Thread by @asymmetricinfo

Today's print column is on cord-cutting: Actually, America, you love bundling. washingtonpost.com/opinions/you-t…

As usual, I'm answering the question's I've gotten.

First question: why do cable networks play games with the pricing, giving you teaser rates and then continually jacking up the cost?

This question isn't really on point., but I'm answering it because the answer is related to my answer about bundling.

So as I pointed out in the column, bundling often occurs in businesses with high fixed and low marginal costs, like airlines, hotels, etc. That's because the marginal cost of added amenities doesn't jack up the price much, but improves the experience a lot

Complicated pricing plans often occur in those same industries--note all the crazy rules around airline fares.

Why do they do this? Price discrimination.

Price discrimination is the fancy term for "Charge what the traffic will bear". Obviously ordinary businesses do this too--coupons, for example, are basically price discrimination. They let manufacturers offer a lower price to cheap people who place a low value on their own time.

But when the marginal cost of a product--the cost of serving one extra customer-- is near zero, price discrimination can get pretty wild.

So think of an airline seat. Once the plane takes off, the revenue the airline can get out of that seat is zero. They have a rapidly wasting asset.

Meanwhile, the marginal cost of putting a butt in that seat is a tiny bit of fuel, a cocktail napkin, and a half-can of soda.

So in some sense, it would be rational for them to sell that seat for a couple of bucks. But if they everyone pays that, the flight will lose money. So they use complicated fare rules that let them extract different amounts of $$$$ from customers with different willingness to pay

Your cable company has a similar problem. Once you've built all the infrastructure and paid for content, it doesn't cost that much to turn the cable on. But if they charge everyone "not that much", they go out of business.

So what do they do? They offer you a teaser rate that's closer to their marginal cost, and then they jack up the price until you call and threaten to quit. It's a pretty effective way of gauging your willingness to pay.

Obviously customers don't like it, but well, they're a monopoly.

Second question: But I can save money, because I only want to watch PBS! (Or insert your favorite channel here)

Answer: Good for you! You're not the average customer! The average American watches a huge amount of television.

The point is not that literally no one will benefit--in any market change, there are always winners and losers. The point is that on average, there's no obvious cost benefit.

The rest of the questions I got fell into the category of "People who clearly had not read to the end of the column".

But I will make a general point about all of these questions, which is that I am trying to solve for the long-term equilibrium, and most people are only looking at the immediate short term.

It is true that at the moment, if you are canny, you save money by cord-cutting, especially if you and your friends swap passwords. However. There are reasons to think this isn't stable long-term.

Ultimately, the cost of cable is driven by two things: the cost of the physical infrastructure, and the cost of the content.

Right now, the cost of the physical infrastructure is spread across cable television and internet service (and some phone, too). Splitting the overhead lowers the cost of each individual service.

If a few people cancel their cable and just pay for internet, they get cheaper internet, plus streaming. If *everyone* cancels their cable and just pays for internet, then internet has to absorb all that overhead, and the price will go up.

Something similar is true of content. Look at the early days of Netflix, when they had a deal to stream Starz content. Netflix customers got a lot of content for a little money, and Starz didn't care because very few of those Netflix subscribers had Starz.

But then Netflix streaming got big, and Starz refused to renew the deal, and all the people who had been smugly saying "I don't need cable, I'm just gonna use Netflix" screamed bloody murder because Netflix was suddenly a very poor substitute for cable

Those people blamed Netflix, and wrote a lot of unintentionally comic internet content about how Netflix didn't understand that all they wanted was to get a large movie library for $8 a month. Neflix understood this very well! The content providers wouldn't play along.

Most of what people hate about the cable industry on the *price* side (customer service is another matter) isn't about the cable industry at all, who are price-takers in the market for content. It's about the companies that own the content.

This is, of course, why Netflix and Amazon and Hulu are trying to become content providers.

Unless you have a way to get them to accept less money for content, you are going to pay a pretty penny for it. And in fairness, they are also a high-fixed cost, low-marginal cost business.

They have to cover the *extremely* high fixed cost of making a premium television show, or a major motion picture. Right now, cable provides a big slice of their revenue. As that revenue stream declines, look to them to make it up out of ...streaming.

As I mentioned above, the streaming services are trying to get around this by getting into the content business. But this requires massive spend. Netflix has negative free cash flow, despite profits, because they're spending billions on content.

Someone's gotta pay for that. That someone is Netflix subscribers, who got hit with a price hike recently.

And Netflix is still (IMHO) a great deal at $14 a month. But if you subscribe to 5 services, each of them raising their price a few $$$ is a big hike in your monthly bill.

In short: over the long term, the infrastructure still has to be paid for, and so does the content. So as cable revenues go down, expecet streaming costs to go up in order to compensate. And *especially* expect streaming services to make it harder and harder to share passwords.

That doesn't mean unbundling creates no value. It's convenient! It means better customer service! It makes more content available!

But a lot of people seem to think unbundling will let them buy $20 gold pieces @ 25¢ apiece. It won't.

Two final thoughts. First, always remember that the content providers are playing a long-term strategic game. They are always looking to improve their negotiating position with the cable companies.

Right now, both content and cable are highly concentrated, and effectively, both monopolies over the stuff they control. Each side would like to keep their monopoly power while depriving the other side of theirs.

So content providers may have an incentive to encourage services like Sling which can actually undermine cable monopolies. But over the long term, this improves their market power. They'll still be a monopoly, negotiating with smaller players.

So if you say "SlingTV lets me replicate cable much cheaper!" I say "I agree!" But will it five years from now? Or will they be Lando Calrissian trying to get a deal out of Darth Vader?"

The second thought is wildly speculative, but interesting to think about: as the market for home entertainment is disrupted, will we see a Fox News of entertainment? It's an obvious niche that's not being filled. But if we do, what will that do to American politics?

Anyway, if you've followed me this far, you can read the column here: washingtonpost.com/opinions/you-t…