Bundle busting: Is Ã la carte cable TV better for consumers?

The government's plan to force content providers and distributors to unbundle cable and satellite TV packages and offer a more à la carte way of choosing what channels viewers subscribe to might seem like a consumer-friendly move, but some experts say it could end up hurting consumers and the TV industry.

"It's a horrible idea," said Laura Martin, a senior analyst in the entertainment, cable and media division of the U.S.-based investment and asset management firm Needham and Company

Martin and her colleague Dan Medina wrote about the potential impact of the unbundling of television services in the U.S. in a July 2013 report titled The Future of TV. They suggest in the report that unbundling would cost content owners and distributors about half their revenue and shrink the channel offerings available to U.S. consumers to "fewer than 20 channels."

"Most entertainment cable channels generate about 50 per cent of their revenue from advertising and 50 per cent from subscription payments," they write. "The reason there are subscriber payments at all is that there is zero ad revenue until a channel reaches at least 25 million homes. Any channel with less than a 25 per cent penetration of U.S. households (and recall that HBO — the best of the best — only has 30 per cent penetration) would probably not survive in an à la carte world."

Legislation may be premature

Under the current pay TV system, an average U.S. household subscribes to about 200 channels but watches only between 10 and 15 month, according to Martin and Medina's research (another recent U.S. study put the numbers closer to 137 and 33). In Canada, the offerings are somewhat more limited, but many households still end up subscribing to well over 100 channels — and in the case of satellite TV, that can balloon to more than 300.

Industry Minister James Moore said this week that the government doesn't want Canadians to have to pay for channels they don't watch and will announce measures in Wednesday's throne speech that will ensure they don't have to.

'It would probably cause the price of the most popular channels to go up much too quickly.'- Jimmy Schaeffler, Carmel Group

Sounds straightforward enough, but experts say legislating an à la carte, or pick and pay, system could have unintended consequences, not the least of which is higher prices.

"It would very quickly cause an awful lot of channels to go away, it would cause a lot of other channels to merge, and it would probably cause the price of the most popular channels to go up much too quickly," said broadcast industry analyst Jimmy Schaeffler of the California-based Carmel Group.

Schaeffler says an à la carte system has never been tried on a large scale and that introducing legislation making it mandatory without precise data on what the effects might be could create "an awful lot of chaos."

"That said, it's probably a necessary evil because the system right now based upon bundles doesn't work especially well either, especially for the consumer," he said.

"It's like going into a grocery store [and being told] you want to buy eggs only, but the grocery store chain says you also have to buy 10 other dairy products."

Hit shows subsidize niche content

Right now, the specialty channels that make up a good portion of any TV package are subsidized by the popular programming that appeals to a wider audience (ESPN Classic versus the main ESPN channel, for example).

The reason networks demand cable providers like Rogers, Shaw and Telus bundle their channels is that hit shows and popular channels represent only a fraction of the content that large media companies like Disney, Warner or NBC produce (Martin and Medina suggest it's as little as 10 to 30 per cent), and programmers need some way of monetizing their niche content.

"By putting these shows on a channel overnight or putting them on lesser channels and then aggregating their viewers to sell to advertisers, this non-hit content can earn more than zero," Martin and Medina say. "Consumer choice is maximized by delivering all content, anchored by hit content."

Under an à la carte system, the niche channels would likely be dropped or moved to lower-tier packages where they would get only a fraction of the viewers they get now and might eventually shift to being only online, Schaeffler said.

Not everybody agrees that losing some of the marginal channels that populate the cable networks would be a bad thing.

"The priority should shift from quantity to quality. We'd rather have a bouquet of great channels than acres of mediocre channels," Chase Carey, chief operating officer of the Fox television network, said in a recent presentation to investors, according to a Forbes report.

Rights holders set the terms

Picking and choosing channels to create a customized bundle that better suits individual tastes might seem cheaper than an all-or-nothing approach, but consumers could actually end up paying more as content providers try to recoup lost subscriber and advertiser revenue from having their content distributed to fewer households.

'The roadblock to greater customer choice is not the content distributors such as Telus but rather the content owners such as CBC, TSN, HGTV.'- Chris Gerritsen, Telus spokesperson

Martin and Medina's report estimates that whereas 100 million U.S. homes pay about $6 US a month for the ESPN suite of sports channels as part of their current cable package, in a world where those channels were optional, only about 20 million hardcore sports fans would subscribe. That, they estimate, would drive up the price to $30 a month — assuming ESPN wanted to retain the same level of revenue it gets now (which the report estimates at about $7.2 billion annually).

Recent surveys suggest that while consumers would prefer an à la carte system, they don't want to pay a premium for it.

Several Canadian cable providers already offer some form of customization of TV packages, which even in Canada contain predominately American content. Telus and Vidéotron, for example, have stripped-down basic plans to which customers can add individual channels or smaller bundles of channels.

Vidéotron said that seven out of 10 new subscribers choose an à la carte plan instead of a ready-made package.

"However, this increased flexibility for consumers entails extra costs for the cable company, without generating additional revenues," Vidéotron spokesperson Youann Blouin said in an email. "It therefore necessitates significant adjustments to the traditional cable TV business model."

Vidéotron said that with more TV viewers migrating online, it is no longer in a position to force its customers to take certain channels or to guarantee its broadcaster partners the same subscriber numbers and revenues as in the past.

Cable providers argue that they're all in favour of making TV packages more flexible but have been hamstrung by content owners.

"The roadblock to greater customer choice is not the content distributors such as Telus, but rather the content owners such as CBC, TSN, HGTV," said Telus spokesperson Chris Gerritsen.

"If the government seeks to unbundle content and allow consumers to pick and pay for broadcasting services, it'll have to create a policy which targets the real roadblocks to more choice, which is the large broadcasting groups that own the content and set the terms under which it is provided to consumers."

Industry feeling the pressure

Martin and Medina argue that content owners have little incentive to allow their programming to be unbundled and point to iTunes and the music industry as a cautionary example.

"Piracy and iTunes unbundled the music album so consumers could buy only the two songs they wanted for $0.99 each, rather than the album (a bundle of A, B and C content) for $10. Global music sales were $16.5 billion in 2012, down 57 per cent from their peak of $38 billion in 1999," they write.

But Schaeffler says all players in the industry — from internet service providers to pay TV distributors to content owners — are feeling the pressure to change the status quo as they face increasing competition from a growing number of online streaming services like Netflix, Amazon, Sony TV and Hulu, whose content Martin and Medina call "the most unbundled form of content, because each show is on-demand, so no show helps any other show."

"With a little more time, the government probably doesn't need to go down this road (legislation), because I would think just the threat of it placed in front of the industry [is enough]," Schaeffler said.

Bundles unlikely to disappear entirely

The industry sees the writing on the wall — that the rise of mobile and internet viewing will make pay TV as we know it obsolete in a decade or two — he said, and unbundling of cable services is already being discussed by lawmakers and regulators on both sides of the border.

In the U.S., Republican Senator John McCain recently introduced the Television Consumer Freedom Act, which has a similar consumer-friendly mandate as the one Moore proposed for Canada. In Canada, the Canadian Radio-television and Telecommunications Commission has already urged cable companies two years ago to introduce more flexibility into their TV options.

Few people in the industry, however, believe that a pick and pay system will be able to entirely supplant the status quo.

Fox's Carey called the notion of a purely à la carte system "a fantasy" and said consumers still want bundles; they just want different bundles from the existing ones, according to a Forbes report.

Schaeffler agrees that, for the time being, bundles are "still necessary to deliver minimal amounts of quality," but, he says, all eyes will be on Canada to prove that theory wrong.

"It's going to be a real interesting test case for you to get going on this a year or two or five or 10 ahead of us," he said.