A Monday article in the Wall Street Journal argues that the internet is on the verge of killing cable companies' widely hated practice of bundling a lot of cable channels together into expensive packages:
Pushback is building that could finally break the bundle. Pay-TV subscriptions have peaked in the U.S., and viewers have alternatives through Internet services such as Netflix, Hulu, and YouTube. Distributors like Verizon’s FiOS are trying to find ways to offer flexibility in pay-TV packages, drawing a lawsuit from ESPN in the process. And networks including HBO and CBS are now selling their content directly to consumers without requiring a subscription to a distributor’s big bundle.
The article goes on to complain about how big media companies "force" cable companies — and through them, consumers — to pay for channels they don't want, artificially inflating the cost of cable service.
The weird thing about this argument is that the company that has done the most to break the cable TV bundle — Netflix — is itself a giant bundle of content. Say you love House of Cards but aren't interested in the many other shows available through Netflix streaming. Netflix doesn't care. Either you subscribe to the whole Netflix bundle or you don't.
It's true that you can buy individual House of Cards episodes from other companies like Amazon or Google — but only at a huge markup. Individual episodes cost $1.99. If you expect to watch more than four episodes a month, it makes more sense to get a $7.99 Netflix bundle, which lets you watch not only an unlimited number of House of Cards episodes but a ton of other content as well.
This kind of bundling makes economic sense, because once a show has been created, the cost of distributing it to one additional person — what economists call marginal cost — is trivial. Removing channels from a bundle doesn't save content creators any money, so there's no reason to think it would save customers money either.
The most popular cable channels, like ESPN and AMC, cost a lot because a lot of people want to watch them. The media companies that own them then throw in other, much less popular channels in hopes of making them more popular. But if media companies sold the popular channels by themselves, they'd do it at a price that was almost as high as they charge for the bundles. In an à-la-carte world, different customers would pay different amounts, but on average customers would pay about the same for a lot less content.
It is true that the internet — and companies like Hulu, Netflix, and YouTube — is making the television market more competitive. But what's new about these services isn't that they do less bundling. Rather, it's that they're charging lower prices, and in the process resetting customers' expectations about how much television content should cost. But there's no reason to think this new competition will lead to a world where consumers no longer buy content in big bundles.