The Fallacy of a la Carte Cable Pricing

Published February 1, 2006

In the 1991 remake of the classic movie Father of the Bride, Steve Martin goes into a grocery store and begins ripping open packages of hot dog buns. When confronted by a store clerk, he explains: “I want to buy eight hot dogs and eight hot dog buns to go with them. But no one sells eight hot dog buns! They only sell 12 hot dog buns. So I end up paying for four buns I don’t need. So I am removing the superfluous buns.”

Martin’s character would probably have favored government regulation of bun-packaging.

More recently, activists have begun demanding “unbundling” in another industry: They want to require cable TV companies to sell channels “a la carte” rather than bundling them together in “tiers.”

This effort to force cable companies to sell their cable channels individually is just as misguided as Martin’s demand to purchase individual hot dog buns. Companies don’t bundle products together to “force” customers to purchase things they don’t want. Rather, bundling is a mechanism for lowering the per-unit cost of goods and services by spreading costs over a larger number of units. That benefits consumers because the price per bun–or per channel–is lower than it would be if the company were forced to sell its product one piece at a time.

This is easy to see in the case of hot dog buns. The price of a 12-pack includes the manufacturing costs of the buns, as well as the labor and materials needed for packaging, shipping, stocking, and ringing up the product. Packaging a 12-pack of buns, for example, might require only three times as much material and labor as packaging an individual bun by itself, thereby reducing the per-bun packaging costs by a factor of four. These savings are passed onto the consumer.

The same can be seen in another example of bundling: the newspaper. Some readers read the business section but not the sports section. So why don’t newspapers allow their customers to pick and choose which sections they want to receive?

The reason is that most of a newspaper’s costs don’t vary by the number of customers who take a particular section. Delivering the paper, for example, costs virtually the same whether the paper is fat or thin. And the columnists and reporters who produce the content in the sports sections will collect the same salary regardless of how many readers get their section. So the better question is: If it doesn’t cost more, why not include every section in every paper?

Precisely the same considerations apply to cable TV. Most of the costs of delivering cable content to a consumer’s home are fixed and don’t change with the number of channels an individual subscriber receives. The Fox News Channel, for example, costs the same to produce whether it has one viewer or a billion. And the infrastructure that delivers content to a consumer’s home costs virtually the same to deploy whether the consumer takes one channel or 100.

Advocates of a la carte pricing seem to think that, if 50 cable channels cost $50 a month, then one cable channel ought to cost $1 a month. But that’s absurd. Taking only one channel doesn’t make cable infrastructure any cheaper to build or maintain. In fact, more staff might be needed to cope with the greater administrative overhead of keeping track of which customers have chosen which channels.

But won’t cable companies at least save money by not having to pay as much in license fees to the studios that create television channels? It’s not likely. Cable channels keep their rates low by spreading the costs over tens of millions of households. If the number of subscribers per channel dropped dramatically, the channels would be forced to raise their rates dramatically.

In practice mandating a la carte pricing would force cable companies to dramatically raise per-channel prices in order to cover their costs. As a result, consumers would pay about the same, on average, but they would get a lot fewer channels for their money. That’s every bit as irrational as Steve Martin’s bun crusade.

Timothy B. Lee ([email protected]) is an editor at the Show-Me Institute, a non-partisan public policy research organization based in St. Louis.