Would A La Carte Cable Reduce Cable Television Costs?
On November 18, 2004, the FCC released a report addressing issues relating to “the efficacy of providing a la carte and themed-tier services to cable and satellite subscribers” (“Pro Big Media Report”). In the Pro Big Media Report, the FCC concluded that “a la carte regulation would increase operational expenses for multichannel video programming distributors (“MVPDs”) (i.e., cable operators) increase the marketing costs and reduce the revenues of programming networks, and provide little economic benefit to consumer.” It concluded that under a la carte, “consumers that purchase at least 9 networks would likely face an increase in their monthly bills.”
But the Pro Big Media Report was nothing more than a one sided justification of the status quo paid for by Big Media. As the FCC would later admit, the First Report relied on a study “conducted on behalf of an industry association and based largely on unsupported and unrealistic assumptions” and “presented incorrect and biased analysis.”
Eventually, the FCC undertook a second study (the “Further Report”) “to respond to questions that have arisen regarding the appropriateness of the assumptions relied upon and the conclusions reached in the” Pro Big Media Report. Using a “complete analysis of the costs and benefits of bundling and the potential costs and benefits of a la carte, the Further Report concludes that a la carte could be in consumers’ best interests.” The Further Report concluded that “consumers could receive as many as 20 channels without seeing an increase in their monthly bills. That is actually 3 more channels than the average cable household watches today.
Additional conclusions from the Further Report:
- The Booz-Allen-Hamilton Study’s own assumptions show that a consumer purchasing 11 cable channels would face a change in his bill ranging from a 13% decrease to a 4% increase, with a decrease in 3 out of 4 cases.
- Under a la carte only the channel the consumer watches will get a license fee. Even if that channel doubles or triples its license fee under a la carte, the consumer would still be paying less to watch that channel than was paid under bundling. Thus under a la carte the price paid per channel watched could significantly decline, even as the price paid per channel received rises. Moreover, any increases in license fees for channels that are actually watched would allow those channels to cover more programming costs and so could lead to increases in quality.
- Given that substantial sunk costs are present in the industry, under certain conditions, sellers have incentive to compete on quality and may even engage in a race for dominance, in which all invest in quality with one or two survivors.