Get ready for the great cable unbundling

Written on:September 27, 2011
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The cable industry is pulling an about-face on the issue of a la carte programming, due to increasingly expensive content rights and a weakening economy making bundles of network programming less affordable for the average consumer. That’s the word from Reuters, which reports that cable executives are negotiating with content providers and seeking regulatory relief in an effort to create smaller and more affordable bundles of programming.

Cable companies have historically fought against the idea of a la carte, arguing that allowing customers to choose channels on an individual basis would tear apart the value of the bundle. Since typical cable viewers only watch a handful of networks each, such a choice would mean that many niche networks with lower ratings wouldn’t survive if viewers didn’t choose to pay for them.

But cable companies have become stuck between a rock and a hard place: On the one hand, media companies are demanding ever-higher carriage fees for their programming; on the other, consumers are being squeezed by a weak economy that threatens to make cable service unaffordable.

Programming costs have risen 6 percent to 10 percent a year over the last decade, Reuters reports. In part the increase comes from broadcast networks demanding retransmission fees for channels that cable companies used to provide free. And in part, it comes from media companies negotiating larger bundles of networks together, each of which generally comes with a higher price.

Those price increases are generally passed on to subscribers, but given the general economic environment, consumers are less able to pay then ever. In a research report issued earlier this month, Bernstein Research Senior Analyst Craig Moffett wrote that a large number of consumers have little discretionary income to spend on luxuries like cable:

After the necessities of food, shelter, transportation and healthcare each month, the bottom 40% of U.S. households have already exhausted all of their disposable income. There is nothing left for clothing… for debt service… for cable… or for phone.

The solution for cable companies may be to find ways to lower the cost of cable. As a result, they will likely need to offer lower-priced bundles of content, or to make some networks — like ESPN — available on an a la carte basis. Under the current model, all cable subscribers pay for each network, even if they don’t watch that content.

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