Goodbye Cable TV Bundle (2015 Jul)

by Barry A. Liebling

A huge number of Americans have cable TV and all of them have first-hand experience with a practice that customers universally despise. The typical cable operator will not sell you stations one-at-a-time. Instead you have to buy a bundle. For example, Basic has the smallest number of stations, Expanded Basic has more, and Premium has the most channels. You decide which bundle to buy, but the cable provider decides what will be in the bundles. The obnoxious part is that you will pay for many stations that you have no interest in watching.

Over the years the cost of subscribing to cable TV has increased dramatically partly because the bundles are getting larger and more expensive. The winners in this are the cable operators that collect ever larger fees from customers and the program providers that sell their channels to the cable companies. The losers are customers who are paying more every year for essentially the same service.

In recent years customers have discovered that they need not play the cable operators’ game. There are new opportunities for push-back. It is becoming common for television viewers to dump cable and get the programs they want by other means. Many are using broadcast receivers for local channels and obtain digital content via the internet from suppliers that are invading Cable TV territory. Think Netflix, Youtube, Hulu, and Amazon.

According to The Wall Street Journal the inflection point is near. Because of competition cable companies will inevitably offer their subscribers various a la carte options. The age of mandatory bundles is coming to an end.

Cable companies have for a long time run their businesses with policies that are inimical to brand building. Consider the classic case of a firm attempting to develop its brand. The objective is to convince buyers to feel affection and attachment to the company’s products. A brand is successful to the extent that customers are enthusiastic about spending money to obtain its goods and are resistant to switching to competitive brands.

This is the opposite of what cable TV providers have accomplished. Typically, customers have little positive regard for their supplier and regard switching from one cable company to another as a (somewhat inconvenient) way to save money. To price-sensitive customers the money trumps the inconvenience. I live in New York City where I have a choice of three cable TV companies. If I stick with one the price of the services and the size of the bundles goes up every year. If this disturbs me I can call Customer Retention and request that they give me a lower rate. Sometimes they comply, but often they do not. Then I can go to the other two cable operators and get an introductory inexpensive contract that is good for one year. At the end of twelve months I can either accept the new higher monthly bill or go through the entire process again.

Notice that the cable companies have set up a system where the firms and their customers are essentially adversaries. Cable TV customers are either resigned to spending ever larger amounts on their service (and resenting it) or are perpetually searching for a better deal. Cable TV executives scheme to squeeze as much as they can out of a customer before he leaves. At the same time they are calculating how steep a discount they have to offer a new customer to switch who is fed up with a rival cable company. And then, once they get their new viewer the cycle begins again.

Why have the Cable TV companies so consistently alienated their customers? The short answer is because they can. A lot is explained by the fact that these businesses do not operate in a free market. Cable TV providers cannot enter a municipality and provide services at will. Instead each company has to strike a bargain with the local government. There are about 8,000 local regulators in the United States. The provider gets exclusive (a legal monopoly) or almost exclusive rights (a government-enforced oligopoly) to the local customers, and the local government gets a cut of the revenues. Note that while I can do business with any of the three cable companies in my New York neighborhood, the door to entering the Cable TV market is closed.

Observe also that the serious competitors to the Cable TV companies are operating in a relatively free market. Companies like Netflix, Youtube, Hulu, and Amazon are all ambitious for profits. But unlike Cable TV companies they cannot take their customer base for granted with impunity and are motivated to get on the good side of their clients.

The era of mandatory Cable TV bundles is coming to an end, and that is a good thing. In an effort to preserve their businesses, Cable TV managements may see the wisdom of courting their paying customers. Even as I write this column Verizon, a Cable TV provider in my area, is running ads touting its new “buy only the channels you want” offering. Soon other cable vendors will do what they have not done previously – allow their clients to buy as many or as few channels as they please at attractive prices. Of course, the Cable TV companies could have acted this way from the beginning if they were appropriately concerned with customer preferences. Now that their revenue base is being seriously disputed they are developing an appreciation for nurturing their brands. There are few things as potent as competition to focus the minds of business professionals.

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