Sports Channels and A La Carte Cable Pricing

by on January 26, 2013 · 4 comments

Matt Yglesias today responded with a post of his own to a NYT article about sports channels and cable pricing by Brian Stelter that Yglesias believed had “bad analysis.” I’m here to defend Stelter a little bit because I think Yglesias was too harsh and that Yglesias erred in his own post about the nature of cable bundling. Yglesias’ posts on cable bundling are good, and especially valuable because his Slate and ThinkProgress audiences are not the most receptive to economic justifications for perceived unfair corporate pricing schemes. In part due to him I suspect, you rarely hear econ and business bloggers calling for a la carte pricing of cable channels.

And Yglesias is certainly right that you can’t really complain about the price of your cable package, which includes the few channels you watch plus the sports channels you don’t watch, because you obviously value the channels more than the price you pay per month, even if the sports are a “waste.” He falters when he says

So since those channels are worth $60 to you, even if unbundling happens your cable provider is going to find a way to charge you approximately $60 for them. Because at the end of the day, you’re paying your cable provider for access to the channels you do watch—not for access to the channels you don’t watch. The channels you don’t watch are just there. If the channels you do watch are worth $60 to you, then $60 is what you’ll pay for them.

It would be an amazing price discrimination scheme if it were true cable operators can figure out how to charge each subscriber the approximate price the subscriber values his favorite channels. Cable companies don’t currently have that ability. Even a la carte distributors, like Amazon Prime with their video offerings, don’t charge you exactly what you value TV shows and movies at. The efficiency of bundling cable channels arises not because cable companies are pricing everyone their reservation price, as Yglesias suggests. Bundling is efficient because in a high fixed-cost industry, like cable, cable channel bundles provide cost savings that outweigh the costs of providing “wasted” channels consumers don’t watch.

I think the main point of Stelter’s article is right and Yglesias is incorrect. It’s conceivable that most customers would actually see sustained lower cable prices if sports channels were someday offered as premium channels, like Showtime and HBO. If Stelter is faulted for anything, it’s that he mentioned the phrase “a la carte,” since it seems like his sources only alluded to a partial breakup of the current bundle–making sports a premium offering–not a wholesale a la carte offering. Stelter quoted a former DOJ antitrust lawyer and anonymous cable executives who say that increasing sports channel prices may make the cable bundle so pricey that cable operators will be forced to break up the bundle, and I see no reason to question their assessments.

I’ll attempt to illustrate what the cable executives are trying to avoid. Bundling components like cable channels lowers costs for providers. If you imagine an a la carte world, it’s plain the costs escalate. Instead of everyone picking from a menu of 3 or 4 bundles from a cable provider, every single subscriber household would have a different customized selection. Cable companies would have to ensure everyone is receiving their requested channels, frequently make corrections and updates, and incur other costs.

Not to mention, a la carte would eliminate many channels currently in existence because there is a cross-subsidy business model in place that makes low-demand channels available in the first place. (A la carte would especially harm religious, African-American, and other niche programming. Currently, these niche content creators have to market their channels only to a few cable and satellite companies for carriage. With a la carte, they would have to engage in nationwide and expensive marketing campaigns to all their likely customers, which is why these smaller firms typically oppose a la carte.) A la carte, then, is costly to both cable and content providers. Offering only a few bundles eliminates many costs.

However, when the price of the bundle increases with more expensive sports programming, as the Stelter piece describes, you lose customers because the bundle has become too expensive. Eventually, it becomes more cost-effective to spin off some sports channels as premium channels, charge those sports customers more, and offer a lower-priced package to everyone else and gain customers. And I suspect sports viewers have relatively inelastic demand (nothing ruins my fall weekend like a Bears black-out on the East Coast), so the losses from a sports unbundling could be minimal.

If there’s a lesson, it’s that this all goes back to Coase and his tautological but helpful theory of the firm. We know where efficient firm boundaries are based on where firm boundaries are. That is, the current cable packages could be disintegrated if it’s too costly to maintain them. In a dynamic market like cable, it may one day be efficient to break up the current bundle, charge everyone less, and make some sports channels premium channels.

  • TheBrett

    I think the main point of Stelter’s article is right and Yglesias is incorrect. It’s conceivable that most customers would actually see sustained lower cable prices if sports channels were someday offered as premium channels like Showtime or HBO

    Some of them already are, along with special options (like NFL Sunday Ticket). I think the problem is that the most expensive sports channels also tend to (not surprisingly) be the most desired, meaning that they’re what’s keeping a lot of cable customers from seriously considering terminating their cable subscriptions.

    Not to mention that the bigger ones (like ESPN) have significant leverage in these negotiations. They could refuse to license the channel to a particular provider if they get kicked into a higher-cost premium package.

  • bskorup

    I think that’s right. ESPN’s leverage is substantial and a cable operator would have to think long and hard before making sports a premium offering and alienating Disney. I don’t think breaking up the bundle will happen soon by any means, but if the trends of costlier sports programming continue it could become profitable.

    It seems to me there’s room in the market for a “Dish Network of cable”–a cable provider with smaller sports package offering cable service at a discount. There are many competitive obstacles for new wire entrants, however, and I’m not holding my breath.

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