The forced bundling of hundreds of TV channels is no longer tenable. This marketing model, the result of 60 years of evolution, has been immensely profitable for TV programmers. Understandably resistant to a change that could cost them billions of dollars annually, programmers must recognize that the model is failing. The two largest cable TV companies have reported their latest quarterly customer attrition. Comcast (News - Alert) lost 129,000 subscribers during the third quarter of 2013. Time Warner Cable, with a substantially smaller customer base, lost 306,000 subscribers during the same period.
While customers frequently switch distributors, the loss for Time Warner (News - Alert) Cable is also attributable to the temporary blackout during its August fee dispute with CBS. Above and beyond these factors, the trend for all TV distributors is decidedly negative. And satellite distributors are even more vulnerable because they have difficulty including Internet service with TV service. The story lies not simply in the number of cord cutters, but also in the never corders – young consumers who never have and never will subscribe to costly pay TV. These consumers vote with their wallets because they find the unwieldy forced bundling too costly – the average monthly cable bill is now $95 and rising rapidly. Recalcitrant viewers rely increasingly on other sources for video programming, such as Internet streaming.
A keystone feature of the current elephantine bundle, known as expanded basic cable, is the dominance of sports programming. Although 20 percent or fewer of TV viewers regularly watch sports, the cost of sports programming represents approximately half of the total bill – and that share is increasing over time. For example, pay TV viewers in the Southern California market will pay an estimated $5 per month to receive telecasts of the Dodgers and Lakers games even if they never watch them. Viewers throughout the West are paying $2 per month to receive regional college games (the Pac-12 network). Again, this is not a matter of choice. A consumer must pay the increased fee to get any of the channels included in the oversized bundle. A consumer revolt is inevitable, and it is happening.
A number of distributors, seeing the inexorable downward trend in subscriptions, strongly oppose the bundling forced upon them by programmers. One distributor, Cablevision, with public support from Direct TV and Time Warner Cable, has sued Viacom (News - Alert) arguing that the programmer’s forced bundle violates the Sherman Antitrust Act. Time Warner Cable itself, because it acts as a programmer for Los Angeles sports teams, has been sued for violating California unfair competition law. If consumers prevail, Time Warner Cable could charge only those consumers who affirmatively opt to receive the telecasts. In Congress, Sen. John McCain has introduced legislation that would force distributors and programmers to offer television programming on an a la carte basis. Standing in the background, the FCC (News - Alert) could be moved to intervene to protect consumers in the manner that its Canadian counterpart has long since done. Even if none of these interventions occur, the steady drop in pay TV subscriptions will, over time, ultimately force the issue.
Meanwhile, programmers such as NBC Universal (owned by Comcast), Fox, Disney (News - Alert) and Viacom continue to cling to the over-sized bundling. My estimate, based on a comparison with the Canadian system that offers substantially more choice and lower cost options, is that U.S. consumers are paying $30 billion or more in excess charges every year. The overcharge benefits programmers. Yet, given the inevitability of change, it is in the programmers’ interest to be proactive in giving consumers meaningful lower cost choices. Both programmers and distributors will benefit when consumers are allowed to make their own entertainment choices at reasonable prices. Sound marketing and good public relations go hand-in-hand.
Smaller, interest-specific bundles and more a la carte offerings would increase overall pay TV subscriptions, and advertising revenues linked to increased subscriptions would also rise. These gains would offset a portion of the revenue lost from abandoning the elephantine cable bundle. Cable providers, some of which are also programmers, could also increase their sales of related products, such as high-speed Internet service, as their public image improved. In addition, by offering concessions to distributors and potential regulators, programmers have a better chance of preserving the beneficial and income generating aspects of smaller, consumer-attractive bundles.
Programmers must face the inevitable. Maintaining sustained profitability requires running a business responsive to consumer demand. Programmers and distributors that act responsibly and ethically will ensure their long-term survival by offering consumers meaningful choices and lower cost options in purchasing pay TV.
Warren Grimes is a professor at Southwestern Law School in Los Angeles and co-author of a noted antitrust treatise. He has written a forthcoming scholarly analysis of the competition issues in distribution of pay TV. He can be reached at [email protected].
Edited by Cassandra Tucker