Imagining a Post-Bundle TV World
By SHALINI RAMACHANDRAN And WILLIAM LAUNDER
What happens when the "bundle" begins to unravel?
The question is taking on intense importance for the cable-TV business, which for decades has forced customers to subscribe to groups, or bundles, of channels—whether they wanted them or not.
Attacks on the bundle approach have escalated, most recently with Cablevision Systems Corp.'s CVC +0.62%lawsuit this week against Viacom Inc., VIAB -0.49%accusing it of antitrust violations for forcing it to carry and pay for more than a dozen "lesser-watched" channels in order to offer the popular ones like Nickelodeon and MTV. Viacom disputes the allegation.
..Now pay-TV executives—as well as its customers—are openly pondering a world where the bundle no longer reigns, even though such a scenario could be years away.
"People should be able to build what they want and get what they want," said Bartees Cox, a spokesman for consumer group Public Knowledge.
"Without the 'take it or leave it' requirements of bundled programming packages at a wholesale level, cable companies could tailor smaller and lower-priced packages that could offer flexibility and have great appeal to specific interests and audiences," said Charlie Schueler, spokesman for Cablevision.
Close.Giving consumers the right to pick and choose could be costly for the big entertainment companies such as Time Warner Inc., TWX -0.50%Viacom, News Corp NWSA -0.14%. and Walt Disney Co., DIS +0.22%which rely on subscription fees from cable channels for a big chunk of their profits. Disney draws more than $10 billion in such fee revenue, mostly from its majority-owned ESPN group of channels, according to estimates from market researcher SNL Kagan. That is about a third of the $31.6 billion expected to be generated industrywide by such fees this year, excluding premium services like HBO and broadcast outlets, Kagan says.
The size of these fees varies widely. ESPN gets $5.54 per subscriber a month, while Viacom's MTV gets 41 cents per subscriber. Niche channels get much less. MTV Hits, for instance, gets two cents, according to Kagan.
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.There are already some cheaper packages in the market—but they aren't promoted heavily. Verizon Communications' VZ +0.13%FiOS service recently introduced "Select HD," priced at $49.99 a month, about $15 below the next-level package. Like similar offerings available from other distributors, it excludes sports channels such as ESPN. But operators can't market these too widely for fear of violating contracts with entertainment companies. Those contracts typically require that their channels reach 80% to 90% of their subscribers.
While some pay-TV executives say that full "a la carte'" could be overwhelming for viewers, others say that such an offering would be "the dream" but not practical, considering the reality of relationships with entertainment companies.
Instead, several pay-TV executives suggest creation of smaller bundles or tiers based on genre, from which viewers could pick and choose. For instance, a general entertainment package could include Time Warner's TBS and Comcast Corp.'s CMCSA -0.51%USA. Atop that package or standalone, subscribers could choose a sports bundle including channels like ESPN and regional sports networks. A news package might offer Time Warner's CNN, News Corp.'s Fox News, Comcast's MSNBC and Bloomberg TV, among others. A family and kids tier might include Nickelodeon and the Disney Channel.
Allowing people to drop sports channels, in particular, could help them save money because sports channels are among the priciest. ESPN is the single most expensive channel by far. But if lots of people drop it, customers who want it would have to pay more.
There are some other expensive channels as well, including News Corp.'s Fox News (94 cents a month) and Time Warner's TNT ($1.24 a month), according to Kagan estimates.
News Corp. also owns The Wall Street Journal.
Mediacom Communications Corp., a small cable operator based in Middletown, N.Y., has long agitated for unbundling. It advocates a "hybrid a la carte" model, in which those most expensive channels are sold individually on top of genre-based tiers.
Only a handful of channels from each media conglomerate are "priced really exorbitantly," said Thomas Larsen, group vice president of legal and public affairs at Mediacom. Under the hybrid model, distributors would take out of the equation the channels "causing the prices of packages to go up so high."
Mr. Larsen, along with DirecTV's DTV +0.93%top programming negotiator, Dan York, also said broadcast networks, which until recently didn't get paid any money by pay-TV distributors, may also have to be sold individually because of the big fees they are now seeking. An executive at one distributor said his company is already in discussions with broadcast station groups to offer networks a la carte to customers.
There has long been intense debate about whether unbundling would save consumers money. Two studies by the Federal Communications Commission in the past decade came to opposite conclusions. A Temple University study, meanwhile, concluded only incremental savings for consumers, and that was before accounting for the higher costs for customer service and programming that distributors would likely pass along