I've rarely seen an abuse of economic logic as dramatic as the push for a-la-carte cable. The economics of zero-marginal-cost services like additional cable channels are extraordinarily unintuitive, and otherwise sensible prescriptions like "more choice" do not necessarily improve consumers' actual options. In fact, debundling of cable is quite likely to lead to worse choices for a similar amount of money.
To see why, let's forget about cable for a moment and imagine a city with 20 parks, strewn throughout various neighborhoods. Suppose congestion isn't an issue; each park is large enough that an additional visitor doesn't materially diminish the experience of the others. The city park system is required to recoup its costs by selling yearly passes.
At first, the park system sells yearly passes to all 20 parks in a single package, for $100. All 100,000 residents purchase the passes, allowing the parks to cover $10 million in annual expenses. Life is good.
But residents start to grumble—after all, they don't visit all the parks. Why should they have to pay for the maintenance of parks they don't visit? In response to this eminently reasonable complaint, the park board offers a new pricing scheme, where passes are sold for each park individually. At first it sets a low price for each pass: $20 a year. Sadly, after a year—and an unpleasant report from the county treasurer—the price for each park is increased to $100. Residents pay the same amount of money for access to only a single park.
Horrors! What happened? As it happens, each family was mainly interested in visiting the park nearest to its neighborhood; although occasionally it might want to visit parks elsewhere in the city, few other parks were worth the $20 annual pass. On average, families purchased only two passes: one to the park closest by, and one to another popular park across the city. Needless to say, this wasn't enough to cover the annual expenses of the park board: its revenues declined by 60 percent!
To compensate, the board initially voted to raise the price for a pass to $50 a year. Its consultants, however, ran several surveys and discovered that at a price of $50, the average resident would only buy passes to 1.5 parks. This, of course, forced a further price increase to increase revenue, leading to another drop in estimated demand. After several excruciating meetings with the consultants, the board realized that the minimal price sufficient to balance its budget was $100. At this point, the average resident would purchase only one pass: the sole worthwhile investment was a pass to the nearest neighborhood park.
This outcome was unambiguously worse for city residents. After all, they derived some benefit from being able to visit other parks—just not enough to justify an extra $100 for any one pass. They now paid the same amount of money but received far fewer choices in return. A policy that purported to promote choice actually destroyed it.
Substitute "niche programming" for "neighborhood parks" and you have the essence of cable economics. I hardly care about MTV; take away Comedy Central, however, and I'll be steamed. Many viewers feel the opposite. In an a-la-carte world, we'd each choose to buy only our favorite channels. Their prices would skyrocket on a thinner subscriber base, to the point we'd be paying nearly as much as we did before. I'd be just as poor financially, and I wouldn't even be able to indulge myself with Jersey Shore—surely a bad deal all around.
Is this analysis of cable economics a little one-sided? Of course. There are legitimate arguments for why a-la-carte cable might be beneficial; maybe it would make content providers more responsive to viewer interests, or shake up some cozy monopolies. But the typical argument for a-la-carte cable is still dreadfully wrong. In a world where additional content has zero marginal cost, the freedom to choose the content you buy has a good chance of leaving you with less choice in the end.