Be Careful What...:Unbundled Cable TV May Result in Higher Costs, Airline-Type Fees

The cable tv industry has won its poor reputation the hard way: it has earned it.

Relentless price increases despite poor customer service and limited choice plus forced purchase of unwanted channels through bundling have alienated much of its audience. But because it has been able to plough its extraordinary profits back into political lobbying, its regional and local monopolies stand ironically secure in the land of market-based decision-making and freedom of choice.

Many have called for unbundling, essentially the right to choose which cable channels to buy. The expectation has been that this will lower costs and provide consumers with better service based on their free market voting with their wallets.

This, research is beginning to demonstrate, is probably delusional and arguably just plain wrong. As the following article explains, the deregulation of the US airline industry may serve as a cautionary tale. It was also supposed to open up a golden age of travel in which consumers had a wide array of choices at a variety of price points. The reality has been industry consolidation which has enabled airlines to decrease competition, reduce service levels and increase prices.

The issue is that the basic economics of monopolies rule. Demand will enable cable companies to charge more for popular services and eliminate those that few people want.

The rise of internet-based options was thought to be the answer to the monopolistic power of the cable franchises. But to pose a competitive threat, it would have to be independent. The reality is that the cable and phone companies have become the primary internet service providers to the home meaning that those companies control internet access and pricing, as well. Hence the battle over 'net neutrality' which the cable and phone monopolies oppose as it limits their upside. Consumers may have greater choice at some point in the future, but they should be prepared to pay more for the privilege. JL

Neil Irwin reports in the New York Times:

Contrary to many peoples’ intuition, the unbundling of cable service could actually lead to higher prices for fewer channels.

The day when people are no longer forced to pay for dozens of cable channels they never watch seems to be coming nearer. But subscribers may want to be careful what they wish for.

On Monday, the Dish Network unveiled a new web streaming service with a handful of cable channels, including ESPN. It is the latest move toward a world in which people assemble a bundle of TV programming options piece by piece (a little Netflix here, HBO’s new streaming service there, Dish’s new Sling TV for some sports) rather than send a monthly check to their cable company for dozens upon dozens of channels packaged together.

Eventually, cable companies may have little choice but to unbundle themselves, whether because of the competitive threat from various stand-alone streaming services or regulatory pressure. It would, at first glance, excite anyone who has ever groaned at the size of a cable bill and the number of channels that hold zero interest.

My colleague Josh Barro covered the economics of cable unbundling last year. Several studies have shown that, contrary to many peoples’ intuition, the unbundling of cable service could actually lead to slightly higher prices for fewer channels.

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Claiming luggage at Brussels Airport. Baggage checking, now done for a fee, is among services once included in ticket prices. Credit Yves Logghe/Associated Press

But there’s another, more subjective dimension in which the rise of unbundled cable service may make us worse off. It’s possible for a market to become more economically efficient while becoming less pleasant for consumers. For a prime example, head to your nearest airport.

A generation ago, buying an airplane ticket meant buying not just a conveyance from one city to another, but an entire bundle of goods. Among them: a seat with enough room to sit comfortably; a meal, a glass of wine or a cocktail; the right to check your bag; the right to trade in your ticket for a ticket at a different time if your plans changed.

As fliers have learned all too well in the last decade, air flight has become unbundled. Want a bit of leg room? That will be a $50 upgrade for a seat in your airline’s “premium economy” cabin. Sandwiches are on sale for $9, a glass of wine for $7. Checking that bag costs $25, and there is a $200 change fee for your ticket, or buy a much more expensive one upfront.

In effect, the airline industry has unbundled, so that you pay only for what you want.

This is, traditional economic theory would posit, a good thing. If you are short of money and will tolerate bare-bones flying experience — crummy seat, nothing to eat, locking your travel schedule far in advance — you are better off than ever before. The rise of airlines like Spirit (where you even must pay to put a bag in the overhead bin) and Ryanair in Europe (a fee just to check in at the airport instead of at home) suggests the de-bundling trend isn’t changing anytime soon, along with the push by major United States carriers to subdivide their cabins into more tiers of service and comfort.

Any of those changes to debundle air travel, in isolation, gives consumers greater control over their flying experience and greater power to pay only for the things they care about. People who are tall or affluent may pay for the extra four inches in economy seating, for example. People who once could not afford to visit family members across the country may now be able to find bare-bone tickets within reach.

But the combined effect of all these supplemental charges is to make air travel a grinding process in which a customer feels constantly assailed by upcharges and decisions that may not be stressful in isolation but make the experience unpleasant.

Consider: Consumers’ overall satisfaction with the airline industry is down 4.2 percent since 1994, according to the American Customer Satisfaction Index, a period in which much of this unbundling has occurred.

What does any of this have to do with the unbundling of cable? There are surely examples of people who would be better off in an era of cable unbundling, such as those who watch only a very small number of channels, none of them high-fee sports channels, with great regularity. They are the equivalent of the people who can afford to fly home to Grandma’s house now but couldn’t in a pre-unbundling air transport system.But for many more people, the result will probably be little or no reduction in total fees, combined with the hassle of making constant decisions about what channels you really want and which you don’t. We already have a small version of that in my household, with the continuing debate of whether to also spring for Netflix while already paying a small fortune in monthly cable bills.

Being a cynical journalist, I would probably never choose to pay for the Hallmark Channel, but have, when flipping through the channels, found it to be airing a “M*A*S*H” marathon that required three hours of my time.

It was the equivalent of the old days when every airline seat had ample legroom and a free drink: You may not know how much you want it until after somebody makes you make the decision to pay.