Published in the Globe and Mail on March 23, 2015
By: Benjamin Dachis and Lawson Hunter
Benjamin Dachis is a senior policy analyst and Lawson Hunter is a senior fellow at the C.D. Howe Institute and co-author of “Scrambled Signals: Canadian Content Policies in a World of Technological Abundance”. From 2003 to 2008, Mr. Hunter served as executive vice-president and chief corporate officer of Bell Canada and BCE Inc.
The Canadian Radio-television and Telecommunications Commission (CRTC) wants to give Canadians greater affordability and choice in their television viewing. But will the CRTC’s Thursday ruling, mandating partial channel unbundling, help on either of these counts?
Starting next year, the CRTC will require that most channel distributors – such as cable and satellite companies – offer customers a basic cable package costing $25 per month. Channel distributors will then have to offer discretionary channels to customers on a pick-and-pay basis or in small, reasonably priced packages.
Let’s use an example to see if unbundling is better for consumers. Say that there are two channels on offer: a sports channel and a cooking channel, and each channel costs the channel distributor $5 per viewer to produce.
And say there are two types of viewers: sports fans and cooks. The sports fans are willing to pay $10 for the sports channel and $4 for the cooking channel. Likewise, the cooks will pay $10 for the cooking channel and $4 for the sports channel.
What’s the combination of price and selection in this situation that makes everyone best off? A bundle of sports and cooking shows at $14. Both types of customer get both channels.
What happens with mandated unbundling? The channel distributor would know it could not get the cooks to buy the sports channel or the sports fans to buy the cooking channel at the $5 break-even price. It would then want to set the price for each channel at how much customers are willing to pay for their top choice. The result would be higher prices per channel: each group would pay $10 for one channel.
Viewers get half the channels, but not at half the price. With unbundling, both sports fans and cooks are worse off.
And what happens to choice in this situation? Indeed, pick-and-pay will mean that viewers will have more choice among the channels on offer. But some channels will disappear.
Television has a large fixed cost, and the cost per viewer falls with every new viewer. If enough sports fans stop paying for the cooking channel, the cost per viewer goes up. The cost might go high enough to make it an unappealing buy, even to the cooks. The channel distributor would then stop offering the cooking channel. In this situation again, pick-and-pay makes viewers worse off by limiting the choices available.
This example shows that the CRTC’s proposal is not based on sound economics.
And, in practice, the costs of mandated unbundling could be even higher.
For the first time in over 15 years, the CRTC is now back in the game of setting prices. Regulation begets more regulation.
The price for a basic package today may be $25. But the day will inevitably come when economy-wide inflation will make those prices unprofitable. Lawyers and economists will converge in regulatory hearings to set price increases. That will happen for cable and satellite companies across the country – for every price increase. Likewise, the CRTC will need to rule on the meaning of “small” and “reasonably priced” packages.
The CRTC ruling and future regulations may not even have been necessary. The rise of new technology is a more powerful force for change than any CRTC ruling. For example, Canadians have seen the legacy companies introduce Shomi and CraveTV to compete with Netflix. Yesterday’s ruling will make it more difficult for legacy platforms to compete with other non-Canadian services that bundle television shows, like Netflix, that are exempt from such CRTC regulation.
If dozens of channels cease to be offered, as some analysts have suggested, Canadians may have more options in how they purchase television channels, but they will have less choice in the content they can choose from. Regulation usually has unintended and market-distorting consequences. The CRTC’s new rules will be no exception.
