Bundles of joy

A report on the “Future of TV” by a pair of analysts at Needham & Co. created a bit of a buzz last week for cutting against the current grain of trumpeting the merits of greater ala carte access to TV content.
The report (pdf), released by senior entertainment and internet analyst Laura Martin and co-authored by Dan Medina, argues not only that the current, multichannel pay-TV bundle is a good deal for consumers, by providing maximum programming choice at a reasonable price, but that eliminating it by offering channels ala carte would be catastrophic for the TV ecosystem, pointing to the baleful effects of unbundling on the music and newspaper industries.
“Despite calls for unbundling because it would give consumers more choices, our math concludes that approximately 50% of total TV ecosystem revenue would evaporate and fewer than 20 channels would survive because a la carte forces consumers to bear 100% of the cost of the channel, whereas today TV advertisers bear 50% of the cost,” the report said. “Our calculations suggest that if the TV bundle starts to degrade, $400 million of market capitalization will turn into $200 million over 10 years, based on the datapoints from music and newspapers.”
Even a partial unbundling, such as segregating sports into a dedicated premium tier, would start the industry down the road to ruin, according to the analysts.
“If sports leave the bundle, we estimate that many of the 20 million households that are heavy sports viewers today would disconnect the remaining entertainment bundle, thereby further pressuring ecosystem profits,” the report said.
The report has met with a fair share of push-back from those who insist, despite Martin and Medina’s math, that ala carte choices would still be more “fair” to consumers because they would not be forced to pay for channels they don’t want. But the more critical question may be whether the current bundle is even sustainable given the combined stress of internal pressures and centripetal forces that are tugging at it.
As Martin and Medina acknowledge, the rising cost of live sports programming has a distorting effect on the rest of the ecosystem.
[A]pproximately 50% of total subscriber fees paid per month by consumers are related to sports channels, even though these channels account for less than 25% of total viewing (Nielsen). This implies that sports are getting ‘overpaid’ by consumers by two-fold,” the report said. “Sports channel fees are being driven by escalating TV license fees for professional sports. With the launch of FoxSports 1, which will compete with ESPN for national sports rights for the first time, we expect sports rights fees paid to leagues to accelerate (i.e., get worse) over the next 24 months.”
While Martin and Medina argue that separating sports programming from the rest of the bundle would be a mistake, the rising cost of sports is starting to turn the bundle itself into a zero-sum game among programmers. As the carriage fees pay-TV operators must pay for sports channels continue to rise, they are starting to crowd out other networks from the bundle.
Ultimately, anything that reduces consumer choice, even without introducing new programming tiers, undercuts the very economic rationale for bundling that Martin and Median endorse. While the analysts credit the networks for being “disciplined” in not licensing their content on an ala carte basis forcing marginal programming out of the bundle through higher prices could have the same effect.
Meanwhile, the number of U.S. households now getting by without a pay-TV subscription at all has reached reached more than 22 million, representing nearly 20 percent of all TV households, according to a recent study by GfK Media & Entertainment. Some of those homes have simply been priced out of the market by the cost of the current bundle. But according to a separate study by Nielsen, at least 5 million homes now qualify as “Zero TV households,” who consumer virtually all of their TV content on-demand. While they may be paying content aggregators like Netflix for on-demand access to programming they’re not part of the linear, multichannel ecosystem that Martin sees as critical to sustaining the current level of investment in content.
Ala carte may turn out to be a bad deal for consumers, service providers and programmers alike. Bu that doesn’t mean it won’t happen.