Does cable channel bundling give us lower prices?

I had an interesting Twitter exchange with @comcastcares, Frank Eliason who does a great job trying to improve people’s image of Comcast, no small task.  I told him, that I’d like to see TV channels unbundled by cable providers so I wouldn’t have to pay for channels I’d never ever watch.  Frank replied that bundling actually lowers costs and pointed to an NY Times article on the subject.  http://bit.ly/jXVO3  He later followed up and told me that programming costs are going up 9% next year, though not YET passed on.

So there are three arguments from the FCC’s dueling studies and Frank’s comments:

1) Overall costs to consumers are lower because they share the costs, like an insurance plan.

2) If consumers were to pick and choose, some (many?) cable channels would disappear, presumably this is a bad outcome for society.

3) Programming costs are increasing, and the cable companies are fighting on behalf of consumers against the greedy content providers.

Let’s look at these arguments. So, let’s say that the article is correct and to maintain revenue in an unbundled world, ESPN would have to raise its rate from $3 for all households to $12 to just those households who want the programming.  Sounds fair.  But suppose further that people refused to pay that high price, maybe consumers have an aversion to paying more than $6/month/channel.  So ESPN’s revenues drop in half.  Again, where’s the problem?  ESPN doesn’t have a right to their current revenue.  They would have to do cut costs like any business.  They could drop some of their channels with few viewers, bid less for rights to events or raise advertising rates.  In the end they would survive and baseball players might get paid less.  And households who don’t value ESPN would save $36/year, on this channel alone.

But the 2nd argument above says that lessor channels that don’t have ESPN’s big draw wouldn’t be able to attract enough viewers to survive.  In the NYTimes article they claim that BET would have to raise its rates 1,200 percent.  And if they didn’t attract viewers they would go dark.  Again, in the rest of the economy, with books, magazines, movies, stores etc, that’s how it works.  Why should these channels get what are effectively public subsidies?  I enjoy the BigTen channel (included in Verizon’s basic tier), but since they carry virtually no advertising, they are making all their money off the monthly fee and I don’t see why my neighbors should have to pay for it.  Why not move the channel to PPV or on-demand on the internet?

It’s a social good that we subsidize so many channels for diverse tastes and interests.  As if these hundreds of cable channels were adding culture.  The reality is many are just recycling material as an excuse to get at the monthly fees.  But the real argument is, who’s deciding what channels get subsidized?  That would the cable companies.  So, what would happen if channels only got money when people watched them?  First, they’d be like every other product in the world.  Second, many would disappear, or merge so that they’d have a higher percentage of desirable content or they’d move to the internet and explore new business models.  Our economy is based on the idea that if the content is worthy, people will pay for it.

Finally, let’s look at the argument that programming costs are going up 9% next year.  Since core inflation is much lower, and rapidly advancing technology in cameras and editing tools are rapidly lowering most production costs and reducing the number of people required, its hard to see why programming costs are increasing.  Lets imagine that the Food Network had to get people to sign-up, in the same way a magazine like Bon Appetit does.  Do we really think that they’d be raising prices this year?  Or would they find a way to lower costs.

To see if the cable companies are really looking to lower costs for consumers, let’s look at their high speed internet business.  Prices have steadily increased even as their costs for bandwidth follow general technology trends are and are dropping rapidly.  Looking at Comcast, their defense is that they are offering much higher speeds than they were a few years ago.  Of course, it happens that they increased speeds only after Verizon offered much higher speeds as they built their FIOS network.  So, the driver of what Comcast delivers in internet services is competition, not their internal costs.  Yet, they argue that for TV the reverse is true.

Ok, that’s my opinion, but what do consumers what?  As a proxy, take the explosive growth of Hulu and other original content internet sites.  An increasing number of young people, the media consumers of the next 30 years, are opting to drop their expensive cable to watch TV on their computer.  Why would they do this?  Hulu’s quality is vastly inferior to the HD delivered by cable.  It suffers from glitches and most people have to sit uncomfortably in front of a computer.  These people (and the numbers are growing rapidly) are voting with their wallets that they won’t pay inflated prices for content they don’t want.

Finally, lets look at Comcast.  While Verizon has invested heavily in their FIOS network, Comcast has been investing in content and is currently rumored/expected to buy NBC/Universal.  Now, lets imagine a world where NBComcast creates a channel and Comcast TV agrees, on behalf of all of their customers, to buy it for $1.50/month/subscriber.  Ratings don’t matter.  The channels doesn’t need to sell any ads (which it can’t because it has no viewers.)  But Comcast makes millions per month.  In what way does this benefit consumers?

The bottom line is that the current system of bundling cable channels is anti-competitive and raises costs for consumers by sheltering channels with virtually no viewers and hiding price signals from consumers as to which channels they’d actually prefer.  It also has the effect of allowing content providers to raise prices indiscriminately since again, consumers are insulated from the actual buying decision by cable companies who have little incentive to lower the price.

I am not among those arguing that content should be free.  People work hard to produce original content and should get paid for it.  I only argue that the cable companies, if they want to maintain their position as gatekeepers, need to offer products more competitively.  They are many ways to accomplish this.  We could be billed per program watched (as with mobile phones), or with various bundles.  Current technology makes it possible to be very creative with offering and billing. And I am pretty sure that the cable executives see this coming, but are milking the existing oligopoly for all the excess profits they can, while the going is still good.

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