A La Carte Cable and the Economics of Abundance

Ars Technica reports that FCC chairman Kevin Martin is once again pledging to force cable providers to offer “a la carte” cable programming. I’ve found discussing this issue frustrating because people have surprisingly strong intuitions about it. Indeed, with the possible exception of “independence from foreign oil,” I can’t think of a single policy idea that is simultaneously so wrong-headed and so popular across the political spectrum.

But it is wrong-headed. People have this intuition that when they sign up for cable, they’re “forced” to pay for MTV to get Nickelodeon. Or conversely, that they’re “forced” to pay for Nickelodeon to get MTV. They seem to imagine that if they could just pick and choose cable channels individually, they’d be able to get the content they want and lower their overall cable bill.

The problem with this line of reasoning is that almost none of the cost of providing cable service to you is dependent on the number of channels you take. In economics jargon, cable channels have close to zero marginal cost. Once the content has been produced and the coax has been laid, it costs little or nothing to give every customer access to every channel in the bundle rather than only certain channels. So if they stop sending you Nickelodeon, it doesn’t reduce the total cost of providing you with your service. So why would you expect a price break?

Indeed, there are lots and lots of examples of bundled products and services that no one in his or her right mind would demand be unbundled. For example, why am I forced to buy the sports section with the business section in my morning paper? Why am I forced to buy evening and weekend minutes with my cellular phone plan? Why was I forced to buy a variety of software products with my new laptop? Why am I forced to take an all-you-can-eat Internet connection rather than paying for only the minutes I need?

These add-on products all have near-zero marginal cost, so it doesn’t cost the company anything extra to provide them to all customers. Indeed, in some cases, it would actually cost more to provide them on an a la carte basis. Imagine the nightmare of being a paper boy if each customer got to decide which sections of the paper he would take.

I think that’s a pretty straightforward argument, but people still seem to find it deeply counterintuitive. It occurs to me that this is an example of a point that Mike Masnick over at TechDirt has been making for a quite a while now: people find reasoning about goods with zero marginal cost deeply counterintuitive. People seem to have a strong intuition that anything that has value must also have cost, and so even if it appears to be free, you’re really paying for it somehow. But with information goods, which can be duplicated an unlimited number of times, that’s not true. Duplicating it really does cost close to nothing, and so it’s socially efficient to make it as widely available as possible.

So the right way to think about cable bundling, I think, is that you get several channels you don’t particularly want for free along with the ones you do want. Requiring a la carte programming simply takes away those free channels. People have an intuitive sense that those channels aren’t really free — that they’re really paying for them somehow. But that intuition is wrong. The extra channels really are free. And prohibiting cable channels from giving them to you really is a bad policy.

Mike has a long series of interesting posts on the economics of abundance here.