Gabriel Rossman on the Future of A La Carte Pricing

Gabriel Rossman, a sociologist at UCLA, is one of the sharpest observers of the media landscape I’ve come across, and he has a very thought-provoking post on how Steve Jobs and Jeff Bezos might succeed where Kevin Martin’s FCC failed, i.e., they might give television consumers more choice about the kind of content they purchase than the traditional cable business model allows. But the result, interestingly, might be a sharp reduction in the quality of the television programming we consume:

A switch to a la carte will probably result in an increase in consumer surplus per unit demanded but a drastic decrease in quantity supplied. (“Consumer surplus” is econ jargon for the subjective experience of a “bargain”).

Suppose that my household values watching True Blood and Mad Men at $5 an episode, Top Chef at $2 an episode, and Mythbusters and Toddlers and Tiaras at 50 cents an episode. Now suppose that my next door neighbors have the exact opposite set of preferences. In both cases there is a total of $13 of demand for television per household per week. If the cable company charges $12.99 per week, both my neighbor and I will write the check, but do so reluctantly as we’re just barely this side of the indifference curve.

Now suppose that someone (say, Apple or Amazon) starts selling shows a la carte. If the price point is 50 cents both my neighbor and I will still watch all five shows. However we’ll only be paying $2.50 a week and will be getting $10.50 in consumer surplus. If the price point is $2, each of us will get three shows and pay $6, for $6 in consumer surplus. If the price point is $4.99 we’ll each buy two shows, pay almost $10, and get two cents of consumer surplus. There is no price point where we both pay $12.99 like we used to. At any one a la carte price point, both my neighbor and I will pay less than we used to, watch the same or less amount of tv, and get the same or higher consumer surplus.

Thus a switch to an a la carte model implies much lower costs to the consumer. Because revenues would fall, so would production by some combination of reduced numbers of shows and reduced production values. Basically, we’re looking at an end to the television renaissance we’ve enjoyed since the late 1990s as people like me decide that we’d rather pay $10 or $20 a month for the few shows we love and do without the rest than pay $50 a month for a bunch of stuff, most of which we don’t even really like.

Of course, there is another structural shift at work, namely the rise of technologies that are sharply reducing the cost of digital effects that can mask skimpy production budgets. In conclusion, Gabriel writes:

That is to say, television may not be economically viable when priced on an a la carte basis and this could lead to a decline in volume and possibly quality of original programming. This will probably involve a slow decline but could be catastrophic. The most likely scenario for a catastrophic collapse is if the studios forecast that a la carte means declining revenue and try to pare back their cost structure in anticipation. This would probably lead to a militant slate getting elected at both WGA and SAG and an even worse strike / soft strike than we had on the last contract cycle.

But this could mean that U.S. viewers will consume more entertainment that is peer-produced, produced overseas, or by institutions that otherwise work outside of the WGA and SAG structure. Quality writing is of course very important, but perhaps quality writers will attach themselves to hyper-realistic animation projects, etc. No more actors! Or rather a somewhat smaller cadre of actors who focus primarily on screen-capture work, and who make middle-class wages rather than outsized sums. There are many, many ways this phenomenon could play out.

All that said, I think Gabriel’s main point is beyond dispute: a la carte pricing has the potential to seriously disrupt the current structure of the television industry. Expect WGA and SAG to wield their influence to press for even more onerous regulation of the entertainment industries. As I’ve been saying for a really long time, this creates an opportunity for the right and the so-called copyleft to form an alliance built on libertarian principle and mutual interest. 

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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