Why Steve Jobs and Jeff Bezos May Succeed Where Kevin Martin Failed (and why we might regret it)

November 1, 2010 at 5:26 am 42 comments

| Gabriel |

OK, so first thing is that those of you who are not telecom nerds should know is that Kevin Martin was the chairman of the FCC during George W. Bush’s second term. His agenda at the FCC was to force multi-system operators (i.e., cable and satellite companies) to provide ala carte pricing. We already have this for premium cable (HBO, Showtime, etc) but not for “basic” cable. The way basic cable television works is that the cable channel charges the carrier a fee for each subscriber, whether or not the subscriber requested or even ever watches the channel. So for instance, before I canceled my cable subscription, about $2 or $3 of my exorbitant cable bill to Time Warner would get passed on to Disney for the privilege of having ESPN, even though I have never watched this channel ever. The reason is that many other people love ESPN and get far more than $3 a month worth of pleasure from viewing it. Disney knows this and tells Time Warner that it’s all or nothing. Long story short, Kevin Martin failed in this agenda and nothing happened with a la carte cable pricing.

A few months ago, Steve Jobs charged up the reality distortion field and unveiled a few products, one of which was eliminating the abomination that was the buttonless iPod Shuffle. The most important “one more thing” reveal though was the new version of the Apple TV. The old Apple TV was basically a stripped down Mac Mini that used the “Front Row” 10-foot user interface to access your iTunes library. It was primarily oriented towards downloading purchased content and storing it on the device’s hard drive. The new Apple TV is basically the same as a Roku in that it emphasizes streaming over local storage.

Both AppleTV and Roku can stream Netflix and each also has an a la carte video service, iTunes rentals and Amazon video-on-demand, respectively. While Netflix is somewhat similar to a traditional cable business model insofar as it’s a monthly subscription fee for “all you can eat,” the two a la carte services represent a decisive break from the cable television business model. Instead of all you can eat, you buy an episode ($1 for 24 hour rental from Apple, $2 for perpetual access from Amazon).

This is a potentially disruptive innovation for the television industry because one of the main ways the industry had practiced price discrimination (and therefore increased both revenues and quantity) was to engage in bundling. A switch to a la carte will probably result in an increase in consumer surplus per unit demanded but a drastic decrease in quantity supplied. (“Consumer surplus” is econ jargon for the subjective experience of a “bargain”).

Suppose that my household values watching True Blood and Mad Men at $5 an episode, Top Chef at $2 an episode, and Mythbusters and Toddlers and Tiaras at 50 cents an episode. Now suppose that my next door neighbors have the exact opposite set of preferences. In both cases there is a total of $13 of demand for television per household per week. If the cable company charges $12.99 per week, both my neighbor and I will write the check, but do so reluctantly as we’re just barely this side of the indifference curve.

Now suppose that someone (say, Apple or Amazon) starts selling shows a la carte. If the price point is 50 cents both my neighbor and I will still watch all five shows. However we’ll only be paying $2.50 a week and will be getting $10.50 in consumer surplus. If the price point is $2, each of us will get three shows and pay $6, for $6 in consumer surplus. If the price point is $4.99 we’ll each buy two shows, pay almost $10, and get two cents of consumer surplus. There is no price point where we both pay $12.99 like we used to. At any one a la carte price point, both my neighbor and I will pay less than we used to, watch the same or less amount of tv, and get the same or higher consumer surplus.

Thus a switch to an a la carte model implies much lower costs to the consumer. Because revenues would fall, so would production by some combination of reduced numbers of shows and reduced production values. Basically, we’re looking at an end to the television renaissance we’ve enjoyed since the late 1990s as people like me decide that we’d rather pay $10 or $20 a month for the few shows we love and do without the rest than pay $50 a month for a bunch of stuff, most of which we don’t even really like.

However desirable the trade-off of less viewing for a much lower price may be, it may prove unsustainable in the long run. I may love Mad Men so much that $2 an episode to stream to my Roku feels like a bargain. However these shows may only be economically viable because there are also some people who have a marginal attachment to the same show and the current business model of cable bundling lets the content producers effectively get several dollars per episode from the cult following and maybe fifty cents an episode from the casual viewers.

For instance, Battlestar Galactica was only just barely profitable and that was achieved by combining high per-viewer revenues from a small numbers of viewers who really got the show (i.e., viewers who loved it for Laura “Airlock” Roslin and Gaius Baltar)  and low per-viewer revenues from a larger number of viewers who just watched once in awhile (i.e., viewers who tuned in to see the spaceships shoot at each other). However contemptible the latter viewers might be, the show wouldn’t have been renewed without them (which might not have been a bad thing given how the show eventually jumped the shark with the whole “final five” business).

That is to say, television may not be economically viable when priced on an a la carte basis and this could lead to a decline in volume and possibly quality of original programming. This will probably involve a slow decline but could be catastrophic. The most likely scenario for a catastrophic collapse is if the studios forecast that a la carte means declining revenue and try to pare back their cost structure in anticipation. This would probably lead to a militant slate getting elected at both WGA and SAG and an even worse strike / soft strike than we had on the last contract cycle.

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42 Comments

  • 1. Gabi Huiber  |  November 1, 2010 at 12:12 pm

    I think a la carte is just the other side of bundling. Both are ways to do price discrimination, and both result in more output than would be available if only either one of them were an option.

    Take the example of sports venues and season tickets. These seem to be aimed at two kinds of customers. The first are people who would pay a lot for one game and zero for others. They will buy season tickets for a price approximating what they would be willing to pay for a guaranteed seat to the one game they care about. This way the stadium sells that one game to them for a margin that would otherwise go to the scalpers. Since for the rest of the time these people’s seats are empty, they can be sold implicitly for other games to people who buy cheap seats with an expectation that they won’t be hassled if they chose to sit in better ones that are unclaimed. These are consumers who would not buy cheap tickets if only bad seats were available: their dollars come to the stadium courtesy of the first kind of season ticket holder.

    The second kind of buyer of season tickets is the guy who has an elastic demand: he will pay more for a season ticket allowing him to go to seven or eight games than he would in total if he had to buy them piecemeal and in that case he only went to the one or two games he wanted the most. If your argument here is that because of this second type of season ticket holders, stadiums would be bigger if only season tickets were sold, then you’ve got to wonder why there aren’t any season ticket-only venues anywhere.

    This suggests that maybe if only season tickets were available, stadiums would be smaller, not larger. It’s even possible that more season tickets are available precisely as a result of the fact that capacity in larger stadiums can be priced a la carte as well. So, in the case of stadiums, a la carte pricing of tickets, in addition to bundling, makes more output, not less.

    Broadcasting, like music, are similar in this respect, though they come to the same conclusion by a different way. Bundling here, I think, is not historically driven by profit-maximizing pricing, but by the limitations of packaging. These are now going away.

    Back in the nineties a professor of management at some Canadian university wrote a piece in the Wall Street Journal calling for the lawmen to shut down Napster. I wrote a letter in response, proposing that instead it should be turned into a legitimate way for bands to sell music by the tune to people who didn’t want to buy the whole album, in addition to those who did, because now the internet was making that possible. There are people now who don’t remember what it was like before iTunes, but at the time the idea was novel enough.

    It looks to me that my beloved Roku and Apple TV are doing to broadcasting what iTunes did to music: unbundling will be a way to produce more, not less, because now you can reach consumers who would not have bought the whole bundle back when that was the only way you could sell the product.

    • 2. gabrielrossman  |  November 1, 2010 at 12:56 pm

      i appreciate your careful thoughts but disagree in two important respects:

      1) stadium seats (or for that matter, theater seats) are rivalrous and have a fixed quantity in the short-run, unlike digital media which are nonrivalrous. this has important implications for pricing of the two goods so we wouldn’t expect them to be entirely comparable.

      2) as seen in this table (http://www.census.gov/compendia/statab/2010/tables/10s1103.pdf), recorded music sales are in fact way down by 40% from 2000 to 2008. during that period the licensed digital market has grown, but not by enough to make up for the decline in the CD market.

      much (a majority?) of the decline is because of piracy, but i think it’s fair to attribute a good portion of it to the decline of bundling made possible by the digital singles market. the two are of course related because the labels only agreed to enter the internet market as an alternative to piracy — steve jobs as good cop to shawn fanning’s bad cop. digital singles are 56% of sales by units but because of the low price point only 12% of sales by dollars. it is of course impossible to figure out exactly how many people would have bought the album for $10 – $15 if they didn’t have the option of buying the single for $1, but the price points are so different that it only has to be > 10% for you to see how bundling makes a lot of money. it’s worth noting that in the digital market, singles outsell albums at 20:1 in units or 2:1 in dollars.

      here’s another way to think about it. the typical hit album has about three hit singles. if we assume that before iTunes and Napster most music consumers would buy an album (at the $15 price point) mostly for those three singles, then the existence of a robust market in singles is undercutting an album market about five times its size.

      • 3. astonerii  |  November 5, 2010 at 10:17 pm

        “How much (a majority?) of the decline is because of piracy, but i think it’s fair to attribute a good portion of it to the decline of bundling made possible by the digital singles market..”

        How about a third reason for the decline? Like in my case, the third time my computer was corrupted and actually required physical replacement of hardware because the CD companies thought putting harmful viruses on the CD disks was a good way to prevent piracy, I stopped cold turkey buying music. I have not one new piece of music in my collection since that day. (well, I will walk that back one step, I bought 3 CDs from an independent artist from their live show in a bar.)

        I decided that the whole enterprise of the music industry was corrupt and I was not going to support it. I do not support sports either. I hope there are more people out there who just simply bouycott the bad actors.

        While some of the people are talking about the proper pricing point, something missing from the entire argument is that the cost of doing business in the TV business has been dropping for quite some time now and it is only the greed of the industry that keeps pricing as high as it is. From the investors to the actors and to the writers (sports athlete pay is the biggest reason I do not support by viewing). For TV shows I buy used DVDs, thereby supporting the industry only mildly by making the purchase of DVDs by others a less risky investment because they can resell them for part of their cost.

        Do not get me wrong, I wholeheartedly think that people should be able to earn as much money as they can, at the other end of the spectrum, there are far too many corruptions in these businesses to force these greedy outcomes of extravagant pay for little effort and even less factual creativity.

  • 4. Dulani  |  November 2, 2010 at 9:35 am

    Gabriel,
    Great post. I agree with most of it. On average, there will likely be less money available for television productions in the future. But I suspect our leaner menu of offerings will look and feel more like the local cinema or HBO’s lineup. The’ll be high quality, compelling, and interesting. If not, most of us will find other things to do with our dollars.

  • 5. m  |  November 5, 2010 at 1:02 pm

    what’s the role of the people who opt to forgo cable, but stream all of these shows for free on sites like megavideo?

    also, fyi – battlestar galactica did NOT jump the shark

    • 6. gabrielrossman  |  November 5, 2010 at 1:12 pm

      i’m not familiar with megavideo, but i’m assuming it’s a piracy site. obviously piracy produces even less revenues (for the content producers) than does a la carte. this may have a further indirect effect as piracy may be one of the forces pushing content producers to work with a la carte pricing. certainly (as gabi and i discussed in earlier comments) this was the case with the music industry.

  • 7. Mark  |  November 5, 2010 at 1:08 pm

    I really like your post and analysis. The overall effect may be what you describe here. But I think you are ignoring an important effect of disintermediation that will happen naturally as a result of Internet initiatives in TV viewing.

    If Comcast were to switch to a la carte pricing tomorrow, the effect would be just as you described. But a big part of the $50 a month we pay Comcast is just monopoly pricing that we pay because there is not yet another good option.

    Once more people are using the Internet to purchase shows directly, monopoly power swings directly to the producer of content. They can offer shows through iTunes for convenience, but also offer the best price from their own site and get the entire revenue stream.

    Right now 50 cents of every dollar I spend on TV is being captured by Comcast. Sending that money to content producers helps produce better content even if I spend less money overall.

  • 8. Morgan Warstler  |  November 5, 2010 at 1:18 pm

    Many, many things wrong here…

    ESPN would charge $20 per month in an a la carte model… twice HBO. And slowly it would come down as Fox Sports competed.

    In a show-by-show model, you consume a lot more than you think – the true # of hours watched on TV is the real value.

    6 hours a day. And you ONLY know which shows you like because there is zero barrier to entry for you to get hooked on them.

  • 9. john  |  November 5, 2010 at 1:31 pm

    I agree with Dulani. The vast majority of television offerings are terrible — reality shows about sub-celebrities, cheap teen soaps and recycled nature documentaries. THOSE shows are the ones that will die, whereas the smaller quantity of shows will probably result in better shows, akin to Mad Men and Dexter, for example.

    • 10. mulp  |  November 5, 2010 at 4:35 pm

      john, to argue that the biggest growth segment in TV will die and be replaced by the smaller niche genre segment is absurd.

      Reality check – Dancing with the Stars got a larger audience share than the World Series final, and baseball is one of the stronger and most stable segment of entertainment, with baseball having a sound profit year.

      Or are you a snob who thinks sports is cheap schlock programming….

  • 11. Dylan  |  November 5, 2010 at 1:52 pm

    In video though it doesn’t seem like bundling is really going away, at least so far, it is just morphing into a different form of Netflix and Hulu Plus and the like. Both Apple’s and Google’s TV product depend entirely on offering access to these bundled products as opposed to the relative failure Apple had when offering only an a la carte option.

    The new internet bundled model for the moment does seem to suggest a lower ARPS than the current cable model…but pricing both directly for content and indirectly through usage based internet caps will likely rise.

  • 12. ahow628  |  November 5, 2010 at 1:56 pm

    Personally, I’ll take the decline, mostly because I watch too much TV as it is.

    However, as you mentioned, you feel like you got a bargain with $2 Mad Men. Since this is the case, what would you be willing to spend to get Mad Men? $5? $10? Personally, I think Mad Men is fantastic and would pay up to $5 an episode.

    Additionally, as the price for ala carte goes up to match the downward trend in bundling, new types of bundling will show up in the form of something like flat-fee monthly streaming packages so we are right back at bundling.

    I think this whole thing started with the advent of TV on DVD. You were no longer at the whim of the network as to when and where you watch things. People love that freedom and ala carte gives it to them.

    Regardless, all this pricing will hit an equilibrium by changes in pricing and an increase in the quality of content produced. Overall, I feel like this is a good thing.

  • 13. nah  |  November 5, 2010 at 2:00 pm

    Like other people, to me the potential loss is largely just fine. Honestly, my whole cable subscription exists to watch football games. My current cable company frequently fights with these networks over subscription fees, resulting in outages. Not only would my costs plummet, but I’d actually receive more content.

    For really critically acclaimed series, I will just wait months or years for them to come out on dvd and benefit from hindsight to know whether a series is worth investing in or turns out disappointingly. Like others I feel this would just be filled by movies or would be created by successful channels anyhow. Most of the programs that would be cut are from 1 hit channels that fill the rest of their time with cheap, poorly made filler, which few people care about anyway.

  • 14. Ben  |  November 5, 2010 at 2:20 pm

    Interesting analysis. Your 2-person preference example seems designed to support your main point, where actual customers preferences may lead to increased opportunity for price discrimination. Your argument about BSG serves as an example. As a show with a niche audience, it probably would have been more profitable if it could have been sold a la carte at a high price point, and may have survived where it failed.

    A la carte potentially opens the door to a long tail of shows that are highly valued by a small number of viewers, in addition to the lowest-common-denominator programming that dominates network and basic cable. HBO/Showtime have already demonstrated this. A further push in this direction should increase the effect.

  • 15. Noah Yetter  |  November 5, 2010 at 3:42 pm

    Surprised to see no mention of channels like HSN that pay the cable companies to include them, rather than vice versa like ESPN. The inclusion of these channels in bundles today lowers the total cost of the bundle. Since offering negative prices directly to consumers can’t work, there’s no way under a-la-carte channel pricing to get the same group of channels we want for the same price we currently pay. We will always pay more, or cut channels.

  • 16. mulp  |  November 5, 2010 at 4:26 pm

    We have an a la carte model to compare subscription bundles to:

    Movies in theaters and movies on TV
    PLUS
    Serial in theaters and serials on TV

    Talk to the few remaining people who grew up before TV, and you will probably find they spent a good part of a day in a movie theater one or more times a week. My dad worked nights in his late teens, so he would head to town early several days a week and spend the afternoon in the theater watching news reels, serials, shorts, movies, all for single admission. Lots of great directors of the pre and early boomers did the same.

    Early TV did “reality” TV, then serials, and then old movies, and only when cable changed with Turner did it begin offering “new” movies. The broadcast networks would do a “new” year old movies once a month as a “blockbuster” special feature.

    Now both the broadcast networks and cable networks fund great serials and movies that target small audiences, while 90% of movie theaters are devoted to only a single demographic with blockbuster language/nationality free action movies or 3 Stooges slap stick comedy. The other 10% is the independent films that end up going direct to genre cable or DVD if they don’t generate buzz at Sundance.

    The Hollywood factory that generated a mixed bag of content for theaters in the 20s, 30s, and 40s (supporting Ron Reagan) cross subsidized by its inherent integration of production and distribution, and the Hollywood control of the content shown in theaters (which was broken by trust busters).

    We do have the public broadcast models that in Europe have a mandated fee for a suite of content, and the US PBS/NPR/PRI voluntary fee (moving to voluntary subscription). Both these models are driven to serve the under served content demand. The BBC funded by mandatory subscription has high public support, and US public broadcasting does well in obtaining the funding needed to be innovative, creative, and serve the broader public desire for diverse programming.

    While we might see the a la carte model drive “TV” the same direction as movie theaters – lots of money on very narrow audience blockbuster content with a backwater of indie content, my guess is there will be the islands of broad subscription to diverse economical high quality content with significant cross subsidy. And this lattersegment which does not offer the potential for high profit from capital gains, but merely a reasonable rate of return, will be largely ignored by those discussing the future and crisis of TV/movie content creators and distributors.

  • 17. MPS  |  November 5, 2010 at 7:01 pm

    Interesting post.

    It makes sense to suppose that producers will charge a fixed rate per show, if this is how the market is currently shaking up (and how it works in the music trade). But maybe, long term, producers will realize this is not the best way to go. They could charge more for the shows (or songs) that are in high demand, than for those that are not. In this context it’s not clear to me that the industry suffers for providing “a la carte” service.

    • 18. gabrielrossman  |  November 5, 2010 at 7:09 pm

      going by the example of itunes music store, it looks like content providers (eg, Universal) prefer a high and variable price whereas the distributors (eg, Apple) prefer a low and uniform price. the latter seem to prefer that because it makes the market easier to understand for consumers, thereby increasing volume. to put it another way, would you buy an AppleTV is it advertised tv show rentals as being “anywhere from 50 cents to ten dollars”?

  • 19. George Williams  |  November 5, 2010 at 9:24 pm

    Nice post.

    Have you given much thought to the 24-hour cable channels, like FOX, CNN, MSBNC, etc? Most of the content on those channels cannot transfer to an a la carte model. Although perhaps some of the more popular programs might (Bill O’Reilly?). However, it seems to me your analysis suggests that 24 hour cable programming will ultimately become untenable, as cable loses more and more subscribers to Apple TV, etc. Perhaps the producers of news will package something like a news show that can be streamed. But perhaps I’m missing something. Would be interested in your thoughts.

    • 20. gabrielrossman  |  November 5, 2010 at 9:33 pm

      hi george,
      that’s a very good point. i agree with you that there is basically no market for cable news at $2 an hour. for it to work at all it would have to be an all-you-can-eat subscription, but i don’t think this is that viable, given the example of how much audience howard stern lost when he went to satellite. more likely you would see low value content (especially but not exclusively cable talking heads) be either entirely ad-supported or made part of a new bundling model (like hulu plus or netflix).

  • 21. astonerii  |  November 5, 2010 at 10:27 pm

    I think as the price of entry decreases for distribution, primarily through the internet, there are ample opportunities for non big players to eventually start filling in the roles. SciFi started off small and has grown large on lower cost productions with compelling storylines. Unfortunately, the business model is breaking due to the same forces occurring in the rest of the media world. Over paid actors, writers and so forth. The crushing of the current status quo will bring in an even greater golden age of entertainment.

  • 22. max  |  November 6, 2010 at 9:38 pm

    Don’t have time to read all the (seemingly thoughtful) comments, but a quick thought:

    If TV went a la carte, why wouldn’t it just turn into YouTube on a grander scale? I.e., independent content producers, viral marketing, “you might like this” suggestions, etc.? Content quality might decline a bit but it should be supported by the ad revenue that would come from such an enormous audience. Ads could also be more easily targeted using user profiles from google/apple devices.

    • 23. Abby Babble  |  June 7, 2012 at 1:32 pm

      HBO’s “Game of Thrones” requires a $100 million budget each season. As much as I love the idea of indie shows gaining traction, I understand that cable networks pay for shows that require a massive budget. Indie studios can’t compete with that much funding.

  • 24. Dan H.  |  November 8, 2010 at 7:22 pm

    Going to an a la carte model will decimate TV programming. Television programming benefits greatly from the bundled model, because it means there is zero marginal cost to the consumer for watching another program. This means people browse, they watch shows on a whim, and they recommend shows to friends who may then check the show out. Word of mouth is a big part of television advertising.

    To see how important zero marginal cost is, consider how much value networks place on the ratings of one show to lead into another. When the Tonight Show’s ratings collapsed, part of the blame was put on NBC’s lead-in programming. This tells us that viewers don’t even want to go to the cost of changing the channel, or that advertising for the next show in the current one is very valuable in building viewership.

    In an a la carte model, this synergy vanishes.

    In Canada, we went to a la carte channel selections for premium TV. We used to package a whole bunch of extra cable channels together into one ‘premium’ package, but then they were unbundled and sold as individual channels (for $1.99 per month), or as packs of related channels. The result was that some of the more niche channels saw their viewership drop into the hundreds where they were getting tens of thousands before.

    Needless to say, no cable channel can make a go of it with a few hundred or a few thousand viewers. So a lot of these channels simply went out of business once they were unbundled.

    As another example, look at how micropayments on the web have failed. The web is another place where zero marginal cost leads to heavy use, lots of browsing, and lots of discovery of new web sites. Various newspapers have tried numerous pricing models, only to find that ANY non-zero price cuts their readership online dramatically.

    In the US, people watch an average of about 28 hours per week of television. If that TV was priced at $2.00 per hour, and they maintained their current viewing habits, their programming cost would be $224/mo. Today, the average digital cable subscriber spends about $74/mo. I assume that people moving to an a la carte system would not be willing to pay much more in total than they pay now.

    The result of all this is that I think you could expect a move to a la carte programming to cut average viewership at least in half, and maybe much, much more. Worst case scenario is that the entire revenue model changes and we wind up with an industry that focuses on a few premium shows that they can monetize with movie spinoffs and DVD packaging, and abandon the rest. Or we might see packages of shows bundled together with networks throwing in extra shows for the first season or first few episodes, hoping to replace the browsing effect.

    Either way, it would force a major restructuring of how television is produced. It would change the entire nature of the hollywood system, from the pay scales of actors to the quality of production.

    • 25. Abby Babble  |  June 7, 2012 at 1:35 pm

      This is a really great point. I think our culture might be better off if TV was all a la carte, because we’d watch less of it … but any way you examine the issue, cable companies will lose money by making the switch. Still, they might opt for that if piracy becomes too much of a problem.

  • 26. Thomas  |  November 9, 2010 at 1:25 am

    I don’t know much about this industry but I can’t help but thinking about an analogy that happened with the world of photography with the advent of microstock agencies. These have so much changed the industry in a very profound way, whereby it’s a lot of less talented photographer vs the few talented approach of a decade ago. I wonder if the same may happen to tv.

  • 27. Warren Cohen  |  November 9, 2010 at 1:00 pm

    I think the description of how viewers watch tv is off. Few watch five shows only or calculate their media diet – they surf, get hooked, surf again….and eight hours later go to bed. The value of the subscription is to be able to surf and sample. No one likes high prices (ie gas, cable) but unlike music or newspaper reading, people like tv – they watch more of it each year.

  • 28. BradR  |  November 9, 2010 at 4:13 pm

    What if Roku/AppleTV/Amazon get smarter about offering different tiers of bundles at different price points, and maybe different delivery qualities and timeframes? So you could buy the very latest episode ala carte in full HD with 5.1 surround at $2 an episode, or SD with stereo for $1, or HD season pass for $1.75 per episode, or SD season pass for $.80 per episode, or buy bigger bundles such as “all HBO shows in HD” for $20 a month, or “all Amazon content” for $100 a month. Or “all of Amazon content with ads for $50 a month”. Or “all of Amazon’s content that’s at least 1 year old with ads” for $20 a month.

    Assuming they have enough tiers to hit everyone’s price point, how would that affect the overall economics of the industry? Obviously, money would pool more directly to the best content creators than it currently does (which is a very good thing, imo). Would the overall money pool be lower or higher than it is with cable TV? With more price points and on-demand viewing, wouldn’t more consumers than ever before be willing to buy into the system? Or is the average consumer’s pricepoint actually way lower than the typical $100 a month they currently pay for a cable bundle? And what about the fact that they have to already pay $50 a month for internet access, that no longer directly subsidizes the TV programming?

    • 29. gabrielrossman  |  November 9, 2010 at 4:39 pm

      there are really two issues in what you’re saying: variable vs uniform pricing and bundling vs a la carte. in theory, even if you have variable pricing and choose the maximal price point for each product ($3.41 an episode for Mad Men, $0.78 an episode for Ice Road Truckers, etc) it’s still possible to make less money than if you were bundling.

  • 30. Evan  |  November 10, 2010 at 4:14 am

    Really interesting read thanks.

    I feel that the issue with a la carte pricing is precisely because it is hard to price discriminate within each product (cable station or programme). Producers can only charge a single price, and this does not maximize output as the price will be above many peoples willingness to pay.

    But I am not convinces that output will drop and quality will drop, below what you might call an efficient level of programming, relative to the cost of programing. Perhaps we are in fact over supplying programing now! For example, if the only way that smaller, less quality and less in demand programs can be developed is by effectively overcharging for popular programs (through the bubble) – I’m not convinced that this is actually a good thing.

    I agree with another commenter that this may lead to a situation like the film industry – less quantity but higher quality. Of course we would see more Tv programs than films though!

    It’s tricky though isn’t it! The optimum outcome would be effective price discrimination per program – but that would sooo difficult to implement.

  • 31. Evan  |  November 10, 2010 at 5:37 am

    I have left a comment that is yet to be published. But I have another thought I would like to add.

    Bundling, in the 2-person scenario you present, to me seems like it allows for cross-subsidization between programming. One program may not make enough revenue to support it on its own, so it makes up this shortfall from overcharging on other programs – but this is all internal to the bundle price.

    On its own, I’m not sure I like this.

    There is also this assumption that ‘high quality’ programming with a low audience will just cease to exist under a la carte pricing – but I would argue that under bundled pricing, all you have to go on is ratings, without considering the willingness to pay of viewers. BSG could well have been viable under a la carte pricing, as suggested by another commenter.

    I’m also not entirely sold on the reduction in innovation. It makes an assumption that cable channels will only innovate by being able to overcharge on popular TV and then use this to fund experimental shows. Yeah… perhaps! But there other pricing models to use… introductory pricing, lower prices on pilot episodes.

    And you know what, if cable channels could basically ‘test the water’ with prices of individual episodes of new TV shows, perhaps at lower prices, then this might actually increase innovation! Maybe innovation is actually hurt by bundling, as it restricts the total revenue the station can earn.

    Hmmmmmmm

  • 32. Evan  |  November 10, 2010 at 5:44 am

    Third comment lol. Telltale Games may be a good example of a possible option to pricing a la carte. They produce episodic video games. Basically one full game (a ‘season’) is made up of 5-6 sections or chapters (or ‘episodes’), of about 2-3 hours worth of game-play each. You can purchase individual episodes as they are released (roughly monthly per game), at about $9, or purchase the entire season/game at a discount.

    They have also tried a pilot program, where they are trying one section/chapter of a game and releasing it on its own. If its successful, they continue with production. So far this have tried this out twice, and for more ‘experimental’ games.

  • 33. Noah  |  November 11, 2010 at 1:02 am

    A lot has already been said here, but it seems worthwhile to more explicitly pose the question of whether or not customers could effectively do price discrimination and determine the value of shows for a la carte pricing. It can be effective for series where people have already seen some shows, formed opinions, and can reasonably assume they will derive a similar amount of enjoyment from the next episode. Once you have watched one season of Mad Men, you know whether you would want to pay $2 or $5 or some other number.

    However, there are many cases where it will be much more difficult to assign value.

    One issue is new programming. The reputation of showrunners, cast, network, or original source material can help viewers value new shows. Even with these cues, a la carte pricing for shows would add considerable uncertainty for both consumers and content providers, as some price would need to be agreed to before anyone watches the show for the first time. It would be difficult for anyone to practice price discrimination in this environment, particularly given the uncertainty of television.

    Another major issue are programs designed for one live viewing and with little repeat value. Unscripted fare, whether it is news or sports or Paris Hilton is my New BFF, may be valued less under a la carte pricing because no one wants to watch them twice. I doubt that readers of this blog would complain much about the loss of many non-scripted programs. However, these programs may have a high a la carte price because of their mass appeal. A high price for a program you only watch once could have some buyer’s remorse attached.

    The buyer’s remorse issue is particularly relevant with sports. Some viewers will watch their favorite teams under any circumstance. Others engage in little discrimination, and will watch any game in a given sports that happens to be on. These can fit together – I watched every UCLA basketball game last year, but also watched a lot of games featuring relatively minor teams. Most viewers are more discriminating. They will look at the quality of the teams involved and the likelihood of a good game, then decide whether to watch. Unfortunately, the actual quality of a sports game is difficult to predict. On any given day, one team may significantly outperform the other, making the game boring to most viewers. Last week, most of the prestigious college football games were essentially resolved by halftime. Other games were highly competitive, so viewers switched from one game to another. In short, the value of a sports event changes rapidly, as the event unfolds. With today’s bundling, a sports fan can switch from one game to another in real time, as their values change. Charging a la carte prices before the game begins could be grossly inefficient, but having a real time market for pricing sports games is a poor option as well.

    A la carte makes a lot of sense for people who watch a few scripted shows, but paying per episode would be highly inefficient and confusing for a large amount of television programming.

    • 34. gabrielrossman  |  November 11, 2010 at 6:15 pm

      noah,

      funny you say sports are the problem because it seems like some of the content that does best under traditional pay-per-view are boxing and MMA. of course i don’t know enough about sports to say if there are reasons why the fighting sports have taken off with pay-per-view but not regular old team sports.

      more broadly, like several other people you’re right to mention that there are issues of discovery, cognitive biases, etc. i’m not sure which of these make the dynamic i’m describing less problematic, which make it more problematic, and which could be ameliorated by things like making the first two episodes free or the co-existence of a bundling model (for low value content) alongside an a la carte model (mostly for scripted content).

      • 35. Noah  |  November 17, 2010 at 10:29 pm

        Boxing and MMA (and pro wrestling, for that matter) have scarcity that other sports do not. Top tier fighters are only in a few matches per year, while other sports are more regular occurrences. Also, you don’t get multiple pay-per-view fights happening at the same time. Team sports have more overlapping events. Most football games start at 10 or 1 PST. Audiences are, for the most part, regional.

        As a market, fights are much closer to concerts than television shows or movies, except that there is a commonly accepted price ceiling. They are fairly anomalous compared to other sports, and the success of pay-per-view wouldn’t necessarily generalize. No one is talking about a pay-per-view super bowl, and for good reason.

        There’s also the broader issue of how institutionalized viewing patterns are. Switching consumption from bundles to a la carte would require conversion costs. It’s plausible that people who watch the most TV will have the TV on all the time, then pick whatever they like the most on that time slot, may have the biggest trouble with conversion. People who just watch TV for a few shows and then turn the TV off could convert more easily.

  • 36. Maynard Handley  |  November 11, 2010 at 5:21 pm

    Gabriel, it seems to me that you commit a common fallacy I see in discussion of media, the belief that the price it costs to produce a movie or a TV show is somehow cast in stone, and everything else revolves around that.

    This is, of course, nonsense. The way the system works is that there is a pile of money on the table, and the demands of everyone involved expand until that entire pile is consumed. If the pile of money shrinks, there will, of course, be a period of transition during which the stupid and the proud will not be able to bring themselves to reduce their demands to what is now reasonable — and others will take their place.

    Certainly for most movies, the bulk of the cost is for the actors, and there aren’t many places they can go when the pool of movie money shrinks. For your expensive TV (presumably the shows you think are in danger, eg your House, your Law & Order: SVU, your CSI: Miami) I would guess salaries are also where the bulk of the money goes — and what do you know, TV salaries are indeed falling).

    So what’s the endpoint? You posit an equilibrium that is so low that any good looking actor finds it more profitable to be a model, or a hooker or something, likewise your TV writer switches to writing microwave manuals, as TV quality withers away.

    I, on the other hand, see a world where, frankly, there is 10x or more as much TV made as needs to be made. (And I say that not as a value judgement, simply as a statement of the extent of the massive duplication that currently exists.) I suspect the pie can shrink quite dramatically and still have, as its major effects, that we’ll lose a number of me-too shows, and salaries, especially at the high end, will drop, without materially affecting quality.

    • 37. gabrielrossman  |  November 11, 2010 at 5:43 pm

      we’re not really disagreeing. if you read the last couple lines of the original post i predicted labor strife is a likely outcome of declining revenues. i basically agree that you could have a cheaper entertainment industry but not all of it would be just that movie stars would own fewer islands (or assistant key grips living in 800 square foot apartments instead of 1500 square foot houses) — some of it would be declines in production values in ways that would show up on the screen.

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