Sunday, August 3, 2014

Channel Bundling and Those Bastard Sports Fans (NOT)

Some hate their channel provider (e.g., Comcast). Just recently see David Lazarus in the L.A. Times, but this type of complaint has been going on for quite a while.

I guess, haters feel that whatever their channel provider does takes advantage of the fact that there are only a few competitors and subscribers must be the worse for it. Take channel bundling. After all, we don't have to buy rutabagas in order to get a case of soda pop, right? So why do any subscribers have to take ESPN when their interests are more in line with the the Discovery Channel? ESPN demands more, basic subscription rates go up, and Discovery Channel-types must be subsidizing ESPN-types.

Now, I'm all about the market power part. In my neck of the woods, is the fact that there is Comcast, AT&T, DishTV, and DirectTV, plus "pull the plug" options like Netflix/Hulu/Amazon Prime, enough to drive competitive behavior? Can Disney force channel providers to do their economic bidding--carriage of umpteen other cheaply produced Disney channels at high markup-- because Mickey Mouse owns the high demand ABC and ESPN too? Can Netflix/Hulu/Amazon Prime buy the right to barge all over our bit rate as we browse the web? Any and all suggest market power problems worth attention.

But I don't get the criticism of channel bundling since it appears both efficient and fair in terms of covering the different costs of our preferred programs. Here's why.

We can all use any channel piped through our cable without precluding anybody else from doing so at the same time. We can't do the same with rutabagas and soda. Further, it is prohibitively expensive to determine which viewers value each and every single channel the most. So channel providers pick an average price and provide it all under one roof in order to minimize costs. [Econ buffs know this is the difference between private goods and toll goods]. Channel providers can tell that willingness to pay goes up with more services, so there are both basic and enhanced services (digital upgrades to include a few semi-premiums but mostly for OnDemand and DVR access). And, of course, willingness to pay for some programming is known so there are premium packages and pay-per-view specials.

To see the efficiency and fairness dimension of channel bundling, consider an extreme example. I'm willing to pay $50/mo for home channels and $0 for anything else. You're willing to pay $75/mo for sports channels and $0 for anything else.

To get the programs, the channel provider pays $15/mo for mine and $30/mo for yours, $45/mo. Put in true competitive profit of $10/mo and we're up to $55/mo. The cheapest way to get the channels to us is to put both over cable at $25/mo and use our nearly zero cost remotes to sort it out. So to stay in business, the channel provider needs $80/mo from us.

But the channel provider can't tell which of us is which; you will say you are me hoping for a lower price. So the channel provider charges us $40/mo each to get their $80. I pay $10 less than my max and you pay $35 less than your max.

Critics, often claiming to be consumer protection advocates, claim that I am subsidizing you. Their claim goes like this. Looking just at programming is $45. Since we pay an equal amount in total (our common $40 each), then it must be that programming costs are shared equally as well, ($15 + $30)/2 =$22.50 each. But my programs only cost $15! So $7.50 of my payment goes to your program cost. Bastard sports lovers anyway :-) And the self-righteous chanting begins. A la carte! A la carte! A la carte!

But this is clearly an incorrect conclusion and ignores how the channel provider's operating sheet will actually look. For the channel provider, $15/$80 goes to producers of home channels, $30/$80 goes to producers of sports channels, $25/$80 goes to cover channel delivery, and $10/$80 is profit. I don't pay for your channels at all! The channel provider pays our different program acquisition cost for us and the rest goes to what it costs the channel provider to get the channels to our homes and their profit.

Sure both types of programming are available to both of us, but simple remote control saves us from having to watch anything we don't want! It seems pretty fair since we each cover our separate program costs. And production costs are minimized so efficiency happens, too.

To go a la carte means the channel provider has to pipe only your channels to you and only my channels to me. It makes the channel provider do what we can do ourselves with our remote control. Costs must go up. We still must pay what we already were paying plus the costs of a la carte.

One last chance for unfairness does present itself. In the extreme example, I am paying $20/$25 cost of getting the channels to our homes and you pay $5/$25. Even this may be fair as well since a smaller number of lower revenue users are the higher marginal cost add ons to the larger number of high revenue users.

Besides, this imbalance of delivery cost coverage actually is due to the extreme example. In the example, we each only want a small set of very specific channels. This is almost surely not the case for nearly everybody. And as total spending equalizes across people, their shares of delivery costs also equalize. Actually, those paying the smallest share of non-acquisition costs are probably Disney lovers of the non-sports (ESPN) variety. They have the widest array of interest channels and the larger cumulative acquisition cost.

There was no cross-subsidy in the first place on programming costs and costs are even higher, and surpluses lower, under a la carte.

A close instructive comparison is amusement parks. Again, we can each enjoy only the rides we like best at our favorite amusement park until congestion becomes a problem (congestion reduces the aptness of the comparison to TV but is spot on for internet). And we know what competition did in the amusement park business. Disneyland (opened July 1955) did ala carte pricing with differently priced separate ride tickets before any competition existed like Knott's Berry Farm (began charging admission in 1968) or Six Flags Magic Mountain (opened May 1971). [If you don't know it already, ask an elder about the origin of the term "The E Ticket".] Mickey Mouse was forced into "bundling"--charging a single same price to all--because Magic Mountain went that way, competing on the basis the price of rides.

A la carte was the choice by Disney when it had more marker power, bundling came to rule in the face of competition, and spending per person was lower under bundling compared to a la carte.

So, we do have market power issues with which to deal. But TV channels are not the same as grocery items. And at least for a close relative, amusement parks, bundling is a sign of healthy competition!

Posted using BlogPress on my iPad.

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