Does Cable TV Ripoff People Who Don’t Like Sports?

by on January 18, 2013 at 7:12 am in Current Affairs, Economics, Sports, Television | Permalink

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Recently the LATimes ignited a firestorm of anti-sports commentary by arguing that people who don’t watch sports are being ripped off by Cable TV.

A key concern is that the higher bills driven by sports are being shouldered by subscribers whether they watch sports or not.

…”I pay $98 a month for cable and half of that is for sports?” said Vincent Castellanos, 51, a fashion stylist who lives inLos Feliz. “I’ve never once gone to a single sports channel. I wasn’t even aware I was paying for it. I want my money back. Who do I call?”

Derek Thompson at The Atlantic corrected some of the numbers but agreed with the analysis:

If you watch sports, millions of pay-TV households who never click on their ESPN channels are subsidizing your habit. If you don’t watch sports, you’re one of the suckers paying an extra $100 a year for a product you don’t consume.

Kevin Drum demanded a la carte pricing so that:

“sports fans would be forced to pay the actual cost of their sports programming without being subsidized by the rest of us.”

I don’t watch sports very often but I think the commentators have misunderstood the economics of Cable TV and the math of content provision. Let’s consider a simple model, there are content providers such as ESPN and Bravo, distributors such as the cable company and consumers. Let’s assume that there are 4 consumers, 3 of them value football at $10 and Top Chef at $0 and one vice-versa so the model looks like this:

Cable TV Bundling

How much will ESPN and Bravo charge the distributors? Bilateral bargaining between content sellers and distributors can be complex but for the point I want to make we can assume that the distributors simple pass on their input costs to consumers. In this case, ESPN will charge the distributor $30 and Bravo will charge $10, the maximum that they can get.

Here is where the LA Times and the others go very wrong – they reason that $30 of the $40 charged is due to sports so each person is paying $7.50 for football ($7.50*4=$30) and $2.50 for Top Chef ($2.50*4=$10) and, therefore, the Top Chef viewer is being ripped off because 3/4 of their bill is going to support programming they never watch! Mathematically this is as true as any other division of total cost but conceptually it makes little sense. Consider, for example, what happens if we add football viewers. With 9 football viewers, ESPN will charge $90 and Bravo $10 and thus the LA Times would conclude that the Top Chef viewer is even more ripped off than before–90% of their bill is going to football! It’s very odd, however, that the ripoff of the Top Chef viewer gets bigger even as the price that they are charged and their viewing habits aren’t changing! Also as we add more football viewers the per-subscriber charge for Bravo gets smaller and smaller, with 10 viewers it’s only $1. Implicitly the LA Times is suggesting that this number represents what a la carte price would be or could be but that’s nonsense–whatever Bravo’s a la carte price would be it doesn’t get lower as we add more football viewers.

Conceptually it’s much clearer to say that each person is being charged $10 for the programming that they most want to watch. Moreover, the reason that Cable TV firms bundle is precisely because by making the demand for their product more homogeneous they can increase profits. In other words, the best bundle for the Cable TV firm is one in which everyone does in fact value the bundle equally.

The bottom line is that there is no reason to think that Top Chef viewers are subsidizing football.

dan1111 January 18, 2013 at 7:36 am

If only there were some form of TV that was available free of charge. That would allow people who don’t like paying for sports to watch TV too.

I also liked this bit: “I wasn’t even aware I was paying for it. I want my money back.” Did he never ever notice that sports channels were included among his cable channels? Or did he think it was some kind of free extra they throw in?

anon January 18, 2013 at 9:27 am

If only there were some form of TV that was available free of charge.

Get a Mohu Leaf Indoor HDTV Antenna for over the air. We cut the cable after getting one of these and a smart TV with an ethernet connection. Get a Roku, Boxxee, or a Google TV box. As Bill alludes to below, cable TV is already dead.

floydthebarber January 18, 2013 at 9:38 am

The ‘broadcast HD’ option didn’t work out for the NCAA football championship game this year…

dan1111 January 18, 2013 at 9:55 am

Was the sarcasm really miss-able? I have never had cable TV.

Amusingly, around the time of the switch to digital, in our area they were airing commercials apparently aimed at people who had never heard of broadcast television (“Did you know you can get real, actual TV programs over the air, entirely free of charge? Just order this digital converter box…”).

Andrew' January 18, 2013 at 8:00 am

I’m constantly amazed how intuitively simple things can be twisted into this kind of bizarre thinking. It’s like saying you should be paid if you are the guy at the party who only watches the Super Bowl for the commercials.

dan1111 January 18, 2013 at 8:14 am

I am a victim of injustice, because I bought a car with four seats. I only ever drive places by myself, and I am being forced to subsidize people with familes and/or friends!

Ted January 18, 2013 at 8:14 am

People love to get ripped off, or at least to feel like they were.

Chris MacDonald January 18, 2013 at 8:16 am

I wonder whether people who feel ripped off by the unwanted sports channels also think that people who buy newspapers, but who don’t value investigative reporting, are being ripped off too.

Urso January 18, 2013 at 9:45 am

Great point. What % of the LA Times budget is spent on sports reporting? I bet Vincent doesn’t read the sports section either. Strange how the Times didn’t mention that.

chris January 18, 2013 at 2:00 pm

Except that the market for news is much more competitive (perhaps excluding local news). TV service providers should be forced to offer a la carte pricing. Their current model is incredibly anti-competitive. In addition to subsidizing and thus keeping on life support channels that would never survive on their own, bundled pricing stifles innovation in programming.

Rich January 18, 2013 at 8:18 am

More likely what is happening, though, is that ESPN is charging a higher per-viewer rate, thus forcing the “bravo” consumer to subsidize the ESPN subscriber because there are fewer substitutes to ESPN relative to Bravo.

Andrew' January 19, 2013 at 5:14 am

Perhaps we need guys walking around reading our cable meters.

superdestroyer January 18, 2013 at 8:22 am

I have always suspected that Ala Carte pricing would be the death of cable television. Starting a new network would require much more start up capital because the new channel would have to convice people to purchase the new channel. Most channels would have so few viewers that it would be impossible for them to survive. Maybe HBO can survive changing the 800K people who want to watch “Girls” but most networks should not survive very long in that market.

Rahul January 18, 2013 at 8:27 am

To me the more interesting quote of the article was this bit: “You pay $80-ish each month for cable About $30 are the programming costs.”

So, what’s the other $50? Overheads?! Sounds a lot.

Eric January 18, 2013 at 12:53 pm

Maintenance and service probably is a lot I’d imagine.

Arima January 30, 2013 at 12:17 am

If they are charging for maintenance and service then those two items should be rpovided. Ever lose power and have to wait hours and sometimes days for the cable company to get it’s act together? Have also lost cable for no apparent reason….sun is shining, birds are chirping and the cable company has lost it…AGAIN!!
As for the sports I am one who feels ripped off. I pay for 5 sports channels and I HATE SPORTS!! It is interesting to me that these damned companies can change there packages whenever they feel like it but when you asked to have something removes the answer is always….”Oh, no we can’t co that”. What a crock!!

Rahul January 18, 2013 at 8:23 am

“Let’s assume a spherical cow!”

The bottom line is that there is no reason to think that Top Chef viewers are subsidizing football……IFF {List of Assumptions}

Assumption #1: “Bilateral bargaining between content sellers and distributors can be complex but for the point I want to make we can assume that the distributors simple pass on their input costs to consumers.”

If you ASSUME costs get simply / directly passed down, of course your model predicts no cross-subsidization.

ricketson January 18, 2013 at 11:49 am

The point is that the evidence is consistent with his simple (and fair) model, so there is no reason to think that something unfair is going on.

DJ January 18, 2013 at 8:23 am

I have worked in the cable industry for a few years now and was surprised to learn some of the economics.

Much of the anger directed at the distributor really should be directed toward the content providers. This is not to say the industry is run by angels – it’s not! (Stupid temporary pricing gimmicks / price discrimination abound, and customer service is usually awful). However, the crazy channel packages are often dictated by content provider fiat.

A lot of people (myself included) would much rather to be able to pick my own bundle of channels and just pay for those. However, this is anathema to content providers for a couple reasons. Who would have picked, say, AMC, before they had Mad Men and Walking Dead? Providers who have “must-watch” channels thus bundle ad-laden sister channels in with the agreements for carriage of the must-watch channel.

Some cable companies have made attempts to move to a la carte pricing models (e.g. multichannel.com/cable-operators/suddenlink-offers-take-fox-networks-la-carte/141002) , but I doubt they’ll be able to convince content providers to let it happen.

charlie January 18, 2013 at 8:28 am

In terms of ESPN, yes. And Disney more generally.

Another important point is ESPN is about the only block of shows that you can buy ads on and guarantee a male audience.

That being said, Comcast owns enough sports stations — and sports teams — that they are just as guility as a content provider.

Mitch Berkson January 18, 2013 at 9:17 am

“Another important point is ESPN is about the only block of shows that you can buy ads on and guarantee a male audience.”

And the cross-subsidization of buying ads on shows with a composite gender audience would be distasteful to the advertisers.

Ted Craig January 18, 2013 at 9:26 am

Advertisers pay for supply, just like everybody else. That’s why 18-34 viewers have a higher value and why male viewers do, too. There are fewer of each.

Bill January 18, 2013 at 9:11 am

Wait until the teams or the leagues create their own “channel” and go direct via internet streaming.

dan1111 January 18, 2013 at 10:02 am

That already exists to fill gaps in TV markets. For example, if you live overseas you can pay for a streaming service of MLB games. I think the NFL has something similar.

However, at the moment it is more profitable for teams to distribute their content through traditional TV when possible.

Bill January 18, 2013 at 10:10 am

Yep, in some markets teams stream.
Expect more. It’s just that you didn’t have to buy a bundle to get MLB and get National Hockey League or Golf that you didn’t want.

Go Kings, Go! January 18, 2013 at 1:58 pm

The Leagues’ streaming channels black-out all home teams (as required by their cable deals), so if I cancel Time Warner, and buy the NHL, NBA, NFL and MLB streaming packages I would not get to watch any Lakers, Clippers, Dodgers, Angels, Raiders, Chargers, Ducks (which is all fine) or Kings (unacceptable) games. Unless I move to South Dakota and then it would make cents.

Bill January 18, 2013 at 2:14 pm

Go,

Ask yourself this question: who do you think–the cable company or the provider–wanted this restriction, and who had to power to get it.

dan1111 January 19, 2013 at 2:53 am

@Bill, not sure it’s one or the other.

Clearly the cable company wants this in order to maximize revenue from their contract. But they don’t have the power to get it unless the sports leagues also agree that it will maximize their revenue. The leagues could insist on keeping streaming rights, and they would still be able to get a TV deal–just a lower value one. They must think that is a bad trade-off (or at least they did when last negotiating a contract–this is a rapidly evolving area).

Some of it depends on the structure of the particular sport, as well. MLB teams, for example, each negotiate their own local TV contracts, while the streaming is a league-wide service. Allowing home games to be streamed would interfere with the operations of the individual teams.

Richard Fritzson January 18, 2013 at 8:24 am

A better way for non-sports people to think about it is that, if they don’t watch sports, they shouldn’t really be paying for cable television. The rest of the package can be had more cheaply from Netflix, Hulu, Amazon and other online providers of video entertainment. Sports however seems to be locked in to cable.

Eric S. January 18, 2013 at 10:42 am

+1

Of course cable TV rips off people who don’t like sports (and HBO). So much of the analysis here (and that newspaper analogy) is pointless because in 2013 you don’t have to live in a bundled world. You can get a Roku box for a one-time fee of $75 and then pay $15/month to watch virtually anything via Hulu Plus and Netflix.

Moreover, you can actually get a fair amount of sports w/out cable. There are MLB, NHL, NBA subscription channels (major downside – they black out local games – and thus this is best for transplants) and you can see a lot of free broadcast HD.

Urso January 18, 2013 at 11:52 am

One of the mystifying ironies of the modern world is that it is sometimes easier to see your team in action when you live in another state. My alma mater will occassionally put games on pay per view, but they will not be available instate (if you’re instate, you’re expected to actually go to the game). And ESPN3 blacks out games in some seemingly arbitrary manner. The rule of thumb is that the farther you live from a place, the more likely you’ll be able to watch their team; but sometimes a Purdue-Michigan State game (say) will be blacked out for the entire eastern 2/3 of the country.

Dan Weber January 18, 2013 at 12:31 pm

I’m not sure what counts as “modern world” but it goes back at least 30 years. People used to be afraid that local broadcast would kill in-person sales.

Steve-O January 18, 2013 at 1:12 pm

With cheap, HD, big-screens, I think TV is hurting in-person sales. I know I go to events less often because I actually prefer to watch the game on TV now unless it’s going to be a sunny 70 degree day (baseball) or an electric atmosphere (think college football games with $150+ FMV for the cheapest tickets).

dan1111 January 19, 2013 at 3:01 am

Obviously different customers are getting different amounts of value out of their TV packages. Even apart from what kind of channels they watch, some people watch far more TV than others.

I object to the idea that people are getting “ripped off”, however, when they voluntarily sign up for a service, knowing exactly what it costs and what they are getting.

I do agree that streaming is quickly becoming a superior alternative. It is interesting to see how that will play out. The rise of streaming is probably going to push cable TV prices lower. But also, right now streaming largely depends on content that was created for traditional TV. Will the same quality of content still be created if TV revenues drop?

Kelly January 18, 2013 at 8:25 am

Great post Alex – different question, but you may have alluded to it so I will bring it up:

Would economic efficiency be higher with a la carte channels? I understand that the cable companies don’t want it, but if the content providers go straight to the consumer via the internet it seems like there is a solution there. Possibly a post for another day…I guess I am hopeful that if a bunch of economists sent an open letter to ESPN they could convince them to allow people without cable to buy the channel through internet, or even better to buy individual games.

Joe In Morgantown January 18, 2013 at 8:44 am

ESPN can be purcased pay-per-view as espn3, but there is a but.

Your ISP has to be on a list on “affiliated providers”. That is, the cross-subsidization of ESPN may not be limited to cable-tv, it looks like they are trying apply the same model to internet providers.

eccdogg January 18, 2013 at 11:03 am

I thought you had to buy cable to get ESPN3 not just have the ISP of an approved cable provider.

I have thought heavily about cutting the cord, but sports are what keeps me buying cable. In fact I pay up for the sports package.

The main reason is that I want to watch every game of my college team and the only way to do that is to have ESPN3.

Brian Donohue January 18, 2013 at 12:10 pm

And if you follow the ADAA, you need “The Ocho.”

Dan January 18, 2013 at 8:40 am

Crawford and Yurukoglu, in a recent AER article, show that unbundling will probably lead to higher prices and slightly lower consumer suprlus. This is because, while consumers get savings from a la carte, unbundling raises the marginal cost in equilibrium for distributors, and they pass along much of this cost increase to consumers.

mkt January 18, 2013 at 12:27 pm

This is reminiscent of the debates about the economics of block booking of movies by distributors, who forced movie theaters to pay for blocks of films and refused to make them available a la carte. IIRC many economists including George Stigler puzzled over the economics of it but never did come up with a definitive explanation for why it seemed to be optimal for the distributors, and how disadvantageous it was for the theaters and consumers. Alex’s simple model might have some promise, and maybe that AER article has nailed things down. (Of course, there are differences in the cost structure of renting out film reels vs providing cable TV service, so the differences in the markets may require different models.)

J.V. Dubois January 18, 2013 at 8:54 am

Your analysis is fine, but then in your model total cost of the Cable TV to any single consumer would be the same – $10. But since all the articles you linked mention that total cost of the bundle per consumer is rising, and that this rise is driven by rise in Sports channels, your Top Chef viewer may feel being ripped off.

So let’s start with your example – $10 per each channel. And now let’s assume that there was some concentration going on in sports so that sports content providers can excercise market power and will say that the price rises to $20 for sports. Bravo operating in a more competitive market of Chef Shows providers cannot afford to charge higher price. Since you assume that all prices are automatically carried over to consumers, and all consumers will have the same bundle – then it logically follows that Top Chef consumer will have to shoulder higher costs even though his favorite content provider did not receive more money from him to improve his show or increase his profits.

So the biggest shortcoming of your argument is that it is that it is only valid in case that all content costs the same. But it is clearly shown in the data you link that sports content is an order of magnitude more expensive compared to the rest of the content.

hutch January 18, 2013 at 11:23 am

that’s similar to what i’ve been thinking: this model only works when the costs to the distributor are the same. in alex’s model, those costs simply get passsed on to the consumer so whether you enjoy football or bravo, everyone pays $10. so even in an a la carte scenario, the bravo viewer would pay $10 and the football viewer would pay $10.

but using the same assumptions, the value (evident from the prices) aren’t the same for bravo and espn. if the price of bravo is $2 compared to $10 for football, would his model imply that bravo is 1/5 as valuable to the viewers as football is? if they’re both $10, then three football fans and one bravo fan would all be charged $10 ($10 x three football fans + $10 x one bravo fan = $40; $40 / four total subscribers = $10).

but if they aren’t the same, i don’t think the result is the same. total costs would be three football fans x $10 + one bravo fan x $2 = $32. $32 / four subscribers = $8 per subscriber for the bundle. the bravo fan is paying $8 for $2 of value. conversely, the football fans get $10 of value for $8. at this point the bravo fan opts out of the bundle and the distributor drops bravo from the package since none of the remaining subscribers watch it. since the only thing that is carried is football, total costs go to $30 and the football fans will pay $10 each since they are no longer subsidized by the bravo fan.

is something missing here?

Dave January 22, 2013 at 10:20 pm

Yes, what your example is missing is that you assume that the Bravo fan is willing to pay $8 for $2 of value. If they are only getting $2 of value from Top Chef, the Bravo fan by definition won’t pay $8 for it. I don’t see any reason that a market failure should prevent this outcome – cable bills come every month, so people have every opportunity to cancel if they feel that they aren’t getting value for their money.

J.V. Dubois January 23, 2013 at 4:37 am

Basically you are right and wrong at the same time. The whole point of all those articles that Alex criticizes was that rising costs of sports channels may drive some customers who do not watch sports out. We do not examine situation as it is , because it is easy to assume that customers not viewing sports channels HAVE to extract value from the rest of the bundle that equals or exceeds the total cost of the bundle.

But Alex basically misunderstood what other people were saying. Their analysis was akin to this one: “Lets assume that sports content price will increase 100 times while the costs for the rest of the content remains the same. So if almost all costs of the cable bundle is for the sports content – how will people consuming other content react? They will probably opt out of it and seek different provider who does not offer sports content in the bundle and offers many times lower price.”

Ted Craig January 18, 2013 at 8:59 am

This is backwards thinking. ESPN subsidizes Bravo. If there weren’t sports on cable, the decline in subscribers would be massive, especially commercial subscribers (i.e. sports bars). That would greatly increase the cost of the remaining channels.

Brian Donohue January 18, 2013 at 9:32 am

Agreed. The business is all about advertising revenues, which means it’s all about numbers. Could ESPN make a go of it on its own? Bravo? Who’s subsidizing whom here?

mike January 18, 2013 at 9:00 am

What I find amazing is that anyone who discusses policy could be so economically illiterate that they didn’t realize this on their own a long time ago. It really just makes them look like idiots when they react with shocked outrage to the most obvious thing in the world.

Of course, what really demonstrates their idiocy is that they apparently don’t realize that this goes both ways. People who watch non-sports programming are being subsidized by people who watch only or mostly sports programming. Same with e.g. Fox News versus MSNBC. And, of course, the reason certain channels charge more is because they are more in demand!

I think that if we really went to a la carte, these idiots would be very unhappy to discover who has been subsidizing who all along. After all, which channels are more likely to survive being paid only for their viewership? ESPN, or Bravo? Fox News, or MSNBC? The History Channel, or MTV?

Bill January 18, 2013 at 9:07 am

The heart of the issue is not in the bundling issue you discussed, but the offhand comment: “Bilateral bargaining between content sellers and distributors can be complex but for the point I want to make we can assume ….”

Beware of any comment that includes the word “assume”. Where the assumption begins is where all the action is, and where a large part of the bundling problem is. If you relax the assumption of bilateral monopoly, the game changes, as does compulsory bundling.

Bilateral monopolists–each has a monopoly (the cable company and the provider)–can reach, and often do, suboptimal points on the bargaining schedule, and the outcome is indeterminate under conditions of bilateral monopoly, ie, you can’t predict the mix of programs and prices. Often that’s why one of the monopolists will partially or totally vertically integrate into the others market, such as Comcast acquiring NBC, or Time Warner creating content for its cable station, so as to improve the bargaining position vis other providers or to fill the space if there is a bargaining deadlock.

It’s more than a bit too complex to go into the bundling and bargaining under conditions of bilateral monopoly–way beyond everyone’s computer programming, game theory capacity–but you don’t need to know that in understanding why compulsory bundling via cable companies is ultimately doomed with changes in technology:

It’s because in the future there will be direct video streaming by the content provider through the internet pipe. You’ll see more ala carte in the future as you access the internet directly via airwaves or through your internet provider (and if it is your internet provider is your cable company, watch carefully that the regulator–who granted them the monopoly in your community–requires equal access for all internet content). Cable companies may make up for it by capping speeds (and upcharging for higher speeds) or charging for monthly capacity usage.

That’s not to say there won’t be bundling on the product side–that’s just a way to price discriminate–but there won’t be compulsory bundling and there will be more ala carte offerings. The degree of bundling we have today is partially a function of bilateral monopoly.

Bill January 18, 2013 at 9:17 am

If you want to get more information on how cable and wireless companies have operated to deal with the threat they pose to each other in deliverying content, or otherwise competing on the buy or sell side, you can view this competitive impact statement concerning a joint venture between them:

http://www.justice.gov/atr/cases/f286100/286108.pdf

Bill January 18, 2013 at 10:08 am

Another paper if you want more on the subject of bilateral monopoly and bundling:

“This paper examines the output and profit effects of horizontal mergers between
upstream firms in intermediate-goods markets. We consider market settings in which
the upstream firms sell differentiated products to, and negotiate nonlinear supply contracts
with, a downstream retail monopolist. If the merging firms can bundle their
products, transfer pricing is efficient before and after the merger. Absent cost savings,
consumer and total welfare do not change, but the merging firms extract more surplus.
If the merging firms cannot bundle their products, the effects of the merger depend on
the merged firm’s bargaining power. If the merged firm’s bargaining power is low, the
welfare effects are the same as with bundling; if its bargaining power is high, and there
are no offsetting cost savings, the merger typically reduces welfare. We evaluate the
profit effects of mergers on rival firms and the retailer for the case of two-part tariff
contracts. In this setting, a merger that harms rival firms and the retailer may still
reduce final-goods prices.”
http://www.ftc.gov/be/workpapers/wp266.pdf

celestus January 18, 2013 at 9:24 am

Channels are bundles too. It would be strange if the optimal amount of bundling was to bundle shows into channels, but not channels into packages. And my guess is that if shows were unbundled the menu of shows would be…not quite optimal. I haven’t watched any Hulu shows, perhaps they are very good, but I certainly don’t think there are any popular or critical hits.

It’s possible that Drum for example would rather pay $150 per month to get the channels he likes than pay $100 per month to get the channels he likes plus ESPN, merely as a point of cultural identity.

derek January 19, 2013 at 9:17 am

Shows are basically already unbundled via DVD sales; they are just not necessarily viewable immediately.

Hulu offers shows from the major broadcast networks, and the networks that do not work with Hulu broadcast their shows online for free on their own platforms. Admittedly, few of these shows have ever reached the highs of The Wire, Breaking Bad, etc., but the major networks are still offering a great quantity of quality. This seems to me to be pretty strong evidence of Hulu’s place. As far as original content goes, Netflix is reviving the critically acclaimed Arrested Development and there is the Kevin Spacey show that is being made as well.

Erik January 18, 2013 at 9:29 am

To me the real crime, precipitated solely by the distributors, is in the pricing of cable/internet/phone bundling. My wife and I don’t have a land line, never have, and don’t intend to get one. We would gladly drop cable and move to the Netflix/Hulu/Roku model. We would be 100% satisfied. However, our only broadband option is our cable provider, and their pricing makes stand-along Internet ridiculously expensive. Sure, we could cut our bill by dropping cable, but the internet becomes so expensive without it that it makes cable a marginal cost that we just decide to pay for the ease of use, DVR, etc.

dan1111 January 18, 2013 at 10:11 am

Is Land Line + DSL really not an option, or not competitive with cable internet pricing?

We were always in the same situation: wanting only internet, not cable or phone. For us the cheapest option always ended up being the minimum phone service possible and DSL (though it is often hard to find the most basic phone option and even harder to get a salesperson to agree to sell it to you).

Erik January 18, 2013 at 10:25 am

DSL speeds comparable to cable are not available where I live. We require a fast connection for work, and if we were to switch to the Roku option for TV I would want adequate speeds there as well.

NPW January 18, 2013 at 11:11 am

I use Clear for this reason. The usefulness of Clear is highly location dependant, but I can stream hulu/amazon. For my purposes, internet and non-sports tv, purchasing only the shows I want comes out to ~$50 total a month. Neither my wife or I watch more than 4 hours of tv a week, and we are in a great location for Clear. YMMV

dead serious January 19, 2013 at 10:20 am

If Clear could provide reliable signals in my area I’d switch in a heartbeat. I guess that’s what you mean by location dependent?

GeoffBr January 18, 2013 at 1:14 pm

Erik,

Is the problem really the distributor? ADSL2 is available in most areas at this point and is quite comparable to basic cable speeds. Do you live in a remote location? If so, I would assume there are significant capital investment costs for the cable company given the low density and this is what is causing most of your pricing issues.

I’m also surprised to hear that standalone internet is prohibitive. While bundles usually bring down the cost of the services relative to individual pricing, I’ve never seen a situation where the cost of standalone internet was more than the cost of the bundle. And to the extent that a TV + internet deal from the cable provider is cheaper than buying them from two different providers, that seems like pretty basic bundling logic to me. How does the pricing work?

Dave January 22, 2013 at 10:31 pm

Geoff – I believe that Erick is saying that cable plus broadband bundled costs only a little more than broadband alone (“it makes cable a marginal cost that we just decide to pay for the ease of use, DVR, etc”).

That actually doesn’t surprise me, as obviously most of the cable provider costs – other than carriage fees to channels – are fixed and don’t vary whether someone subscribes to broadband only or just cable. I’m thinking mainly of building and maintaining infrastructure, but also billing.

I think that this sort of bundling by cable is going to be a surprise to a lot of people if people ever do start dropping cable subscriptions in big numbers. Unless high-speed wireless emerges as a viable competitor, standalone broadband pricing from cable companies will almost certainly go up if cable TV subscriptions wane.

Sbard January 18, 2013 at 12:57 pm

Where I live, land line + DSL ends up being slower for about the same price as cable internet.

Brian Donohue January 18, 2013 at 9:34 am

This post highlights two disturbing trends in this country:

1. An alarming drop in critical thinking skills
2. Outrage and indignation as the centerpiece of what passes for 21st century ethics.

g January 19, 2013 at 12:39 am

What makes you think there are trends here and that they are trending in the direction you describe? Apply some critical thinking skills.

buddyglass January 18, 2013 at 9:40 am

Sports fans may also be paying for channels they don’t want. If there were a-la-cart pricing I would pay for the local broadcast channels (only because my reception isn’t the greatest) then add ESPN, ESPN2 and Fox Sports Southwest and the Longhorn Network. That would be it. Even if the sports channels were more expensive than the others it seems reasonable to suspect that only paying for three of them might cause my monthly bill to decrease. To be honest, I could probably get by with just ESPN and the Longhorn Network, since most of the UT games that were previously shown on ESPN2 or Fox Sports Southwest are now shown on the Longhorn Network.

Dale January 18, 2013 at 10:27 am

Let me point out how careful you must be with examples. Change the $0 values to $5 in the above example and assume (yes, assume) that the MC of distribution is $0. Then, the bundled price of $15 yields $60 of profit (gross- programming costs are a fixed cost in this case). The optimal unbundled prices are $10 for sports and $5 for Top Chef. Never mind the technical definition of cross-subsidy (which only economists care about) – the Top Chef customer is indeed being ripped off. This is the classic example of bundling and how it can be bad for consumers.

Of course it is much more complicated that this. I have testified about this at the FCC (I would add that I was the only economist testifying in favor of a la carte programming – all the economists lined up against it just happened to be funded by the programming industry) and the most common argument against my bundling example is that somehow the costs of providing Top Chef would prevent the programming from ever getting produced (without the additional revenue from the bundle). This is a potentially valid argument, but certainly debatable. It is indeed the programmers that lie at the heart of the issue, rather than the cable distributors. But the issue is actually quite complex and your example is only a special case – one that potentially is misleading.

JR January 18, 2013 at 10:39 am

Dale is right, it’s the programmers (content providers) that drive the bundle, not the distributors. The pricing model can easily be tweaked by the cable or dish people to maximize profits in multiple ways. The tail wags the dog. If you want to hate on the cable industry, there is plenty to chew on (historically poor customer support, oligopoly franchising with local gov’ts, etc), but this is a content problem.

Bill January 18, 2013 at 2:16 pm

JR,

Look at Go Kings Go comment above and ask who had the power and interest to obtain the restriction.

JR January 18, 2013 at 10:32 am

I work in the cable industry. Video may be dead, but it builds and pays for the infrastructure that the highly profitable and fast growing high-speed data (HSD) utilizes. Same with Voice (albeit, not a growth area). Also, we experience ~7% churn rate monthly with subs that ONLY have one of our services (e.g. JUST video, or JUST voice), but that drops below 2% if they have 2 of our services and then below 1% if they have a triple-play.

Buzzcut January 18, 2013 at 10:36 am

I have not had cable since 2003, when I got my first HDTV. You absolutely sacrifice sports programming when you do so. If the NFL were only or mostly on cable (like baseball and basketball), I would probably have to subscribe.

In general, people watch far too much television.

FE January 18, 2013 at 10:43 am

The question is poorly framed in terms of “subsidizing football.” That framing implies that the cost of televised football is fixed and the question is how to allocate the cost. But the price of tv contracts negotiated between the NFL and ESPN does not much depend on the cost of producing the product. The price is generated by negotiations among monopolists and duopolists – the NFL, ESPN, and the cable companies with their bundling power. If we switched to a la carte pricing, the NFL-ESPN contract price would fall by some amount. It’s not as if the NFL customers would all be forced to pay extra now that the Bravo customers are no longer “subsidizing” the fixed cost of football.

Bill January 18, 2013 at 10:45 am

I don’t know if I should do this.

It may lead you to watch more TV.

Here is a web calculator on how you can purchase ala carte and drop your cable bundle. It lists options by program so you can drop your cable bundles:

http://www.forbes.com/sites/jonbruner/2012/07/31/how-to-cut-your-cable-interactive-calculator/

Dale January 18, 2013 at 11:06 am

There is one big problem with the calculator. It does not account for any usage costs from your cable provider. Most cable providers have usage caps and charge according to how high you want the cap. While you can purchase a la carte programming over the web, you then have to consider potential charges for web traffic that you might incur. When you purchase a programming bundle from your cable provider, there is no usage limit.

I have been surprised at how little this has been mentioned concerning Netflix – and that Netflix’s pushing customers to use streaming rather than discs also ignores this. If I watch 2 movies per week (as I often do with my Netflix discs), then I am likely to incur additional bandwidth charges from my cable provider. Perhaps I just have worse broadband choices than most people.

NPW January 18, 2013 at 11:16 am

I stream about every other day. No problems.

Bill January 18, 2013 at 1:11 pm

Dale,

Before we get into a discussion about bandwith congestion, capacity costs, etc.: what do you think my cable company will charge when the electrons are shipped to my DVR device at 2 am in the morning when there are no capacity limitation problems.

Will you give me an upcharge.

Of course, even though I am not congesting.

Now, what will you charge when a cell carrier, or a radio station’s excess capacity, begins competing with you?

affenkopf January 18, 2013 at 10:46 am

Any explanation why sports in most European countries are on premium cable channels while in the US they’re on basic cable? Culture? Regulations?

Chris January 18, 2013 at 11:04 am

The points Alex makes are good. But here’s my thought… There is a lack of accountability to the sports watchers, which continues to drive costs ever higher. Since the actual sports viewers don’t have full realization of cost (it’s distributed across all subscribers) there is very little demand-side pressure to contain cost.

I think it’s analagous to higher-ed and even health care where the costs are hidden and therefore not realized by the consumer (higher-ed in the form of federal loans and grants, heath care in the form of insurance, medicare, medicaid). The lack of cost visibility distorts markets.

bc January 18, 2013 at 11:14 am

There are people that don’t like sports?

axa January 18, 2013 at 11:27 am

yes, such people is commonly known as “women”

Rich Berger January 18, 2013 at 11:30 am

We know at least one who is not a “woman”.

JR January 18, 2013 at 12:30 pm

We’ll be the judge of that Rich ;)

NPW January 18, 2013 at 11:56 am

There are people who would rather play a sport than spend money watching sports. We call these people men.

Rich Berger January 18, 2013 at 11:29 am

I wonder how Vincent Castellanos feels about his tax bill – would he like a la carte pricing for government? I would.

Jason Shafrin January 18, 2013 at 11:48 am

I think the rip-off factor is that many non-sports shows are available online through other sources (e.g., hulu, netflix) although sometimes delayed. If people do not mind a slight delay in viewing content, then cable is a rip-off and people should buy other products. With sports, this is difficult to do because there are not good substitutes. This occurs because i) many games are not available off of cable and ii) if someone is interested in the outcome of a game and regularly uses the internet, is difficult to NOT find out that information, particularly for important games.

I agree with Alex’s analysis, but consumers should consider the degree to which sports and non-sports cable content can be substituted with online distribution channels.

Dave January 22, 2013 at 10:35 pm

“Then cable is a rip-off and people should buy other products” – Well if Mr. Castellanos “should” buy other products, then why isn’t he?

jeff January 18, 2013 at 12:52 pm

Sirius Radio was forced to offer a la carte by the government in 2008, and virtually no subscribers signed up for it. Admittedly they don’t promote it heavily but it is available. Seems there was a lot less demand for it than government and oublic interest types thought.

Dave January 22, 2013 at 10:41 pm

Well, there’s definitely some overlooked costs to a la carte for a consumer. As a consumer, managing what channels I pick on a la carte basis takes up my time versus just picking a bundle.

Bill January 18, 2013 at 1:14 pm

Of course, the biggest,

and most expensive, bundle of all is

College.

Departments cross subsidize each other; the French department is subsidized, while there is a demand for Chinese, but you can’t hire a Chinese language person because you can’t fire the French profs because of

Tenure.

Popeye January 18, 2013 at 5:48 pm

How expensive is it to run a French department? It’s got to be much cheaper than the science department.

GiT January 18, 2013 at 8:02 pm

At the colleges I’ve been too, department size seems to correlate pretty well with demand. Spanish classes exceed French, and the two together exceed pretty much everything else. And everything else is certainly not full to overflowing because of a lack of teaching faculty.

dirk January 18, 2013 at 1:36 pm

Great post, Alex.

Rob McMillin January 18, 2013 at 2:14 pm

All this, and not a word about the situation in San Diego that kept the Padres off the air for Time Warner customers. This is prelude to more of the same; I expect the Dodgers will be next, eventually, though we will have to wait for the next TV contract and its stratospheric figures to hit the cable companies first.

The Times analysis is right on the mark. Cable TV companies know it. Cable TV customers know it. This will change.

dmc January 18, 2013 at 2:57 pm

How is Bilateral bargaining different from bargaining?

Bill January 18, 2013 at 4:12 pm

In bilateral bargaining when both are respective monopolists–one is a monopsonist (the only buyer), and the other the only seller (monopolist)–the bargaining outcome is indeterminate, and can, and often does, result in higher prices and less output than if the seller and buyer merged and were a single monopolist. Look up the term “bilateral monopoly”

Bill January 18, 2013 at 4:15 pm

If you want a modern day example of bilateral monopoly, think: baseball (or hockey) players union v. team owners bargaining as a group. How often does that result in a quick resolution?

nathan w January 20, 2013 at 12:50 pm

Why pay for programming I don’t want on cable when I can get the programming I actually want online, and can even choose to pay nothing for it if I want.

derek jeter autograph January 20, 2013 at 10:02 pm

not all people like sport!? oh yea!

GrandArch January 22, 2013 at 5:04 pm

The example given is a tad bit of a straw-man. Consider the following example:
WTP
Consumer Football Bravo Total Purchase Bundle?
Consumer 1 $15 $0 $15 N
Consumer 2 $20 $0 $20 Y
Consumer 3 $9 $15 $24 Y
Consumer 4 $0 $10 $10 N
Total $44 $25 $69
Avg (Charge to consumers) $11 $6 $17
Avg charge to c w/ WTP>0 $14.5 $12.5

WTP=Willingness to pay.
Assume no distribution cost.
Here we see that only consumers 2 and 3 value the package enough to purchase it bundled. Nonetheless, consumer has a positive willingness to pay, and assuming zero marginal cost, their purchase may be efficient. If a la carte pricing occurred at each individual’s WTP, each consumer would purchase and we’d see the highest total surplus (equivalent to the competitive outcome of giving it away at marginal cost (for free) – though no consumer surplus). If we change the assumption to a la carte pricing at the average WTP for a consumer who is willing to pay, consumers 1, 2, and 3 would still purchase some bundle, and with either pricing setup you see greater total surplus than the bundle.

sports autographs January 23, 2013 at 7:43 am

I like watching ESPN, Solar Sports and etc. and I my self enjoyed every minute watching sports. However, I didn’t even think that there were hidden issues in cables. There should be a fair share and consumer must only pay what they want to watch. A dispute for rebate should be file.

Frankie Goes to Hollywood January 27, 2013 at 10:12 am

Tyler asked a question about this on our graduate micro exam…something to the effect of how is consumer surplus, producer surplus, and tv channel innovation different under bundling and a la carte pricing systems.
I enjoyed these kinds of questions. I remember comparing our exam questions to those for the same courses at Harvard, MIT, etc. We had to answer what I would call real world problems using economic reasoning, whereas the exams at the other colleges were mostly focused on figuring out math problems.

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