Unbundling Television Channels
Once again, those frozen-brained Canucks seem to be showing the world how to do business. First they drove through the financial crisis on the bulletproof tires of their banking regulatory system; now they’re going to apply that regulatory nous to the cable company cartel. (Bias disclosure: while I happen to live and work in New York City, I was born and remain a Canadian citizen. So it’s possible I’m not completely objective regarding the strengths of the Canadian business environment.)
Reuters reports that the Canada’s industry minister opined on Sunday that he doesn’t think Canadians should pay for channels they don’t watch, and he’d like to do something about it. Obviously there’s no technical reason why a consumer can’t buy their channels à la carte, and as it happens, he may not have to do much. In fact, the regulatory nudges started a couple of years ago, and Reuters reported last month that there are a range of offerings appearing, with some companies using à la carte as a selling point. Canadian companies are well aware of how unpopular bundling is and are already starting to acquiesce. But as Forbes noted today, American cable companies don’t appear to be open to that kind of change, despite widespread consumer dissatisfaction and Senator John McCain’s bill last spring.
While the barriers to entry aren’t quite what they once were, there are still good reasons why the cable and satellite companies are permitted to work like an oligopoly. Infrastructure costs are prodigious and you need a level of market coverage out of the gate. But that doesn’t mean the pricing models are inviolable, as the baby steps in Canada are showing. Nevertheless, those arguing for the status quo may have a few points. The principal argument is that smaller channels are effectively subsidized by the more popular ones in the bundle. People may be willing to pay $4/month for ESPN but many fewer will pay twenty cents for Bravo (these are wholesale costs from a few years ago, but you get the idea). By lumping ESPN with Bravo and others of like popularity, you get a wealth of choice. If it didn’t work that way the many fewer consumers interested in Bravo would have to pay much more for it, or more likely it simply wouldn’t be a viable channel.
No one can tell for certain how the math would work out. In an ideal free market, i.e. fully à la carte, it’s likely that many channels would disappear, but they would be the weaker ones that no is willing to pay a premium for. The cost of those remaining would jump dramatically. But we have established that consumers will pay comfortably in the range of sixty dollars per month for their television fix. Even if Bravo, Comedy Central, FX and BBC America each jumped into ESPN’s four dollar range, an à la carte selection still includes fifteen channels that you actually watch. How many does a consumer actually need?
At the end of the day, the business model has to change. McCain’s initiative expresses popular opinion, that the cable companies are gouging, and that perception isn’t likely to change by itself. Customers are cutting the cord by watching their programs online or through Netflix. As the incipient changes in Canada show, the market can respond without collapsing; the US market will sooner or later evolve too.
« The Marketplace of Cloudy Ideas The Business of Open Source »
