Choosing Your Cable Channels

At Marginal Revolution, Tyler Cowen has a post that deals with the consumer comment : "I don't ever watch Bravo but still I must pay for it".

In the post, Tyler references the subject of bundling and decides that price discrimination is a possible reason why channels are not offered on a channel by channel basis.

I'm not prepared to say that any of this is wrong, but that there may be an alternate explanation.

A naive consumer would likely simply say : "I'm not asking much, just reduce my bill by what it costs to provide me with the channels I don't want."

The cable company will likely say something like: "It would be too expensive to provide the equipment that could enable and disable reception on a channel by channel basis."

While both of these points of view have some merit, it is likely that the real reasons that produce the staus quo lie elsewhere.

First of all, the consumer assumes that the cable company incurs a positive marginal cost to provide him with channels that he doesn't want to watch. This is unlikely, and the actual marginal cost is probably negative.

To see this, consider that the scarce economic good that the cable company has to sell is delivered channel capacity.

Some cable channels are widely desired and the cable company is selling the consumer entertainment or information content. These channels make money for the cable company and the cable company pays the content providers for the right to carry them.

Other cable channels are only of interest to narrow niches of the public, and the content providers are required to pay the cable company for distributing their content to the public. They must do this if they wish to attract advertising or fund raising revenue.

In a similar vein are the shopping channels and infomercial providers. These definitely must pay the cable company for carrying them.

To just concentrate on the shopping channels, they will pay the cable comapny an amount that will vary with the number of households that can access their programs. If the cable company allowed consumers to block access to the shopping channels, it would risk being paid on the basis of unblocked channels rather than the much larger number of accessible households. It is very likely advantageous to the cable companies to receive the benefit of the optimism of the shopping channels as they cannot know just how many consumers actually tune in. If the cable companies were to provide blocking capability to consumers, they would likely lose the plausibility of denial of knowlege of just how many consumers are watching the shopping channels. The shopping channels are left with the uncertainty of whether their sales are limited by the number of accessible households, or by the relative non-competiveness of their product. This reduces their bargaining power with the cable companies.

In part, in the end, consumers are not really the ones who are paying for unwanted channels, but rather it is the shopping channel customers whose payments must cover the cable channel access fees in addition to all other costs that the shopping channels incur, if the shopping channels are to survive.

Share this

In your shopping channel

In your shopping channel example, the costs per person that those channels are willing to pay will go up, since they are more certain that the people who ask for it will be watching.
I would not try to guess what the scale of that effect it, but it should be noted.

I like Tyler's explanation

I like Tyler's explanation generally speaking, but I doubt his assumption that "the cable company has a good idea of demand in general".

I think Don's explanation is excellent too. The root of consumers' expressed preference for unbundling is the misperception that extra channels incur a positive marginal cost (and the general misperception that prices have something to do with costs).

Taken together, the two give a good picture of why messing with cable bundling practices is a bad idea. The consumers' reasoning is flawed, and they'd be worse off if they got what they're asking for.

Noah, Your points are

Noah,

Your points are excellent, and correct.

eightball,

This is a good point and one I alluded to by talking about risk. Your comment gives me the opportunity to create a more involved story.

Assume that a cable company has reserved 10 channels as shopping channels, and that there are 100 shopping companies that would like access. The determination as to what channels are actually broadcast is almost certainly the result of an effective auction process, independent of the form the bidding might take.

The situation is like the prices paid per entry in a mailing list by advertisers. The higher the degree of qualification of the names on the list, the more the advertiser would be willing to pay to increase the profit yield from mailing costs.

When the cable company is offering access to its subscribers to bidding shopping channels, there is a wide range of qualifications that it could provide.

At one extreme, it could simply provide the total census population of all the towns for which it has the cable franchise.

At the other extreme, it could conceivably provide the count of subscribers that are known to spend more than $1000 per year with shopping channels.

It is clear that on a per qualified subscriber basis, the shopping channels would pay far more per subscriber for the highly qualified list.

The cable company now faces the question of what level of qualification gives it the most revenue from the shopping channels.

This is a hard question to answer, but there is a factor that would likely push the answer towards the less qualified end of the spectrum.

The larger of degree of qualification, the less the uncertainty on the part of the shopping channels as to what their revenues would be.

This lower degree of uncertainty should translate into a much smaller spread of bids among the 100 bidders. In the limit, there is no advantage to the cable company of holding an effective auction since all the bids will be about the same.

OTOH, sticking with a relatively high degree of uncertainty (low degrees of qualification) will produce high bids far higher than the lowest bids.

In effect, the most optimistic shopping channels will get the access in return for their higher bids.

If the cable company can demand extended advance payment, non-refundable, contracts, any over-optimistic shopping channels may well fail and return their access rights for recycling well before the end of the contract term, all to the good of the cable company.

Regards, Don