Costs and Revenues of à la Carte (ALC) Versus Bundling in Television Markets

Abstract

Abstract. This paper compares costs and revenues of two modes of provision of pay-television by cable and satellite providers. The two modes are bundling and a la carte, both of which are subscription-based services. Results of this research show that on average a la carte is more expensive to deliver than bundling, while revenues of both are comparable. The paper also deals with the economics of urban agglomeration and regional networks. It shows that improvement in technology makes it possible to simulate agglomeration in metropolitan areas with networks, which makes it possible for small urban regions and rural regions to share in network outputs.(ProQuest: ... denotes formulae omitted.)1. IntroductionLitman (1995) provides a summary of the historical events since the 1960s that culminated in the development of the pay-television market. The market for pay-television was created to fill a void due to the scarcity of the electromagnetic spectrum. This scarcity caused a limitation to the availability of the very high frequency (VHF) stations in local markets, which restricted transmission to only three national TV networks. Litman goes on to describe the Federal Communications Commission (FCC) rulings permitting pay-TV to exist, but in the mean- time restricting the programming to only types not available from commercial broadcasting. In 1972, Home Box Office (HBO) started a channel subscrip- tion service available on a monthly basis. In 1977, the U.S. Court of Appeals declared that the FCC limitations on programming were invalid, which opened the door for pay-cable networks to be competitive with the three commercial networks. Litman estimates that in 1995 cable television penetrated about two-thirds of households in the United States.Litman further explains the development of pay- TV by noting that consumers were willing to subscribe to redundant networks as cable systems began to offer multiple networks. Crawford and Yurukoglu (2012), henceforth CY, term this trend in marketing as bundling (multichannel). Multichannel TV refers to subscription-based services.CY explain that multichannel TV is widespread among some 110 million viewers who spend about $50 billion a year to watch on average more than seven hours of TV every day. The multichannel system, though it makes consumer tastes more homogeneous, nevertheless extracts producers' surplus. The welfare effects are ambiguous, as pointed out by Stigler (1963) and Adams and Yellen (1976). CY's paper addresses an alternative to bundling, termed a la carte (ALC) pricing. Regulations requiring ALC choice by consumers would probably alter the TV market. Canada, Hong Kong, and India mandate unbundling with different structures of regulations, which makes general- izations difficult.CY provides a thorough description of the bundling of channels, explaining that all cable and satellite systems offer a variety of systems. The first type, the broadcast channels, is advertising supported. This includes major national channels, such as ABC, CBS, NBC, FOX, and public and independent television. The second type, the cable programming channels, is supported by advertising and fees and includes MTV, CNN, and ESPN. The third type is premium programming, which is advertising free, such as HBO and Showtime. The fourth type is pay-per-view for on-demand viewing, allowing viewers to watch theatrical releases and sporting events. Note here that broadcast and cable channels are bundled and offered as basic services. Premium channels are unbundled and sold as premium services. Most recently, premium chan- nels started offering multiplexing programming as a single brand, such as HBO, HBO2, and HBO Family.Through a process of simulation, CY estimated that total input costs of ALC would rise 103.0 percent for a combination of 49 channels. Consumer welfare would increase between 0.2 and 5.4 percent. Industry profits would increase in the range of 2.4 percent and 12. …