NYT’s Joe Nocera on perils of a la carte regulation

by on November 26, 2007 · 12 comments

New York Times business columnist Joe Nocera penned a lengthy column on the potential dangers of a la carte regulation over the weekend. He summarized why–as we have pointed out here before–despite the best of intentions, a la carte regulation is certain to backfire:

À la carte. It sounds so appealing, doesn’t it? Instead of having to accept — and pay for — all the channels bundled by your cable company, you could pick from a menu and pay for only the ones you watch. … Yet as appealing as the idea might seem at first glance, there is a reason that Congress has not taken the bait and passed an à la carte law. À la carte would be a consumer disaster. For those of you who yearn for it, this is a classic case of “be careful what you wish for.”

Nocera goes on to show that, contrary to what a la carte regulatory advocates believe, prices for most customers would rise in the long-run:

But wait: how can it be that à la carte will cause cable prices to rise? If you are subscribing to far fewer channels, doesn’t it therefore follow that your bill will be lower? Strange as this may seem, the answer for most people is no.

True, if you decide to take only one or two channels, à la carte pricing will save you money. But how many people are going to limit themselves to one or two channels? In fact, even if you pick as few as a dozen channels, à la carte will almost surely cost more than your current “exorbitant” cable bill.

The reason is that unmoored from the cable bundle, individual networks would have to charge vastly more money per subscriber. Under the current system, in which cable companies like Comcast pay the networks for carriage — and then pass on the cost to their customers — networks get to charge on the basis of everyone who subscribes to cable television, whether they watch the network or not. The system has the effect of generating more money than a network “deserves” based purely on viewership. Networks also get to charge more for advertising than they would if they were not part of the bundle.

Take, for instance, ESPN, which charges the highest amount of any cable network: $3 per subscriber per month. (I’m borrowing this example from a recent research note by Craig Moffett, the Sanford C. Bernstein cable analyst.) Suppose in an à la carte world, 25 percent of the nation’s cable subscribers take ESPN. If that were the case, the network would have to charge each subscriber not $3, but $12 a month to keep its revenue the same. (And don’t forget: with its $1.1 billion annual bill to the National Football League alone, ESPN is hardly in a position to tolerate declining revenues.)

And that’s one of the most popular channels on cable. What percentage of cable subscribers would take Discovery, or the Food Network, or Oxygen, or Hallmark — or the many, many more obscure networks that you can now find up and down your cable box? Five percent? Ten percent? According to Mr. Moffett’s analysis, if every African- American family in the country subscribed to the Black Entertainment Network, it would still have to raise its fees by 588 percent. He adds, “If just half opted in — still a wildly optimistic scenario — the price would rise by 1,200 percent.”

Even worse, Nocera goes on to show how a la carte would likely decimate the wonderful diversity of programming choices we have on TV today, (a point that I have repeatedly stressed in all my work on the subject):

Indeed, it is quite likely that many of the smaller channels would simply vanish because they wouldn’t have enough subscribers — or couldn’t charge enough to stay in business with the subscribers they did have. … We all have our particular interests and tastes, and under its current business model, cable does a remarkable job of satisfying those interests. Diversity of programming is one of the real benefits that cable has over the old over-the-air broadcasting system. When we pay for the cable bundle we are, in effect, subsidizing those channels for everybody — including ourselves.

Make sure to read the entire article. Nocera really nails it.

  • Mark Seecof

    Do you shut off all your critical faculties when you write about cable-TV regulation?

    Although I don’t favor the most- publicized a-la-carte regulatory proposals, TLF posts are not the reason.

    Let’s look at Nocera’s big example for a moment. He suggests that 75% of subscribers pay $3/month for ESPN even though they don’t watch it. Why should they pay for it? Given a choice they could spend that money for channels they do want! Appealing to ESPN’s supposedly inviolable demand for revenue proves nothing. In a free market, sellers are supposed to earn their revenues from willing customers, not just announce that they “need” a certain amount of income (and if ESPN’s revenue fell, it would just pay less to sport leagues and so-forth)[1]. Letting ESPN hear the message of the market would be good for consumers overall no matter how much it might frost ESPN’s executives.

    (Doesn’t the ESPN example strike you as weird? Can you name another common consumer good that 3/4′s of the buyers don’t actually want? Usually only government tax-and-spend schemes (e.g., Los Angeles’ 0.5% general sales tax to fund “light rail” that almost no one patronizes [plus much of the money goes to graft]) illustrate such a level of coercion! Really, the ESPN example, if true, demonstrates that cable-TV really does have near-monopoly power, since it can compel absurdities which are normally the province of government intervention!)

    Bookstores only ask you to pay for the books you buy, not those you leave on the shelves (yes, yes, store overhead is distributed across all books. Of course with unbundled cable there would be a monthly service charge apart from channel fees).

    Anyway, as presented, the overall argument makes no sense. Unbundling could only force every channel to raise prices if consumers bought less cable-TV overall.[2] Otherwise (if consumer TV spending stayed about the same) there might be winners and losers among both consumers and providers, but if some channels did well while others withered that would just reveal true popularity, so what’s the problem?

    If some consumers paid lower cable bills they could use their extra money to buy other forms of entertainment (or whatever they valued most at the margin). It insults the reader to suggest that consumers would subscribe one by one to every channel now in their bundles and pay quadruple for the privilege. It’s likely that many consumers with less appetite for TV viewing would subscribe to few channels and pay less, while some true vidiots would subscribe to many channels and pay more. The average consumer would be better off. TV providers would earn less but other entertainment purveyors would earn more. Total economic activity in the US would remain the same (or even expand slightly, since entertainers would get more creative in a more competitive marketplace).

    Also, it’s a myth that advertisers would pay less overall to program suppliers. Sure, they might adjust their buys (slightly), but advertisers with TV budgets buy where they get good response, or on “Nielsen” ratings– advertisers don’t actually care very much about the bundles forced on consumers.[3]

    I posted a comment a couple of weeks ago, with a citation to the latest academic work on bundling (in general, not specifically in American CATV), showing why and how bundling in the pay-TV industry is anti-consumer. I would respect TLF more if you tried to analyzing the issue rather than just repeating cable-industry propaganda filtered through the business press to the effect that unbundling would necessarily harm consumers.

    [1] I can see why Nocera emphasizes ESPN, because the spectre of unbundling forcing BET to raise prices sixfold when only, you know, BET viewers pay for it hardly makes bundling look good to the vast majority of cable viewers now forced to subsidize a channel they would hardly watch at gunpoint.

    [2] Unless you make unreasonably negative assumptions about transaction costs.

    [3] Bundles matter a lot in suppliers’ relations with advertisers, but only because suppliers use bundling to screw advertisers as well as viewers– forcing advertisers to appear on channels they don’t care about in order to appear on those they do.

  • Mark Seecof

    Do you shut off all your critical faculties when you write about cable-TV regulation?

    Although I don’t favor the most- publicized a-la-carte regulatory proposals, TLF posts are not the reason.

    Let’s look at Nocera’s big example for a moment. He suggests that 75% of subscribers pay $3/month for ESPN even though they don’t watch it. Why should they pay for it? Given a choice they could spend that money for channels they do want! Appealing to ESPN’s supposedly inviolable demand for revenue proves nothing. In a free market, sellers are supposed to earn their revenues from willing customers, not just announce that they “need” a certain amount of income (and if ESPN’s revenue fell, it would just pay less to sport leagues and so-forth)[1]. Letting ESPN hear the message of the market would be good for consumers overall no matter how much it might frost ESPN’s executives.

    (Doesn’t the ESPN example strike you as weird? Can you name another common consumer good that 3/4′s of the buyers don’t actually want? Usually only government tax-and-spend schemes (e.g., Los Angeles’ 0.5% general sales tax to fund “light rail” that almost no one patronizes [plus much of the money goes to graft]) illustrate such a level of coercion! Really, the ESPN example, if true, demonstrates that cable-TV really does have near-monopoly power, since it can compel absurdities which are normally the province of government intervention!)

    Bookstores only ask you to pay for the books you buy, not those you leave on the shelves (yes, yes, store overhead is distributed across all books. Of course with unbundled cable there would be a monthly service charge apart from channel fees).

    Anyway, as presented, the overall argument makes no sense. Unbundling could only force every channel to raise prices if consumers bought less cable-TV overall.[2] Otherwise (if consumer TV spending stayed about the same) there might be winners and losers among both consumers and providers, but if some channels did well while others withered that would just reveal true popularity, so what’s the problem?

    If some consumers paid lower cable bills they could use their extra money to buy other forms of entertainment (or whatever they valued most at the margin). It insults the reader to suggest that consumers would subscribe one by one to every channel now in their bundles and pay quadruple for the privilege. It’s likely that many consumers with less appetite for TV viewing would subscribe to few channels and pay less, while some true vidiots would subscribe to many channels and pay more. The average consumer would be better off. TV providers would earn less but other entertainment purveyors would earn more. Total economic activity in the US would remain the same (or even expand slightly, since entertainers would get more creative in a more competitive marketplace).

    Also, it’s a myth that advertisers would pay less overall to program suppliers. Sure, they might adjust their buys (slightly), but advertisers with TV budgets buy where they get good response, or on “Nielsen” ratings– advertisers don’t actually care very much about the bundles forced on consumers.[3]

    I posted a comment a couple of weeks ago, with a citation to the latest academic work on bundling (in general, not specifically in American CATV), showing why and how bundling in the pay-TV industry is anti-consumer. I would respect TLF more if you tried to analyzing the issue rather than just repeating cable-industry propaganda filtered through the business press to the effect that unbundling would necessarily harm consumers.

    [1] I can see why Nocera emphasizes ESPN, because the spectre of unbundling forcing BET to raise prices sixfold when only, you know, BET viewers pay for it hardly makes bundling look good to the vast majority of cable viewers now forced to subsidize a channel they would hardly watch at gunpoint.

    [2] Unless you make unreasonably negative assumptions about transaction costs.

    [3] Bundles matter a lot in suppliers’ relations with advertisers, but only because suppliers use bundling to screw advertisers as well as viewers– forcing advertisers to appear on channels they don’t care about in order to appear on those they do.

  • Henry Miller

    The question is this: do you want 500 channels in your living room, even though you are reading my post here, or do you want just the 1 channel you will watch latter on?

    500 channels is a lot of choices. If you want that many choices, a la carte is not what you want – you want the everything bundle. If you just want the 3 channels you watch, a la carte is for you.

    Most people I know with a TV flip channels a lot. They want 500 choices, and every once in a while they stop at a channel they have never looked at before – and the next week they do the same, but going to a different channel. They would not subscribe to those channels a la carte, (it isn’t worth it), but they do want them there just in case they happen to want to watch it some night.

    If people were not happy with the price of cable they would find something else. I don’t have cable – my TV is used only for video games (and I only have it because it was free), I know other people with just broadcast TV, and a few more with just basic cable. I think the majority of my friends are paying for everything though.

  • Henry Miller

    The question is this: do you want 500 channels in your living room, even though you are reading my post here, or do you want just the 1 channel you will watch latter on?

    500 channels is a lot of choices. If you want that many choices, a la carte is not what you want – you want the everything bundle. If you just want the 3 channels you watch, a la carte is for you.

    Most people I know with a TV flip channels a lot. They want 500 choices, and every once in a while they stop at a channel they have never looked at before – and the next week they do the same, but going to a different channel. They would not subscribe to those channels a la carte, (it isn’t worth it), but they do want them there just in case they happen to want to watch it some night.

    If people were not happy with the price of cable they would find something else. I don’t have cable – my TV is used only for video games (and I only have it because it was free), I know other people with just broadcast TV, and a few more with just basic cable. I think the majority of my friends are paying for everything though.

  • http://www.blawgletter.com Blawgletter

    Ah, yes, the illusion of choice. A bundle offers choice among the channels the cable company has chosen to include in it. You can’t change the bundle to add or subtract channels. You can’t even switch cable providers. You could pay extra — a LOT extra — to add premium programming, particularly sports games. But in bundling the only real choice you have is when you’re endlessly switching channels and get a serotonin high from knowing, just knowing that you have an enormous number of channels that you will never, ever watch.

    A la carte gives consumers genuine choice. They can pick only the channels they want, or they can pay for a small, medium, or large bundle in lieu of making channel-by-channel decisions. Plus they can constantly fine-tune their channel selection.

    I wrote an analysis of Nocera’s column the other day at http://www.blawgletter.com. It says:

    In his NYT Talking Business column today, Joe Nocera counts “the bundle of networks [that] cable delivers into your home” as “one of the blessings” of the cable industry. Ha!

    He writes that requiring cable giants like Comcast and Time Warner to let subscribers choose their channels “would be a consumer disaster.” Double ha!

    His proof consists of the hypothesis that “a la carte will almost surely cost more than your current ‘exorbitant’ cable bill” because it would eliminate the “subsidizing” effect of bundling. Obscure, niche, and — let’s face it — bad channels survive because the good ones in the bundle carry them. Triple ha!

    Blawgletter realizes that saying “ha!” over and over again doesn’t make much of a persuasive argument. And yet we have a point, which will take us a few more paragraphs to lay out.

    We ask first whether the cable colossi favor or oppose a la carte. Answer: They hate it with a passion. That should tell you something.

    Second, how do the behemoths of bundling benefit from same? For starters, they use it to justify skyrocketing cable rates, which have risen far faster than inflation. The more channels in the bundle, the lower charge per-channel — Comcastic! If you get 200 channels of junk plus 20 that you may actually watch instead of only 100 junk channels, you pay less on average for each channel — wow! And some regulators actually buy the argument.

    Third, who cares if the price of ESPN quintuples — as Mr. Nocera posits it will — in an a la carte regime? Will die-hard sports fans really suffer from having to choose between the droll repartee of ESPN’s celebrocasters and the possibility of falling in love with a cooking program while switching channels?

    Fourth, why on earth does Mr. Nocera think that giving consumers more choice in the short term will in the longer term result in less? He asserts that killing the bundling subsidy will wreak havoc on less popular or new channels, sending them to cable oblivion. He asserts that but does nothing to substantiate it. And we don’t believe a bit of it.

    For one thing, guess who does more and more programming these days? Correct — the cable companies themselves. And guess who decides whether to put the cable companies’ new programming into the bundle? Right again. The monopolists’ ability to discriminate in their own favor already constrains consumer choice. A la carte would at least make the discrimination and its effects more visible.

    Nor would a la carte spell the end of all bundling. We see no reason why consumers couldn’t choose a bundle — or a combination of bundles — instead of selecting each and every channel they want.

    Finally, we recall another monopoly that not so long ago bundled all its services under the sleepy eye of the Federal Communications Commission. Ma Bell provided all Americans with a clunky, monochromatic, rotary-dial telephone; local service; directory assistance; and long-distance service, which (not coincidentally) subsidized local service in the name of universal service. Now, of course, you can buy what you want from just about whichever company you like. We pay the freight for encouraging universal telephone ownership in a fully transparent way. Unbundling seems to work.

    We suspect that Mr. Nocera’s aversion to a la carte results in part from the comforting notion that monopolists may act benevolently. We admit the possibility but point out that Comcast and Time Warner know what Ma Bell did back in the day — that the power to limit output, including in the form of consumer choices, maximizes the monopolists’ profits at the expense of consumers.

    Who hates a la carte the most? The ones whose ox it would gore.

    Barry Barnett

    Yes, we do have a pending case against Comcast.

  • http://www.blawgletter.com Blawgletter

    Ah, yes, the illusion of choice. A bundle offers choice among the channels the cable company has chosen to include in it. You can’t change the bundle to add or subtract channels. You can’t even switch cable providers. You could pay extra — a LOT extra — to add premium programming, particularly sports games. But in bundling the only real choice you have is when you’re endlessly switching channels and get a serotonin high from knowing, just knowing that you have an enormous number of channels that you will never, ever watch.

    A la carte gives consumers genuine choice. They can pick only the channels they want, or they can pay for a small, medium, or large bundle in lieu of making channel-by-channel decisions. Plus they can constantly fine-tune their channel selection.

    I wrote an analysis of Nocera’s column the other day at http://www.blawgletter.com. It says:

    In his NYT Talking Business column today, Joe Nocera counts “the bundle of networks [that] cable delivers into your home” as “one of the blessings” of the cable industry. Ha!

    He writes that requiring cable giants like Comcast and Time Warner to let subscribers choose their channels “would be a consumer disaster.” Double ha!

    His proof consists of the hypothesis that “a la carte will almost surely cost more than your current ‘exorbitant’ cable bill” because it would eliminate the “subsidizing” effect of bundling. Obscure, niche, and — let’s face it — bad channels survive because the good ones in the bundle carry them. Triple ha!

    Blawgletter realizes that saying “ha!” over and over again doesn’t make much of a persuasive argument. And yet we have a point, which will take us a few more paragraphs to lay out.

    We ask first whether the cable colossi favor or oppose a la carte. Answer: They hate it with a passion. That should tell you something.

    Second, how do the behemoths of bundling benefit from same? For starters, they use it to justify skyrocketing cable rates, which have risen far faster than inflation. The more channels in the bundle, the lower charge per-channel — Comcastic! If you get 200 channels of junk plus 20 that you may actually watch instead of only 100 junk channels, you pay less on average for each channel — wow! And some regulators actually buy the argument.

    Third, who cares if the price of ESPN quintuples — as Mr. Nocera posits it will — in an a la carte regime? Will die-hard sports fans really suffer from having to choose between the droll repartee of ESPN’s celebrocasters and the possibility of falling in love with a cooking program while switching channels?

    Fourth, why on earth does Mr. Nocera think that giving consumers more choice in the short term will in the longer term result in less? He asserts that killing the bundling subsidy will wreak havoc on less popular or new channels, sending them to cable oblivion. He asserts that but does nothing to substantiate it. And we don’t believe a bit of it.

    For one thing, guess who does more and more programming these days? Correct — the cable companies themselves. And guess who decides whether to put the cable companies’ new programming into the bundle? Right again. The monopolists’ ability to discriminate in their own favor already constrains consumer choice. A la carte would at least make the discrimination and its effects more visible.

    Nor would a la carte spell the end of all bundling. We see no reason why consumers couldn’t choose a bundle — or a combination of bundles — instead of selecting each and every channel they want.

    Finally, we recall another monopoly that not so long ago bundled all its services under the sleepy eye of the Federal Communications Commission. Ma Bell provided all Americans with a clunky, monochromatic, rotary-dial telephone; local service; directory assistance; and long-distance service, which (not coincidentally) subsidized local service in the name of universal service. Now, of course, you can buy what you want from just about whichever company you like. We pay the freight for encouraging universal telephone ownership in a fully transparent way. Unbundling seems to work.

    We suspect that Mr. Nocera’s aversion to a la carte results in part from the comforting notion that monopolists may act benevolently. We admit the possibility but point out that Comcast and Time Warner know what Ma Bell did back in the day — that the power to limit output, including in the form of consumer choices, maximizes the monopolists’ profits at the expense of consumers.

    Who hates a la carte the most? The ones whose ox it would gore.

    Barry Barnett

    Yes, we do have a pending case against Comcast.

  • Larabee

    What I’m wondering is who is pushing for this sort of regulation? In today’s political climate, ideas such as these never get very far without corporate backing of some kind. Which corporation(s) wish for this regulation to come about and why?

  • Larabee

    What I’m wondering is who is pushing for this sort of regulation? In today’s political climate, ideas such as these never get very far without corporate backing of some kind. Which corporation(s) wish for this regulation to come about and why?

  • eric

    I am not a corporation, and I am pushing for a la carte cable because I am a very selective viewer and there is hardly anything on cable TV I want to watch. I might subscribe if I could buy a few channels at low cost. But some so-called libertarians would support the right of a duopolistic pay-TV industry to deny consumers that choice. Go figure. Many of them are just afraid that if the government can start regulating cable, they will cut off their porn channels — that’s my guess.

  • eric

    I am not a corporation, and I am pushing for a la carte cable because I am a very selective viewer and there is hardly anything on cable TV I want to watch. I might subscribe if I could buy a few channels at low cost. But some so-called libertarians would support the right of a duopolistic pay-TV industry to deny consumers that choice. Go figure. Many of them are just afraid that if the government can start regulating cable, they will cut off their porn channels — that’s my guess.

  • Jocelyn Gallant

    I have a problem with Comcast for not letting me to choose the channel that I want, I am force to take package with full of unwanted channel like Espen and other sports channels we are being hit with higher cable prices that so many of us struggling in the slowing economy. We just cannot afford to pay higher prices to Comcast Cable Services. Its rip off.

    This a problem for those who do not have stable employment, those who is on fixed income such as senior citizens who cannot afford to pay all their hard earn money that work all their lives to big Comcast Cable Company we making them rich. The rich is getting richer the poor is getting poorer.
    Something needs to done about this problem over price customers that cannot pick and choose their channels they want but are being force to take package with unwanted channels not by choices and Customers should have more choices what channel they want. Not the cable company decides for customers.

    Thank you for your attention in this matter. Look forward to hearing from your in your reply to this matter.

    Jocelyn Gallant

  • http://HTML Jocelyn Gallant

    I have a problem with Comcast for not letting me to choose the channel that I want, I am force to take package with full of unwanted channel like Espen and other sports channels we are being hit with higher cable prices that so many of us struggling in the slowing economy. We just cannot afford to pay higher prices to Comcast Cable Services. Its rip off.

    This a problem for those who do not have stable employment, those who is on fixed income such as senior citizens who cannot afford to pay all their hard earn money that work all their lives to big Comcast Cable Company we making them rich. The rich is getting richer the poor is getting poorer.
    Something needs to done about this problem over price customers that cannot pick and choose their channels they want but are being force to take package with unwanted channels not by choices and Customers should have more choices what channel they want. Not the cable company decides for customers.

    Thank you for your attention in this matter. Look forward to hearing from your in your reply to this matter.

    Jocelyn Gallant

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