A La Carte, Agian

Suppose I wish to purchase only the Sports page of the Washington Post on an a la carte basis on the theory that it ought to be priced less than the whole newspaper? 

Or suppose that I wish to purchase only the interview in Playboy (or centerfold if you prefer) on the theory that it ought to be priced less than the whole magazine. 

No one thinks the government should – or could – mandate that newspapers or magazines be made available on an a la carte basis just because some politician or policymaker thinks that some consumers might prefer to "pick-and-choose" only their favorite sections. 

Yet, in the past, politicians and policymakers have suggested the government should require cable operators to make available the channels on their systems on an a la carte, pick-and-choose basis. 

This was a bad idea when Senator John McCain and others offered it previously over a decade ago. 

It is a worse one now. But Sen. McCain is back at it again, with his newly introduced "Television Consumer Freedom Act" (S. 912). In his May 9^th floor remarks introducing his bill, Sen. McCain said it "is about giving consumers more choices when watching television." 

My gosh! In the history of humankind, consumers never have had so many choices for watching so much diverse video programming offered by so many video providers. 

Whatever the situation over a decade ago when Sen. McCain first urged adoption of an a la carte requirement, it is indisputable that the video programming and distribution marketplace is now competitive. Curiously, despite what should be its obvious relevance to consideration of new regulatory requirements, Sen. McCain does not discuss the current competitive marketplace environment in his floor remarks. 

In the context of this blog, it is impossible and unnecessary to chronicle the remarkable increase in consumer choice in the video marketplace that has occurred over the past decade. For a general picture with lots of data points, I refer the reader to the FCC's Video Programming Competition Report (Fourteenth Report), released in July 2012, even though this report covers marketplace developments only through 2010.

In the Fourteenth Report's very first paragraph, the FCC states that "the most significant trends since the last report relate to the increased deployment of digital technology, consumers’ rising demands for access to video programming anywhere and anytime, and the evolution of online video from a niche service into a thriving industry." Remember, this is as of the end of 2010.     

Today's cable systems typically offer subscribers approximately 900 unique channels, and the two competing satellite operators (Dish Network and DIRECTV) offer nearly the same number of channels. And now, of course, the "telephone companies" compete in the multichannel video market with similar video offerings. Presently, the cable companies have approximately 58% of the multichannel video programming distributor (MVPD) market, the satellite providers 33%, and the telephone companies 9%. 

But as the FCC observed, even as of 2010, the emergence of "over-the-top" online video as a "thriving industry" further altered the marketplace environment in the direction of more consumer choice. Today, Netflix, with 29 million subscribers, is the nation's largest subscription video service, with more subscribers than Comcast (22 million). In addition to the dominant provider Netflix, other major online video programming purveyors include Hulu, Amazon, iTunes, HBOGo, and Apple TV. Not to mention YouTube, which recently announced initiation of a subscription video service. And, of course, in addition to the traditional "television" screen, you can watch all this various video programming on laptops, notebooks, and smartphones. 

We truly do live in the age of "TV Anytime, Everywhere." 

While Sen. McCain did not focus on these competitive developments, it would be difficult to conclude a marketplace failure exists warranting further government regulation of video program providers. In his May 14^th statement at the Senate Subcommittee on Communications, Technology, and the Internet hearing, Sen. McCain summed up this way: "Consumers should not have to pay for television channels they do not watch and have no interest in watching." It is true that the cable and satellite operators do not presently allow consumers to purchase channels on an individual basis, but there are an increasing number of online providers that already offer just such "on demand" business models. 

And the most fundamental point is this: In light of the existing competition among video programming purveyors, it is much more likely that the marketplace will satisfy consumer demand in the most efficient, least costly manner than some government-directed offering. While the idea that all consumers should be able to purchase only the channels they choose to watch from all MVPDs may have superficial appeal, the notion that such a universal a la carte regime really would benefit consumers is highly suspect. 

Numerous previous studies have shown that a government-mandated a la carte regime would not necessarily lower prices for consumers and might well diminish, even substantially, the number of channels available, especially those appealing to minority or specialized tastes. This is only logical. With the unbundling of all channels, the costs for making available certain individual channels would rise as the audience size for particular channels is reduced. Some channels almost certainly never would get off the ground because, absent the opportunity to bundle them with already-popular channels, MVPDs would not risk incurring the costs of carrying a channel with little initial expected audience demand. 

In a 2003 study, "Issues Related to Competition and Subscriber Rates in the Cable Television Industry," the GAO concluded that, under an a la carte regime, cable networks could lose advertising revenue, and, as a result, "some subscribers' bills might decline but others might increase." 

And in their 2008 Perspectives from FSF Scholars, "Bundles of Joy: The Efficiency and Ubiquity of Bundles in New Technology Markets," Stan Liebowitz and Stephen Margolis explained at length why product bundling generally is efficient and ubiquitous throughout the economy. With respect to cable operators, at the time subject to pressure by then-FCC Chairman Kevin Martin to adopt an a la carte model, Professors Liebowitz and Margolis had this to say: "Customers may naïvely believe that the single channel price will be their bundle price divided by the number of channels in the bundle. Regulators may cynically give them pay-by-stations options. But since customers will be unhappy with the likely result, some regulatory alternative will be found, but no alternative is likely to enhance efficiency." 

Again, today's video distribution and programming marketplace is more competitive than ever and, thus, almost certainly responsive to evolving consumer demands. It is foolish to think the government can do a better job of deciding how video programming should be offered than the marketplace. 

I should say that I understand that, strictly speaking, Sen. McCain's bill does not impose a government mandate requiring MVPDs to adopt an a la carte model. Rather, the bill would withhold from MVPDs and broadcasters certain regulatory "benefits" absent adoption of an a la carte model. It is in this sense that Sen. McCain says that his bill is "voluntary." 

Without engaging in a linguistic debate concerning the definition of "voluntary" in the context of a regime in which the government confers and then threatens to withhold certain benefits absent agreement to adopt a government-preferred course of action, I will grant Sen. McCain this: Due to the remarkable changes in the video marketplace that I have already discussed, it is time to begin examining, on a comprehensive basis, jettisoning many of the outdated legacy regulatory requirements he has identified, such as the network non-duplication, syndicated exclusivity, must-carry and retransmission consent, compulsory copyright, and so forth. 

But the existence of such a tangle of legacy requirements in a fast-changing, competitive marketplace should not be a justification for adopting still more government intervention. Rather, I would respectfully urge Sen. McCain to consider it a reason for reducing and eliminating outdated regulations so the free marketplace can be allowed to work. 

One final note: Recall my (hypothetical) desire to purchase only the Washington Post Sports page or the Playboy interview (or centerfold). I said at the outset that no one believes the government should – or could – mandate that the Post or Playboy be required to satisfy my desire. Apart from any others, a reason for this is that the First Amendment would prevent such government intervention with respect to the exercise of the publishers' editorial discretion regarding the way they wish to assemble their content into a package. I argued way back in May 2007 in "The Constitution, A La Carte" that any government requirement that has the effect of imposing an a la carte regime on cable operators and other MVPDs likewise should be found to violate their First Amendment rights because it would infringe upon their editorial discretion to package their program content as they wish. 

I said then that "a la carte constitutionalism simply won't do." I still believe that to be true, of course, and I hope you do as well.