Publication Date: March 2006
Publisher: Library of Congress. Congressional Research Service
Research Area: Media, telecommunications, and information
The Federal Communications Commission (FCC) has released two reports on a la carte pricing of cable television networks that reach contradictory conclusions. On November 24, 2004, then-chairman Michael Powell issued a report (Initial Report) that concluded that requiring cable and satellite operators to offer cable networks in an a la carte fashion -- either as a replacement for the current expanded basic service tier or as an optional alternative to that tier -- would likely increase the monthly cable or satellite bill for most households and reduce program diversity. On February 9, 2006, current FCC chairman Kevin Martin released a "Further Report" that appears to contradict the first one, concluding that for the 40% of cable households (and 100% of satellite households) that already receive digital service, a la carte purchasing is likely to lower the monthly bill. Neither of these reports was supported by the full Commission and each was released as an unofficial report. These inconsistent findings by the expert agency have caused some confusion.
Neither report is based on a model developed by the FCC itself. Rather, each made relatively minor modifications to a model and study performed by Booz Allen Hamilton Inc. for the National Cable & Telecommunications Association. Yet, as Booz Allen explicitly recognizes, there is significant "uncertainty involved in building an economic model for a la carte," partly because of the large number of potential interactions and responses by consumers, program networks, and cable and satellite operators that must be modeled, and partly because of the lack of empirical data, especially on the response of households to different a la carte prices per channel. Given the lack of data, Booz Allen was not able to use standard economic methodology; rather it had to employ an indirect approach and rely on a number of potentially challengeable assumptions about how households, cable and satellite operators, and program networks would behave. This indirect approach could not be avoided. But given their reliance on a host of assumptions that were of necessity formed in the absence of comprehensive empirical data, neither the Booz Allen study nor the two FCC reports should be viewed as providing definitive results. It appears, however, that most of the criticisms of the Initial Report that are presented in the Further Report either are not supported by available market data or cannot be proven one way or the other.
Large tiers generally benefit those households that prefer a wide variety of programming and/or niche programming; a la carte pricing generally benefits those households that watch only a small number of networks and prefer general interest programming, but could have serious implications for diversity. Requiring operators to offer all options might not meet the needs of all households, however, because the migration of some threshold number of households to a la carte pricing could undermine the economic feasibility of large tiers.
Technological change and the mandatory transition to digital television in 2009 are likely to precipitate new market dynamics and ultimately the current tiered business model may well give way to a video on demand approach that is akin to a la carte pricing. This report will not be updated.