A La Carte TV Is Never Happening

Chris sent me this article by Dustin Rowles:

So, in an a la carte model, I could watch all the channels I normally watch for $17.62 per month before taxes and fees. I suspect most of our cable bills would look much more like $20 a month instead of $60 a month, and that’s exactly what the cable industry doesn’t want, which is why we’ll never get an a la carte model.

First of all, the a la carte model already exists at a show level via DVDs or iTunes. And the price per show is a lot more than $18. Even if you get seasons of Breaking Bad on sale, they are still probably about $18. That alone indicates the theory that AMC would double their subscriber rate to a mere $0.23 per subscribe is ludicrous.

But price aside, many people make this argument without understanding how the TV business works. Everyone loves Mad Men and Breaking Bad…now. But when AMC debuted these shows 5 years ago, most people wouldn’t have given them a chance right out of the gate. In the a la carte model of picking individual channels, a lot of people probably wouldn’t have had AMC in their package, which in turn would have meant AMC wouldn’t have been making as much money. Which means they probably wouldn’t have taken the risk of doing original programming. Which means we never would have had two of the greatest shows on TV.

Cable networks don’t make most of their money off subscribers (unless they’re HBO). They make their money off of advertising. Advertisers pay based on the number of viewers. If the number of people who have a particular channel decreases, advertising rates drop. Also, what happens during downtime?

A trend that caught on with HBO a few years back was to add and drop the channel depending on which show was on when. HBO got wise to this and spreads their series out more so that this only works if a subscriber just wants a show or two. AMC’s series have seasons that are only about 13 episodes long. Mad Men took 1.5 years off. Would everyone have kept AMC during that layoff? If the channel really cost $0.23, the answer is probably yes. But if the channel cost $5, would they?

Knowles had this to say earlier in his piece:

However, in the all or nothing model, if you want one channel, you have to pay for them all, so FX earns $5 from all 100,000 subscribers, or $500,000. Eighty percent of their revenue comes from the 80,000 subscribers who don’t want their channel. Changing to an a la carte model would essentially deprive FX of 80 percent of its revenue.

He acknowledges that this would be a massive revenue hit for a lot of channels, and that’s only taking into account subscriber fees, and not advertising fees. Of course the cable industry doesn’t want to change this. Why would they? No business in the world is going to change a business model that is working for them. Why would these channels sacrifice massive amounts of revenue to make a few grumpy customers happy?

I still think there is an outside chance this could happen, but not at the prices Knowles suggests. And the savings for the subscriber would probably have a diminishing rate of return. He cites a list of about 15 channels he would select and assumes prices would merely double. It seems unlikely channels would be this cheap. More likely the would be closer to $1 per channel, and there would be packages available for similar channels. For example, he lists ESPN at $4, ESPN2 at $0.54 and NFL Network at $0.75. My guess is that the actual prices would be more like $5, $2 and $2 respectively, and then there would be something like a “sports package” that would cost like $7.50 or something and include all three. And when subscriber’s did the math on what this actually would cost, they would quickly find out that this isn’t a better deal1 than just having all the channels.

It’s easy to talk about how much cheaper it would be for end users. It’s harder to understand what the real impact of this is on the entire landscape. Networks rely too much on advertising to cut off their subscriber count at the knees. At some point the model is going to change, but an a la carte model via cable providers is probably not the answer.

  1. Obviously I am making a lot of assumptions here, but so is the original poster []