Shedding Tiers For a la Carte? An Economic Analysis of Cable TV Pricing

A new regulatory debate has sprung up around the pricing of TV networks on cable and satellite systems. Many argue that bundling networks on tiers, rather than selling channels individually, is anti-consumer and forces families to purchase programming they don't value and often find ofensive. The Federal Communications Commission, after issuing sharply conflicting reports on the subject, is considering measures to enforce a la carte pricing. This paper explains the economics of multi-channel video distribution, showing that network cost conditions dictate reliance on bundling. Consumers do, in fact, purchase programs they find valuable, with operators efectively throwing in additional content for free. This outcome is dictated not by market power, as competitive entrants bundle just as aggressively as do incumbents, but by the underlying economic conditions: cable TV networks are distributed to additional households at zero marginal cost. Restricting the basic tier fiom, say, 60 channels to just those, say, 20 channels a given subscriber prefers is actually more expensive than providing the large tier to all. The upshot is that the goal of reduced retail prices under a la carte is a chimera. Federal Communications Commission, and as an economic expert for plaintiffs in cable TV class action litigation, as well as for satellite TV operators, cable TV operators, cable TV programmers, and the Federal Trade Commission, and authored a White Paper on cable TV pricing commissioned by the Turner Broadcasting System (owned by Time Warner) which was submitted to the Federal Communications Commission in its a la carte regulatory proceeding (Aug. 2004).