Why a la carte cable TV is a nutty idea
Unbundling cable is about politics, not about driving down prices
By Marc Gunther, FORTUNE senior writer

NEW YORK (FORTUNE) - Every Sunday morning, The New York Times lands on my driveway with a thud. I customarily discard the Styles section (no interest in weddings), the Travel section (no vacations being planned) and the Sports section (dull, dull, dull). But it never occurred to me -- until now -- to call up the people at The Times to tell them that I would like to buy only certain sections of the newspaper and not others. And if The Times were to tell me the paper is an all-or-nothing deal, well, maybe I should ask my Congressman to require The New York Times Co. to sell its newspapers a la carte.

This is, in effect, what some politicians in Washington -- led by Kevin Martin, the chairman of the Federal Communications Commission and U.S. Sen. John McCain, an Arizona Republican -- are pushing the cable TV industry to do. They would like to require cable operators to "unbundle" their packages of channels, so that consumers can save money by buying only the channels they want and no more.

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It's a nutty idea, even by Washington standards.

And it's not really about saving consumers money, as we'll explain.

Last week, in case you missed it, FCC chief Martin issued a 61-page report called "Further Report On the Packaging and Sale of Video Programming Services To the Public," which argued that unbundling channels could save customers money. The reason it was a "Further Report" is that the FCC, under its previous chairman, Michael Powell, had reported on this very same questions 15 months ago and come to the opposite conclusion -- that unbundling would cost consumers money. Ah, economists.

The report did what it was supposed to do -- it made headlines. "FCC Sees Cable Savings in a la Carte," said The Times. "Cable by Channel Could be Cheaper" said The Washington Post. Cable rates are newsy, largely because they are rising faster than most everything but home prices and gasoline. Rates have climbed by 35 percent to about $57 a month for the average home, analysts say. I pay $137 a month to Comcast (Research), the nation's biggest cable operator, although I get high-speed Internet access and more premium digital channels that I can count. (And I write for FORTUNE magazine and CNNMoney.com, both part of Time Warner, the nation's other big cable operator.)

The thing is, 72 million people subscribe to cable. If they don't think they are getting good value, they can switch to satellite TV providers like DirecTV (Research) and Echostar or wait for the phone companies like Verizon or SBC Communications to offer video, as they have begun to do. They could also watch over-the-air television or -- please make sure you are sitting before reading on -- they could watch no television at all.

If cable TV were a necessity, like phone service or electricity, there might be reason for regulators to decide how it should be sold. But it's not. We need food and oxygen. We don't need The Food Network and Oxygen.

What's more, the FCC report is filled with so many "mights" and "coulds" that it's impossible to know whether unbundling would drive down rates. The FCC admits that it lacks data "about what a la carte prices would be for individual networks."

We can be fairly sure, though, about one thing unbundling would do: It would drive a bunch of cable channels out of business. They'd lose subscriber fees and ad revenues. Most people would not miss G4 or Sprout or the Golf Channel or the Independent Film Channel or BET but the reason pay television has become so pervasive -- about 85 percent of American homes subscribe to either cable or satellite -- is that it serves a variety of niche audiences.

So what's going on here? Politics, as usual. Supporters of unbundling include Phyllis Schlafly, James Dobson of Focus on the Family and the Parents Television Council, as Kansas City TV writer Aaron Barnhart reports. These conservatives want consumers to be able to avoid so-called indecent channels. Of course, viewers already can avoid them by using existing "blocking" technology or monitoring what their kids watch on TV.

The FCC's Martin, a Republican, is scoring points with conservatives who could help him out if he decides to run for office in his home state of North Carolina, insiders say. The FCC can't even order cable to unbundle, which is why McCain, a 2008 presidential hopeful, wants Congress to step in.

To be sure, bundling is a complex economic and regulatory issue. The Microsoft antitrust case was about bundling, at least in part. But cable today faces more competition than Microsoft's Windows operating system in the 1990s.

The irony here is that that cable industry has begun to offer a more radical version of unbundling than the one sought by the politicians. The Walt Disney Co., Viacom, CBS and General Electric's NBC are selling individual cable shows -- on DVDs and, lately, on Apple's iTunes, where you can download episodes of Nickelodeon's SpongeBob SquarePants, Comedy Central's South Park, USA's Monk, The Disney Channel's The Suite Life of Zack and Cody and Showtime's Sleeper Cell for $1.99.

Maybe the politicians haven't noticed but the Internet is the ultimate disaggregator. TV networks, magazines, music CDs and newspapers, including the Sunday Times, are unbundled online -- efficiently, conveniently and without any help from Washington. Top of page