With the Breaking Bad finale upon us, what would you pay just to be able to watch AMC Networks Inc (NASDAQ:AMCX)? Maybe $5 a month?
Sports fans, how much would you pay for a cable TV service that only provided ESPN? Ten bucks? Maybe $15?
For fake-news junkies, what is your nightly fix of Jon Stewart and Stephen Colbert worth? Would you pay $3 for your Comedy Central?
Unfortunately, these a la carte cable prices aren’t even half of what you’d pay for these channels if John McCain’s Television Consumer Freedom Act of 2013 compels pay-TV providers to get rid of the cable bundle.
Sen. McCain seems to be missing something in his analysis that an a la carte TV service would benefit consumers. In fact, doing away with the cable bundle would likely result in higher prices for most households, fewer viewing options, and less quality programming. So, although a la carte cable pricing seems like it’s a consumer friendly concept, the cable bundle model is here to stay. At least for now.
Picking and choosing
With about 100 million cable TV subscribers in America, everyone pays for a similar set of channels, even the ones they don’t watch. So, while I’m paying to watch Kornheiser and Wilbon bicker on ESPN, I’m also paying for your kids to watch Dora, Spongebob, and Phineas and Ferb.
In a world where I can subscribe to only the channels I want, I wouldn’t be subsidizing your kids’ favorites and you wouldn’t be subsidizing my sports fanaticism. As a result, we’d pay higher prices for the channels we want, but nothing for the channels we never watch. Everything seems great!
But a funny thing happens when you give consumers this choice. Prices increase much more than people expect.
Without the cable bundle, ESPN likely would see its subscriber base fall from 100 million to closer to 20 million super-fans. As a result, it would increase its fee fivefold, to about $30 per month. That’s just its cut.
Take into account that cable providers have fixed costs in delivering the feed and that they’re out to make a profit as well, and you’re already paying roughly the same you do for the entire bundle you get now.
In fact, out of the average $80 cable bill, about $30 goes toward programming. So, those 20 million sports fans will undoubtedly see their cable bill go up. And maybe they should — sports is the costliest content.
Oh, the drama!
But for the non-sports fan, things don’t get much better. Say you love AMC’s Mad Men, Breaking Bad, and The Walking Dead. Currently, $0.35 of your cable bill goes toward carrying that channel — chump change compared to ESPN’s $5.54 affiliate fee.
But that number soars in the a la carte world. Even if every one of the 5.9 million viewers who tuned into the Breaking Bad premiere this year chose to subscribe, AMC Networks Inc (NASDAQ:AMCX)’s affiliate fee would need to balloon to well more than $5 to maintain its revenue. Add a few more channels with similar audience sizes into your lineup, and things add up quickly.
But that’s just part of the hit for networks. If AMC Networks Inc (NASDAQ:AMCX) has a maximum of 5 million viewers for a show, advertisers aren’t going to pay as much for a spot during The Walking Dead premiere next month. They’re not going to pay ESPN as much for a spot during Monday Night Football. The networks will have to make up this revenue somehow — say, through higher subscription fees — or they’ll see profits fall.
So, in the event that consumers are provided “freedom” from the cable bundle, you’ll likely pay more for your TV package. And what do you get in return for your higher priced television? Less quality programming.
A la carte cable will kill the best shows
The best television shows are no longer on broadcast television. Cable networks won more Emmys than broadcast networks last year. You probably watch some of them, and you have your cable bundle to thank for them.
Although these critically acclaimed shows don’t attract the largest audiences, they attract devoted audiences. If you’ve had a conversation with a fan of Breaking Bad, the show sounds more addictive than the crystal meth Heisenberg cooks.
The cable network business is much different from the broadcast network business. Broadcast networks make most of their money from advertising while cable networks make much more from affiliate fees. Therefore, broadcast networks produce shows intended to attract wide audiences, resulting in some of the most boring television.
Cable networks are looking for a spot in the bundle so 100 million subscribers pay their carriage fee whether they watch the channel or not. Thus, they produce great television shows that attract devoted audiences. The rest of the schedule is filled up with cheap programming and syndicated shows.
Without the bundle, every channel will resort to appealing to the lowest common denominator. They’ll want to attract as wide an audience as possible because they can’t rely on every cable subscriber to pay their fee. This means more bad TV and less quality programming.
Moreover, Laura Martin, an analyst at Needham & Co., suggests that fewer than 20 channels would survive in an a la carte cable model. In all likelihood, your family watches at least one channel that wouldn’t make the cut.
Martin estimates that half of most cable channels’ revenues is derived from advertising, and advertisers are relatively uninterested in stations with less than 25% penetration. No more than 20 channels have the pricing power to maintain a significant audience while raising prices.
In short, unless you only watch Two and a Half Men, the cable bundle is critical to your television watching experience. Quality shows will become even rarer, and you might not even have a chance to subscribe to a favorite channel.
The cable bundle is the worst … except for all the other options
If you love television, and it’s hard not to with all the great shows these days, then the truth is the bundle is your best friend. Cable still offers one of the best values in entertainment on a per-hour basis. A family of four can go to two movies a month for the same price as the average cable bill.
While you may not need the breadth of entertainment cable allows, the only way it survives is through the bundle. Otherwise, the enterprise unravels: TV shows cease to take chances, channels go out of business, and you’re still paying the same price. The bundle keeps anyone from paying too much and supports quality entertainment. Is that so bad?
The article You’re Stuck With the Cable Bundle, and That’s Not so Bad originally appeared on Fool.com and is written by Adam Levy.
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