Why a-la-Carte Cable Pricing Will not Reduce your Cable Bill
Christopher Carter
I've been rading a lot lately about efforts to reduce the cost of content (i.e. cable channels) on cable systems. Recent actions include suits by Cablevision against Viacom and Verizon suggesting a pay per channel viewed model. While many agree the cost of cable programming is outrageous given the actual amount of channels watched, here's why a change to a la carter pricing or pay per channel viewed really won't reduce one's cable bill. Economics.
Cable systems (MSOs) are capital intensive businesses. It costs a lot of money to bury cables and build head ends and manufacture CPE, and to finance the debt upon which these networks are constructed. This requires significant cah flow, and anyone who reads an annual report of a cable system can see how much cash these monopolists generate. And the business models for cable programming are so lucrative, with two revenue streams, its no wonder Fox and other broadcasters are contemplating discontinuing their over-the-air broadcast services to combat the Aereo start-up, assuming the latter continues to win court battles.
Let's look at this with some basic numbers. Cablevision has approximately 3.0M customers in its market. Homes passed in industry parlance. Cablevision pays each cable channel a fee for each of
- ESPN (Photo credit: Wikipedia)
those homes who has access to, but not necessarily view, each channel. ESPN, for example, charges the highest fees in the industry at more than $5.00 per home passed. Thus, each month Cablevision pays ESPN $15.0M for the priviledge of broadcasting ESPN to its 3.0M homes passed.
What if ESPN were priced based on homes viewing the channel and NOT the homes who are passed. If only 50% of Cablevision home passed actually "opt in" and watch ESPN, do you think the payment to ESPN will go down to $7.5M? No. My guess is there will be a scaled rate card based on the number of viewers who actually view the channel. Hence, the rate card for ESPN if only 1.5M Cablevision subscribers watch ESPN could be as high as $10 per home who viewed the channel.
The pie is the same size. The cable service provider has an imbedded asset base upon which they must have a signiicant ROI to generate enough cash flow to cover its costs and debt service, and make a handsome profit. If program rates do not increase based on a-la-carte pricing or homes viewed, the cost of the pipe will most definitely increase, and that cost will be substantial as well.
Any way you look at it, your cable bill is not going down anytime soon. Get used to it, or cut the chord and watch programming over the Internet.
