Regulating
the Cost of Nickelodeon
By Kenneth Brown
Alexis de Tocqueville Institution
Depending on who does the analysis, national cable
rates have gone up, approximately 8.2 % in 2003. In response, Senator John McCain (R-AZ) a
proponent of re-regulating the cable industry, has
demanded that the U.S. Senate have a full scale hearing to look into why the Nickelodeon
channel and his other favorite cable TV shows are going up in price. While the Senator may have good intentions, there
are a number of reasons why using Congress is a bad idea to control cable TV
prices.
The first problem is that market forces are
enabling competition to work, ironically by the hands of Congress. The 1996 Telecommunications Act loosened the reigns
on regulations, which enabled new entrants to rapidly pursue market share. Today, the competitive landscape for cable TV
is drastically different from what it was in 1996. In 1994, there were only 40,000 DBS (direct
broadcast by satellite) subscribers; today, there are 20 million. DBS has not
only captured 20% of the marketplace, but is widely credited for the
contraction in the cable industry subscriber base. Last year, while the number of cable TV
subscribers declined 8%, the number of DBS subscribers went up 10%.
This sentiment was echoed in the October
2003 report published by the General Accounting Office (GAO) entitled, “Issues
Related to Competition and Subscriber Rates in the Cable Television Industry”. The report commented, “DBS operators have
emerged as a nationwide competitor to cable operators. This competition has
been facilitated by the opportunity to provide local broadcast stations. Competition from DBS operators has induced
cable operators to lower cable rates slightly, and DBS provision of local
broadcast channels has induced cable operators to improve the quality of their
service.”
Meanwhile,
the discussion of cable TV prices is a discussion about a number of variables,
particularly the cost of programming.
Every year, cable providers are forced to adjust their rates for
increased programming expenses to make the same profits. Recently, the focus of programming costs has
been the 20% rate increase by ESPN in May 2003.
As executives at major cable operators and ESPN debate the recent price hikes,
it is clear that cable rates reflect not only the rising cost of broadcasting
professional sports, but the spiraling costs of operating professional sports teams
as well.
Senator McCain and others have suggested
that Congress could mandate that cable TV providers give consumers an
opportunity to buy programming “a la carte”, meaning that ESPN would be a
separate charge from the entire package allowing consumers to opt in or opt out. This solution would only further complicate
the problem. New audience numbers would skew
each channel’s marketing and for some, seriously impact their advertising
revenue. A la carte services would mean
that channels depending heavily upon advertising dollars would immediately face
a stark future. Second, in an unbundled
world, cable providers that couldn’t sell enough HBO,
would resort to increasing the price of Noggin, etc. Inevitably, mandatory unbundling would only lead
to increased prices for consumers to access quality programming.
In principle, the suggestion of unbundling
mandates has long-term implications as well.
Resolving cable TV prices with mandatory unbundling could potentially
become a cure-all template for any problem which surfaces regarding entertainment
service pricing. Any venue with
complaints about price hikes could face the same recourse, mandatory unbundling
of its premium services to satisfy consumer’s that want the same product – only
cheaper.
Satellite TV, satellite radio, and dozens of
entertainment services aggregate products for both the economic and marketing
advantages. Hypothetically, should a
consumer group complain that Rolling Stone Magazine is getting too expensive, it
too could be forced to sell a stripped down, cheaper version to satisfy
customers. Unquestionably, such a
proposition would seriously impact the advertising revenue of the magazine as
well as its potential to keep its core base of customers. An a la carte mandate
from Congress is an inherently flawed strategy because it does not properly
incorporate business theory. As opposed
to setting a precedent that could be used to negatively impact scores of
business models, it would be best let suggestions for a la carte structures to be
handled in the marketplace, than by the U.S. Congress.
Besides economics, there is another unique
and more serious problem with the decision by Senator McCain and others to
regulate the price of cable TV, and that is the question of priorities. Why is the price for optional entertainment a
national priority? And where is this really going? The litany of economic arguments for and against
cable pricing regulations scuttle the real point: why does the price of MTV need
legislative controls?
To illustrate how misplaced the debate is
over cable rates, leaders in the U.S. Congress, including Senator McCain, are
actively contrasting increases in the price of cable TV with leading economic
indicators such as the consumer price index (CPI) and inflation. Cable TV is a
100% private enterprise. Cable TV is not
oil, platinum or even coffee. Overall, as
popular as entertainment is, it is not classified as an “essential” product by
the market, nor widely considered a utility service like gas, electricity or
water. Entertainment, vis a vis
cable TV, is still considered by most a fantastic privilege, and that’s about it.
The economic indicator argument is specious also
because a number of popular mass entertainment products in the last
year have increased as well. For
example, prices for ML Baseball tickets increased 11%, NFL tickets increased 6%
and movie theater tickets increased 3%.
While the increase in movie ticket prices seem minor, over 165 million
people bought tickets to movies in 2002, which translate the 3% number into a
very significant figure.
Whether the price goes up or down is irrelevant. The real question is when did cable TV become
an essential purchase, a right for every American? It seems like yesterday when Congress wanted
hearings to discuss whether movies are too violent, whether children are
watching too much television, or whether being an avid couch potato is healthy. If cable TV price increases force Americans
to watch less TV, it seems that Congress itself is conflicted whether this outcome is better or
worse for Americans; another sign that in the long run, Congress would probably
never agree how to control cable TV rates anyway.
The reality is that basic TV, which still includes
both local and national programming is still free, its
the price for additional specialty programming that Senator McCain is upset
about. However, when the federal government’s time
spent on national security, health care, and education has to compete with
debating the price of entertainment channels on cable TV, it tells Americans that
our leadership does not have its priorities in order.