Eight buns, eight wieners, eight channels
In the 1991 remake of the classic movie Father of the Bride, there’s a scene in which Steve Martin goes into the grocery store and begins ripping open bags of hot dog buns. When confronted by a store clerk, he explains: “I’ll tell you what I’m doing. I want to buy eight hot dogs and eight hot dog buns to go with them. But no one sells eight hot dog buns! They only sell twelve hot dog buns. So I end up paying for four buns I don’t need. So I am removing the superfluous buns.”
Why do hot dog buns only come in packs of twelve? Martin explains: “Because some big-shot over at the wiener company got together with some big-shot over at the bun company and decided to rip off the American public. Because they think the American public is a bunch of trusting nit-wits who will pay for everything they don’t need rather than make a stink!”
Martin, it seems was an early critic of the insidious practice of bundling: “forcing” consumers to buy products together that they would rather purchase separately. More recently, activists have begun demanding that the government force the cable industry to adopt an “a la carte” pricing model for television channels. They say it’s unfair to force people to buy television channels they don’t want.
The effort to force cable companies to sell their cable channels individually is every bit as misguided as Martin’s demand to purchase individual hot dog buns. Companies don’t bundle products together to “force” customers to purchase things they don’t want. Rather, bundling is a mechanism for lowering the per-unit cost of goods and services by spreading costs over a larger number of units. That benefits consumers because the price per bun–or per channel–is lower than it would be if the company were forced to sell their product one piece at a time.
This is easy to see in the case of hot dog buns. The price of a 12-pack of buns includes the manufacturing costs of the buns, but it also includes the labor and materials needed for packaging, shipping, stocking, and ringing up the product. Packaging a 12-pack of buns, for example, might only require three times as much material and labor as packaging an individual bun by itself, thereby reducing the per-bun packaging costs by a factor of four. These savings are passed onto the consumer.
The same can be seen in another example of bundling–the newspaper. Some readers read the business section but not the sports section. So why doesn’t newspapers let their customers pick and choose which sections of the newspapers they want to receive? Isn’t it unfair to force the businessman to buy the sports section?
Most of a newspaper’s costs don’t vary by the number of customers who take a particular section. Delivering the paper, for example, costs virtually the same whether the paper is fat or thin. And the columnists and reporters who produce the content in the sports sections will cost the same whether all of the paper’s readers get that section or just some of them. In economic jargon, the marginal cost of including the sports section in everyone’s paper is very low.
In fact, the administrative hassle of keeping track of who has chosen to take which sections of the paper is likely to offset whatever small savings there might be from not having to print certain parts of the paper. Moreover, newspapers are largely funded by advertising, and advertisers want their ads delivered to as many households as possible. Therefore, not only would “unbundling” newspapers not save publishers very much, it would actually lose them some revenue from advertisers, who would pay lower rates based on the lower circulation of the section in which their ads appear.
In short, it would clearly be absurd to require newspapers to sell their sections “a la carte.” Combining several sections of the paper into one product is economically efficient and allows newspapers to give their customers more content for less.
Precisely the same considerations apply to cable TV. Most of the costs of delivering cable content to a consumer’s home are fixed costs that don’t change with the number of channels an individual subscriber receives. A cable channel, for example, costs the same to produce whether there is one viewer or a billion. And the infrastructure that delivers that content to a consumer’s home costs virtually the same to deploy whether the consumer takes one channel or 100.
Advocates of a la carte pricing seem to think that, if 40 cable channels cost $40/month, then one cable channel ought to cost $1/month. But that’s absurd. Taking only one channel won’t reduce the cable company’s costs very much–the same equipment and staff will be needed. In fact, more staff might be needed to cope with the greater administrative overhead of keeping track of which customers have chosen which channels.
But won’t cable companies at least save money by not having to pay as much in license fees to the studios that create television channels? It’s not likely. Cable channels are able to cover their costs with relatively low per-customer fees because they spread the costs over tens of millions of households. If the number of customers dropped dramatically, the channels would be forced to raise their rates in order to cover their costs.
In short, a la carte would lead to consumers paying about the same, on average, but getting a lot fewer channels for their money. That’s every bit as irrational as Steve Martin’s bun crusade.
Tim Lee is the science and technology editor of Brainwash and the editor at the Show-Me Institute, a Missouri think tank. His website is www.binarybits.org.