Why the unbundling of cable channels is unlikely to happen

June 3, 2014, 11:00 AM UTC
A family watches TV in the living room in the 1950s.
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Like many cable TV viewers, Mike Humphries has hundreds of cable channels available to him. But often, he feels like there is nothing to watch. When he does find something of interest, it is very likely to be on just a handful of his favorite channels.

“I have been a reliable cable subscriber for the past 15 years, but it seems like with each passing year my selection of channels I actually want to watch remains the same — or is reduced — while the overall number of channels increases, along with my bill,” Humphries said. “Rather than subsidizing all the specialized channels I don’t want, like 27 variants of the Home Shopping Network, I would greatly prefer to pick and choose the channels I want at a reasonable and reduced rate.”

The North Carolina resident isn’t alone. According to a recent Nielsen report, U.S. homes receive, on average, 190 channels — but watch only 17 of them. The switchover from analog cable television to its digital counterpart provided viewers with not only a tremendously improved picture, but the ability to receive hundreds of new channels. Which is exactly the problem.

“Over the past five years, there has been a lot of growth in channels,” said Pat McDonough, senior vice president of insight and analysis at Nielsen. “The growth has come from the adoption of digital cable.” He added that a family of four may watch 30 channels among them, with a few overlaps, still a fraction of what is available in typical cable service today.

The problem? It isn’t economically feasible to unbundle those channels and pay à la carte. In fact, such a move could even make the cable bill increase.

“The subscription model that includes hundreds of channels is not anywhere near broken,” said Dan Cryan, research director of digital media at IHS Technology. “That bundle system is what really helped the cable business grow up. In many ways the bundling is essentially cross-subsidizing channels you don’t want, while other people might not watch the channels you like and in that way they’re subsidizing your channels.”

In other words, you’re paying less for your favorite channels than you think you are — and removing channels from a bundle could actually increase the bill by revealing their true cost. “In that system, you lose the opportunity to even see the content on the other channels,” said Greg Ireland, research manager for multiscreen video at IDC.

According to the Nielsen study, called the 2014 Advance National TV Household Universe Estimate, the plethora of cable offerings has been cannibalizing ratings. Yet the number of U.S. television homes, a figure used to determine total audience, continues to grow. There are now 116.3 million TV homes in the United States, Nielsen estimates, demonstrating that more people are watching TV even as it spreads out across more channels.

So what’s the trick to enviable ratings? Quality content, which attracts both viewers and advertisers, Nielsen says.

“The big advertisers continue to look for faster ROI,” said Adam Armbruster, an advertising industry consultant. “As a result of the competition with so many channels, the networks are now getting more and more creative because scale in audience size is hard to find. For now, the networks are the last bastion of large viewers.”

Which is why some advertisers are trying more creative means to attract eyeballs, such as “tie-ins with programming,” Armbruster said. “It used to be that they’d run a straight branding, but we’re seeing ads blur increasingly with the programming,” he said.

And the ads are getting more specific as channels proliferate, Nielsen’s McDonough said. “The Golf Channel is running more ads specific to golfing, while the food channels are pushing food related products and equipment,” he said. “These ads could then resonate more with the consumer who is watching it.”

And as for that big cable bill? Some people have been moved to cut the cord, but relying on streaming services like Netflix (NFLX) and Hulu is still no replacement for live programming or the current seasons of popular television shows. “The core stuff like network programming makes going with just Netflix unapproachable,” said technology analyst Rob Enderle.

Viewers in North America may soon get to see what an unbundled option looks like. In November, the Canadian Radio-Television and Telecommunication Commission announced that it would draw up a report to determine whether unbundled cable offerings would be in the best interest for consumers. Its neighbor to the south is watching intently.

“Anything that tries to evaluate different distribution models in the best interest of consumers is worth watching,” Ireland said. “Still, if we lose bundles, we could lose niche audience and even minority programs. In that way, it is a ‘Be careful what you wish for’ model.”