In a somewhat significant shift, U.S. cable operators are working on a plan that could require some programmers to unbundle their networks and allow customers to subscribe to channels on an individual basis, Reuters reports. Embracing a la carte
Though the move might under other circumstances be a radical departure from traditional practices, the ways cable operators are likely to “unbundle” channels will limit the impact. Unbundling does not mean a la carte choice, where consumers can buy channels one by one.
Rather, cable operators will likely create a few additional tiers, some of which do not include the high-priced sports channels such as ESPN, while others might expand on “lifeline” services cable operators already sell. The key, though, is ESPN and sports programming, which are driving much of the programming cost explosion. Some think the new embrace of selective unbundling is a stepping stone on the way to full a la carte service. Cable ponders big switch
Others think the move is a way to raise prices, which might go too far. In one sense, the interests of consumers and cable operators are aligned. Programming cost increases get passed straight through to customers. Up to a point, operators would rather not have to do so, since the additional revenue flows to the programmers, not the distributors. Since many larger operators also are programmers, though, the objections are nuanced. Unbundling impact
There are a couple key and straight forward objectives, though. Cable operators want to be able to offer lower-priced packages of channels to price-conscious consumers. But cable operators also would like to regain some leverage over the networks. Selective unbundling would help them do so.
Right now, local TV broadcasters, for example, bargain from a position of strength, as Federal Communications Commission rules require that cable operators carry those channels. And though in decades past local broadcasters were content to ensure they were available on the cable networks, these days local broadcasters expect to be paid for the use of their signals. That is one element of growing programming cost for cable and other distributors.
The cost of sports programming is another key driver of costs, especially ESPN. But there is an additional angle. When a network is a “must see,” it can bargain for carriage of other new channels also owned by the network. In other words, to get ESPN, a distributor might also have to carry a number of other lightly-viewed new channels also affiliated with ESPN.
So what cable operators would like to do is gain negotiating leverage at the same time that they gain the right to offer lower-cost service. In many cases, the new packages would cost less because they those packages exclude high-priced sports programming, for example.
The threat of unbundled programing is going to encounter fierce resistance from network owners. It isn’t simply that fewer cable customers for ESPN means ESPN will make less potential advertising. ESPN also will find its ad rates under pressure, as its viewership would likely decline. ESPN also will make less money from affiliate fees, which are the content rights cable operators buy on a per-subscriber basis. Fewer subscribers means lower affiliate fees.
In principle, the new approaches would build on the “lifeline” service cable operators have offered for decades. Such tiers typically are low-cost offerings featuring local channels and public service channels. In principle, though, the new gambit would allow cable operators more freedom to create “sports-free” packages, for example.
The move is a nod in the direction of restraining programming costs and creating lower-cost tiers of service. It would go too far to say the cable industry suddenly has done an about-face on a la carte, which the industry traditionally has opposed.
Nor is it clear that most consumers would actually wind up paying less in a full a la carte regime, where users are free to build their own services network by network. That would severely hamper the advertising support models most of the networks rely upon, and would cause most networks to raise affiliate fees to compensate.
An economist might say the typical video bundle works because it allows distributors to apply scale and scope economics.
The corollary is that most networks, which are advertising supported, want to be part of a “no choice” basic tier for business reasons of their own, namely the ability to better sell the advertising that underpins their business models.
According to some studies, relatively few networks actually make $100 million or more in annual ad revenue, though. And some would use that as the threshold for a self-sustaining business supported mainly by advertising.
When video distributors say a bundled approach creates economics that favor smaller, niche networks to thrive, they are right. Deprived of carriage on a broad “enhanced basic” tier, perhaps 60 percent of networks might find themselves immediately imperiled, as going concerns. impact of a la carte on networks
But ever-growing content costs are a problem for consumers and video distributors. Programming costs have risen six percent to 10 percent a year over the last decade, Reuters reports. At the same time, consumer willingness or ability to pay has been under pressure. Bernstein Research Senior Analyst Craig Moffett points out that a large number of consumers have little discretionary income to spend on luxuries like cable.
An “a la carte” menu of programing would give consumers who are not sports fans the freedom to drop high cost sports channels such as Walt Disney Co’s ESPN and ESPN 2 from basic packages. At around $4 a subscriber, ESPN is the most expensive channel in the cable business, according to SNL Kagan.
But don’t look for operators to offer full a la carte. Instead, look for distributors to offer some options for sports packages that cost more, since much of the content cost escalation is driven by sports programming.