Why Cable Companies Bundle Their Channels

Introduction (Via The New Yorker)

It seems like an annual rite: to usher in the new year, cable providers and networks squabble over programming fees. This time around, the tussles involved Time Warner Cable and Fox, and Cablevision and Scripps, which owns the Food Network and HGTV. These fights, unlike most corporate standoffs, are waged in public, with both sides running TV spots and newspaper ads pleading their cause. This might seem like an obvious strategy, but it’s also a dangerous one. These ads may remind some viewers of how much they love Bobby Flay. But they also remind those who’ve never glanced at “Iron Chef” how much of their cable bill goes to channels that they don’t watch.

That’s a problem, because while cable TV has always relied on “bundling”—you have to buy a package of channels rather than picking only those you want—in recent years the practice has come under fire, in no small part because the price of those bundles keeps rising. The bundles do, of course, include many more channels than they did a decade ago. But, as Kevin Martin, the former head of the F.C.C., was fond of pointing out, if you’re watching only sixteen channels why should you pay for eighty-five? So consumer advocates have been pushing for a system of so-called “à la carte” programming, expecting that this would drive down prices for consumers.

Notable Excerpts (Via The New Yorker)

In fact, it probably wouldn’t. 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 à-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 à-la-carte packages would be generally cheaper than the current bundles.

Some of this, presumably, is just inertia. But it’s also true that consumers often find bundles appealing. Many popular consumer products, like the iPhone, are bundles, as are newspapers and magazines: you buy the whole thing, not only the articles you want to read. TV networks themselves are bundles: if you subscribe to HBO (a channel that cable systems do offer à la carte), you pay for all its shows. Consumers also seem to like another form of bundling; namely, flat-rate pricing. At Disneyland, people used to pay an admission fee and then buy tickets for individual rides. But in 1982 Disney introduced all-in-one pricing, and attendance rose. Likewise, people buy gym memberships instead of paying by the visit, prefer all-in-one calling plans, and vehemently oppose the idea of metered Internet access.

Successful bundling depends on the idea that what you’re paying for is “cable television,” rather than merely a collection of channels. Public fights over programming costs disrupt that idea.

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21. January 2010 by Miguel Barbosa
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