Paying for Channels You Never Watch

Monday, April 19th, 2010

Erick Schonfeld shares an estimate from the hardly disinterested Convergence Consulting Group that 800,000 US households have abandoned their TVs — or, rather, their cable and satellite TV subscriptions — for Net-based options, like Hulu, Netflix, etc.

He introduces the idea with a common complaint:

Have you had enough of paying your cable company through the nose for 800 channels, when all you really watch is maybe 20 or 30?

MG Siegler shares a similar sentiment:

Most people pay in excess of $50 a month (and some much more) to the cable companies. For what? Mostly for a bunch of crap they don’t want and will never watch (nor would they even have time to). The problem is that the cable companies have refused to move towards an a-la-carte offering, even though there is a clear demand for it.

I hate to break this to everyone, but, no, you’re not paying for hundreds of cable channels you never watch. Yes, you are paying for a package that includes hundreds of cable channels, and, yes, you rarely if ever watch most of them, but, no, that does not mean that you’re paying for hundreds of cable channels you never watch.

Confused? I’ll explain.

Most of us have a very strong instinct that if, say, we’re paying $40 a month for 400 channels, then we really should only have to pay that $0.10 per channel for the dozen or so channels we really watch — maybe a bit more. Heck, even $1 per channel we really watch would seem like a bargain.

Wait, what just happened there? Did you notice? We assumed that one channel would cost one-four-hundredth as much as 400 channels — and that the cable company should pass along the savings to us, the consumers. But there are no savings.

If the cable company could send you just the dozen channels you want — or even just the dozen specific shows you watch — it wouldn’t save them a dime. It wouldn’t save the networks creating the shows a dime either. It doesn’t cost your provider money for you to watch a show the networks have already created and that they’re already broadcasting over their cable or satellite network.

Was it expensive to create the show? Yes, very. Was it expensive to lay cable or to shoot satellites into space? Yes, very. Is it less expensive if you decide not to watch Bravo, ever? No.

Ordinary people’s economic intuitions assume that a product is a commodity like grain. It should cost the consumer just a bit more than it costs the middle-man, to cover some small amount of overhead. But the networks and the cable and satellite providers are running enterprises with enormous up-front sunk costs that they need to recoup and very low variable costs that give them the high margins to make that possible. They’re all overhead.

How does a producer charge for a product that costs an enormous amount to develop but a negligible amount to share? That’s hard to do. He can’t typically charge the first guy $100 million, to cover his costs, and then charge everyone else a penny, or give it away, or whatever — although that’s not too far from the Renaissance Italian model for commissioning great works of art.

The cable company might ask you which one channel you really, really like and then charge you $40 per month for that one channel — or more realistically just $30, or $20, or $10, or whatever. How much they can get depends how much you like ESPN, or SyFy, or whatever.

But then they have (a) less revenue and (b) a bunch of channels — and all that cable bandwidth — they’ve paid for going to waste, earning nothing.

They’d be happy to sell you a second channel. In fact, they more or less have to, because they can’t support their business on $10 per month from die-hard ESPN fans, plus $10 per month from die-hard SyFy fans, etc. But what price do they charge?  If they go à la carte and charge $8 per channel, they lose $2 per die-hard fan who would have happily paid $10, but they presumably sell more subscriptions. If they charge $5 per channel, they have to sell twice as many channel subscriptions as at $10 per channel — and they’re still missing out on all the sales they could make to people who wouldn’t mind getting Animal Planet for $1 per month.

So what do they do? They give you a bundle of channels — which is like charging you $10 for your favorite channel, $8 for your second-favorite, $5 for your third-favorite, and so on, down to pennies for the channels you watch when “nothing’s on”. And the dozens of channels you never watch are in fact free.

And they never had to figure out which channels were whose favorites, so they didn’t have to charge different people different amounts for the same channels, which would really upset them — if it were explicit.


  1. Becky says:

    It reminds me of church when someone said we paid the organist too much money for an hour every Sunday and I said we were paying for all the years he learned to play.

    I guess I was fairly accurate.

Leave a Reply