Wednesday, July 28, 2010

The surprising usefulness of middlemen

One common reaction to my argument about the inefficiency of a-la-carte cable is to stress that cable bundling is really just a holdover from a technologically backward era. In the past, it wasn't possible to sell stations individually. Now it is. In fact, very soon there will be no need to rely on cable providers at all. From a technical standpoint, there's no reason that television should be carried via dedicated "cable" or "satellite" companies, rather than simply piped over whatever internet connection a home happens to use. To many observers, the case seems clear: now that we have the technology to sell stations individually, the middleman is nothing more than a lumbering, soon-to-be-extinct monopolist.

But my point isn't that there is some technical need for Comcast or Time Warner to bundle (or even sell) content. Instead, I'm arguing that this practice is economically efficient. Someone has to pay the fixed costs of creating content; once these costs are paid, there's zero marginal cost to offering channels as widely as possible. I might only want cable to watch sports on ESPN or TNT, and you might only want news channels and cartoons, but the costs of creating all this content wouldn't magically go down if we had the option to purchase stations individually. Instead, assuming that the overall amount of content didn't decrease, on average we'd be paying the same fee for fewer options.

By bundling stations together and allowing us to access more content for the same price, the much-hated cable middleman has actually improved our choices. This arrangement is the accidental result of past technical limitations, but that doesn't mean it's not efficient.


R Mutt said...

I tend to agree.

But the standard argument in favour of price segmentation is that it's good for the poor, who couldn't afford the fixed cost, but could afford the most basic package.

Matt Rognlie said...

Right. That's a very good point—different tiers of service allow consumers who otherwise wouldn't have any access to cable to get something. I'm certainly not against offering different bundled tiers of programming -- say, one with 20 channels, and the next with 100 -- because this serves a valuable price-discriminating function. I just think that a-la-carte cable offers very little price-discriminating power beyond that provided by the standard "tiered bundles" framework, while leading to a much larger risk of market unraveling. I should definitely clarify this the next time I write on the topic.