through my internet connection, so my bill actually should be some small fraction of a penny.
For the most part, the Internet connection charges you for the costs of providing service, although admittedly if half the users have high bandwidth demands and half the users don't, the second half somewhat subsidizes the first half since the communications provider will need to have equipment and upstream bandwidth suitable to handle the aggregate demand.
Nonetheless, after that you pretty much ARE looking at a bundled system. Want to buy a video download from Amazon? Subscribe to the Wall Street Journal Online or (until recently) Times Select? Buy a membership with some website that allows you to download adorable high-res pictures of frolicking kittens and puppies every month? You've paid the base cost of service; the rest is entirely at your option.
The present cable television system pretty much operates as a gateway to a number of subscription sub-doors, except that the cable company likes to pay for many of them as group purchases and then redistributes the cost to the consumers. It's as if your ISP charged you an extra $20/month in exchange for having unlimited access to WSJ Online and Lexis-Nexis: a sweet deal for any users who accessed Lexis or both, but a rip-off for anyone who only wanted WSJ or neither one at all.
Problem is, when you get something like that institutionalized in a monopoly-esque market, it's kind of hard to root it back out without strong competition or regulatory guidance.
Ben R. wrote: Going satellite thus tends to cost far more if you want both high speed internet and more than basic channels.
Not necessarily. In the Denver-area market, for example, Qwest will happily offer you a bundle deal with DirectTV, Qwest DSL, and Qwest analog or digital phone at prices competitive with what Comcast is peddling for the same three services.
I would probably prefer small bundles, perhaps choosing two or three bundles that have 5 channels each instead of having to evaluate each channel. I think it is also a good compromise.
http://tinyurl.com/3ddmud
In this very simple model bundling improved both company revenue and consumer surplus.
-dk
Hasn't anyone taken a marketing class?
Let's say I'm willing to pay $5 a month for the kite-flying channel and $1 a month for the corn-husking channel while Megan's preferences are exactly the opposite. If the cable company charged $3 a month for each channel, Megan and I would each buy the one channel we like best but if the cable company bundles them into a package for $6 a month we would both buy the package with both channels.