[SEE UPDATES AT END
WSJ report on cost, viewership,
Disney's ESPN moving in this direction?]
The increasing shift from bundles of TV channels to Over the Top (OTT) and "a la carte" -- or at least "skinny bundles" or re-configurable bundles -- has raised cheers and fears -- and now a broad stock market decline -- but I suggest we should be thinking about a different kind of "post-bundling" future.
The answer is for bundles to become dynamic, and on-demand -- not post-bundling as in after bundles go away, but post-bundling as in defining bundles after the viewing. Alfalfa, one of "Our Gang" comedies' "Little Rascals" had the answer in 1936: "Pay As You Exit."
This may seem strange, but think about it. What sense does it make for me to choose ahead of time what channels I want to be able to watch in a given month? Does Spotify ask me to choose what record labels I will want to listen to? How would I know?
This also bears on the broader migration from pay TV networks on cable and satellite, to OTT services like Netflix, as given new immediacy by this week's market sell-off of traditional TV companies. Still more broadly, this idea of post-pricing and post-bundling can be beneficial for almost any kind of content aggregation, as expanded on below.
What I propose is that TV/video distributors let viewers select a special post-bundled plan that offers "run of house" access to all available programming, and then applies bundled package rate discounts to that month's viewing -- after the viewer household has made its choices, program by program. Note that this differs from simple "a la carte" which charges a non-discounted rate for a given channel or program. (It has been suggested that a la carte will actually raise costs to consumers, but that does not reflect the idea that a sensible a la carte plan should include package discounts.*) It also differs from skinny or changeable bundles, which still must be pre-set in advance, even if easily changed from month to month. The idea is to apply quantity discounts, much like in current bundling, but do it in a way that lets viewers choose what to watch with a minimum of constraints.
Such a scheme can give viewers full choice, match that with appropriate levels of billing, and open up a whole world of programming that has been walled off. It may hurt some programmers who have gotten a monopoly benefit by locking in a channel slot, but will help programmers who are able to find a public, without being arbitrarily gated by the distribution system.
This can be done with conventional pricing methods, but can be far more effective with the more flexible, value-based FairPay model described in this blog, as explained further below.
Busting the dam of bundling
Channel bundling is a historical accident, based on the fact the cable and satellite TV distribution systems could only carry a limited number of channels, and had no on-demand capability. The distributor had to allocate those channels well in advance to match demand. Furthermore, it was impractical to charge consumers based on programs watched, so prices were for unlimited viewing of a bundle of channels. Since different households had different viewing habits and budgets, a range of bundles were offered at different price levels, and with some flexibility as to which channels were in the bundle.
None of that makes sense in our new world of Internet-based TV, where any program can be provided on demand. It remains a knotty problem for the economics of distributors and TV programming networks, but that too shall pass. They have resisted fiercely, but the dam seems to be breaking as a growing list of incumbent players test the waters or consider it.
Similar issues apply in a somewhat different form to OTT SVOD "channels" like Netflix and Hulu -- see my post "Beyond the Deadweight Loss of 'All You Can Eat' Subscriptions." Hints at the turbulence resulting from the busting of the dam, even for these OTT services, is provided in a VideoNuze article, "Why SVOD Services Are At Risk Of Being Downgraded by Consumers to Transactional VOD," showing how our current business models just do not make sense, and concluding:
All of this underscores how uncertain things are for everyone in the TV and video ecosystem. In our Uber-crazed world, consumers are being trained to expect services on-demand and pay only for what is valued and used. Continuously fine-tuning their video services for those actually being watched will become the norm, a huge departure from the traditionally inert world of pay-TV subscriptions. [emphasis added]Simple Post-bundling
The idea is simple. Let viewers pay for what they use, and do it in a sensible way that corresponds to the value they get. Current bundles (regular or skinny) do not do that, a la carte does not do that (not without discounts), and flat-rate SVOD does not do that. Viewing is irregular and unpredictable -- the only way to determine its value is after it is logged.
Instead of selecting a bundle from a menu beforehand, we need to be able to consume dim sum-syle, and then see what we used, and then price that with an aggressive discount schedule (unlike simple dim sum). A simplistic un-discounted dim sum at a la carte prices would be overpriced, and consumers will fear running up unexpectedly high charges. But it is easy to do better, with discount tiers for various levels of viewing, and for various mixes of premium content.
- Pricing should factor in not only which channels were viewed, but how many shows (and maybe even which ones).
- Tiered plans could give prices similar to current bundles, but with the flexibility to dynamically alter the bundle.
- Usage factors could reasonably be set so a bundle of many lightly viewed channels might cost no more than a bundle of a few heavily viewed channels.
- A degree of usage related pricing would better track to value. That could limit the cord-cutting of light viewers, and obtain fair increases in revenue from heavy viewers (with price caps to maintain affordability).
- Consumers could be alerted when they approach various budget thresholds, so they need not fear nasty surprises.
Even greater tracking to value -- and consumer friendliness -- can be obtained with the FairPay cooperative pricing process (see overview). This provides greater flexibility in matching the value proposition to the consumer, and in protecting the consumer from pricing shocks to their budget.
- With FairPay, the distributor can propose prices for the past month based on a post-bundling discount schedule, but the consumer has leeway to soften the effect of spikes due to high usage (in terms of number or type of programs viewed).
- The distributor balances this consumer power by determining whether the consumer is being fair over the life of the relationship, and the ability to revoke the FairPay privilege of those who are consistently not fair enough, sending them back to conventional set-pricing plans for their future viewing.
- Since there is little actual cost to short periods of unfairly low pricing, this serves to grow a larger and more loyal customer base, while weeding out those found not to pay fairly for the value they receive.
As the VideoNuze article points out, subscribing to channels makes no sense in an on-demand world. This actually applies to both cable channels and OTT services, since either way, a la carte pricing threatens their survival.
- Traditionally, channels got viewer revenue by being packaged in cable/satellite systems. Post-bundling can readily apply there, administered by the distributor. Some long tail channels that enjoyed subsidies in excess of their value will have to retarget their production models, but those that had no channel slots could find new life in a more open post-bundling world.
- For OTT, free-standing long tail services will find it hard to justify $5-10 per month from more than a small cadre of dedicated viewers. But aggregators like Netflix and Hulu can make them accessible to an entire world of viewers.
- Even high-end channels will find the going tough. Is CBS really worth $5.99/month? To some maybe, but to most people, probably not -- not once every other channel tries to get a fixed slice of our wallet.
- And even Netflix should move on from its one-size-fits-all model. Holding its fees to a set $8.99/month means it cannot offer much premium content (nor can it appeal to those on very low budgets) -- sooner or later that inflexibility will become a real problem -- and the spotty availability of prime movies already is a problem. With flexible post-bundling, Netflix could afford to offer all of CBS, HBO, ESPN, etc., and a full catalog of movies. Netflix should be the Spotify of video!
The very idea of a long tail channel becomes questionable -- their curation model must shift from a channel (24 hours of content) to a brand (a continuing supply of desirable content, maybe less continuous, but well curated).
Content wants to be free ...as in free speech, not free beer
This is the whole new value proposition of the Internet age -- its an "inter-network," remember! Content providers keep trying to wall-off their content (in "walled gardens"), but the manifest destiny of the Internet keeps breaking those walls down. Post-bundling is the pricing model for the Internet age, the age of the Celestial Jukebox. Why can't we access anything we think we will value, and then pay a fair price for whatever that turned out to be? This obviously applies to music (Spotify) and why not news, magazines, books, etc. An earlier post explained how a similar form of post-bundling could expand the market for travel guides, such as when taking a multi-country cruise to one city (=program) in each of several countries that were each covered in different guidebooks (=channels).
The Celestial TV Jukebox
It is time for TV/video providers to embrace the new consumer-driven on-demand world. I don't care if I watch my programs from CBS or HBO or Showtime or Netflix -- I care about watching specific programs. Channels are no longer "channels." They are simply content brands that I may come to have some interest and trust in. Why should I buy a "channel" and pay for programs I don't watch?
It is time to think about the answer Alfalfa found: "Pay As You Exit" -- bundle in arrears -- post-bundle. Finding the right way to do that will take some experimentation, and be disruptive to the incumbent networks and distributors, but the sooner we get started, the sooner we will find our way out of the wilderness to reach the land of milk and honey. It seems clear that some of the incumbents have begun to take this sea change seriously, and this week's wake-up call in the stock market adds evidence that we are approaching an inflection point.
[More on post-pricing and value-based strategies in this newer post: Finding Value in The Subscription Economy]
*The analysis of a la carte pricing in the Barro NYTimes article, Irwin's follow-up, and in Wikipedia, seems flawed not only by ignoring the role of volume discounting, but also by assuming that the technology of pay TV distribution will continue unchanged. Barro says that channelized distribution argues for bundles:
Think of it this way: If I put my bag in an overhead luggage bin, you can’t put your bag in the same spot, so it makes sense to charge me personally for my use. But if I watch Bravo, that doesn’t stop anyone else from watching the same show. When a good is “nonrivalrous” like a cable signal, giving it to me doesn’t stop anyone else from using it or add production costs at the margin. In those cases, it can make sense to throw lots of stuff into one package, whether or not I’ll actually use it.But that is obsolete technology. It may take time to change over, but cable operators already send a mix of TV channels along with a separate Internet stream down the same pipe to our cable modems -- that can carry any channels desired, as it now does for OTT services like Netflix. (Even the "cable TV" channels now use Internet Protocol in their dedicated channel slots.) As I pointed out in a 2006 post, cable operators can shift capacity between these pipes, and they continue to gradually increase the capacity of the Internet pipe. With some simple equipment changes their plant can shift to all IPTV, with no fixed channels. (Doing that system-wide will take some time and money, but not that much.) So the technical reason that made bundling economical is now disappearing.
The skeptics also point to the psychic cost of being nickel-and-dimed, but there are ways to counter that as well. I suggest that post bundling goes a long way toward softening that, and the even softer post-bundling of FairPay makes that even more comfortable.
As to the more fundamental economics, a recent WSJ article puts it plainly: "Selling packets of channels to subscribers once made sense, but not so much anymore." It makes even less sense once you think about post-bundled packaging discounts.
[UPDATE 3/22/17: WSJ report on cost, viewership]
Small Cable Channels You Pay for—but Don’t Watch—Are Dying. But don’t expect your bill to decrease as networks go away."
This report points out how dramatically the cost per viewer varies. with rarely-watched channels like Fox Sports 2 and MTV Classic costing many thousands of dollars per year per viewing household, compared to a median of $699 (and of course the more highly viewed cost outlier, ESPN at $3,885, for its barely over 2 million viewers). Some of the channels are nothing but reruns! What a waste! Some channels have made a killing on this, but it is time the industry got its house in order, and moved on to provide real value at a fair price.
There is a constant drumbeat of news reports on the decline of pay-TV bundles, and of the difficulties faced by the growing number of skinny bundles.
When will the industry move beyond all of these silly bundles? We don't need no stinking bundles! What we need is value-based pricing for what customers actually watch.
[Related Post 9/25/17: Is Disney's Robert Iger hinting at moves in this direction for ESPN?]