Saturday, January 02, 2010

Who's helped by "a la carte" pricing?

The Fox/Time Warner debacle (which was settled last night) has reopened discussion of a la carte pricing for cable. A la carte means that cable operators would be obligated to allow subscribers to choose and pay for only the channels that they watch. Never watch ESPN? You wouldn't have it in your channel list, and you wouldn't pay for it.

Consumers love the concept of a la carte, because it promises to dramatically lower cable costs. Most people have 20 or fewer channels that they watch regularly, and that's all that they'd have to pay for. However, a la carte is Kryptonite to both the cable operators and networks. The cable operators would have to price their services much closer to their actual costs, which would mean significantly lower revenues. They would no longer be able to offset the costs of cable networks that they have to pay for with cable networks that pay the operators for carriage. (For example, cable operators pay Fox to carry the Fox News Channel, but Fox pays the cable operators to carry the Fox Business Channel.)

Under a la carte, the cable networks could no longer get revenue from every cable subscriber, no matter whether or not they ever watch their channel. Disney's ESPN is legendary for refusing to allow its primary network to be moved to a sports tier; Disney insists on getting paid for every subscriber that a cable system has. If subscribers could pick and choose, Disney would only get revenue from those subscribers who actually want to watch ESPN enough to pay for it. ESPN's viewership numbers, and its advertising revenue, would likely drop significantly.

ESPN and Fox News are very popular, so they'd probably survive in an a la carte environment. The survival of marginal cable networks would be much more problematic. Most cable networks claim all of the subscribers to their cable systems as potential viewers, and set advertising rates (at least in part) based on those numbers. Marginal networks would see their potential viewer numbers drop dramatically under a la carte, and their revenues from cable operators would drop as well.

A few years ago, I interviewed a European IPTV operator that launched its service with a la carte pricing. The service was very popular, but it consistently missed its programming revenue goals, so it quietly replaced a la carte with the tiered pricing model used by US cable operators. The European operator found that it lost few subscribers and significantly increased revenues. (The operator's market was so competitive that even with tiers, its service was only 1/3rd the price of comparable cable or IPTV service in the US.)

A la carte pricing would be the fairest approach for consumers, and it would introduce true supply-and-demand pricing to the cable business, but it would probably also result in the failure of many existing cable channels. The forces favoring a la carte simply don't have the political or financial clout to make it happen in the U.S. at this time.
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