Bundle Up

With today's cable TV packages, subscribers have access to more channels and more content than they could ever possibly consume. For die-hard entertainment fans, the amount of choice is likely a dream come true.

All that choice isn't free, though, and prices for the most popular cable packages have increased fairly steadily over the past 20 years. (And with the pending merger of Comcast and Time Warner, many people are concerned that prices will only continue to rise.) Here's a chart of how a typical monthly cable bill has changed from 1995 through 2012, courtesy of the FCC:

On the other hand, here's a graph of how the number of channels has changed:

From these two sets of data, we can calculate the "cost per channel" — how much you pay divided by how many channels you get — to see whether your money is really providing you with more content or not.

Based on the graph above, for many years the average cost per channel increased; recently, though, the number of channels has grown so quickly that the cost per channel has dipped below its 1995 level.

But again, it's not like everyone with a cable subscription watches every channel they have access to. Most of us have a handful of favorites, and don't really care about a majority of the programming offered. So what would happen if people were allowed to choose which cable channels they wanted to subscribe to? This is often referred to as an à la carte pricing system. That certainly sounds like good news for consumers -- since if you don't want to subscribe to a channel, you wouldn't have to pay for it -- but there's a catch.

You see, not all of your monthly cable bill goes to the cable company itself: a significant portion gets broken up and paid to the individual cable channels. These amounts are called carriage fees, and every cable channel charges them. Here are some example carriage fees from 2012, when the typical cable bill was $61.63:

Channel Carriage Fee
CNN $0.57
Animal Planet $0.09
Disney Channel $0.97
ESPN $5.06
Discovery Channel $0.37

You'll notice that not all carriage fees are created equal.  More popular channels can demand a higher fee to allow cable providers to sell their content to consumers.  ESPN, for example, charges a whopping $5.06 per subscriber (the highest among all channels by a wide margin...the industry average is about 20 cents), while poor little Animal Planet can only wrangle less than a dime.  But maybe you don't really like ESPN, and you'd drop it if you could.  If you were allowed to do just that, you could bring your total bill down to $61.63 — $5.06 = $56.57.

That might sound great, but what's good for you isn't necessarily good for ESPN, or subscribers who might actually want to pay for it. For example, imagine a town of 100 cable subscribers. Under the current system, ESPN makes $506 each month. But under an à la carte  system, if only half the town decided to subscribe to ESPN, it would only make half as much money: $253 instead of $506.  If the channel needed to keep its revenues steady, this would mean that it would have to charge the remaining fifty subscribers twice as much: $506 ÷ 50 = $10.12.

Because ESPN is so popular, it could probably weather the storm, but an à la carte system would likely play havoc on smaller channels.  Organizations like Animal Planet can survive on paltry carriage fees, in part, because they pick up revenue from subscribers who otherwise wouldn't pay to watch.  Essentially, everyone who wants to buy ESPN is charged a mandatory additional $0.09 per month for Animal Planet, which earns the little guy a lot more subscribers than it would get on its own.  If bundling went away, probably so would Animal Planet.  And that's sad...who doesn't like puppies and stuff?

So the most popular channels would have to charge more money to keep their revenues steady, and a lot of the smaller channels would go away entirely.  In the end, doing away with cable bundling could very likely lead to a situation where the average consumer is paying nearly the same amount for a monthly subscription that includes fewer channels (and the industry loses a lot of ad revenue to boot).  Then again, for the consumers who only want a handful of channels, it might be a great deal.  Some Canadian companies offer an à la carte system.  Maybe we should take a cue from our neighbors to the north?

Teachers, do you want to have this conversation in class?  Check out the lesson materials on our site!


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