Will unbundling cable save you money

If you have cable TV, you probably do not watch most of the channels you get. The average U.S. television household receives 189 channels, up from 123 in 2003.

But viewers are watching only 17.5 of those channels, which is nearly unchanged from 11 years ago, according to a new report from Nielsen.

It would be great if you could pay just for the channels you actually use, right?

That is the idea behind “unbundling,” which some consumer groups have advocated. Cable companies would sell you individual channels rather than vast packages of them. It is an easy idea to get behind when cable companies, never the most lovable of service providers, are raising prices and merging.

But surprisingly, unbundling cable channels would not make consumers materially better off. The most likely result would be people paying about the same amount for fewer channels.

Think about what you would do if your cable service were unbundled. Maybe you watch a lot of CNN, Comedy Central, Bravo, A&E and TLC, so you would buy just those five channels. Or maybe you think A&E and TLC are pretty similar. Given a cable system that includes both, you watch some of each, but if you had to pay separately for each, you’d just make do with one. So you would be buying just four channels.

You would lose some things of value here. Along with TLC, you would drop some channels you used to watch occasionally, like Discovery and Esquire. If your brother used to come over and watch a couple of football games a year on ESPN, he would not be able to do that anymore.

But you would be paying a lot less with so few channels on your bill, so you would be happier despite the loss of some content – assuming prices per channel stayed the same.

Pricing problem

Now consider what would actually happen to prices.

The cost of maintaining the wires to your house and keeping the lights on at the cable company would not go down, even as you order fewer channels. It costs just as much for the cable company to deliver four channels as it does 189. There is good reason to expect your cable company to raise your basic service charge to cover those expenses, offsetting part of your per-channel savings.

And consider how the cable channels would react. The networks make money in two main ways:

They get per-subscriber carriage fees from the cable companies that distribute them, and they sell advertising. Ad revenue would fall a little, as some viewers dropped channels. The number of customers subject to carriage fees would plummet as consumers ordered fewer channels.

Meanwhile, each channel would know its remaining subscribers are mostly people who actually watch, meaning they have a high willingness to pay. Knowing this, they would raise carriage fees. A lot.

In a paper published in 2012 in the American Economic Review, the economists Gregory Crawford and Ali Yurukoglu estimated that, under a mandatory unbundling system, channel carriage fees would about double. They found the average customer would end up spending slightly more on cable under an unbundled system, while watching slightly fewer channels.

On the other hand, some people who currently do not get bundled cable at all would take the opportunity to buy a few channels. Since those new entrants would be better off, Crawford and Yurukoglu estimate that unbundling would slightly benefit consumers, raising the value of the typical cable service by 0.2 percent.

But they note that is before accounting for the fact that unbundled packages would cost more to market and deliver.

Sports savings

Not everyone would lose out. If you never watch sports, you might be better off not having to pay for ESPN, which charges the highest carriage fee of any basic cable channel.

But Byzalov estimates that sports channel carriage fees would more than triple under unbundling, as most subscribers opt out and only die-hard sports fans buy in. Consumers who do not care about sports at all would be better off, but casual sports fans would be worse off.

All of this is counterintuitive. Packaging a product so you are mostly buying stuff you do not want seems as if it should be bad for consumers. And there are advantages of unbundling in other areas of the economy, like Frontier Airlines’ new fee for carry-on baggage. If I put my bag in an overhead luggage bin, you can’t put your bag in the same spot, so it makes sense to charge me personally for my use.

But not everything should be unbundled. When a good is “nonrivalrous” like a cable signal, giving it to me does not stop anyone else from using it or add production costs at the margin. In those cases, it can make sense to throw lots of stuff into one package, regardless of whether I’ll actually use it.

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