Analysis: Canadian cable TV's 'a la carte' menu begins to take hold

By Liana B. Baker and Alastair Sharp NEW YORK/TORONTO (Reuters) - A transformation in how some Canadian cable TV companies sell channels to consumers might be a sign of things to come in the much bigger U.S. market. With "a la carte" pricing, cable companies are offering Canadians an alternative to "take-it-or-leave-it" bundles that effectively force viewers there - and in the United States - to pay for channels that they do not watch in order to get access to those they do. The Canadian Radio-television and Telecommunications Commission pushed the change when the regulator "strongly encouraged" the introduction of more-flexible packages two years ago. And Canadian consumers seem to like what has been happening. In the largely French-speaking province of Quebec, for example, industry sources estimate that 70 percent of viewers buy a very basic TV offering of mostly broadcast fare and then pay for small groups of cable channels from a long list ranging from Discovery Channel to BBC Canada. Meanwhile, U.S. media companies are fighting the a la carte concept ferociously. Walt Disney Co, Time Warner Inc and others worry that subscribers will drop less-popular channels. And with fewer subscribers forced to pay for pricey channels like sports cable network ESPN, the cost will increase for viewers who want them, the companies say. Needham Research estimates that a purely a la carte model would wipe out $70 billion in revenue for the U.S. TV industry and that fewer than 20 U.S. channels would survive if consumers had to pay for each one separately. "The bottom line is that the Canadians are way ahead of the U.S. in this realm," said pay TV expert Jimmy Schaeffler of the Carmel Group. FIGHTING AGAINST DEFECTION More flexible programming packages may help U.S. cable companies prevent people from defecting to cheaper Internet-based offerings from the likes of Netflix Inc and Inc. MoffettNathanson Research estimates that about 2.2 million U.S. households have canceled their cable video service since 2010. About 35 percent of cable video subscribers whom Ipsos polled for Reuters in August said they were considering such a move in the next six months. In Canada, Vancouver-based Telus Corp, one of the nation's largest telecom companies, has used the a la carte strategy as a major selling point since it aggressively expanded its Optik TV service several years ago. Since 2011, the number of its TV subscribers, mainly Optik customers, has more than doubled to nearly 750,000. Other Canadian cable companies have moved with varying degrees of intensity: BCE Inc's Bell has matched the pick-and-choose deal offered by Quebecor Inc's Videotron in Quebec. In the most populous province of Ontario, Rogers Communications Inc and Bell have been less open to such change. Overall, the Canadian market is at a hybrid stage, combining bundling with some a la carte offerings. For example, Telus offers a pared-down basic package without sports channels for a regular price of C$29 ($28.11) a month to people who also subscribe to its Internet, home phone or mobile phone service, and allows them to add up to 50 individual channels for C$4 each. It may hurt the bottom line in the short term, but it also creates more loyal customers who combine a lower-margin TV subscription with more-lucrative services such as broadband, Telus Chief Executive Officer Darren Entwistle told Reuters. "We've just taken a longer-term view for the service," he said, with the "significant" economic returns expected to come from the noncable services. Videotron cuts out both sports and U.S. networks such as ABC, NBC and CBS from its basic package, which costs C$25.10 a month when combined with at least one other service. However, customers can pay extra for a package of additional channels of their own choosing in bundles of 5, 10, 20 or 30, which would bring their total TV bill to between C$37 and C$55. MORE FOR LESS? Some experts say viewers may pay more under an a la carte system than through bundling. "Consumers in most a la carte models end up paying more or less the same as what they were paying before, and all they have to show for it is that now they have fewer channels," said MoffettNathanson research analyst Craig Moffett. Some cable operators have shied away from the a la carte model, in part because major programmers discouraged it. Much of the most popular programming in Canada comes from south of the border, and U.S. media companies that negotiate these contracts have been pushing back against Canadian cable companies that want to offer programming on more-flexible terms. Some U.S. media companies are seeking guaranteed fees for a channel and sometimes lost ad revenue as fewer people subscribe, said David Purdy, senior vice president of content at Rogers. Two U.S. programmers interviewed by Reuters said they would have to charge the Canadian operators more to carry their channels if the a la carte model is widely adopted. Rogers, the largest Canadian cable operator, sells its most basic package for C$38.67 in Ontario, C$15 more than Telus' Essentials in British Columbia. A Rogers subscriber can then add some additional channels at C$2.80 each. The number of Rogers TV subscribers has declined to 2.19 million subscribers from 2.30 million in late 2011. "We are fighting aggressively for more-flexible packaging options," Purdy said. "Our fear is that if we don't innovate in this regard, we will see lower penetrations of people paying for television." PICK WHAT YOU WANT? Some Canadian viewers also want the a la carte push to go further. Isaac Zeitoune, a 37-year-old financial planner and Bell satellite TV customer in Montreal, says he likes to choose which 15 channels he gets because he wants Disney Channel for his kids, some reality show channels for his wife and Canadian business channel BNN for himself. But he wishes his package would also include CNBC and CNN, which are part of a 20-channel package that costs an additional C$5 that he does not want to pay. Matthew Polka, CEO of the American Cable Association, a lobbying group for 850 smaller independent cable companies, said U.S. operators should study how their Canadian counterparts deal with the challenges of offering more choices to consumers. "It's not perfect (in Canada)," he said, "but it's better than the forced, bloated expanding bundle than we have today" in the United States. (Reporting by Liana B. Baker in New York and Alastair Sharp in Toronto; Editing by Ronald Grover, Martin Howell and Lisa Von Ahn)