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How the Great Unbundling of Pay TV Could Backfire on Consumers

Jan 08, 2015

For years, couch potatoes have dreamed of an a la carte pay TV model. Instead of the standard package—a bloated bundle with hundreds of channels that you're paying for whether you ever tune in or not—the a la carte option would allow customers to pick and choose and pay for only those deemed worthy. Every household is different, but the average pay TV customer watches only 17 channels, a small fraction of the 189 channels that are factored into the average package's monthly bill.

To which the natural reaction of many customers tired of constantly rising cable bills is: Wouldn't it be a cinch to save a bundle simply by eliminating the bundle?

In fact, while the oversized bundle remains the standard, the door to unraveling the cable package has been opened, thanks to the arrival of a broad variety of viewing options—notably including standalone streaming options that require no cable package from HBO, the Dish Network, and of course Netflix. Admittedly, Dish's just-introduced Sling TV streaming service is also a bundle, but it comes with only 11 popular, very watchable channels (including all-important ESPN), and at just $20 a month, it's a potentially big money saver.

To many, it's a just and foregone conclusion that the big cable bundle will continue to lose its dominance in the marketplace, and that cord cutters and upstart competitors will push us all toward an increasingly a la carte system. There are likely to be more small and affordable packages along the lines of Sling TV, and we'll probably see more options to pay to stream content from favorite individual channels, which HBO and CBS have already made possible.

And yet, as much as consumers loathe the big pay TV providers, analysts have long warned that we should be careful what we wish for in terms of an a la carte viewing future that doesn't necessarily involve Cablevision, Comcast, Verizon, or Time Warner Cable.

Back in 2010, New Yorker business columnist James Surowiecki wrote that if the bundle disappeared, the cost per customer for each channel would soar, "perhaps on a customer-by-customer basis." The likely result would be that loads of channels would go out of business, and that the average customer would pay roughly the same amount monthly he was paying for the big bundle, only with far fewer channels.

The landscape has changed since then, what with the consensus assumption that TV in the future will be delivered via the Internet rather than cable. Yet the argument that unbundled TV will not necessarily yield cheaper prices remains. Among cable defenders, this acclaimed manifesto from 2013 summed up the big upside to the bundle, including more content and cheaper prices when they're broken down on a per-person, per-channel basis:

Cable TV is socialism that works; subscribers pay equally for everything, and watch only what they want, to the benefit of everyone.

More recently, Wired offered some deep-held concerns for consumers regarding a future dominated by Internet TV options:

It will be deeply fragmented. That could threaten the very companies that pioneered this space to begin with—and make it more difficult and more expensive to get everything you want to watch.

In light of Dish's rollout of Sling TV this week, Neil Irwin of the New York Times summed up previous research on the topic of how an a la carte TV scene would play out, writing, "contrary to many peoples’ intuition, the unbundling of cable service could actually lead to slightly higher prices for fewer channels."

Irwin pushes the issue further, diving into the idea that not only could unbundling provide worse value, but there's a good chance it'd make the average customer even more miserable regarding pay TV than he is right now. And the cautionary tale he cites as an example of how this could come about is the one that travelers have been living through for the past two decades or so. After all, the airline industry has steadily unbundled the flight product, which was once a package including food, checked bags, and the privilege of actually sitting on the plane next to your travel companion. With today's more a la carte model, the price of airfare may include nothing more than bare-bones transportation.

What's more, the airlines that have embraced the a la carte, fee-laden way of doing business most just so happen to be the most hated carriers of all. And across the board in the industry, flight prices have gone up, not down, while the unbundling has been underway.

Is pay TV heading in this same direction? Irwin acknowledges that unbundling undeniably benefits certain kinds of consumers—travelers who don't fly with bags or care about legroom, and TV viewers who watch only a few channels and no sports. Yet he writes that the effects of unbundling on the average TV customer will be similar to what we've seen with the airlines:

For many more people, the result will probably be little or no reduction in total fees, combined with the hassle of making constant decisions about what channels you really want and which you don’t.

The airlines have been working hard over the years to perfect systems for extracting maximum revenues out of passengers. A recent New Yorker story described the broad airline strategy of inflicting "calculated misery" on customers and all but force them to pay fees to avoid the pain: "Basic service, without fees, must be sufficiently degraded in order to make people want to pay to escape it."

Bloomberg View columnist Megan McArdle responded to the idea of "calculated misery" with a slightly different take on the matter. "The problem isn't greedy airlines" trying to milk customers by making them miserable, she writes. "It's us."

When travelers use search engines to find and book the cheapest tickets possible, McArdle explained, we're sending a message to airlines that low flight prices are the most important and perhaps only criterion in our purchasing decisions. "To win business, airlines have to deliver the absolute lowest fare," McArdle writes. "And the way to do that is ... to cram us into tiny seats and upcharge for everything."

It's understandable that people want cheap airfares, just like we want cheap pay TV bills. It's just that the way providers get to these end points may ultimately make us less—not more—happy. In the end, the standard could become an assortment of confusing fees and bills that, when tallied up, isn't cheap at all.

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