Carriage Fees And à La Carte

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When I wrote about à la carte cable pricing yesterday, I got treated to a lot of links, rants, queries, expletives, etc. about carriage fees. The way this works is that owners of high-value cable networks (think ESPN or CNN) charge cable companies money for the right to broadcast their station. And technically, the way they organize these fees is as a per subscriber charge.

This doesn’t, however, change the basic analysis. You can just imagine pushing it back one level. If consumers buy less coffee, Starbucks loses revenue, but its costs also fall. But if some people decide they want to drop ESPN, that doesn’t do anything to reduce ESPN’s cost structure. Some of the resulting losses will be allocated in the form of lower content production budgets, some will be less profits for ESPN’s owners, and some is going to wind up being higher prices for ESPN’s remaining customers. Most of these customers will be able to afford the higher fees thanks to all the money they “saved” dropping CNN. Meanwhile, CNN faces the same problem of reduced revenue and the same need to cut costs and raise prices. What ends up happening is that everyone is paying substantially higher per channel prices for somewhat lower-quality versions of the products. But each network now has a somewhat smaller audience since its lost marginal customers, and therefore its advertising rates go down which creates further losses. Now this isn’t a pure “everyone loses” scenario. If ESPN is genuinely the only channel you watch, then you’ll come out ahead in the new fragmented dystopia. But most people will be worse off.

Now don’t get me wrong, I ditched cable television a little while back! The companies have terrible customer service and are currently offering a poor value proposition. But rather than usher in the fake utopia of à la carte, I think new digital distribution models will eventually settle on giant bundles.