Your Cable Bill’s Going Up Again, But Forget a la Carte Pricing

Time Warner Cable is raising rates on Los Angeles customers by 8.2 percent — and there are more increases on the way. This is no surprise — your bill goes up every year. After all, as Chief Executive Officer Glenn Britt pointed out today in his company’s earnings call, video programming costs have grown 32 percent in the past four years. Over that same period, Time Warner Cable has raised its average revenue per user by 16 percent.

So, even as Time Warner Cable raises your rates, it isn’t keeping up with how much it’s paying for the content.

In other words, you’re only partially right to blame your cable company for why you’re shelling out big bucks each year. You also have to look further downstream at the content companies or programmers who are charging the cable operators — News Corp., Disney, CBS, etc.

Now, even cable operators are becoming content companies. Time Warner Cable just agreed to buy the right to carry LA Dodgers games through a new regional sports network. Last year, the company debuted another regional sports network that carries LA Lakers games. Comcast and DirecTV also own sports networks. Plus, Comcast owns 51 percent of NBC Universal, one of the largest programmers.

So the picture is muddled. But for the most part, cable economics is straightforward: Operators pay cable and broadcast networks money for the right to broadcast content, and the cable and broadcast networks make a profit from these deals. Then, the cable operators charge you more money so they can pass along some of those costs and make a profit themselves.

Lots of people are sick of their cable bills rising — including Britt, who again today labeled the current cable TV ecosystem as anti-consumer.

So why not let customers choose which networks they want and pay for only them? Not everybody wants sports channels anyway, right? And who really needs 800 channels? If you think that idea — called a la carte pricing — would work, think again. The math just doesn’t work.

For a video explanation with some cool graphics, check this out.

Let’s take ESPN, one of the most popular cable networks. I’m going to borrow this general line of thinking from Craig Moffett, cable and satellite TV guru, who has written at length about this.

Disney, which owns ESPN, makes almost $6 per month for every single basic cable customer. You don’t watch ESPN? Too bad. You’re paying $6 a month for it.

If you could suddenly just pay for only the channels you want to watch, let’s say 50 percent of you would pay for ESPN. That’s probably too high, but let’s run with that.

Disney would immediately have to charge $12 a month for ESPN to make up for the lost revenue. They’ve just lost half their viewers. Plus, ESPN makes money from all of the other networks they make cable providers buy to get access to ESPN — like ESPN2, ESPN Classic, etc. That’s another few bucks per month.

And then there’s advertising revenue — in an a la carte world with half the audience, ad rates just dropped, big time, on ESPN. And then there’s the lost advertising on the other networks, such as ESPN2 and ESPN Classic.

Now Disney is charging, say, $25 a month just for ESPN to make up for the lost revenue. Just one channel. And chances are you probably want at least a few more  — MTV, Comedy Central, AMC, TNT, whatever. Those may not cost you $25 each but the same math applies. They’re going to cost more than you think.

Dish CEO Joseph Clayton says he knows there’s an audience of 18- to 28-year-olds that just wants to pay $20 a month for video — preferably streamed online. But Dish has struggled to figure out a way of giving consumers the content they actually want for that price, because programmers aren’t exactly handing it over at low cost. Clayton once told me he could put up a channel of the moon for very low cost — but that doesn’t mean people would actually watch.

This isn’t to say that the current system is always here to stay. What’s likely to happen is that cable operators will begin to offer you smaller, more personalized packages of channels. In other words, you may still have to pay for ESPN, ESPN2 and ESPN8 The “Ocho” if you’re a sports fan — but you may not have to pay for three cooking channels in addition if watching food isn’t your thing.

The cost will be lower and you’ll get more channels you actually watch. So stop focusing on a la carte, and refocus your attention to mini-packages, because that’s what is far more likely to occur.

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