The real truth about a la carte programming

Sure it sounds great. Just pay for the 15 or so channels you actually watch. In fact, take ouf the major networks and most people watch just a handful of channels. If you could pay for just those instead of the hundreds of channels you don’t watch, your bill would be lower, right?

Wrong.

The problem with having a la carte programming across the board is, these content providers want their money. They’re not going to be content with losing 75% or more of their revenue. That’s just not how it works. In fact, a la carte pricing could make your bill go up! Let’s take an example.

Let’s say you want the XYZ channel on DIRECTV. Right now, DIRECTV pays $1 per subscriber per month for the XYZ channel, and it’s on the lowest tier, so all 19 million subscribers get it. DIRECTV pays $19 million a month to XYZ channel, that’s $228 million a year. That’s a lot of cabbage! Now, the only way this channel can go a la carte is with a new contract. XYZ channel will agree to a la carte, but since they think that only 10% of subscribers will bite, the new price is $10 per subscriber. So, the cost to you for XYZ channel could be as high as $40 a month, just for that channel (assuming a standard cost model where the acquisition cost is 25% of the end user price.

Forty bucks. For one channel. Is that what you were shooting for?

There’s another piece to the puzzle… many of the channels that people want to skip are actually profit centers, not cost centers. DIRECTV and other providers actually make money for carrying shopping and religious channels, because those channels actually pay DIRECTV for carriage. So you may not watch them, but they bring your bill down anyway. Not a bad deal when you think about it.

Of course there are some glaring exceptions. Sports channels, notably ESPN, are some of the most expensive ones out there, sometimes costing more than premium channels. Moving these to “a la carte” would probably lower the bill for those who don’t watch any sports, but it would be a nuisance to those who do, and there are lots of people who do. Still, it might be nice for the average person to realize that as much as 25% of his bill is due to three or four channels.

To truly go a la carte, look at how much money you would have to spend at a redbox and on iTunes for the programs you already watch. What if you paid $3.00 per episode for every show you watch? Would you spend more or less money than you do today?

The real bottom line here is that the push to change the pay-TV model is great, but it has to be done carefully and slowly. Pay TV isn’t the only entertainment out there (some people read tech blogs.) Pay TV providers need to continue to add value while holding the line on costs. In many cases changing to an a la carte model does neither.