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Unbundling the Cable: Why can’t I subscribe to the networks I actually watch?

June 3, 2011

Every cable subscriber eventually asks this question: “Why do I have to pay for crappy channels like Jewelry Television and the Jim Bakker Exploit-the-Faithful Network? Can’t I just subscribe to the 10 channels I actually watch?”  As our collective television consumption drifts away from schedules decided by the networks to one chosen by the viewers, it appears such a wish is likely to emerge as reality. Cable programming options such as “on demand” viewing, in addition to (legal) on-line proprietors such as Hulu and iTunes permit an almost individually-tailored television viewing experience. Yet, on the cable subscription front, the overall system has changed little since Bruce Springsteen, undoubtedly flummoxed by the physical challenge of locating Double Dare amongst the cavalcade of product hucksters, stock-market screamers and game-show hosts (but I repeat myself), perfectly encapsulated the zeitgeist in his 1992 single “57 Channels (and Nothin’ On)“.

While advances in remote-control technology allows us to permanently skip the channels falling outside of our interests (an issue that deserves further debate), we are still “forced” to finance the multitude of networks whose programming never occupies a second of our viewing schedule. Instead of being charged $50 per month, why can’t I pay $13 for the five channels I watch, and eschew the OWCNBC Shopping Land of Fox Business Planet?

Earlier this week, Alyssa Rosenberg of ThinkProgress and Megan McArdle of the Atlantic took a deeper look at this conundrum. Rosenberg, seeking an answer to the bundling question, offers the sound analogy that most methods of cultural consumption, such as books or music, do not require the customer to purchase a merchant-dictated menu of items in order to obtain exactly what one wants. Whereas we once had to buy the entire record, on-line hawkers like iTunes allow us to not have to pay for filler tracks such as the “skits on hip-hop albums” (although much of Missy Elliott’s toss-off between-track chatter-fests merit no complaints from me). She also cites a recent study indicating that “Generation Y” is far less likely to subscribe to a pay-cable service than their parents – also known as “cutting the cord”. (Hey, broad-brush naming professionals – can we get a better moniker for this group than “Generation Y”? Why not the “Challengers”, since the first real collective moment in their lives was the aforementioned space shuttle tragedy?) While there are many reasons for this, including the obvious “My-(everything)” ability to avoid what we dislike in most other elements of our lives, the crucial concern is financial. According to Georg Szalai of The Hollywood Reporter and Craig Moffett of Sanford C. Bernstein (a business research firm), the average revenue from consumers for cable and satellite services has increased 29% in the last five years (from $59.82 to $77.43), amidst a time where any rise in real income has been marginal at best, particularly within the much-prized 18-29 demographic. Hence, it would behoove the cable industry to follow the lead of Netflix (10 quid per month for unlimited on-line access to about 15% of their total catalog) and Hulu (free with limited advertising for new content, $9.99 for the entire run of most programming), and offer more choice to the consumer at a lower price-point. Especially when competitors like ShowBox are popping up all the time offering free content. Basic economic theory indicates that 5 to 10 dollars from millions of (former) customers is better than watching their revenues fall into the hands of the competition, right?

If it was only that simple, McArdle says. The complicated way to explain why this system persists involves the affiliate fees (the business term for what the cable companies pay a network per subscriber), which are based upon the number of viewers for a network. The fee negotiated between the cable company and the network would be radically affected by a la carte subscription options, since ESPN would no longer be in 60 million homes, but solely the 15 million that specifically request it. Therefore, instead of an affiliate fee of $4 per subscriber, she states that the rate would need to be increased to enable maintenance of the previous revenue stream. Either that, or the network would have to reduce their programming costs, increase advertising rates, or both. This increase would basically erase any potential savings emanating from elimination of unwanted channels. In addition, the infrastructure transformation from a two or three-tiered system to one consisting of as many “tiers” as customers would require a larger service staff within each cable company, eliminating potential discounts.

While I believe McArdle is correct, perhaps there’s a tipping point where if a subscriber selected under a certain number of channels, their cost would fall beneath their previous bill. If we were to switch from the current model to the Select-Your-Network method, the cost increase for upgrading infrastructure and services would not likely exceed 10-20% of the current charge for this particular element of your fee. So with no change in channel selection, our fictional bill has increased from $75 to $85 per month. Now we start picking off networks (while the Missus and I are not cable subscribers, for the sake of this argument, let’s pretend we are). There are 172 channels found on most cable and DirectTV subscriptions, which total about $34 in subscriber fees between them, meaning that about half my bill pays for overhead and provision. While a few networks ask for sizable fees, the industry average is 20 cents per channel. According to Peter Kafka, the top 10 reported franchise fees are:

ESPN/ESPN HD: $4.08

Fox Sports Net: $2.37

TNT: $0.99

Disney Channel: $0.88

NFL Network: $0.75

Fox News: $0.58

HDNet: $0.55

USA: $0.55

MGM HD: $0.53

CNN en Espanol: $0.51

Nine other networks charge cable companies at least 30 cents per subscriber, with the rest averaging about 18 or so cents. If I pared my cable package down to the two channels I’d watch most frequently (AMC and NBA TV), which would cost 55 cents between them, my cable bill is still close to 40 bucks per month – and that is before networks raise their affiliate fees to make up for the decreased pool of subscribers.

What if the networks simply decided to offer their subscriptions online to their smaller but specific audiences? Perhaps I could toss aside the infrastructure costs and get my programs straight from the tap? McArdle alludes to the potential problems resulting from such a restructuring. Instead of the current model, where hundreds of networks collect a small but stable flow of nickels from several million subscribers, a Choose Your Own Adventure system would relegate the channels to an absolute dependence upon their loyal (but drastically smaller, and potentially unpredictable) niche, throwing a massive monkey wrench into the financing and creation of future programming. Currently, 56% of American households have at least a basic cable package. Instead of AMC producing Mad Men with the resulting finances from 60,000,000 people throwing 20 cents into the pot, they’d need the show’s 1.5 million viewers to pony up $8.80 per month to maintain their current revenue stream. And they’d need to compensate for the reduced ad rates that would result – while AMC will never be viewed by every subscriber, the fact that Utz potato chips could potentially be seen by 120,000,000 eyeballs allows the network to ask for higher rates than if the viewership had a built-in limitation of the small number that actually subscribes to the network.

Which brings us back to Springsteen. While there might be 57 channels with nothin’ on, there are also ten or so networks with programming that is pretty damn good. How can we create a system where a family can consume these productions without having to drop 40-70 bucks per month? I’m curious for your thoughts.

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