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Demand and Supply: Should Congress Unbundle Cable?

by Elaine Schwartz    •    May 16, 2013    •    566 Views

If I pay $100 for a 50 channel cable package, then choosing the 25 channels I really watch should cost me $25. Yes?

I suspect Senator John McCain agrees. But it might not work out that way if his legislative unbundling proposal is passed by Congress.

Currently, consumers buy cable packages that provide access to groups of programs. A typical bundle, this Comcast offer includes “over 160 channels…40 commercial free music channels …17,000 on demand choices” for “as low as” $49.99 for 6 months. In 2005, the average household watched only 15 of the 96 channels in its subscription and paid close to $600 annually.

So, would à la carte be better?

Demand:

According to academic studies, no one is sure if unbundling will save us money. One Temple University researcher unbundled cable packages into “7 mini-tiers by channel genre” and concluded that we would save 35 cents per household per month. On the other hand, one of 2 FCC studies concluded that unbundling would be beneficial but the other did not.

Trying to assess the impact on the consumer, economists have created alternative package scenarios. They have cited consumer surplus, transaction costs, “option value” and monopoly power. They list the other bundles we buy like season tickets and newspapers (a bundle of articles). They cite huge cable price increases and lack of choice.

Supply:

On the supply side, analysts refer to the high fixed costs that relate to the expense of wiring and establishing a network and then to the low marginal cost of expanding and implementing it. They remind us of programming costs and licensing fees. Unbundling could upset the revenue stream that facilitates the current industry structure. It could mean the demise of less popular channels. Or, it could encourage more productivity and new industry approaches.

So, with all of these demand and supply variables and more, how to decide whether unbundling makes sense? Maybe we don’t have to decide. One journalist suggests waiting for internet competition to upset the current market model.

Sources and Resources: While this WSJ article summarized the unbundling issues and alternatives most clearly, this academic paper has 51 pages of everything you ever wanted to know about cable TV and bundling. In addition, for lots more reading and the source of more of my facts, I suggest this New Yorker column, this Slate article, this Atlantic discussion and here is the McCain proposal. After reading it all, I can only say that the countless variables are all in flux because of technological innovation.

From "Unbundling Cable Television:An Empirical Investigation" by Dmitri Byzalov

From “Unbundling Cable Television:An Empirical Investigation” by Dmitri Byzalov

 

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