New Conventional Wisdom: Cable TV Bundling is Good for Consumers

by on January 28, 2010 · 5 comments

Catching up on some magazines while waiting for my car to pass its annual emissions test the other day, I came across an article on cable TV bundling. Not too long ago, the issue of cable TV multichannel packaging–and whether cable companies should be required to offer channels “a la carte,” allowing customers to pick and choose the channels they watch–was a hot issue. Former FCC Commissioner Kevin Martin pushed heavily for it, even though the FCC’s own research, and later as some real-world market trials, found that a la carte options would not gain market traction.

The article nicely summed up the reasons.

The simple argument for unbundling is: “If I pay sixty dollars for a hundred channels, I’d pay a fraction of that for sixteen channels.” But that’s not how a la carte pricing would work. Instead, the prices for individual channels would soar, and the providers, who wouldn’t be facing any more competition than before, would tweak prices, perhaps on a customer-by-customer basis, to maintain their revenue. That doesn’t necessarily mean that Bravo would suddenly cost fifteen dollars a month, but there’s little evidence to suggest that a la carte packages would be generally cheaper than the current bundles. One recent paper on the subject, in fact, estimated the best-case gain to consumers at thirty-five cents a month. But even if it wasn’t a boon to consumers an a la carte system would inject huge uncertainty into the cable business, and many cable networks wouldn’t get enough subscribers to survive. That’s a future that the industry would like to avoid.

The source of this insight is not The Wall Street Journal, The Economist, Reason magazine, the first places you’d expect to see it. These thoughts instead come from James Surowiecki’s column in this week’s New Yorker, a good as measure as any of the liberal establishment’s cultural, political and economic zeitgeist. Just to show that the first excerpt was not a cursory nod to the bundling argument in order to set up its demolition, here’s a section that speaks to how the market addresses the psychological underpinnings of how consumer perceive value.

The appeal of bundling is partly that it reduces transaction costs: instead of having to figure out how much each part of a package is worth to you, you can make a blanket judgment. Bundling eliminates the problem of fretting about small expenditures, which may be one reason that flat-rate pricing is very common in the vacation industry (cruise ships, all-inclusive travel packages, and so on). It also offers what economists call option value: you may never watch those sixty other channels, but the fact that you could if you wanted to is worth something. Many consumers also perceive bundles as bargains; getting a bunch of things for one price feels like a deal, even when it’s not.

Surowiecki is author of The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations, a book that explores the way large groups shape economic outcomes, and as such, serves as something of an attempt to quantify the concept of Adam Smith’s “invisible hand.”

Surowiecki rarely gets ideological, but the insights of his economic observations—that a group of diverse individuals with diverse interests can collectively shape  market direction in counterintuitive ways–should give any central planner pause. I’m grateful to see them get airing in the media mainstream.

As far as cable a la carte, Surowiecki puts the policy discussion back where it belongs—on the degree such plans would interest consumers. Here’s where real-world business models trump regulatory mandates (although Surowiecki cautions that dust-ups over programming costs, like Time Warner Cable’s spat with Fox in December, could change consumer thinking). While a regulator might see a la carte as a good idea, what the regulator thinks doesn’t matter. Consumers simply don’t want a la carte, for reasons that can be identified and rationally understood.  Policies that fly in the face of this reality are doomed to fail, usually at a high cost to businesses and consumers alike.

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