Small Cable Companies Seek an End to Bundling

By Daniel B. Kline Markets Fool.com

When someone buys a cable TV package, he or she not only gets a bunch of channels few people watch, he or she pays for that privilege. That happens because the larger content owners have significant leverage when they make a deal with cable companies.

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The pay-TV provider, for example, might be dealing with Time Warner (NYSE: TWX) seeking to make a favorable deal to carry TBS, TNT, Cartoon Network, and CNN. Instead of just offering those channels at market price, Time Warner can use them to make a deal where the cable company has to also take (and pay for) Turner Classic Movies, truTV, and other less-watched channels.

This practice happens all over the cable dial and it's used by all the big content providers. It's why a company like Disney (NYSE: DIS), which owns popular channels including ESPN and Disney Channel, can force cable companies (and eventually consumers) to buy Fyi, the Military History Channel, and Freeform, among others.

Cable companies have no choice but to make these deals because they can't sell a service without the top-tier channels.

Now,the American Cable Association (ACA), a cable trade association that represents small and mid-size pay-television providers, has asked the Federal Communications Commission (FCC) to change the policy. The trade association, joined by independent channels Mav TV, Ride TV, and One America News Network, filed a brief asking the federal watchdog to end the practice of bundling.

Cable TV customers have little choice when it comes to what's in their package and what they pay for. Image source: Getty Images.

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Why is this important?

The big content owners like Disney and Time Warner have used bundling to make cable companies to carry channels. Sometimes this leads to creating a new channel that finds an audience (ESPN2 being an example), but in many cases it forces pay-TV providers and consumers to pay for channels few people watch.

"To obtain must-have programming, MVPDs [cable and satellite companies] must set aside huge amounts of their limited bandwidth and programming budgets to carry dozens of bundled channels in which they (and their subscribers) have no interest," the ACA wrote.

It's a practice that not only forces cable bills higher, it also makes it much harder for independent channels to gain distribution, because even if they ask for low carriage fees, the cable companies are reticent to do anything that pushes bills any higher.

What happens next?

The ACA comments were submitted as part of an FCC request seeking input on new rules that would govern how cable companies treat content providers. Those hearings were initiated under former FCC Chairman Tom Wheeler, who resigned after Donald Trump took office. New Chairman Ajit Pai has vowed to shrink industry regulations while also eliminating net neutrality rules.

Those are moves that generally favor big companies. It's hard to see the current FCC considering rules that hurt companies like Disney and Time Warner by forcing an end to bundling.

However, listening to the ACA's argument and ending the practice of bundling would lower cable bills while also giving smaller pay-TV companies more ability to carry small, niche channels their subscribers may want. Changing these rules would be very pro-consumer, but it's much more likely these changes come about through consumer pressure due to cord-cutting than FCC action.

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The author(s) may have a position in any stocks mentioned.

Daniel Kline has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Walt Disney. The Motley Fool recommends Time Warner. The Motley Fool has a disclosure policy.