As a former cable TV engineer, I've been thinking about this issue for a long time. I don't think a-la-carte will lower the price of cable TV. But that's not the purpose of this post. I'm posting this in an attempt to explain what might actually happen if a-la-carte were mandated by Congress.
Several factors would affect the price of a-la-carte cable TV service.
Infrastructure Cost Recovery
There's a common misconception that a-la-carte pricing would reduce the price of cable TV in proportion to the number of channels received.
In fact, a substantial portion of the price for cable TV service covers "infrastructure costs" -- the costs incurred by the cable TV company to provide the service to subscribers. Under the cable TV industry's current pricing model, infrastructure costs are buried in the monthly charge for the basic service tier (although some cable companies allocate a portion of these costs to an extended basic tier). Depending on numerous factors, these costs account for somewhere between 50% and 75% of the retail price for the basic tier.
How would infrastructure costs be recovered if a-la-carte pricing were mandated?
Advocates of a-la-carte don't address this question. But the obvious pricing model already exists: internet access. When you subscribe to internet access with an Internet Service Provider (ISP), you get:
- A physical connection to the internet.
- Access to numerous "free" websites. "Free," in this case, means that the websites are available to you as part of the internet access charge whether you use them or not.
- Access to numerous "pay" websites. "Pay," in this case, means the sites are available to you only if you agree to pay an extra charge. This category also includes sites that are partially free and partially pay.
If we apply this pricing model to cable TV, you would subscribe to "video access" with a "Video Service Provider" (VSP), and you would get:
- A physical connection to the video service.
- Access to one or more "free" channels. "Free," in this case, means channels that are available to you as part of the video access charge whether you watch them or not. This might be a "home page" channel with information about what to do next. There might be several more, depending on what Congress actually enacts and how the courts interpret it. More about this later.
- Access to numerous "pay" channels. "Pay," in this case, means any channel other than the free channels described above. This category includes advertising-supported channels such as CNN and ESPN; non-commercial channels such as NASA-TV and C-SPAN; and "premium" channels such as HBO and Showtime. This is the a-la-carte part: you select, and pay for only the pay channels (or tiers of channels) that you want.
If we apply this pricing model to cable TV, what would the monthly "video access" charge be?
I'm not going to try to answer that question. But if you consider that it's likely to be at least 50% of your present basic cable charge, you can draw your own conclusion.
So what are the so-called "free" channels that might be included as part of the video access charge?
Here's a list of possibilities:
Local Television Broadcast Stations
Television broadcast stations transmit their signals "over the air." If you have your own antenna, you can pick them up off the air for free. If you have cable TV, you receive them as part of basic cable service.
Under federal law, cable TV systems must carry most local broadcast stations on the basic tier (this is called the "must-carry" rule). Under certain conditions, federal law also allows broadcast stations to demand cash payments, or other forms of compensation, from cable operators (this is part of a set of rules called "retransmission consent").
The question now arises: what rules would apply if Congress mandates a-la-carte pricing for cable TV?
We can be certain that the broadcast industry will demand that the existing must-carry and retransmission-consent rules remain in place. If the broadcast industry gets its way, broadcast stations carried on cable TV would not be a-la-carte options; they would be free channels that you would get as part your video access service whether you watch them or not.
And broadcasters would still retain the right to demand cash payments for retransmission consent. Which, of course, would drive up the price of video access service.
As I see it, Congress would have three options for dealing with this situation:
1. Leave the existing must-carry and retransmission-consent rules as they stand, even if it means driving up the price of video access service.
2. Enact rules similar to the rules that now apply to satellite TV companies (DirecTV and Dish Network). Under those rules, every cable TV company would be required to carry all local broadcast stations under the old must-carry and retransmission-consent rules, but it would be allowed to offer these channels to its subscribers as a separate optional tier at a separate retail charge. The subscriber would then have a choice: receive broadcast stations off the air with an antenna, or pay extra to receive them as part of the video access service.
3. Enact rules similar to Option 2, but allow cable TV companies to offer each broadcast station on an individual-channel basis -- the true a-la-carte option. The subscriber would then have complete freedom of choice -- receive desired stations off the air with an antenna, or pay extra to receive them through the video access connection. Or even receive some with an antenna and pay for others.
Of course, any choice other than Option 1 would put Congress on a collision course with the National Association of Broadcasters. I suspect that Congress is not likely to pick a fight with the NAB.
Local Television Secondary Channels
We've all heard that by next February, most television broadcast stations will be required to broadcast exclusively in a digital format, and to discontinue their analog broadcasts. This change will allow broadcasters to offer high-definition programming. It will also allow them to offer additional television programming on so-called "secondary" channels.
Under current federal rules, cable TV companies are not required to carry secondary channels. However, the National Association of Broadcasters has petitioned the FCC for a change in the rules that would extend the existing must-carry and retransmission rules to secondary channels. It remains to be seen what action the FCC (or Congress) will take.
One thing is certain: if the government agrees to change the rules as the broadcasters demand, cable TV companies will be forced to carry most secondary channels as free channels. You would get them as part your video access service charge whether you want them or not.
Of course, the government might consider other options. It could, for example, require cable companies to carry all secondary channels, but offer them to their subscribers on a separate optional tier at a separate retail charge. Or it could simply do nothing, and leave secondary-channel carriage decisions for the cable TV companies and the broadcasters to negotiate in a free market.
My guess is that the government won't do anything. I suspect that even Congress will be able to figure out that requiring cable TV companies to carry more channels isn't what a-la-carte advocates have in mind.
But, as I say, that's just a guess.
PEG Channels
"PEG channels" are channels dedicated to Public Access, Educational Access, and Government Access. Under federal law, Local Franchising Authorities (LFAs) have authority to require that cable systems provide PEG channels and carry them on the basic tier.
Political support for PEG channels varies widely. In many communities, only a small percentage of subscribers watches these channels. Yet in spite of low viewership levels, these channels often enjoy strong support among community leaders.
PEG channels enjoy particularly strong support among LFAs. Every LFA has legal authority to determine the access requirements in its community, and to enforce the provisions of the franchise agreement. LFAs are represented nationally by the National Association of Telecommunications Officers and Advisors (NATOA). With NATOA's support, LFAs are effective advocates for PEG channels.
The question arises: what rules would apply to access channels if Congress mandates a-la-carte pricing for cable TV? Would LFAs retain their current rights?
I think we can assume that NATOA and its member organizations would demand that PEG channels would not be a-la-carte options. Instead, they would lobby to make them free channels that you would get as part your video access service whether you want them or not.
My guess is that Congress will agree to NATOA's demands.
Religious Networks
In the late 1970s, the cable TV industry began using satellites to distribute television programming to individual cable systems. Satellite delivery dramatically lowered distribution costs, and has led to the enormous expansion of television program choices now available to cable TV and satellite TV subscribers.
The first programmers to utilize satellite delivery were Time, Inc.'s Home Box Office (now HBO), Ted Turner's Atlanta television station WTCG (now TBS Superstation), and Pat Robertson's Christian Broadcasting Network (CBN, now ABC Family). But unlike HBO and WTCG, Robertson did not charge cable systems for the right to use CBN's programming.
This was an offer that few cable companies could resist: access to unique programming without having to pay a monthly "license fee" for it. Cable companies nationwide soon began carrying CBN on their basic service tiers.
In the years since, numerous other religious networks have appeared; like CBN, most of them do not charge cable companies a license fee. Today, most cable companies carry several religious networks, and, for the most part, they offer them to subscribers on the basic tier.
The basic tier is "prime real estate" on the cable TV dial. Except for premium channels, every programmer wants its signal carried on basic. Some programmers even have the legal right to be there. Under federal law, broadcast stations must be carried on basic, and LFAs have the right to require basic-tier carriage of PEG channels.
Religious programmers derive their revenue from viewer contributions, so they too have a vested interest in being carried on basic. But they're keenly aware that if the cable TV industry were forced to adopt full a-la-carte pricing, the basic tier, as it exists today, would cease to exist. The late Rev. Jerry Falwell has written:
"Thanks to modern technology, many formerly local ministries are now global in scope. Yet at this most promising moment the very survival of religious broadcasting is threatened in the United States. A flawed federal regulatory proposal has reemerged that would institute a per-channel charge on cable television (sometimes called 'a la carte') which threatens to purge Christian broadcasts from the vast majority of U. S. households.
"Proponents of placing a per-channel charge on cable and satellite programming range from Naderite consumer groups to well-intentioned proponents of decency standards. They mistakenly believe that a federal mandate on per-channel charge would reduce cable costs to consumers and make television a better medium for their children. On both counts,
proponents of these regulations are sadly mistaken....
"How tragic it would be to endanger religious broadcasting in America because of a policy dictate from Washington. What a shame it would be for this great country to deny those seeking inspiration and redemption access to the Word of God. And what a shame it would be if we denied a daily message of hope to those faithful whose physical infirmities keep them from leaving their homes.
"I hope and pray that the bureaucrats and politicians in Washington are listening: Adopt higher decency standards. But protect the ability of cable and satellite broadcasters to share the message of God's love with as large an audience as possible."
— The (Nashville) Tennessean, 1 Jan. 2006
http://tinyurl.com/6dq5dr
Was Falwell correct? Would cable companies indeed drop all religious networks and offer them on an a-la-carte basis? If so, how would cable companies recover their costs?
As I see it, there are three possible scenarios:
1. Congress mandates a-la-carte pricing for all channels, including religious networks. Cable systems would have to offer each network as a separate channel at a separate retail charge. Even though cable companies would not have to pay license fees, they would still incur additional costs (anything that generates phone calls incurs costs). So they would have to charge some sort of monthly or transaction fee for each religious network.
2. Congress mandates a-la-carte pricing for all channels, but allows cable companies to group similar channels in tiers. Under these conditions, a cable company could offer an optional tier of religious networks at a small additional retail charge.
3. Same as 2, except that the religious tier would not be optional. It would be provided to every subscriber as part of the video access charge.
Although only Option 3 would completely allay Falwell's fears, I believe that Option 2 would be a satisfactory compromise.
My guess is that Congress won't mandate full a-la-carte for every channel. It will leave the issue open, in effect allowing cable companies to choose Option 2 or Option 3.
Home-Shopping Channels
Home-shopping channels derive their revenue from product sales, and they pay cable companies a commission on sales within their service areas.
If a-la-carte cable TV pricing were mandated by Congress, cable companies would have compelling reasons to offer home-shopping channels to all subscribers as free channels. Since home-shopping channels don't charge license fees for their programming, cable companies would not incur additional costs by offering them to all subscribers.
But they would certainly lose money if they were forced to offer home-shopping channels on a full a-la-carte basis. Although home-shopping channels have a loyal, if small, audience, it's unlikely that many subscribers would pay a monthly fee to receive them. Cable companies would face increased administrative costs while losing commission revenue.
My guess is that Congress won't mandate anything. It will leave the issue open, in effect allowing cable companies to include home-shopping channels as free channels.
Advertising-Supported Cable Channels
This category includes some of the most popular programming available from cable television: Animal Planet, CNN, Discovery Channel, Disney Channel, ESPN, Fox News, MSNBC, MTV, Nickelodeon, TBS Superstation, USA Network, WGN America. This category also includes a few cable channels that do not accept advertising: the three C-SPANs (funded by license fees), Turner Classic Movies (funded by license fees), NASA-TV (funded by taxpayers), and LINK-TV (funded by viewer contributions).
Advertising-supported cable channels derive revenue from two sources: advertising and license fees.
- Advertising rates are based on several factors, but a significant factor is the total number of potential viewers. Every month, every cable company reports to its program suppliers the total number of subscribers that it bills for each tier of cable service. The total number of subscribers capable of receiving a given channel, summed across all cable systems, is then taken as the number of potential viewers for that channel. Even if you never watch a particular channel, you're counted as a "potential viewer" if you subscribe a tier that contains that channel.
- The license fee is the wholesale price that every cable company pays to a program supplier in exchange for the right to carry its programming. For channels carried on the basic tier, typical license fees are around $0.25 to $0.50 per subscriber per month, although ESPN's exceeds $2.50.
- License fees are higher for channels carried on upper tiers. This price differential compensates program suppliers for lower advertising revenue resulting from the lower number of potential viewers. In some cases, the price differential is so onerous that a cable company actually loses money if it places a channel on an upper tier.
Cable companies recover license fees from their subscribers by building them into the retail price of the tier on which they are carried.
The real significance of this business model isn't just the sum of the two revenue streams; it's the way in which the two revenue streams reinforce each other:
- License fees reinforce advertising revenue. There's an old adage in the advertising business that "paid advertising is worth more than free advertising." A consumer who pays for a publication (print or video) is more likely to read/watch it than a non-paying consumer.
- Advertising revenue reinforces license fee revenue. Advertising revenue enables the producer to provide a better product (print or video), thus enticing consumers to spend more time reading/watching it, and, by extension, enticing more consumers to buy the advertised product.
Now imagine what would happen if cable companies were forced to offer advertising-supported cable channels on an a-la-carte basis. Almost every subscriber would cut back the number of channels it receives (I certainly would, and ESPN would be the first to go). Every program supplier would face an immediate, precipitous decline in license-fee revenue and a similar decline in advertising revenue. The inevitable result is obvious: the program supplier would raise its license fees, curtail its production budgets, or both.
And if it still couldn't make ends meet, it would no longer offer the affected channels.
Of course, one could argue that the program supplier could partially offset these losses by charging higher advertising rates. To an extent, that's a legitimate argument. The old advertising-industry adage that "paid advertising is worth more than free advertising" certainly applies here: any viewer who pays for access to a particular channel is more likely to watch it.
But it's unlikely that increasing the advertising rates would generate enough revenue to offset the losses resulting from the smaller number of potential viewers. Advertising rates are economically elastic; at some point, advertisers are simply going to refuse to pay higher rates for fewer potential viewers.
Premium Channels
This category includes programming offered at separate retail prices (HBO, Cinemax, Showtime, The Movie Channel, Encore, Starz) and programming offered on a pay-per-view basis. These channels are supported by license fees; most of them do not accept advertising.
These channels are already offered on an a-la-carte basis. It is unlikely that Congress would enact anything that would result in any changes.
The bottom line...
If my guesses are correct, here's how a "a-la-carte" cable TV pricing would end up:
When you "sign up for cable," you'll actually be signing up for Video Access service. As part of this service, you will receive several free channels:
• The primary channels of local broadcast stations.
• PEG channels required by your Local Franchising Authority.
In addition, you might receive several more free channels:
• The secondary channels of local broadcast stations.
• A bunch of religious channels.
• A bunch of home-shopping channels.
We could even give this service a name. We could call it "basic cable service."
After you've digested all that, you'll be able to pick your favorite advertising-supported cable channels. But don't be surprised if some of your former favorites are no longer available.
Neal McLain
webmaster@theoldcatvequipmentmuseum.org
August 6, 2008