Economics of Cable TV

A reader sent me some questions that are too hard for me. I would benefit from some more information about the markets in question but have no good way to obtain it. This is the best I can do. The question(s):

There is a dispute between the NFL network, which packages some football games, and Time Warner and Cablevision, which serve 17 million viewers combined.  The Cable companies say the NFL is asking too much for them to carry the NFL network in their lineups.

The networks make money from advertising, so you might think that the pricing would be reversed, and that networks would actually pay the cable companies to be carried rather than the other way around.

On the other hand, there is now competition (in most areas) between traditional cable companies, Verizon Fios, and Satellite TV.  So that might lead to a bidding war and higher prices for the right to carry popular content such as the NFL network.

So both the networks and cable companies benefit only if the networks are carried.  And no one benefits if they aren’t.  So does this suggest that prices would be low, or does it suggest that the tension between needs of networks versus broadcasters leads to higher prices?

Are there some economic theories/rules that cover this type of situation?

My inadequate reply follows. Can anyone add to this?

This sounds like it has the elements of a two-sided market (viewers on one side, content providers on the other, cable companies in the middle). See my prior post on such markets. But as the questioner points out, this is actually more complex than that because there are advertisers as well. So the market is at least three sided. Competition in two sided markets is very hard to study. What’s going on in a more complex market would be harder still to formalize.

What this suggests is that a case-study based approach would be of value. I’d want to talk to folks in the industry and put the questions to them. But I don’t know anybody in this industry.

That there are outcomes for which everybody is better off but that don’t occur due to each actor’s strategic decision process is exemplified in the game of prisoner’s dilemma. Such tragic outcomes occur all the time. It may be going on in the cable TV case.

Having said all that, here’s a way to think about what’s going on. It has two parts, one at each extreme of consumer behavior. The truth will be somewhere in the middle. First, suppose we assume that a viewer who wants to watch NFL games will purchase services from whichever cable company that offers the NFL network, no matter which one does so. If that is the case, then the NFL network doesn’t have to worry about missing viewers if they’re not carried by some cable company or another. They just need to be on some network and then the viewers will come to them. (I don’t believe this assumption holds for everybody.)

If NFL viewership is large enough cable companies will care a lot whether or not they get to carry the network. So I would expect a bidding war and higher prices paid for the content, both by the cable company and by viewers who want to subscribe to a service that carries the NFL network.

On the other hand, if viewers are sticky and won’t change cable networks even if the line-up changes (another assumption I don’t believe 100%) then it is the NFL network that has to worry about which company carries it. They will flock to the largest service provider and that provider may not have to pay a dime. They might even be paid, resulting in lower consumer prices for that provider (all other things held constant).

So, I’m inclined to think that a major factor here is consumer patterns of demand, switching rates, transaction costs, and the like. (I have a prior post on the demand and degree of substitution of products that is relevant to this.) It is complicated because the companies offer bundled services (many channels) and consumers generally sign multi-month or multi-year contracts and/or get discounts for combining with internet or phone service.

What’s really going on may vary by market. Only a detailed study of consumer behavior could reveal the answers. Such a study may exist in the literature. There are a lot of academic papers on the cable TV market. I just don’t know that literature.

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