Rafi Mohammed

Why Do I Have to Buy Extended Cable to Get HBO?

Posted on March 27th, 2007 (0 Comments)

A few weeks ago, I received an agitated message from my friend George. “My cable television bill is over $100 Rafi,” he huffed, “but I only really watch 3 channels. I’d be willing to pay $30 just for those three key channels.” George posits a great question – why can’t consumers buy just the cable channels they want to watch?

Intrigued, I called several of my economist and legal friends at various Washington DC regulatory agencies enquiring why consumers are being “forced” to buy bundles that include channels they have no interest in. In the end, I think one of my more cynical friends had the best (and right) response: “The answer is simple Rafi,” she explained, “because they (cable companies) can…” Echoing this sentiment, Senator John McCain has opined that cable companies “have continued to give customers all of the ‘choice’ of a North Korean election ballet.”

It came as a surprise to me that the pricing of most cable television systems is not regulated by the Federal Communications Commission (FCC) or State boards (there are some cases, in areas deemed to be not competitive, where basic tier pricing is regulated). So…cable companies are just like any other for profit entity – they price to capture the value of their services.

It’s sort of like airlines. The other day I was checking in at the counter and the guy in front of me wanted to standby on an earlier flight. He was appalled when the agent mentioned a $100 ticket change fee…“but if there is a seat open on this flight, what do you care” he edgily contested. Why do airlines charge a $100 change fee when they can make a traveler happy by getting them home earlier in a seat that would otherwise go empty? …because they can.

Interestingly, in February 2006, FCC Chairman Kevin Martin signed off on a FCC report indicating that unbundling would save consumers money. A great finding…though it completely contradicted a report released 15 months earlier (under previous Chairman Michael Powell) that concluded that unbundling would cost consumers money. I know this is an obvious place to crack a joke…but I have many close friends and used to work at the FCC...so I’ll let you insert your own humor [insert FCC joke here].

When the FCC held hearings on whether a la carte pricing should be mandated on cable television companies (again, odd because they do not regulate cable companies), I found the opposition’s arguments fascinating. Those against a la carte pricing warned that allowing consumers to select their own channels would reduce viewership for most cable channels – which means cable stations would receive lower advertising revenues, have to amortize its costs over a smaller number of subscribers, and spend money to market its channel. This would translate into an increase in per-channel subscriber fees relative to prices when everyone is forced to subscribe. Well…of course that’s true. But it’s a free market – why should consumers have to buy channels they don’t watch?

These dissenters went on to argue that a la carte pricing would hinder the development of new cable television channels. Requiring customers to buy new channels, regardless of whether they are going to watch the channel or not, would certainly help launch new channels. But again…this is a free market. Let consumers decide if the market warrants a channel entirely devoted to reruns of the hit television show COPS.

That said, the free market argument I’m making works both ways. Let’s face it…television is entertainment – not exactly a life or death product. If consumers don’t like cable prices, they are free to dig up their old television antennas, purchase satellite television, buy television programs from iTunes, or up their Netflix subscription. Remember…cable operators are “for profit” companies.

So, while offering a la carte channels may make customers better off (like airlines allowing fliers to standby on an earlier flight with empty seats for free), why don’t cable companies sell channels a la carte? (Everyone in unison): “because they can…”

Interested in the cable bundling issue from an economic perspective? Check out these two papers by Beard, Ford, & Koutsky and Brown & Alexander. I should also address the concern that it will be costly to offer a la carte pricing. Today, cable companies in Canada offer a la carte pricing and have found making this option available is not prohibitively expensive.

Please feel free to send me any questions or comments. I update this blog two to three times a week – please consider signing up to be notified by e-mail of a new blog post. Thanks for taking the time to read my blog.

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