Who moved my (TV) bundle?

TRAI has ordered broadcasters to comply with the newest tariff order by August. This is likely to reduce their revenues, and increase customers' mental costs, so nobody is happy.

My old boss, Jim Barksdale, used to say there’s only two ways to make money in business: One is to bundle; the other is unbundle.

Netscape co-founder and A16Z partner Marc Andreessen had said this in an interview on his firm’s website. He went on to say,

Basically media is getting re-bundled. And so you’ve got these new models—Spotify in music, Netflix in video, and Amazon in eBooks, right? — that are re-bundling media together, and by the way, building very big companies around it, just very different kinds of companies than the ones that used to dominate.

The interview was published in 2013. In other words, US television media had already perhaps entered the re-bundling phase.

Things are a little different in India. While HotStar and Amazon Prime and Sony Liv and Zee5 and Netflix (and …) have taken off, to different extents, the regulator believes that India is not yet in the “re-bundling phase” of the media business. The Telecom Regulatory Authority of India (TRAI; which regulates broadcast television, among other things) has directed broadcasters to comply with a “tariff order” it brought out in January this year.

What does this order entail? afaqs! has a good explainer.

In order to address the issue of huge discount during the formation of bouquets by the broadcasters vis-a-vis sum of a-la-carte channels, the Authority prescribed following twin conditions to ensure that price of a-la-carte channels does not become illusionary:

i) the sum of the a-la-carte rates of the pay channels (MRP) forming part of a bouquet shall in no case exceed one and half times the rate of the bouquet of which such pay channels are a part; and

ii) the a-la-carte rates of each pay channel (MRP), forming part of a bouquet, shall in no case exceed three times the average rate of a pay channel of the bouquet of which such pay channel is a part.

Additionally, the Authority decided that only those channels which are having MRP of Rs.12 or less will be permitted to be part of the bouquet offered by broadcasters.

There is also a clause that limits the price of the “network carriage fee” at a lower level compared to earlier.

This “new tariff order” that came out in January needs to be read in conjunction in the earlier “new tariff order” that had come out in February 2019 (so what we have now is “newer tariff order”? Anyway the industry calls it NTO 1.0 and 2.0). This is the key feature of NTO 1.0.

The NTO, popularly known as the MRP regime, mandates that customers select the channels and bouquets they want to subscribe to and for broadcasters to announce the MRP of the same. The new regulatory framework was implemented on February 1, 2019 and the extended deadline to complete the migration from the old framework to the new one is March 31, 2019.

We can think of NTO 1.0 as enforcing price transparency, and NTO 2.0 as enforcing bundling transparency.

Prior to the NTO 1.0, while all TV consumers in India got their signals through a set top box (either provided by the DTH operator or the cable company), they didn’t really have a choice on what to pay for and watch. Pricing wasn’t transparent, either, which allowed cable operators to indulge in price discrimination. Back to the afaqs! article from earlier:

In the pre-NTO era, the [Local Cable Operator] would buy all the content at a wholesale rate and be free to sell it at whatever retail rate he chose. "For example, the LCO would buy the whole set of channels for Rs 130 from an MSO; he would sell it to some for Rs 300 to others for Rs 250 and Rs 200," explains Vynsley Fernandes.

To further break it down, let us take the example of Sion, in Mumbai. The same package, with the same number of channels, will have a very different price in buildings - around Rs 400, while in the chawls in Dharavi, consumers were asked to pay around Rs 200.

The MSO would go to the broadcaster and negotiate as hard as he could to get the deal at a very good price. "If the MSO has a huge reach they did not even need to negotiate too hard for a better deal. We need to understand that the advertising revenue is a few multiples of the subscription revenue and hence, reach is important for broadcasters," explains an industry expert.

What the NTO 1.0 brought in was transparent pricing. Each channel was to have a “maximum retail price”, so customers knew (or were supposed to know) exactly what they were paying for and how much. It also meant an end to price discrimination by cable operators based on customers’ willingness to pay.

It is not hard to see why we needed a NTO 2.0 to follow NTO 1.0. Once the transparent pricing regime was brought in, broadcasters took to extensive bundling. With the price of each individual channel being transparent, the way to sell otherwise less popular channels was to bundle them with more popular channels and then offer the bundle at a good price.

NTO 2.0 puts an end to that practice. Firstly, the price of a bundle cannot be less than two-thirds the price of all the channels put together. Secondly, no channel within a bundle can be priced at over three times the average price of a channel in that bundle. Thirdly, no channel priced above ₹12 a month can be offered as part of any bundle.

The combination of these regulations means that using “bundled pricing” to “push” channels that people may not buy standalone might be a thing of the past. In fact, that might be the intention of the NTO 2.0 itself.

Broadcasters, unsurprisingly, are not happy.

In a conversation, [Sony Pictures Television Networks India MD] N P Singh told afaqs!, "Who is TRAI to decide which is an unwanted channel and which are the driver ones? There are viewers for those channels too." He adds, "You are the consumer and you make the choice about the content you want to watch and whether that content is relevant to you, is a choice that you should make and I must not force on you.

Sudhanshu Vats, who used to be CEO and MD of Viacom18, a broadcaster, said, “Comedy Central is a very small channel at an all India level but I am sure there would be about 500,000 homes where Comedy Central is very popular. So, I think we have to recognise the diversity and complexity of the country.”

The idea here is one of "option pricing”. While 500,000 homes in the country might be big enough fans of Comedy Central to buy it a la carte, a much larger number of customers might be willing to buy it if and only if it is offered a a lower cost as part of a bundle. The transparent pricing regime being brought in by TRAI damages the value of this latter transaction (for both the channel and the customer).

Partho Dasgupta, management consultant and ex-CEO of BARC (Broadcast Audience Research Council, the body that measures TV viewing in India) doesn’t agree with the timing. “This NTO 2.0 directive is quite ill timed - the broadcasters are struggling to revive their business anyways - channels have still not recovered from NTO 1.0 effect and some are closing down. I must say regulator should reconsider this.”.

And there is this:

Karan Taurani, Vice President, Elara Capital, said NTO 2.0 will lead to lower average revenue per customer (ARPU) for TV, which has shot up by almost 60% at an average post NTO 1.0. Lower ARPU would mean a lower share of revenue for the broadcasters, who were getting almost 50% share post NTO 1.0.

So NTO 1.0 was brought in to ostensibly reduce prices for customers and make sure they know what they’re paying for. Instead, the regulation ended up increasing prices (this is rather common in regulation in general, where the intended and actual consequences of a piece of regulation are diametrically opposite). So the regulator has brought in a new piece of regulation to lower the prices once again.

afaqs! has some good analysis of who will be the winners and losers under the new regime.

While the broadcasters can continue to fight the regulator on these regulations (there is an ongoing legal challenge anyways), why do cable companies bundle? Rather, why does anyone bundle at all? And why does Jim Barkdale believe that the only ways of making money are to bundle and unbundle?

The Economics of Bundling

When we think of bundling, we think of channels. We think of “buy one get one free” offers. We think of toothpastes and toothbrushes sold in the same pack. There are some bundles that we don’t intuitively think of as bundles. Your favourite newspaper, for example, is also a bundle.

One of us (Suprio) has written about this already.

To understand the wildly differing results of the two NYT paywall models, let’s not think of the NYT as a single paper but as a bundle of content types: world news, politics, opinion, sports, metro, culture, arts, travel. The TimesSelect approach was to ask what type of content to put behind the paywall, the answer would depend on what you thought most readers would pay for. But what if there are different kinds of readers: Opinion junkies, cultural avant-gardes, sport fans, community watchers, foodies. Each group values types of content differently.

The table below (from Bharat Anand’s book The Content Trap) puts a price to what different readers would pay for different sections of the paper:

Each group is willing to pay a lot for his preferred type and very little for anything else. The problem is amplified because you don’t know who is what type of reader. What content do you put behind the paywall? The TimesSelect approach reflected a view that the Times knew what content appealed to their readers. The new approach admitted that the paper didn’t know, and the answer might differ across readers. They set a single price across the bundle (in the above theoretical example that price would have been $18).

This was possibly how channels in India were priced before NTO 1.0 came in. Being sold in bundles to resellers (cable operators), who then sold them on to customers in larger bundles, charging them on willingness to pay. Economically that might have made sense, but TRAI believed that customers believed that they were paying for things they didn’t need.

Speaking of bundling, this excellent podcast with Patrick O’Shaughnessy and Shishir Mehrotra, is an excellent primer into why bundles work and under what conditions they work. Mehrotra talks about his “four myths of bundling”, and describes the conditions under which the bundle will work. The key insight is that bundling works when different users are interested in different parts of the bundle.

Back to Suprio’s old article:

This almost magical effect of bundling was first explained in a 1976 paper by William Adams and Janet Yellen (the ex-Fed Chair). Their key insight was that the real value of bundling comes not from combining products that were similar but by combining customers with different preferences.

The TRAI order (both NTO 1.0 and 2.0) makes this incredibly difficult. That said, it is not impossible.

Consider the ESPN-History Channel bundle that Chris Dixon alludes to in his seminal article on bundling, but let’s change the numbers for Indian conditions. Assume that there is an equal number of sports and history lovers. Sports lovers can pay ₹10 for ESPN and ₹3 for History, history lovers can pay ₹10 for History and ₹3 for ESPN.

Let’s say the maximum retail price is ₹9 for ESPN and ₹9 for History. So half the customers (sports lovers) will buy only ESPN, and the other half (history lovers) will buy only History, giving an average revenue per user as ₹9. The average consumer surplus (what the customer is willing to pay minus what she pays) is ₹1 per user.

Now let’s say this is offered in a bundle. NTO decrees that this bundle be priced no less than ₹12 (two-thirds the sum of prices of the channels). Let’s assume the bundle is priced at that. Notice that the combined willingness to pay for both channels is ₹13 for everyone (irrespective of what their primary interest is). So all customers will buy the bundle.

Now, ARPU is ₹12 (33% higher than earlier). Consumer surplus per user is ₹1 (same as earlier). This means bundling makes channels much better off and consumers no worse off (also, notice that in general, bundling makes far more sense for channels than it does for customers, which possibly explains TRAI’s thinking).

The cost of thinking

The above example might show that bundling, even under TRAI’s guidelines, is a win-win for companies and customers (or at least win-no lose. A “pareto improvement”, as economists might call it). However, that doesn’t take into account the customers’ mental costs of optimisation.

ESPN-History is just one (hypothetical) bundle. Given that we have over 500 channels in India, the number of possible bundles can be in the thousands. Once a customer decides what channels she would like to see, the number of decisions she is likely to have to make in terms of “how to buy” these channels is likely to run into the thousands.

It is possible that she might just eschew this optimisation, and just buy the bundle her cable operator recommends to her (transparent, yes, but no choice, thus defeating TRAI’s objective). It is also possible that she might just decide to buy all channels a la carte (possibly what TRAI wants from its NTO).

She might save some money, but may not subscribe to channels such as Comedy Central that she may sometimes want to watch, but not enough to want to pay full price. Value will be destroyed for such channels, and they will be forced to charge their loyal subscribers extra. And some of these subscribers might become less loyal. And set off a vicious cycle.

Broadcasting is a complex medium. And when you have complex problem, simpler solutions (and simpler regulation) is recommended. While TRAI’s new and newer tariff orders ostensibly make things more efficient, transaction costs might mean that value is ultimately destroyed.

Putting it another way, the tension of making the optimal choice of channels can make any consumer’s consumer surplus to melt away.