Tech.gov: TV a la Carte

Television is undergoing a fairly major evolution: First, it's going high-def and digital. On top of that, telephone companies will soon be joining cable and satellite vendors with their own TV services. And video on demand will eventually do away with TV schedules, a process already in progress as digital recorders such as TiVo make such schedules irrelevant.

These transitions have not escaped the notice of Congress and the federal government, which have in fact promoted some of them--especially the switch to digital TV. More recently, the government has also started the process of putting telephone companies on an equal footing with cable and satellite operators, as these companies increasingly compete with each other at every level. Now, the Federal Communications Commission is preparing to release a study that reverses its own previous conclusions, and that could lead to federal regulations that would encourage or force cable and satellite operators to give us all more control over which channels we subscribe to.

One of the main arguments for an a la carte system--one in which pay TV customers would be able to choose which channels they pay for and receive--is to give parents greater control over the programming that is beamed into their homes, and in turn, made accessible to their children. The impact of such choice, however, would extend far beyond parents and kids.

Right now, you and I must sign up for a tier of service that includes a pre-set number and selection of channels. The more you pay, the more channels you get--but we don't get to pick individual channels. In fact, even when we choose premium movie or sports packages we may end up with more than we actually want. For example, the various HBO channels are often bundled with Cinemax channels that you pay for and get whether you want them or not.

I receive 200-plus channels with my DirecTV service, but I actually watch only about 30 or 40 of them, tops, over the course of a year--far fewer on a regular basis. The rest are dead air as far as I'm concerned. I'm only paying for those 200 because there were two or three of them that I really wanted, but couldn't get with a more basic bundle.

I'd love to trade some of the channels I do have for others that aren't available unless I pay even more per month, but no cable or satellite company gives me that option.

If the FCC has its way, I soon might have mine. But even if I get to shed a few dozen unwanted channels and gain a couple I'd prefer, there's no guarantee that I would be paying any less per month than I do now. When the government first examined the issue in mid-2004, plenty of people argued that prices would rise, not fall--and that we'd get fewer programming options.

It's a basic assumption that we make every day: If you go for the bundled deal, odds are good that you're paying less than you would for the individual items purchased separately. Restaurants work that way with their prix-fixe meals, as do computer vendors that offer a great deal on a printer and digital camera if you buy them along with your new PC. Cable and phone companies have been working hard for years to convince us that we save on bundled phone, TV, and Internet services.

The same principle applies to those 200 channels on my satellite box. As they're bundled now, I pay something like a quarter per channel. What do you want to bet that the price would be significantly higher if I were to create a lineup of my own? Customization costs.

Both the older FCC study and a separate contracted study by Booz Allen Hamilton indicate that, in many cases, prices would rise under an a la carte model. This finding held true regardless of whether that model was a complete free-for-all, where customers would always pick all channels; a partially restricted scenario, where users would supplement a basic offering with a themed selection of channels (family, kids, sports); or a hybrid scheme in which customers would get to choose between a la carte or bundled service-tier pricing.

Judging from FCC chairman Kevin Martin's remarks to a Senate Committee at the end of November, the new unreleased study may dispute some of the calculations and assumptions that went into the earlier document. The new study focuses on some analyses within the 2004 Booz Allen Hamilton study that showed that under certain conditions, digital cable subscribers might experience a nearly 2 percent decrease in their bills with an a la carte option. Since all these calculations are still theoretical, I'm betting someone will come along and dispute the new numbers as well.

What's harder to dispute is that the current economic models underpinning most broadcast and cable networks depend on broad viewership to get advertising revenues. If stations don't appear in markets at all because no service carries them, they can't make enough money selling ads, and they won't be able to cover their costs, which in turn affects their ability to produce programming. Some stations may fail altogether. Others may raise their licensing rates to cable/satellite companies in order to recover their lost revenue--increases that cable/satellite vendors may well pass on to you and me. Moreover, allowing customers to create their own bundles may require new equipment on the pay TV operator side, such as networking gear and set-top box upgrades, along with software to enable and bill for customer choice.

Another disturbing potential consequence of getting rid of today's channel bundles: We might lose narrowly focused stations altogether. My service tier includes all sorts of specialty channels--some ethnic, some theme-oriented (such as science, country, kids), some educational--that might not survive the financial shakeout if a la carte critics are correct. The argument goes that not enough people would be willing to pay for these channels to keep them afloat outside a bundle. If my personal choices are any indication, I would say that's a fair prediction: Some of those specialty stations definitely would not make the cut if I could prune my channel lineup, or exchange some of the channels I get for others that I would prefer.

Are there channels we should protect based on merit even if, in a more open market, they would not survive? We've chosen to protect industries before (farming and airlines, to name two), and we certainly have rules and guidelines about how broadcast stations should meet their government-mandated obligation to operate in the public interest. Should we use tax dollars to ensure that ethnic, religious, or gender-themed networks remain viable while allowing food networks to duke it out and live or die by the market?

We all have our own answers to these questions; coming up with a consensus may be practically impossible. I believe, however, that customized programming choice is inevitable based on the other current trends--primarily video on demand, Internet video, and IPTV.

We won't know actual costs until some company starts offering customizable pay TV. But it seems highly unlikely that I would end up paying the same amount for the same number of channels I now get in a bundle. That doesn't bother me much, though: I would rather pay more and get exactly those channels I want than get a discount on 100 channels I never watch. Your bottom line may vary.