Everyone Subsidizes Everything

In America, the cable television business is a great example of modern economics and a warning about what’s coming down the road. This story on the cable business has a line that caught my attention.

Big news came out last week that might have gotten lost in the shuffle of the slowest sports week of the year — according to the Wall Street Journal the number of cable subscribers is beginning to contract in a more rapid fashion. In particular, ESPN has lost 7.2 million subscribers in the past four years, over three million since last year. That could have a seismic impact in sports media since if the cable bundle is one large bubble — as some have been suggesting for years — then the sports universe may be in for a cruel tumble. I’ll explain why that could be, but first let’s spend some time with a refresher on the cable and satellite industry.

You pay for every single channel you receive on your cable or satellite package. Most people don’t realize this because the cable bill is one large number, but if you break your bill down every single channel has a monthly cost. Here are the 15 most expensive national sports networks along with what they cost a month and the number of homes they’re in. (Numbers courtesy of SNL Kagan).

1. ESPN $6.61 x 94.5 million homes = $7.5 billion
2. NFL Network $1.31 x 73.6 million homes = $1.16 billion
3. FS1 .99 x 91.2 million homes = $1.08 billion
4. ESPN2 .83 x 94.5 million homes = $941.2 million
5. SEC Network .66 x 69.1 million homes = $547.3 million
6. Golf Channel .35 x 79.4 million homes = $332.2 million
7. NBC Sports Network .30 x 83.1 million homes = $299 million
8. Big Ten Network .39 x 62 million homes = $290.2 million
9. MLB Network .26 x 71.3 million homes = $222.5 million
10. FS2 .28 x 64 million homes = $215 million
11. NBA TV .29 x 57.2 million homes = $199 million
12. ESPNU .22 x 74.9 million homes = $198 million
13. CBS Sports Network .26 x 61 million homes = $190.3 million
14. NHL Network .32 x 37.4 million homes = $143.6 million
15. Pac 12 Network .39 x 12.3 million homes = $57.6 million

While you probably receive in excess of 100 channels, most of us watch only 16 or 17 channels in a given month. If you’re a single girl without kids, you probably don’t watch Sprout and if you’re a single guy you probably don’t watch Lifetime, but you pay for every channel you receive. In practice this leads to much better television, because channels can go after small audiences with powerful and compelling programming that might not otherwise be financially feasible. For instance, hardly anyone watches “Mad Men,” in the grand scheme of ratings. It’s a very smart, slow-paced, intellectual program that appeals to a relatively small audience. On average less than four million people watch each episode of “Mad Men.” That leaves over 90 million people who receive the channel and the show but don’t watch. Yet these non-viewers subsidize “Mad Men,” by paying for AMC. Since most of us receive over 100 stations yet watch only 16 or 17, we all pay for in excess of 80 stations that we don’t watch. One positive result of the cable bundle has been a tremendous amount of money rolling into television programming and the flourishing of great shows that wouldn’t necessarily work if ten million or more people had to watch. That’s why I’ve written before that I support the idea of cable television bundles, everyone subsidizes everything meaning that the quality of programming is stellar across the television landscape. We may not all like the same shows, but all of us have never had better options. We’ve been in the midst of the golden age of television.

Right there is the core belief at the heart of modern economics. It is the belief that if we spread the costs far enough, they disappear. It is at the heart of public policy, government finance and the modern technology economy. Uber, to pick on a favorite target, relies on tens of millions of non-users to pay a few pennies extra in their phone bill so Uber users get a bargain.

Of course, the idea of socializing costs sounds good in the abstract because the amounts seem small, but the cable experience is showing how it ends and it is not pretty. For most Americans, cable TV was $20-$40 per month at the start of the cable age and you got a dozen channels. That was in the 80’s and 90’s as municipalities made deals with cable companies to wire up their communities.

Content makers figured out that adding their channel to the system only worked if they could get on the core package. Otherwise they had to rely on ads and that meant attracting viewers. The new channel owners would bargain hard to get on basic or maybe the next tier up. Every few years they would work to increase the carriage fees and improve their spot on the package, thus guaranteeing themselves a month fee, even if no one was watching.

As is always the case, a dollar here and a dollar there adds up. The average TV bill now is $125 per month. The result is a rash of cord cutting. With a broadband connection and bit of ingenuity, you can get most recorded content free or nearly so. Some people have simply stopped watching TV. Content makers, sensing a sea change, are now offering their stuff on-line without a cable subscription.

When you base the revenue model on everyone subsidizing everything, the incentives all point in the wrong direction. Sticking with the cable example, the content makers stop looking at viewers as customers. Their customer is the cable operator. At the same time, the actual customers start looking for ways around being taxed for content they don’t view. The result is an unstable model that eventually collapses.

That’s the reason modern western economies are stagnating. The model of socializing costs and privatizing profits – everyone subsidizing everything – works great for the top, but it is sand in the gears of the economy in general. At some point the gears grind to a halt and the whole thing collapses. There’s simply no way to spread the costs so thin that they actually disappear.

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steve
steve
5 years ago

In addition to receiving programming to display to the viewer, most cable TV boxes send data back to the cable operator, including a serial number for the particular set-top box; the cable operator knows how many households, and exactly which households, are watching any given program at any given time. The revenues they send back to the content providers (a particular cable channel that is) is dependent on those viewership numbers. In turn, the cable channels pay revenues to each show’s production company. So there may be quite a bit of cross-subsidy going on, but there is also a lot… Read more »

el baboso
Member
5 years ago

That’s why the big urban mono-dailies got as jacked as they are. They were monopolistic content bundlers as well but for in depth news as opposed to the more superficial crap you got on TV or the radio. Where else were you going to get box scores or some vague clue of what was going on in congress or the state house circa 1985.

UKer
UKer
5 years ago

I bang on about this a lot, but the ideal is Al-Beeb. The BBC’s license fee is enshrined in the nation’s law: you have to pay for the state propaganda machine whether you watch it or not, and the penalty is a hefty fine or even jail. Better still, the organisation once foolishly called ‘Auntie’ gets to levy their tax on anyone who buys a television set, or a device capable of receiving BBC’s mostly left-wing output. Even if you bought an old telly to use as a bookend you get a semi-threatening letter within days, warning you of the… Read more »

JimmyDeeOC
JimmyDeeOC
Reply to  UKer
5 years ago

I was only vaguely familiar with it. I am quite sure 99% of Americans are wholly unaware. This shocked me: “…..Since 1 April 2010 the annual licence fee has been £145.50 for colour and £49.00 for black and white.” That’s twice as much as my car registration, and I live in California! Man…you guys lurched full totalitarian-socialist after the War (Though I admit the direct effects, piled upon the even greater devastation a generation earlier, were many times greater than we dealt with stateside, to be sure.) Somehow knowing this actually LESSENS the genius of Orwell for me. You didn’t… Read more »

UKer
UKer
Reply to  JimmyDeeOC
5 years ago

Supposedly Britain in the mid-forties, freed of the burden of war, swiftly voted socialism in because — according to some — the nation was tired of ‘the warmonger Churchill.’ Well, that’s convenient left-wing view for while Churchill may not have made great peacetime Premier, he was far better than the envious, hypocritical loons Labour dredged up with all their nationalisation plans. Churchill wasn’t PM when war broke out in ’39 so it was hard to see how he could be blamed, but blame is always the mainstay of the left so no surprise there. As for the size of the… Read more »

Aeneas
Aeneas
5 years ago

I love that he used the overrated Mad Men show as a exemple of this failed system, Mad Men isn’t really about the glory days of WASP America.