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Monday, November 26, 2007

NYT's Joe Nocera on perils of a la carte regulation
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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.

posted by Adam Thierer @ 9:43 AM | A La Carte

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