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Message: [QUOTE="nzm136, post: 713390, member: 2531"] Nobody is paying for anything that they don't want right now. They are paying for what they want and getting the rest for free. It's all weighted averages that are compiled through industry research. From a cable provider's standpoint, the advantage to grouping channels into a tier is that, if it is done right, it alters the elasticity of the combined channels in a way favorable to the cable company. [B]Illustration of statement one:[/B] IF: Person 1 values Channel A at $10 and Channel B at $0 Person 2 values Channel A at $10 and Channel B at $0 Person 3 values Channel A at $0 and Channel B at $10 and those are the only 3 people in the market THEN: Channel A's carriage rate will be $6.67 ($20 total) Channel B's carriage rate will be $3.33 ($10 total) and customer subscription rates will be $10.00 ($30 total) *Person 1 will pay $10 and get Channel A for a price that he is willing to pay to get it, and Channel B for free *Person 2 will pay $10 and get Channel A for a price that he is willing to pay to get it, and Channel B for free *Person 3 will get Channel A for free, and pay a price that he is willing to pay to get Channel B [B]Illustration for statement two:[/B] THE FUTURE When separate: (a la carte) Person 1 will pay $3 for Channel A and $5 for Channel B Person 2 will pay $3 for Channel A and $5 for Channel B Person 3 will pay $5 for Channel A and $3 for Channel B When sold separately, a cable company will charge $3 for access to Channel A and $5 for Channel B. They will make $9 off of Channel A via 2 willing subscribers and they will make $10 off of Channel B via 2 willing subscribers. That's a total of $19 between the two channels. THE PRESENT When grouped: (bundled) Person 1 will pay $8 for the bundle of Channel A+B ($3+$5=$8) Person 2 will pay $8 for the bundle of Channel A+B ($3+$5=$8) Person 3 will pay $8 for the bundle of Channel A+B ($5+$3=$8) When bundled, the cable company will charge $8 for the bundle and sell it to 3 willing customers. That leads to $24 in revenue, which is $5 more than if sold separately. END CONCLUSION A la carte will lead to higher nominal costs for individual channels because it does away with our current system of weighted averages. However, the current system is merely an illusion. Nobody is actually paying for channels that they do not want. For every channel that a customer is "overpaying" to receive, there is a balancing channel where they are underpaying. This economic force is illustrated by the fact that once a la carte ends, the price for individual channels will go up. The charade of weighted averages will end. That's the bad news, but fret not. The good news more than outweighs the bad news. When done right, the current model of bundling is far more efficient at extracting value from customers than an a la carte model. That means that if a la carte were to become a reality, cable companies would become less efficient at taking money out of their customer's pockets. In other words, your cable bills will all go down. The author wrote about statement one and to that extent he is correct. However, he completely missed statement two, so his end premise is in left field. I'm guessing that he is either a really bad journalist, or, more likely, he doesn't really understand what he is talking about. Unfortunately, the people who write about this kind of stuff rarely have degrees in business and/or economics, and this is one area where formal training in both fields is very handy. P.S. My numbers for statement two are very cherry-picked in that it will not work for all numbers. However, since the cable companies can pick what channels they are grouping together, they get to cherry pick their channels. And since I can assure you that the cable companies don't group channels randomly, cherry-picking doesn't lead to an inaccurate explanation of the forces at play in the real world. [/QUOTE]

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