Weekly Update

Pay-TV’s Ala Carte Tipping Point

Many pay-TV subscribers, as well as policymakers, have complained for decades over what they view as a rip-off: being forced to order bundled tiers of TV channels instead of being able to select and pay for only the ones they want.

“Why should I have to pay for 100 channels,” the argument goes, “when I only watch a dozen or so regularly? Why can’t I just pay for the ones I watch?”

The notion of being able to pay for TV channels a la carte is certainly appealing in principle. But in reality, it overlooks the way the economics of the pay-TV business actually operate. Without the leverage of the bundler’s wholesale pricing model, networks would need to charge individual users far more for select channels than the per-subscriber fees they currently collect from pay-TV operators to generate the same amount of revenue. The total monthly bill for many, perhaps even most, subscribers would end up being as high or higher than with the bundled tier.

Many low-rated networks, moreover, might disappear because they would not be able to generate enough revenue from direct payments by consumers to sustain their programming costs. The net result would be less choice of channels for consumers.

But despite this, cracks may be starting to show in the traditional bundled pricing model. Ever-rising demands by the networks for higher carriage and retransmission feeds, coupled with shrinking subscriber counts, are driving pay-TV operators’ total per-subscriber programming costs to unprecedented levels that may prove unsustainable.

At the same time, the growing number of over-the-top a la carte alternatives available to consumers, coupled with the bad economy and greatly slowed household formation, is constraining operators’ ability to pass on those higher costs to subscribers.

The result is that the traditional pay-TV bundled programming tier may be approaching a tipping point beyond which it is no longer viable.

According to a recent report by Multichannel News, Time Warner Cable’s overall programming costs rose 6.5 percent in 2009 due to higher carriage and retransmission fees. But Time Warner lost a total of 210,000 subscribers last year, which meant that on a per-subscriber basis, programming costs rose by 8.3 percent. For 2010, it expects to lose 375,000 subscribers while total programming costs will rise another 6.5 percent. That works out to a per-subscriber cost increase of 9.7 percent.

The situation is the same at Comcast. Total programming costs rose 8.8 percent in 2009, while per-subscriber costs increased 11.6 percent. For 2010, total programming costs are expected again to rise by 8.8 percent while costs per-subscriber will accelerate by 12.3 percent.

As the gap between total programming costs and real per-subscriber costs increases for pay-TV operators, the gap between the wholesale price and the theoretical a la carte price of a network shrinks. While it’s hard to know precisely where those two lines will cross, the closer together they get the stronger the case for ala carte pricing.

Given those trends, it’s no surprise to see debate breaking out in the industry over the right price for a la carte access to content. Both Time Warner and NBC Universal, for instance, have rejected Apple’s entreaties to make their shows available to rent for 99 cents each on the new Apple TV OTT platform. Neither programmer objected in principle to making their shows available a la carte; they merely insisted that Apple’s proposed price was too low.

That, plus the fact that Apple has been able to sign up ABC and Fox for its rental service, suggests the major content owners are already assuming an a la carte pricing model for at least some of their TV programming.

The bundled pricing model won’t unravel over night, of course. It still mostly serves the purposes of both programmers and pay-TV operators. But if cord-cutting accelerates and subscriber counts continue to fall, it won’t much longer be able to provide the wholesale leverage needed to support increasing returns for programmers (to say nothing of the operators).

At that point, the bundle will start to fray.

Question of the week

WIll networks be forced to embrace a la carte pricing for TV subscriptions?