Friday, March 21, 2008

Why Cable Prices Seem To have Increased So Rapidly

When a candy bar manufacturer has higher costs it can raise prices by giving less. The 3 ounce bar becomes the 2.75 ounce bar. This in effect is an 8% price increase. But the increase is not as painful because our expenditure stays constant.

The print media can do the same to a point. They can reduce the news hole (ratio of editorial content to advertising), even reduce the number of pages, while keeping price the same. It may take time before consumers realize they are getting less. But as long as out-of-pocket prices don’t increase, the pain seems minimal.

The cable business has a different model and consumers have different expectations. Since towns, then cities, started being wired for cable, the providers have been giving us more—like a bigger bar, fatter publication—and been increasing prices commensurately. At first the increases in programming were very visible. In the 1970s and especially in the 1980s, cable subscribers went from having four or five channels to 10 or 20. Starting from such a small base, it was simple to have 100% and 200% increases in channels. First it was the “superstations,” such as WTBS and WGN. These were FCC licensed broadcast stations serving Atlanta and Chicago, respectively. They were among the first to use satellite to get national distribution. Then came cable-only networks, such as CNN and ESPN. It was explicit that there was far more choice even as the price went up.

To continue the junk food analogy, it was as if a candy bar went from 2 ounces to 4 ounces and from $.50 to $1.00. On a per ounce basis it is the same price. Just as crucial, it felt heftier in the hand. Now, consider further small increments in the candy bar, adding an additional quarter ounce each year. The larger the bar, the less physically obvious the change appears. Customers might not realize that it went from four to four and a quarter ounces. A 6% price increase would seem to be just that—-more money, though the cost per ounce stayed the same. Indeed, when the candy bar got to a certain point, many buyers might yell, “Enough. I don’t need so much chocolate.”

Much the same in the cable biz: Despite the apparent hikes in the cost of cable, the cost per ounce- er, ah-- the cost per channel has actually slightly trailed the cost of living index for the industry as a whole, as seen in the accompany chart, from the FCC’s report on cable prices released 15 months ago.

Still, adding a channel to the 40 or 50 that populate the more prevalent basic tiers is less obvious than it was in 1985 when there were far fewer. And, though many subscribers may see not benefit in adding, say, the Fine Living Network it may be quite welcome in a few hundred thousand households.

So, like the consumer pleading for no more increases in candy bar size, even at the same per ounce price, some consumers might prefer to see a halt in adding channels if that could moderate price increases. Here is where my analogy breaks down. Whereas more candy may not be so healthy, having access to more choice on cable could be. Or at least not unhealthy. Just as having access to the seemingly limitless diversity of material available now via the Internet, the availability of so many channels on cable provides opportunity for access even if, as individuals, we rarely take advantage of all that’s there. Even within a household, the bundle of channels each member uses may have little overlap (if my family is close to typical). While a la carte selection—unbundling—may seem attractive, there are many good social, cultural, not to mention economic, reasons while there is less there than may seem obvious. I’ve taken on the bundled/unbundled issue previously.

Like many of you, I’m a bit resentful when, like clockwork, Comcast notifies me of another 6% price hike. But unlike the folks who scream about the greed of media conglomerates, I checked out Comcast’s latest financials. Last year it had an 8.3% profit on revenue—good but certainly not obscene monopoly profits. It has $30 billion in long term debt. The few shares of Comcast stock I own (a legacy of some old AT&T stock, which spun off its cable holdings, which were acquired by Comcast) are worth today less than five years ago. So much for big fat greedy media companies. I’ve already looked at switching to satellite, but I’ll wait for Verizon’s FiOS to come to my neighborhood and decide who will get my business.

Either way, it will be a big candy bar at the same old price per ounce.

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