Why Bundling Doesn’t Work Anymore

The word is out. The two largest cable-TV companies have reported their latest quarterly customer attrition. There is no doubt that the longer-term trend for all TV distributors is decidedly negative.

The younger generation of viewers is cutting the cord, or never connecting it at all. They’re voting with their wallets because they find the unwieldy forced bundling of TV channels too costly — today’s average monthly cable bill is $95 and rising rapidly. These same viewers rely increasingly on other sources for video programming, such as Internet streaming. Something has to give.

Some distributors, seeing the inexorable downward trend in subscriptions, strongly oppose forced bundling. Cablevision Systems, with public support from DirecTV and TWC, has sued Viacom, arguing that the programmer’s forced bundle violates the Sherman Antitrust Act. TWC, because it acts as a programmer for Los Angeles sports teams (Lakers and Dodgers) and forces other distributors to bundle the expensive sports programming into the giant pay TV bundle, has been sued for violating California unfair competition law.

If consumers prevail in that lawsuit, TWC could no longer force pay TV customers who have no interest in watching the Dodgers or Lakers to pay an extra $5 a month. In Congress, Sen. John McCain introduced legislation that would force distributors and programmers to offer TV programming on an a la carte basis. Standing in the background, the FCC could be moved to intervene to protect consumers in the manner of its Canadian counterpart. Even if none of these interventions occur, the steady drop in pay TV subscriptions will, over a period of years, ultimately force a resolution.

Meanwhile, programmers continue to insist on oversized bundling. They do so because they have known no other system, and this one means billions of dollars of extra yearly revenue. My estimate, based on a comparison with the Canadian system, is that U.S. consumers are paying $30 billion or more in excess charges every year. This is money that flows to the programmers. Yet, given the inevitability of change, it is in the programmers’ interest to be proactive in giving consumers meaningful, lower-cost choices. Programmers and distributors will benefit when consumers perceive they can make their own entertainment choices at reasonable prices. Sound marketing and good public relations go hand in hand.

Programmers must face the inevitable reality. Running a business responsive to consumer demand will require giving up short-term profits, but it is a principled and sound business strategy for long-term profitability.

Warren Grimes is a professor at the Southwestern Law School in Los Angeles.