Conventional Wisdom Against A La Carte

Do you believe in “conventional wisdom?”

Sean Payton, the head coach of the New Orleans Saints, evidently does not. The Saints were the first team ever to attempt an onside kick in the SuperBowl before the end of the fourth quarter. The gambit came up spades… or in this case, fleurs-de-lis, as the Saints recovered, scored the go-ahead TD and the Colts were never the same. Sean Payton broke with so-called conventional wisdom and won the world championship.

In the TV industry, the conventional wisdom is that a switch to “a la carte” programming won’t save you any money. You see, if ESPN becomes a la carte and only one out of three households decide to purchase, then they will have to charge 3x the cost for the channel to remain revenue neutral. (Actually, they’d have to charge a little bit more to offset the loss of putative ad revenue from the loss in viewership.)

Take, for instance, ESPN, which charges the highest amount of any cable network: $3 per subscriber per month. [now over $4 per subscriber] Suppose in an à la carte world, 25 percent of the nation’s cable subscribers take ESPN. If that were the case, the network would have to charge each subscriber not $3, but $12 a month to keep its revenue the same. (And don’t forget: with its $1.1 billion annual bill to the National Football League alone, ESPN is hardly in a position to tolerate declining revenues.)

And that’s one of the most popular channels on cable. What percentage of cable subscribers would take Discovery, or the Food Network, or Oxygen, or Hallmark — or the many, many more obscure networks that you can now find up and down your cable box? Five percent? Ten percent? According to Mr. Moffett’s analysis, if every African- American family in the country subscribed to the Black Entertainment Network, it would still have to raise its fees by 588 percent. He adds, “If just half opted in — still a wildly optimistic scenario — the price would rise by 1,200 percent.”

But did you notice the non sequitur? The mathematics might be correct, but the logic is not. ESPN might charge 3x… or 10x… or they might even DROP the rate. Why? The cost for the channel should maximize their profits. Why doesn’t McDonald’s charge $10 for a Big Mac? Because they probably would no longer be serving “billions and billions.”

Right now, the channel affiliate fees are a black science. How are rates determined? Back room games of poker? Tarot cards? A splattering of goat entrails?

Perhaps, a better way would be returning transparency to the marketplace. A la carte allows us consumers to exert competitive pressures on TV stations and cable operators. We should be able to pay for our own programming, not our neighbor’s… or worse, that fat ass on the couch who watches over 14 hours of television each day.

Source:
Bland Menu if Cable Goes à la Carte
Joe Nocera
New York Times, November 24, 2007