In the past (when I watched more TV than I do today), I often wished for cable services to be unbundled, so I could just access the channels showing things I wanted to watch. The bundles always seemed to be carefully constructed so that I had to select multiples to get each of the channels I liked. It seemed obvious that my cable bill would be much lower on that basis. But, I was probably wrong then, as Megan McArdle points out:
Here’s the truth: You don’t want your cable to be unbundled. You just want to pay less for it.
Seriously, guys, you like bundling. You know how I know this? You seek it out in your consumer products. You want your hotel to give you free Wi-Fi and you don’t want it to charge you by the towel. Many of you go on all-inclusive vacations and cruises. You buy mobile-phone contracts to get a “free” phone rather than pay by the minute. You are constantly — and I mean constantly — complaining that your health insurance is not more comprehensive, even though this would just mean you’d pay more for the insurance. And I won’t even get started on your agonized wails when airlines started charging you to check a bag and stopped providing a “free” plate of congealed mystery meat. You buy books and subscribe to magazines rather than pay by the article or the chapter. You love bundles. What you hate is the size of your cable bill.
Why do you like bundling? Because you don’t want to have to think about it. Oh, sure, there are people who would like to spend their days obsessively managing their minutes, reading and towels in order to save 5 percent, but the rest of us would rather not spend our time worrying about blowing the Wi-Fi budget. So we go for the all-inclusive package.
Now think about cable bundling. The Great Unbundling Fallacy is the belief that if you pay $150 now for 1,000 channels, you ought to be able to pay, say, $25 a month for the channels that you watch. Unfortunately, as with our hotel example, it doesn’t work that way.
In our example, right now you’re paying $150 a month for a large array of cable channels but only watch, say, 15 to 20 of them on a regular basis. In our simplified example, we’ll say that 100 million other subscribers are also paying $150 a month for a large array of channels, of which they each only watch 15 to 20, though not the same 15 to 20 as you. Let’s assume that revenue is distributed to channel operators roughly according to the number of eyeballs they attract, which is basically true — ESPN gets much higher fees than some crafting channel, because many people will subscribe to cable to get ESPN, while few will do so to watch a knitting program.
So what happens when you unbundle? How much do you have to pay for your channels?
That’s right: $150. You aren’t cross-subsidizing the channels you don’t watch, but all those other people aren’t cross-subsidizing all the channels they don’t watch, so you have to make up for that lost revenue. The price for each channel goes up until you’re paying about what you were before. By one estimate, average savings from unbundling would be about 35 cents a month. [PDF]
Update: Fixed link.