Predictably, television was one of the first topics Tim Cook was asked about at yesterday’s interview at AllThingsD. This followed the rumors of Yahoo acquiring Hulu, and Microsoft’s entertainment-centric Xbox One launch last week.

It’s all about TV and the imminent age of cord-cutting. On this the blogosphere is certain.

Except for one little problem: the economics of cord-cutting simply don’t make sense, for neither networks nor viewers. Consider two examples: ESPN and AMC.

ESPN is the linchpin upon which cable television turns. It’s the sole reason many people have cable, and it’s insanely profitable. The vast majority of that profit comes from affiliate fees paid by cable companies on a per-subscriber basis (unless otherwise noted, all numbers are from this Forbes article that combines information from Disney’s annual report and data from SNL Kagan):

ESPN FY12 Revenue: $9.4 billion

Affiliate fees: $6.1 billion

Ad revenues: $3.3 billion

That’s about $508 million per month in affiliate fees alone, from about 100 million households.

Last week, ESPN averaged 1.36 million viewers in primetime, which is 9.52 million for the week, or about 40.8 million for the month. I think it’s fair to say that most of those are not uniques, to use Internet parlance. If we assume that the average ESPN household tunes in eight times a month in primetime, then that means about 5 million households watch ESPN a month.

Let’s assume this is true. That means:

Every household pays $5.13 per month for ESPN in affiliate fees

Only 4.8 percent of households watch ESPN. If ESPN were only available a la carte, each of those households would have to pay $101.60/month for ESPN to achieve the same revenue numbers they do currently

The 95.2 percent of households who don’t watch ESPN would only see their cable bills decrease by $5.13 were they able to exclude it

UPDATE: The ESPN numbers were too low; they are closer to $15/viewer. See the update here

ESPN is a special case for many reasons, so let’s take AMC, a geek favorite. AMC pulled in 460,000 viewers a night last week, yet earned $196 million in affiliate fees last quarter. If we assume that the average AMC viewer tunes in the same eight times a month, that’s 1.73 million households that watch AMC:

Every household pays $0.65 per month for AMC in affiliate fees ($65.3m/100m)

Only 1.7 percent of households watch AMC. If AMC were only available a la carte, each of those households would have to pay $38/month in order for AMC to achieve the same revenue numbers they do currently

The 98.3 percent of households who don’t watch AMC would only see their cable bills decrease by $0.65 were they able to exclude it

Both these cases are overly simplified, and make a lot of assumptions, and, crucially, ignore price elasticity: at those a la carte prices, both ESPN and AMC would get a lot less viewers, both decreasing advertising revenue and requiring that much higher of a fee to maintain their current revenues.

The truth is that the current TV system is a great deal for everyone.

Networks earn much more per viewer than would be sustainable under a la carte pricing

Networks are incentivised to create (or in ESPN’s case, buy rights to) great programming; making your content “must-watch” lets you raise your affiliate fees

Viewers get access to multiple channels that are hyper-focused on specific niches. Sure, folks complain about paying for those niches, but only because they don’t realize others are subsidizing their particular interests

Cable companies know the cable TV business, and would prefer to put up with customer disgruntlement over rising prices than become dumb pipes

Cable TV is socialism that works; subscribers pay equally for everything, and watch only what they want, to the benefit of everyone. Any “grand vision” Apple, or any other tech company, has for television is likely to sustain the current model, not disrupt it directly.

This is a three-part series.

Part 1: The Cord-Cutting Fantasy. Getting only the content you want without paying for everything is a fantasy. Pay TV is socialism that works.

Part 2: Why TV has resisted disruption. Great content is differentiated, has high barriers to entry, and depends on networks.

Part 3: The Jobs TV Does. The key question is attention, not set top boxes. What jobs do we hire TV to do?

Also see Steve Jobs on TV, my Apple TV prediction, and my Additional Notes on TV

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