Kagan Report Finds Costs Would Rise

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LOS ANGELES (AdAge.com) -- As cable operators scramble to offer family-friendly tiers to ward off a government-mandated a-la-carte system of delivering channels to customers, it's become clear that consumers' best interests are not really what's being served.

That's the conclusion to be drawn from Kagan Research's latest look at the economics of the situation.

The problem is that the underlying conclusion that set off this latest round of discussions is based on a false premise, according to Kagan. That premise, as articulated by Federal Communications Commission Chairman Kevin Martin and based on a yet-to-be released FCC report, is that a la carte is in the best interests of the consumer.

"It's typically not understood that expenses for TV-channel platforms would rise with a la carte," Kagan said in a release last Friday.

On average, Kagan reports, cable subscribers pay about $1.49 per day for a bundled package of 64 channels, about seven cents a day more than they paid per day last year, when they received four fewer channels. On an average per-hour-watched basis, subscribers pay 15 cents to 20 cents. To beat the bundle price on an a-la-carte basis, subscribers would have to choose no more than nine channels, Kagan said.

This analysis assumes that most subscribers, in an a-la-carte pricing system, would tend to order channels such as Discovery and ESPN "that are also the most expensive," Kagan said.

"Those who want to rush to a-la-carte pricing are thinking too simplistic and are not thinking through the implications," Kagan Senior Analyst Derek Baine told TelevisionWeek.

The entire push for a la carte is based on flawed thinking at an even more basic level, Mr. Baine said. "Most ironically, what started all of this was the uproar about indecency that started with the Janet Jackson incident at the Super Bowl. You hear the argument that if there [were] a-la-carte choices or family tiers, many of us would not have seen that," he said, adding that the incident with Ms. Jackson happened during the Super Bowl over mainstream broadcast TV and would not have been blocked in any homes by family tiers or an a-la-carte system.

If only half a cable operator's subscribers migrate from a basic bundle to an a-la-carte model, "TV-channel operators would need to raise per-capita channel-carriage fees by a multiple of four," Kagan said in its release.

Currently, on average, basic-cable networks derive about half their revenue from fees they get from cable operators, about 44% of their revenue from ad sales and the rest from "miscellaneous activities," according to Kagan.

"If we went to a la carte, niche channels with small audiences would never get off the ground," Mr. Baine said. "Take the Food Network, for example. If the industry had been on an a-la-carte model when it wanted to launch, it would simply have never got off the ground. But because it was part of a basic bundle, it was able to find an audience and it prospers."

A la carte is, quite simply, "a bad consumer idea," said Brad Siegel, a cable-programming veteran who is vice chairman of the 14-month-old Gospel Music Channel. It "could cost the consumer so much more money to get so much less," he added. "Anyone who advocates [a la carte] doesn't understand what the impact would be for the consumers and the financial model of the business as a whole."

However, others argue that the fact cable operators are now saying they can come up with family tiers argues for going to an a-la-carte system. That Time Warner Cable, for example, has said it now has a plan for a family tier "demonstrates that the cable industry does have the ability to offer options, when they've been claiming for many months that they can't," said Lanier Swann, director-government relations for Concerned Women for America.

~~~ Chuck Ross is publisher and editorial director for Television Week. Doug Halonen and Jon Lafayette, TV Week reporters, contributed to this story.

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