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Selling TV Channels Individually Goes Against Economics & Experience, Says Kagan Research

Posted on: Tuesday, 18 July 2006, 18:00 CDT

While news stories and advocacy groups argue against cable TV channel bundling, there's little economic rationale evident for potential benefits from requiring the sale of TV channels individually, according to a July 14 Kagan Research audio conference.

The average cost per channel is actually declining, new cable TV channel launches would certainly stop with a la carte offerings, and consumers have not embraced the unbundled concept in the past, Kagan Research senior analyst Derek Baine said during Kagan's The Economics of Basic Cable Networks and Potential Impact of a la Carte Pricing audio conference. "It would reduce diversity and consumers would just select networks they already knew," he said.

Prices for individual channels are already falling. The average retail cost per channel in a big basic package declined from 75 cents in 2000 to 71 cents in 2005, according to Kagan Research databook Economics of Basic Cable Networks. Retail includes the markup by cable operators to cover equipment, operating costs and other items.

Consumers see their monthly cable bills grow because the channel bundle has enlarged, from 18 in 1990 to 64 in 2005. Thus, the channel package grew from $16.78 in consumer spend on TV service in 1990 to $45.40 on average in 2005.

To those who argue cable operators are price gouging, Economics of Basic Cable Networks notes that cable operators' profit margins have narrowed by 17 percentage points on TV channels from 1990 to 2005.

Supporters of a la carte pricing say viewers just watch 10-14 cable channels anyway, so why not offer them individually. Baine counters that experience shows there's little consumer appetite for a pick-and-choose approach. DIRECTV's original plan before its 1994 launch was to offer channels individually, but it dropped the idea upon finding consumers simply became "paralyzed" when trying to sort through options, he said.

Baine argues that today consumers have pricing choices with budget-conscious packages from satellite platform DISH Network. In another indication, over-the-air pay TV outfit U.S. Digital Television just filed for liquidation bankruptcy after a lukewarm response to its rock-bottom $19.95 per month TV service.

Sports channel ESPN receives criticism as the most expensive basic cable network in the channel bundle, but Baine notes that ESPN's cash flow profitability is below the industry average. That's because of steep costs for sports rights. "Its margins are not that high in comparison to its fees," he concludes.

Baine believes that some consumer griping about cable bills is misdirected because enhanced services, such as digital video recorders and high definition, pump up those monthly charges too.

Kagan Research forecasts that basic cable network cash flows will grow at a healthy rate, despite a slowing of what has been robust revenue growth, because expense growth is decelerating even more rapidly. Also, "new channel launches are very difficult these days," notes Kagan senior analyst Deana Myers, which has its silver lining in reduced channel clutter.

About Kagan Research, LLC

For over 35 years, media and communications operators, content providers and institutional investors have relied on Kagan Research for thought leadership in media business research. Kagan's consulting, publishing and data services provide exclusive benchmarking data and analysis, market advisories and long-range forecasts for TV, radio, cable, satellite, wireless, movie and sports sectors, as well as informed perspectives on emerging media, digital communications, and Internet technologies. Kagan is one of the world leaders in valuing and appraising media assets. For more information, visit www.kagan.com. Kagan Research is a division of JupiterKagan, Inc.

About JupiterKagan, Inc.

JupiterKagan, Inc. was formed in 2006 from the merger of JupiterResearch and Kagan Research, two companies providing thought leadership, research and advice in the domain of media and telecommunications, the Internet and emerging consumer technologies. The company's deliverables include continuous information services (available by subscription), research reports, data, inquiries with research analysts, appraisals, litigation support and consulting. JupiterKagan is headquartered in New York City with offices throughout the U.S. and Europe. For more information, visit www.jupiterkagan.com.

Source: Business Wire

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