Importance

May 25, 2004

FCC Requests Comments on a la Carte Cable Subscriptions

Today, the FCC issued a request for comments regarding a la carte cable programming pricing (Comment Requested on a la Carte and Themed Tier Programming and Pricing Options for Programming Distribution on Cable Television and Direct Broadcast Satellite Systems [PDF]). This is an issue that has gotten much press recently, mostly due to consumer group pressure as well as conservatives who don't like the idea that some of their money might be supporting indecent cable programming.

Most of the articles that address this issue, however, deal solely with the question of whether consumers should have to pay for something they have no interest in. In contrast, a passle of economists argue persuasively that, in fact, cable bundling can be a good thing in aggregate. See, among others, Marginal Revolution: Why can't you choose your cable channels?. The basic idea is that "when demands are scattered [hard to tell who likes sports and who like cartoons] and the marginal cost of additional service is low," bundling makes sense.

However, this doesn't address the bundling that concerns me - the bundling of programming from content producer (think Disney) to cable company. If a cable company wants Disney's ESPN, they're going to have to take some of Disney's less popular channels as well. Read on...

Posted by Ernest at 11:15 PM

You might wonder why, if bundling makes sense for consumers, why it doesn't also make sense for cable companies. But the assumptions for both cases are different. In the case of consumers, an assumption is that the cable company can gauge the aggregate demand for a channel but not the specific demand. In other words, the cable company knows that 50% of its customers want ESPN, they just have a hard time identifying which 50%. Of course, the cable company could go through a process of interviewing and negotiating with each individual consumer to determine their specific demand, but the transaction costs are too high. On the other hand, since cable companies and content producers already engage in expensive negotiations for channels, the transaction costs would seem to be reasonable. A content producer should be able to negotiate and determine a cable company's specific demand for a particular channel.

As with any bundling scheme, one also has to ask to why the seller would want to bundle, since that generally decreases the price they can get from negotiating two separate prices. In this case, among other reasons, bundling content has the effect of increasing the barriers to entry for producers of cable channels. If Comcast has to take a food channel from Disney as part of the ESPN deal, it will be more difficult for me to get Comcast to buy and provide good channel space for my food channel. The increased barrier to entry more than offsets Disney's lost revenue from bundling.

Of course, one might argue that the content creators want to bundle through the cable companies to the consumer. But we have a middleman here for a reason, don't we? Shouldn't the cable company buy programming channels a la carte and then decide on what bundling to consumers makes sense? If we want to turn the cable companies into common carriers for content, fine. But, if not, then let them decide what bundling makes sense, since they are closer to the consumers.

Thus, I am happy that the FCC is actually addressing the content producer bundling issue. Some of the questions the request for comment proposes are:

Do MVPDs ["Multichannel Video Programming Distributors" - FCC-speak for cable and satellite companies] currently have the option to purchase channels from programmers on a stand-alone basis, such that they could, if they chose, offer programming to consumers on an a la carte or themed-tier basis? What are the limitations, if any, on their flexibility to do so? What statutory or regulatory action would be needed to remove any such limitations?
What would the impact be on retail rates to consumers if programmers were required to offer their programming to MVPDs exclusively on a stand-alone basis, and could not also offer programming on a bundled basis for free or at a discounted rate?

This next question is a very good one considering the "must carry" rule that allows broadcast networks to be especially extortionary.

How have broadcast networks and affiliate groups used the retransmission consent process to expand carriage of affiliated programming? How has this affected rates for MVPD offerings for consumers?

The next three questions make me think of the doctrine of "copyright misuse" for some reason.

What, if any, Constitutional or other legal questions are raised by programmers' ability to bundle services through retransmission consent, regional sports contracts, and national programming contracts for marquee programming?
What, if any, Constitutional or other legal questions would be raised if Congress required programmers to offer their channels to MVPDs on a stand-alone basis and prohibited them from requiring carriage of their programming on particular tiers?
What, if any, Constitutional or other legal questions would be raised if, in addition to currently offered packages, Congress required programmers to allow MVPDs to voluntarily offer their channels on an a la carte or themed-tier basis?

If any economists would like to work with me on some comments to the FCC, let me know. Comments are due July 8th.

  Comments and Trackbacks (http://www.corante.com/cgi-bin/mt/mt-tb.cgi/2804)

I'm a little confused about your comment on why bundling doesn't make sense for cable companies. Isn't part of the benefit of bundling that the consumer gets a wider array of chanels for a relative bargain? So in the case of cable companies, why wouldn't they get access to a wider array of programming also for a relative bargain?

Posted by Susan on June 15, 2004 10:22 PM | Permalink to Comment

There are two levels of bundling here. Content producers bundle channels to the cable company. Cable companies bundle channels to the consumer. Only one layer of bundling makes sense, that is, letting the cable company bundle channels to the consumer.

Posted by Ernest Miller on June 15, 2004 10:41 PM | Permalink to Comment

I understand that there are two levels of bundling. I'm just not clear on why exactly content producer bundling doesn't make sense. Why isn't it analagous to the scenario between cable company and consumer? Surely there is some economic benefit to the cable company in being able to buy content in a bundled fashion and then pass on that content diversity to the consumers.

Posted by Susan on June 17, 2004 08:08 PM | Permalink to Comment

The reason it makes sense in the consumer context is because there are many consumers and it is difficult to discover their desire for particular channels. On the other hand there are few cable companies and they have teams of lawyers negotiate contracts with the content producers. Thus, there is little justification for bundling except as an anti-competitive move.

Posted by Ernest Miller on June 17, 2004 08:16 PM | Permalink to Comment

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