Lawson Hunter, Edward Iacobucci and Michael Trebilcock are the authors of the recent C.D. Howe Institute study "Let the Market Decide: The Case against Mandatory Pick-And-Pay."
The last few weeks have seen the federal government taking on Canada's telecoms and broadcasting companies yet again. This time, it wants them to unbundle channel offerings for television viewers. However, Ottawa's proposals are deeply misguided and likely futile given the technological revolution unfolding in the communications sector.
The federal government requested the Canadian Radio-Television and Telecommunications Commission (CRTC) to report on the feasibility of allowing Canadian consumers to subscribe to pay and specialty television services on a service-by-service basis.
The move is, in part, a response from the media trend moving away from traditional "push" programming with only a few channels on offer. We are now in a world of "pull" consumer preference, where consumers have choices in what, when and where to watch video content.
There is a superficial appeal to the argument that good policy would grant consumers the freedom to buy whatever channels they want, and not to buy those that they do not. After all, in many other parts of the economy, consumer choice prevails. When a shopper buys groceries, for example, she does not have to buy a banana in order to buy a lemon.
What this appeal to free-market instincts misses, however, is that sellers make the decision to bundle products all the time. A grocer bundles when it sells a bag of oranges, or three bags of milk together. Take what you are looking at right now: newspapers bundle different sections with a variety of news into a single product – local news, business news, sports news, entertainment news, and editorial opinion sections.
The same economic logic applies in bundling television channels. Why is that?
Buyers have different preferences, and thus different demand, for different products. Differences across buyers in their willingness to pay for a particular product does not necessarily imply variation across buyers in their willingness to pay for a bundle of products. Newspapers or television distributors can't tell exactly which consumers will pay the most for each individual offering.
Just as diversification in your stock portfolio reduces variance in your portfolio's return, bundling can reduce the variance across consumers in their willingness to pay. This allows the seller to charge a price for the bundle that better maximizes its profits without pricing consumers out of the market. Such profits on each sale may be especially important in a market like broadcasting in which there are high fixed costs that the seller must cover to be viable.
Bundling can increase sales and total economic value relative to the case in which television distributors set single prices per channel, prices based on guesses as to how much consumers are willing to pay per channel.
Because bundling can be a potentially good thing for the market as a whole, the government should not mandate an end to it. Regulating pick-and-pay or product offerings would launch the CRTC on a more interventionist role in the entire content and video distribution business. Regulation often begets more regulation. To the extent support for Canadian content is a concern, the better approach is a more fundamental review of the best means of supporting Canadian production.
As options for viewers expand and competition amongst channels intensifies even further, bundles will only survive in the marketplace if they provide consumers with advantages that they would not otherwise realize. Consumers already have an expanding array of viewing choices, like Netflix, which is itself a bundled offering.
Any regulation mandating pick-and-pay would become irrelevant at best, harmful at worst.