Whose A La Carte Is It, Anyway?

by on December 22, 2005 · 24 comments

James’s post in defense of a la carte makes me think that a big part of what’s going on in this debate is ambiguity and confusion regarding what exactly counts as “a la carte.” As my recent article suggests, most a la carte activists seem to imagine that, if the standard cable tier gives you 50 channels for $50/month, then you should be able to buy 10 channels for $10/month, or one channel for $1/month.

That is, of course, absurd. It would be great for consumers if it were possible, but the problem is that the cable companies would go bankrupt. It costs a lot more than $1 to deliver that one channel to the customer’s home. That’s why, if forced to adopt a “pure” a la carte model, channels would have to set the per-channel cost much higher than $1–probably more like $5-10 per channel. It should be obvious that consumers wouldn’t benefit from that.

But if we relax our definition of “a la carte,” it’s possible to imagine a model that could work. Consider a world in which every subscriber pays a $40 access fee, and then chooses channels “a la carte” for 25 cents apiece. This is, technically speaking, an a la carte system, and it would probably work just fine: at 25 cents apiece, most consumers would probably take 30 or 40 channels, roughly approximating the status quo. This could plausibly be called an “a la carte system,” and it might work just fine.

Now consider a third system, with one minor change: the cable company decides to throw C-SPAN into the basic package for free, and tacks on 6 cents to cover the subscriber fee. (If I remember correctly, this is what C-SPAN charges per subscriber) My question is: has this ceased to be an a la carte system? After all, consumers are now being “forced” to buy C-SPAN in order to get other cable channels. But it’s hard to imagine cable customer being outraged at a 6-cent hike in their bills.

What’s going on is that your monthly cable bill is actually paying for two things: the programming and the infrastrcture necessary to deliver the programming. What people don’t seem to understand is that the infrastructure is by far the largest fraction of the bill. According to this article, the average cable bill is $45 for 64 channels. Of that, $45, only $14 goes to cable networks for the cost of content. The remainder, $31, goes to cover the cable company’s own costs.

To bring this back to James’s article, I suspect the systems the Baby Bells are rolling out will be “a la carte” only in the third sense described above. There will doubtless be a basic access fee that will apply to everyone who gets the service. There’s also likely to be some content, such as C-SPAN and PBS, included for free with the basic IPTV service.

But the fact is, the current cable industry is already a la carte in this sense. There’s some content available with the basic package, and then there is other content–”premium” channels, pay-per-view content, on demand movies–that is offered “a la carte.” The only difference is a matter of degree: the Baby Bells might be putting less content in the “basic” bundle, while the cable companies are putting more.

If that’s how we’re defining the terms, it’s not clear what’s being argued about. Of course a la carte, defined in this loose sense, “works.” No sane person would claim otherwise. The debate is whether “pure” a la carte, in which there is no “basic” bundle, can “work.” I think the answer to that is clearly no, and I’ll be shocked if the Baby Bells ever offer such a pricing structure.

  • Anonymous

    “That is, of course, absurd. It would be great for consumers if it were possible, but the problem is that the cable companies would go bankrupt. It costs a lot more than $1 to deliver that one channel to the customer’s home. That’s why, if forced to adopt a “pure” a la carte model, channels would have to set the per-channel cost much higher than $1Ã?¢â?‰?probably more like $5-10 per channel. It should be obvious that consumers wouldn’t benefit from that.”

    Why should consumers care how much it costs the Cable companies to produce shows–that’s their (the cable companies) problem. There is now competition, in the form of downloadable programs, which could be selling for as little a a buck or two for a show, given that most people only watch a few shows, they will come out ahead. A la carte will be forced on the cable companies by competition.

    It would not be wrong though to push for a la carte when they are a monopoly–in my mind if a company gets a monopoly, they have to accept the regulation.

  • Anonymous

    “That is, of course, absurd. It would be great for consumers if it were possible, but the problem is that the cable companies would go bankrupt. It costs a lot more than $1 to deliver that one channel to the customer’s home. That’s why, if forced to adopt a “pure” a la carte model, channels would have to set the per-channel cost much higher than $1Ã?¢â?‰?probably more like $5-10 per channel. It should be obvious that consumers wouldn’t benefit from that.”

    Why should consumers care how much it costs the Cable companies to produce shows–that’s their (the cable companies) problem. There is now competition, in the form of downloadable programs, which could be selling for as little a a buck or two for a show, given that most people only watch a few shows, they will come out ahead. A la carte will be forced on the cable companies by competition.

    It would not be wrong though to push for a la carte when they are a monopoly–in my mind if a company gets a monopoly, they have to accept the regulation.

  • http://www.binarybits.org/ Tim

    In the first place, cable is not a monopoly. Almost every consumer in the country has satellite as an alternative, and as you point out, additional competition is on the way.

    In the second place, how is the consumer going to download those shows off the Internet? That’s right–they’ll need a broadband pipe. Who are they going to get it from? Probably the cable company. And guess what? Cable companies charge about as much for a broadband pipe ($30-50) as they do for cable TV service. So you’re making my point–in the future there will probably be “hybrid” a la carte, where you pay for a basic bundle (which might be labeled “broadband Internet” in the future) and then have the option of buying additional content a la carte. That’s different from “pure” a la carte, in which you only pay a per-channel fee for the channels you decide to take.

  • http://www.binarybits.org/ Tim

    In the first place, cable is not a monopoly. Almost every consumer in the country has satellite as an alternative, and as you point out, additional competition is on the way.

    In the second place, how is the consumer going to download those shows off the Internet? That’s right–they’ll need a broadband pipe. Who are they going to get it from? Probably the cable company. And guess what? Cable companies charge about as much for a broadband pipe ($30-50) as they do for cable TV service. So you’re making my point–in the future there will probably be “hybrid” a la carte, where you pay for a basic bundle (which might be labeled “broadband Internet” in the future) and then have the option of buying additional content a la carte. That’s different from “pure” a la carte, in which you only pay a per-channel fee for the channels you decide to take.

  • Joseph Dixon

    “Why should consumers care how much it costs the Cable companies to produce shows–that’s their (the cable companies) problem.”

    This statement highlights the misunderstanding that the general public has about cable companies. Most cable companies do not produce their own programming. They purchase channels from third party companies and rebroadcast it on their system. The same companies that the satellite companies are buying their programming from. There is not a seperate Discovery Channel for satellite and in many cases the programing that you are downloading for “a buck or two” on the internet is produced by the same third party companies. The reason they can afford to do this on the internet is because of the fees that they are already receiving from the cable and satellite companies.

    Also, the cost of producing this programming is not irrelevant to the consumer. If a cable company is spending more in content than they receive from subscribers they will not stay in business. To which you might reply, good I don’t like them anyway. But keep in mind, without cable companies helping to support the production companies that make the programming, you wouldn’t have much to download. (except maybe some of the independent shows, which I admit are getting better. But that would be like only having PBS and Public Access to watch).

    (…and don’t say that there is content produced by broadcast channels that is supported by advertising and not the cable industry because Tivo and the like are slowly eating away at the advertising revenue that support those options. and the cable companies pay fees to them as well)

  • Joseph Dixon

    “Why should consumers care how much it costs the Cable companies to produce shows–that’s their (the cable companies) problem.”

    This statement highlights the misunderstanding that the general public has about cable companies. Most cable companies do not produce their own programming. They purchase channels from third party companies and rebroadcast it on their system. The same companies that the satellite companies are buying their programming from. There is not a seperate Discovery Channel for satellite and in many cases the programing that you are downloading for “a buck or two” on the internet is produced by the same third party companies. The reason they can afford to do this on the internet is because of the fees that they are already receiving from the cable and satellite companies.

    Also, the cost of producing this programming is not irrelevant to the consumer. If a cable company is spending more in content than they receive from subscribers they will not stay in business. To which you might reply, good I don’t like them anyway. But keep in mind, without cable companies helping to support the production companies that make the programming, you wouldn’t have much to download. (except maybe some of the independent shows, which I admit are getting better. But that would be like only having PBS and Public Access to watch).

    (…and don’t say that there is content produced by broadcast channels that is supported by advertising and not the cable industry because Tivo and the like are slowly eating away at the advertising revenue that support those options. and the cable companies pay fees to them as well)

  • Karl

    “What’s going on is that your monthly cable bill is actually paying for two things: the programming and the infrastrcture necessary to deliver the programming. What people don’t seem to understand is that the infrastructure is by far the largest fraction of the bill.”

    So if people don’t understand this, then break down for us what exactly that rate, raised 5-10% yearly, is being used for. Hint: most of it isn’t going toward already laid infrastructure. It’s going to executive bonuses and grinning investors.

    Also keep in mind people are paying between $45-$60 for a broadband pipe as well, and many of these customers have been paying the cable company for decades. It’s not as if infrasturcture cost is straining their profit margins.

    That said yes, some basic bundle would probably have to exist. But why is it we’re not even at the point where sports programming is a package, if ESPN is the most expensive channel?

  • Karl

    “What’s going on is that your monthly cable bill is actually paying for two things: the programming and the infrastrcture necessary to deliver the programming. What people don’t seem to understand is that the infrastructure is by far the largest fraction of the bill.”

    So if people don’t understand this, then break down for us what exactly that rate, raised 5-10% yearly, is being used for. Hint: most of it isn’t going toward already laid infrastructure. It’s going to\ executive bonuses and grinning investors.

    Also keep in mind people are paying between $45-$60 for a broadband pipe as well, and many of these customers have been paying the cable company for decades. It’s not as if infrasturcture cost is straining their profit margins.

    That said yes, some basic bundle would probably have to exist. But why is it we’re not even at the point where sports programming is a package, if ESPN is the most expensive channel?

  • James Gattuso

    Good points. I think you may be right that the final result may be a hybrid, with some flat fee and some per channel price. There are more variations possible too — most likely much more of what is now called pay per view, sort of a la carte on steroids.

    That said, I don’t think that a flat fee is necessarily required in order to cover fixed costs. Every industry has fixed costs to one degree or another. E.g., I can see a movie in a theater simply by plunking down the ticket price, even though the theater operator has fixed costs. No fixed monthly fee is required. The ultimate structure of fees depends upon a huge number of variables. The only thing we can safely assume is that if government regulators try to predict what the structure SHOULD be, they will get it wrong.

  • James Gattuso

    Good points. I think you may be right that the final result may be a hybrid, with some flat fee and some per channel price. There are more variations possible too — most likely much more of what is now called pay per view, sort of a la carte on steroids.

    That said, I don’t think that a flat fee is necessarily required in order to cover fixed costs. Every industry has fixed costs to one degree or another. E.g., I can see a movie in a theater simply by plunking down the ticket price, even though the theater operator has fixed costs. No fixed monthly fee is required. The ultimate structure of fees depends upon a huge number of variables. The only thing we can safely assume is that if government regulators try to predict what the structure SHOULD be, they will get it wrong.

  • http://www.binarybits.org/ Tim

    Right, I think we’re in total agreement about the policy conclusion: the government shouldn’t mandate any particular price structure. So far, the market hasn’t delivered any “pure” a la carte video services, which makes me think that they probably aren’t commercially viable. But who knows, maybe the march of technology will change that!

  • http://www.binarybits.org/ Tim

    Right, I think we’re in total agreement about the policy conclusion: the government shouldn’t mandate any particular price structure. So far, the market hasn’t delivered any “pure” a la carte video services, which makes me think that they probably aren’t commercially viable. But who knows, maybe the march of technology will change that!

  • chaser7016

    The solution is to have an ISP come along that offers broadband service that mirrors current cell phone bills. You’ll have a certain amount of monthly bandwidth and anything over you’ll be charged for.

    This will be great for keeping the net as we know it today(net neutrality wouldnt be a congressional issue), as well as paying for what you want to watch and consume. P2P could become legal as monies from our monthly bills can be funneled to big media or to joe making media in his room!

    Can not imagine this not happenning, especially with the Skype’s of the world. Id say a wireless ISP will be the first to instill such a plan!

  • chaser7016

    The solution is to have an ISP come along that offers broadband service that mirrors current cell phone bills. You’ll have a certain amount of monthly bandwidth and anything over you’ll be charged for.

    This will be great for keeping the net as we know it today(net neutrality wouldnt be a congressional issue), as well as paying for what you want to watch and consume. P2P could become legal as monies from our monthly bills can be funneled to big media or to joe making media in his room!

    Can not imagine this not happenning, especially with the Skype’s of the world. Id say a wireless ISP will be the first to instill such a plan!

  • Walter E. Wallis

    Outlaw exclusive cable franchises – no reason you can’t run half a dozen fiber optic cables on a pole.

  • Walter E. Wallis

    Outlaw exclusive cable franchises – no reason you can’t run half a dozen fiber optic cables on a pole.

  • http://www.binarybits.org/ Tim

    Walter,

    An excellent suggestion! In fact, it’s an idea I’ve written about in the past.

  • http://www.binarybits.org/ Tim

    Walter,

    An excellent suggestion! In fact, it’s an idea I’ve written about in the past.

  • James Gattuso

    Actually, exclusive franchises are already prohibited under the 92 cable act, and the FCC is looking at whether localities have violated that ban by unreasonably denying franchises to competitors. Maybe the question should be whether franchising itself should be done away with.

  • James Gattuso

    Actually, exclusive franchises are already prohibited under the 92 cable act, and the FCC is looking at whether localities have violated that ban by unreasonably denying franchises to competitors. Maybe the question should be whether franchising itself should be done away with.

  • David P

    To Tim’s point “In the first place, cable is not a monopoly. Almost every consumer in the country has satellite as an alternative, ”

    Not true. There are many of my friends at work who live in apartments who cannot install sat dish. They get cable provided by the cable companies or (worse) by the apt. building directly.

    One infact bought at HDTV only to find that apt building does not not transmit the HD channels….and can give no expected date for HD.

    I’d prefer to get away from channel concept completely and simply select the shows I want to watch. I want to watch UK version of The Office followed by US version of The Office followed by Miami Local news followed by my wifes Chicago local news.

  • David P

    To Tim’s point “In the first place, cable is not a monopoly. Almost every consumer in the country has satellite as an alternative, “

    Not true. There are many of my friends at work who live in apartments who cannot install sat dish. They get cable provided by the cable companies or (worse) by the apt. building directly.

    One infact bought at HDTV only to find that apt building does not not transmit the HD channels….and can give no expected date for HD.

    I’d prefer to get away from channel concept completely and simply select the shows I want to watch. I want to watch UK version of The Office followed by US version of The Office followed by Miami Local news followed by my wifes Chicago local news.

  • Insider?

    25 cents a channel isn’t a good figure, becuase ESPN charges a huge amount ($3 per person per month) compared to something like CNN (50 cents per person per month)…and all those “annoying” shopping channels you think you’re paying for? you’re not…they can actually LOWER your bill, and you might even qualify for a 25 cent credit for adding 10 shopping channels “a la carte”

    and that’s with special deals where ESPN comes “bundled” ..it would probably be $4 or $5 to the cable co if “a la carte”…add a mere $15 per month base rate, and you’re already up to $20 for ONE MEASELY CHANNEL.

    Since some companies have a package of FIFTY channels for that price…where exactly is the savings?

  • Insider?

    25 cents a channel isn’t a good figure, becuase ESPN charges a huge amount ($3 per person per month) compared to something like CNN (50 cents per person per month)…and all those “annoying” shopping channels you think you’re paying for? you’re not…they can actually LOWER your bill, and you might even qualify for a 25 cent credit for adding 10 shopping channels “a la carte”

    and that’s with special deals where ESPN comes “bundled” ..it would probably be $4 or $5 to the cable co if “a la carte”…add a mere $15 per month base rate, and you’re already up to $20 for ONE MEASELY CHANNEL.

    Since some companies have a package of FIFTY channels for that price…where exactly is the savings?

Previous post:

Next post: