Worth publicizing: À la carte pricing for cable

Broadcast | Access/Network
In the town of Brookline, the cable company had given an ultimatum to customers to convert to digital, and pay extra per month to rent the convertor boxes. This has caused a bit of rancor, as cable television is expensive enough as it is. When everyone has a digital cable box, the cable company will be able to fine-tune each viewer watches; no longer will a subscriber be able to simply hook up to a cable-ready set and watch channels. This could be a cause of deep concern. Or it could be a great opportunity, to finally introduce a real market in television by using à la carte pricing, where users can choose to only pay for the channels they want.

Let's take a look at the recent history of cable, and also understand how it works relative to other media, in order to understand how à la carte fits into place.

Two points came up after Comcast announced its intention to buy Disney. Jay Leno quipped that "That's a sign right there that your cable company is overcharging you, when they can afford to buy Disneyland!" Some more gamely analysts, such as a Jeff Kagan and David Kessler, passed on evaluating the values, and stuck with the financial value of the decision: Here's Kessler, interviewed by Michele Norris on All Things Considered (2/12/2004):

"What they want from Disney are the cable channels. Disney has ESPN, it has the Disney Channel, the Family Channel. These are very important assets for Comcast to get their hands on when they compete against their competitors. It's a war out there. Time Warner will step up to Comcast, and say we want you to pay more for HBO, and unless Comcast has some bullets to fire back, and say, we can't raise prices on HBO, or else I'm going to raise the prices on the Disney Channel. Comcast very much needs Disney (or someone like them) to maintain their power in the business. … Leverage is the name of the game."

Kessler's view he passes no judgment on this type of behavior, as to whether it would be useful to consumers, or even legal. In fact, the FCC has had little patience for media companies to play games with each other by denying service to customers. We've been there before with these same two companies. In May 2000, Time Warner cable did not want to include the Disney Channel in its basic package, so it knocked ABC-TV off its signal. The FCC took a day to find Time Warner in violation of the law, and ordered them to restore service (in particular because the infraction happened during the "sweeps" period. See more at FCC's archive of this case).

A more telling example, which speaks directly to the need for à la carte pricing, brings up the saga of YES Network and Cablevision. The New York Yankees were able to build a powerful team during the 1990's thanks in part to a cable television contract from the MSG Network which brought them an average of $40m/year. After their fourth World Series in five years, in 2000, they were able to up the contract to $52m for another year. But if broadcasting baseball was so lucrative, why not own the network themselves? Thus the YES Network was born. Then there was the matter of distributing. The DirectTV was glad to add it, but the largest cable operator in the NYC suburbs, Cablevision, wasn't so accommodating– after all, they own the spurned MSG Network (as well as the arena it's named after, Madison Square Garden, plus the two major professional teams who play there, the Knicks and the Rangers). Cablevision wanted to pass along the $2/month cost to viewers, but the YES Network would not play ball unless Cablevision offered the games as part of the free package. So the games American League champions were not available on cable to most of the fan area for the 2002 season. They returned the next year thanks. One might consider the appellation of "the Evil Empire" to be quite apt here– except for the fact it's part of a larger trend of behavior of professional sports teams.

All of this brings up a larger point about the media industry in general. Does AOL– or any of the broadband providers which now dominate the marketplace– control what goes over the Internet? Nope. Do AT&T and Verizon have any say in what is communicated on their phone lines? No, they act as a common carrier. Remember the Golden Age of cinema, when the studio system controlled the production of movies in Hollywood, as well as the distribution of films in theaters? This was ended by the Supreme Court's decision in 1948 of United States vs. Paramount, which upheld the claim by the government (with support from independent movie producers), that the current system was in violation of antitrust law. This decision, incidentally, took twenty-seven years from when the FTC first investigated "block booking".

Block booking, J. A. Aberdeen writes in Hollywood Renegade, "meant that a studio would sell its films in packages on an all-or-nothing basis, usually requiring theaters to buy several mediocre pictures for every desirable one." This is not very different at all from how a customer purchases cable today. "The root of all evil in the motion picture industry," is how the Society of Independent Motion Picture Producers described block booking in 1942, en route to the 1948 Supreme Court vindication. (The website for the Hollywood Renegades book provides further information about the SIMPP).

The answer is to make cable work like any other market– allow customers full choice. This is sometimes called à la carte cable, in order distinguish it from the full-package (In fact if "à la carte" were the norm, as it is in most every other industry, we would be debating how much cable companies could bundle their offerings.) Customers would choose and pay for individual channels. Media conglomerates might offer packages which offer several of their channels for a bundled deal, but the cable company would not bundle all the offerings into one.

Calls for à la carte cable have reached the U.S. Congress. Senator John McCain (R-AZ), citing the YES/Cablevision tussle, sent this letter last year to the major cable companies asking that they provide their customers with pricing models which enable choice. Rep. Tom Osborne (R-NE), in an interview with Bill Moyers on NOW last month about obscenity on television, discussed that an alternative to financial penalties would be like the proposal McCain floated "…where you wouldn't have to have all 60 cable networks in your home. If there's three or four that you don't like you can eliminate them."

McCain, chairman of the Committee on Commerce, Science and Transportation, pressed the Government Accounting Office for an investigation. Last October the GEO issued its report "Issues Related to Competition and Subscriber Rates in the Cable Television Industry". The report sours on à la carte pricing, focusing on the problem that "In addition to the subscriber costs of converter boxes, cable operators also would incur costs to monitor and manage an à la carte approach." But such fears of cost and technology, is completely alien with the way that the government works in setting policy– even in this very industry, where a government mandate for High-Definition TV broadcasts incurred a significant cost on the television networks. We are now approaching the seventh year since the 1997 law which required conversion by 2006 with little to show for it but sharper pictures for people who bought more expensive HDTV-capable sets. Interestingly, the upshot is that the conversion to the digital system has encouraged the cable companies to voluntarily upgrade their cable infrastructure thoroughly– bringing digital cable boxes into our town without any specific mandate from the government.

Reading through the sources of the GAO report, it appears that the opinion of the major cable companies and cable networks carried the day; they wanted nothing to do with anything that could upset their economic model of bundled subscriber fees. What may be surprising to some is that Cato Institute and the Competitive Enterprise Institute, groups which supposedly call for a more free market, agree with the GAO since it would entail "government intervention" (the CATO institute, in their handbook, feels that "Antitrust" is "Anti-Free Market"). I have taken great pleasure in providing a Response to the Cato Institute on Cable.

Nonetheless, there were dissenting voices to this part of the report, including the American Cable Association of independent cable operators and the Consumers Union. In their comments, the ACA stated: "In short, the sole reason that ACA members do not offer high-priced programming on an ‘à la carte’ or ‘mini-tier’ basis is because media conglomerates, including Disney, Fox and others, flatly deny this option to smaller cable operators."

Only a few years ago, a customer in this area could ask for à la carte cable (though could only get it at rip off prices, which meant that they would be the same price to get ten channels instead of a package of seventy). Now it's no longer possible. The new provider, Comcast (which bought AT&T, which bought Cablevision) has signed long-term deals with the cable networks, based on the tiered pricing. Sure, long-term agreements are beneficial when you buy into a wireless phone service, or even a magazine subscription, since you are giving a company money up front to invest. But the way cable works, the money is spread without the market benefit of direct customer choice.

Citizen's groups have taken notice, but have had trouble getting the word out with almost zero coverage from televised media. In August, The Public Interest Research Group published a report "The Failure of Cable Deregulation" where they wrote: "Consumers must be given the right to purchase every individual channel on an á la carte basis at fair, reasonable and nondiscriminatory prices." But this report is lost amidst the wide advocacy aims of PIRG. A more focused site, The Center for Digital Democracy does not mention it on its home page. The issue may be dead in Congress for now, but it governs many of the other media issues we face. Open access? Many consumers have a DSL-or-cable choice as it is; they should instead demand to have the choice over which content to pay for. Media ownership? With a direct pricing model, viewers can be more choosey in who they watch.

The next phase for this effort will be in towns like Brookline, where the digital equipment is already in the process of being deployed to each subscriber. The town should not focus on the $4/extra for each box, but should instead turn their attention to the larger war– the cable bills of $60/month and up. Given larger scope of this issue, we will eventually need action from the state, as well as the federal level as well. Let's just hope that when they talk about competition and choice, they really mean it.

May 12th: Here's the link to my proposal for Brookline to demand a la carte cable pricing from Comcast as part of the license renewal negotiations. I learned last night at the Selectman's hearing, and in Peter Howe's Globe story, that this affects the city of Boston as well. I invite residents to post comments there.
May 20th: The Washington Post reports FCC Asked to Examine A la Carte Cable TV. Also, here's the Consumers Union index of Cable Television issues.
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  • Response summary: 1 comments, 0 Viewpoints
    Why are cable bundles bad? arthurv Jun 07 ’04 6:59PM
    . Bundling is ok, but one mono-bundle is not. Jon Garfunkel Jun 07 ’04 11:23PM
    . . I think we’re close arthurv Jun 08 ’04 7:03PM
    . . . thanks for your insight Jon Garfunkel Jun 09 ’04 2:34AM