Why A La Carte Cable Pricing Will Never Work In Traditional Cable Systems


Rumor has it that Apple is not only developing an Apple Television (not to be confused with the Apple TV) but also plans to launch a unique video streaming service along with it.  Apparently a year ago, Steve Jobs approached CBS about a content deal, which the CEO of CBS, Leslie Moonves, turned down.  He stated “I told Steve, ‘You know more than me about 99 percent of things but I know more about the television business’”.

Leslie was concerned that Steve’s idea would harm CBS’s current revenue stream.  What those exact revenue streams are, I’m unsure of.  But his position is an all too familiar one when it comes to trying to get the old guard of the entertainment industry to realize that technology has changed the way viewers consume their entertainment.  As the years progress, there may be an option whereby the media companies can give the viewers what they want without jeopardizing the revenue stream.  Online streaming of video media is probably the closest we’ll ever get to a la carte programming.

I’ve been in the cable providing business for over 12 years and I’ve heard time and time again from customers, “Why can’t I just buy the channels I want?  Out of the 100 channels I have in my package, I only watch about 5 or so of them.”  They have a logical query, until the numbers game starts and that is something that most of the cable buying public does not understand.  It’s all about the numbers…and the dollars.

I always like to give the following example:  Let’s say that ESPN costs $5 per subscriber for the cable system to have the channel on their lineup.  ESPN is typically required to be on the highest penetrated tier (package) of a cable system.  Of course the reason for this is to ensure that ESPN gets the highest return on their investment of allowing you to carry their channel.  After all, by carrying their channel, you’re making your lineup more enticing to potential customers, right?  So let’s say the cable system has 3,000 subscribers on its highest penetrated tier.  That’s a cost of $15,000 per month to the cable system or $180,000 per year (averaged since subscriber counts ebb and flow).

So a customer pays $55 per month for the package which is the highest penetrated tier the cable company has.  $5 of that, as we’ve already pointed out, is the cost of ESPN to the cable system for that one customer.  Suppose the customer was a real sports fan and wanted just the sports channels plus the local networks – they didn’t really care about any of the other channels such as USA, TNT, SyFy, etc.  The customer figures that if they can get a “sports tier” they could save money.  And logically that would make sense.

But to ESPN it doesn’t make sense nor dollars.  If we estimate that 60% of the viewers wanted the sports tier, that would be a 40% loss in revenue for ESPN due to those views that did not watch sports.   Granted at 60%, that is still $9,000 per month or $108,000 per year.  But a company like ESPN or any of the major media companies are not going to give up $6,000 per month to make the customer happy.  No, if they did allow a la carte pricing for their channel, they would ensure that the formula put into place would guarantee no loss of revenue for them.

Specifically, a channel inside of a package being $5 would turn into a $10 a la carte channel.  This would guarantee that not only would ESPN maintain their revenue stream, but they could potentially realize more revenue.  But the customer really hasn’t won anything here.  Think about it – if ESPN would double the price, the other channels that customers may want individually would probably do the same.  In theory, that same customer that said they only watched 5 or so channels out of the 100 they pay for could very well wind up paying the same amount for those 5 channels or at least close to it.  Granted, ESPN is one of the highest if not the highest priced channels on cable, but one can easily see that a selection of 5 channels, depending on what they are, could cost $30 to $40 a month, which really isn’t any savings considering the selection went from 100 channels to 5.

The problem with the idea of a la carte is the customer’s rationale that if they could select just the handful of channels they wanted to watch, they could cut their cable bill drastically.  Unfortunately, it can’t work that way and the big media companies won’t allow it.  There is hope that this will change with online streaming of the content because the companies will find a way to maintain their revenue streams and the customers will have more flexibility and choice.  But as far as a la carte on traditional cable systems is concerned, that’s wishful thinking in the ether.

 

Side note:  I have nothing personally against ESPN and everything I’ve stated in this article concerning actual pricing, subscriber counts et al is pure conjecture and in no way should be taken as fact.




 

 


3 Comments

  1. damondnollan March 15, 2012 10:10 pm  Reply

    I cut my cable all together so ESPN, TNT, and all the other channels are NOT getting any of my money. These networks, excluding the Discovery channel, CW and the like, need to get smart because more and more of us are leaving the service. If I can watch more television without commercials, I will. For that, I have Netflix.
     
    Thanks for sharing the cable company’s point of view.

    • Donovan Adkisson March 16, 2012 10:40 am  Reply

       @damondnollan Yep, if I didn’t work for a cable company, I’d probably be a cord cutter myself.  :)

  2. Donovan Adkisson June 25, 2012 3:33 pm  Reply

    An article that pretty much backs up what I said here.  http://www.multichannel.com/article/486361-Pay_TV_A_La_Carte_Could_Put_1_Million_Jobs_At_Risk_Analysts.php?rssid=20073
     

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