Would A La Carte Cable Plans Reduce Cable Bills?
Next to gasoline, cable is the one thing whose price increases I most often hear people complain about. Maybe I hear about it more often because my husband works for Comcast or because cable rates go up even more frequently than postage rates, but with the average monthly cable bill hovering near $50, people with cable have a good reason to be concerned about more increases.
Some cable subscribers have switched to satellite, an option which is not without faults of its own, while others have suggested a la carte, or per-channel, pricing. This idea sounds quite appealing to those who would like to receive, for example, the Disney Channel but not the Golf Channel (or vice versa). Parents could choose family-friendly channels so that they would not have to worry about learning how to use parental controls, while those without children in the home could opt not to receive Nickelodeon and related channels. No one would have to pay for channels they don’t watch.
In reality, many consumers would be able to receive far fewer channels than they might expect for the price they want to pay. How could a la carte programming be more expensive than the package deals most cable companies currently offer? You might blame it on corporate greed, but if you do, don’t blame only the local cable provider. For each channel you receive, your cable company pays a per-customer subscription rate each month. Some channels, such as ESPN, cost more than $2.00 per subscriber. (High salaries for professional athletes are one factor in this high rate.) Many of the larger cable companies require cable providers to show their less popular channels in order to get lower prices for their popular channels.
The telecommunication industry is currently in heated debates over whether the government should forcibly break up these “bundled” deals so that cable providers can offer a la carte pricing. The FCC has conducted several studies on the topic and has come to opposing conclusions as to whether a la carte pricing would benefit consumers. (Most recently, it says that it would.) Some say that such government intervention would result in the demise of smaller channels and fewer viewpoints to be broadcast, while others say that the current dominance of the large cable companies already prevents alternative, independent channels from having their voices heard.
Debates over the appropriate extent of government regulation aside, a la carte pricing would bring fewer subscribers for each channel, which would mean fewer people to share the cable provider’s total cost and, as a result, higher per-subscriber rates for each channel. In addition, cable providers would have additional costs associated with initiating and maintaining the technology and administrative processes required for offering an additional service plan, while cable channels would spend more on marketing in order to induce customers to purchase their channels. These costs would be passed on to cable subscribers.
Families who truly watch only a few channels, including one or two from the higher-level tiers of current cable packages, would probably save some money with a la carte pricing. However, those families whose favorite shows are scattered over many channels or who are interested in specialty channels that appeal to only a few people could actually receive fewer channels on an a la carte plan than they receive for a similar price on a current package deal. (As with a la carte menus in a restaurant, those small items can quickly add up to more than what you’d pay for the buffet!)
Incidentally, despite the frequent increases in cable bills, the cable industry’s Spring 2007 GRIP (Grassroots Information Program) newsletter circulated among Comcast employees argues that the company’s prices shouldn’t be judged solely on basic subscription rates. “With more customers taking cable’s triple play [cable, telephone, and Internet services bought from the same provider],” the newsletter reads, “the actual price for these products is more than 23 percent lower than it was ten years ago, adjusted for inflation. And the quality of the product is dramatically superior.
This article does a good job of unquestioningly adopting the cable companies’ claims.
The cable companies are wrong however. There is an economic theory called price discrimination, wherein the more a company can differentiate between consumers and charge them according to their demand, the better the equilibrium point will be between supply and demand and the greater the surplus will be enjoyed by both suppliers and consumers.
What this means is this: there are people right now who enjoy tv, but are unwilling to pay $50 for it. What do they do? They don’t buy it. This is a market inefficiency: these people are willing to pay something for some lesser package, but the market is not serving their needs. Now say that ala carte cable comes along: suddenly these people can pay $30 and watch 4 channels, voila! the suppliers have captured the surplus which would have otherwise not been capture.
But what about the people who were paying the $50? They will be able to pay for the cable channels they actually want, and the market will more efficiently offer them a product priced towards their demand. Both the cable companies and the consumer will profit, because the cable companies can charge more per service (channel) offered since only people who watch the channel will buy it, and the consumer will pay only for those services he wants. The more efficient market outcome will make both groups more happy.