Why a la carte cable won’t save you as much as you think

May 30, 2013

Sen. John McCain (R-Ariz.) wants to require cable companies to offer cable channels on an a la carte basis. Consumers love this idea. They feel they could save a bundle of money if only they could stop "paying for" channels they don't watch.


John McCain (AP)

The scare quotes in that last paragraph are there to tip you off to the fact that it might not be that simple. Consumers could actually end up paying more for less. As Matt Yglesias has argued, once a cable company has wired up your home for service and signed you up, it doesn't cost any more to deliver 100 channels to you than one. Some people imagine that if they're getting 50 channels for $50 per month, they should be able to get individual channels at a dollar or two each. But cable companies would almost certainly respond to an a la carte requirement by jacking up the price of individual channels. The result could be that consumers pay about the same amount of money for dramatically fewer channels — a losing proposition for everyone.

It's true that cable companies pay per-subscriber fees to content providers like Disney and Fox. In principle, an a la carte model would reduce those fees. But that creates a new problem. Disney and Fox also spread the costs of producing their content across a broad base of consumers. If an a la carte regime allowed millions of users to opt out of their channels, content companies would likely jack up per-customer fees in order to recoup the lost revenue.

So economic theory suggests that an a la carte rule might save consumers money, but probably not as much as they might expect. How does it work out in practice? In a 2008 study, economists Adam Rennhoff and Konstantinos Serfes tried to simulate the economic consequences of an a la carte rule. Using industry data, they modeled how cable companies and content producers would react if consumers had the right to purchase channels one at a time.

Their model predicts that the average cable bill would fall by 15 to 20 percent, as consumers cut channels they didn't watch very often. Unsurprisingly, a la carte regulations would reduce cable industry profits.

The most interesting finding was about the effects of an a la carte rule on content producers. They found that when cable companies bundle similar channels together, it helps to insulate channels from price competition. In other words, if Comcast is selling CNN, Fox News, and CNBC to consumers as a package, those channels don't need to undercut each other's prices. Rennhoff and Serfes predict that an a la carte model would cause many channels to price their channels more aggressively. The per-subscriber price might still go up, but not enough to offset losses from having fewer subscribers. Again, this pushes down the average consumer's bill.

Of course, falling revenues for cable channels could harm consumers if it forces some to cut back on programming or exit the market altogether. Media conglomerates use bundling to help their newest and weakest channels to get wider distribution than they could get on their merits. Ironically, an a la carte model might be most harmful to consumers with niche interests, as channels with the smallest audiences are no longer able to cover their costs.

In other words, to the extent a la carte regulations save consumers money, they do so by reducing the profits of cable companies and content producers. That could harm the quality and diversity of cable programming. That's why Yglesias has suggested a more straightforward way to achieve the same objective: Congress could directly regulate the prices cable companies charge, as it did before 1996. That might produce the same redistributive effects with fewer harmful effects on the cable programming.

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