So many to choose from, so many to pay for.

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The Fault in John Green's Cable Logic

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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John Green, author of "The Fault in Our Stars" and other top-selling young adult novels, took to Twitter today with a complaint about his cable package:

Naturally, this attracted hundreds of retweets and thousands of favorites. It's a common complaint, and now that someone famous has said it, it seems like a good time for me to revisit the Great Truth About Cable Bundling.

Here's the truth: You don't want your cable to be unbundled. You just want to pay less for it.

Seriously, guys, you like bundling. You know how I know this? You seek it out in your consumer products. You want your hotel to give you free Wi-Fi and you don't want it to charge you by the towel. Many of you go on all-inclusive vacations and cruises. You buy mobile-phone contracts to get a "free" phone rather than pay by the minute. You are constantly -- and I mean constantly -- complaining that your health insurance is not more comprehensive, even though this would just mean you'd pay more for the insurance. And I won't even get started on your agonized wails when airlines started charging you to check a bag and stopped providing a "free" plate of congealed mystery meat. You buy books and subscribe to magazines rather than pay by the article or the chapter. You love bundles. What you hate is the size of your cable bill.

Why do you like bundling? Because you don't want to have to think about it. Oh, sure, there are people who would like to spend their days obsessively managing their minutes, reading and towels in order to save 5 percent, but the rest of us would rather not spend our time worrying about blowing the Wi-Fi budget. So we go for the all-inclusive package.

And, in fact, unbundling doesn't necessarily save money. Imagine you're running a hotel. You could charge guests for every little thing, from washcloths to television rental to electricity usage. After all, I often don't use all the towels, so why do I have to pay for them? Why don't you offer them a la carte?

Because your guests would dislike it, of course -- they'd be wasting a lot of their vacation time arranging for add-ons, and they'd feel penny-pinched. More important, all those transactions would be costly. You'd have to install electricity meters, and pay a staffer to go around reading them before checkout. You'd have a staffer in charge of towel rentals and a customer service person to mediate disputes with guests over whether they got all the towels they paid for. Someone would have to go hook up a television in any room that requested one. That labor cost would have to be added into the price of the service, so everyone except the cheapskates who packed their own towels would be paying more for the same stuff. Customer satisfaction would fall, especially since you'd be creating lots more opportunities for disputes.

So instead you bundle all the stuff that everyone uses, from electricity to towels, and only charge for stuff where expenditures are highly variable, such as room service. The guests are happier, costs are lower and everyone has a lot less hassle.

Now think about cable bundling. The Great Unbundling Fallacy is the belief that if you pay $150 now for 1,000 channels, you ought to be able to pay, say, $25 a month for the channels that you watch. Unfortunately, as with our hotel example, it doesn't work that way.

In our example, right now you're paying $150 a month for a large array of cable channels but only watch, say, 15 to 20 of them on a regular basis. In our simplified example, we'll say that 100 million other subscribers are also paying $150 a month for a large array of channels, of which they each only watch 15 to 20, though not the same 15 to 20 as you. Let's assume that revenue is distributed to channel operators roughly according to the number of eyeballs they attract, which is basically true -- ESPN gets much higher fees than some crafting channel, because many people will subscribe to cable to get ESPN, while few will do so to watch a knitting program.

So what happens when you unbundle? How much do you have to pay for your channels?

That's right: $150. You aren't cross-subsidizing the channels you don't watch, but all those other people aren't cross-subsidizing all the channels they don't watch, so you have to make up for that lost revenue. The price for each channel goes up until you're paying about what you were before. By one estimate, average savings from unbundling would be about 35 cents a month

But I'd argue that even that overstates things, because it doesn't figure in the option value of channels you don't usually watch but might occasionally. I watch sports a few times a year: some Yankees games, March Madness and, in even-numbered years, the Olympics. I can watch them when I want because they're part of my package. But if I wanted to add them on for special events, it would cost me a lot more than 35 cents -- or I'd have to go without watching games.

You know this, because you still want to have your shows bundled in channels, don't you? You want this because buying the shows you actually watch on DVD -- well after they air -- could easily cost you more than your cable subscription.

Yes, the unbundlers will say, but I want to focus my money on the channels I love, making the kind of content I want to watch. This strikes me as even more wrong than the argument from price.

Here's the thing: The folks making this argument are almost always talking about relatively small niche shows, from "The Wire" to "Mad Men." These are high-quality shows that networks produce in order to make themselves a more valuable proposition to the cable carriers -- shows that will make loyal fans demand their carrier offer your network. But the audiences for these shows are not large. And unbundling would actually put up a barrier to getting more viewers, because now instead of persuading folks to give you an hour on Sunday night, you'd first have to persuade them to subscribe to your channel, then persuade them to watch the show.

Of course, there are channels that do this -- HBO, Showtime and now Starz. But more and more shows are coming from channels such as FX and AMC that don't charge for subscriptions and would probably have a hard time doing so without the exclusive sporting events and movie libraries that attract people to the premium channels. In an unbundled world, they would have difficulty building an audience for their innovative shows, and a harder time financing those shows without those small but steady carrier fees. That spells less of my favorite television, not more. Really niche channels would probably just die altogether.

To put it another way, if you agree that we're in a golden age of television, you should be very cautious about making radical changes to the environment that produced that television.

I'm not arguing that literally no one would save money under an unbundling arrangement, because that would be ludicrous. Some people will pay more, and others will pay less. If you watch cable television a few times a year, then you are a candidate to save money with unbundling -- but you also should probably just cancel your cable subscription. Households that literally never watch a sporting event are probably also candidates to save some money.

But the more average viewer, in a household that watches a more normal 10 to 20 channels a year and occasionally turns on a game, is unlikely to see either their bills go down or their enjoyment go up. It's just a complicated regulatory mechanism to allow you to spend more time arguing with customer service about why you're getting HGTV instead of the Food Network.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Megan McArdle at mmcardle3@bloomberg.net

To contact the editor on this story:
Brooke Sample at bsample1@bloomberg.net