Analyzing cable regulation proposals

By Kenneth Brown

Alexis de Tocqueville Institution

November 5, 2003

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.

Mass Entertainment Market Snapshot
	2003 Avg Price	2002-03 Change	*2003 Total Revenue	*2002-03 Change	*# Customers
Cable TV	$49.62/mth	8.20%	$60.2 Billion	-8.00%	72.2 Million HHS
Satellite TV	$48.93/mth	1.60%	$12.5 Billion	10.00%	20.36 Million HHS
VHS Movie Rentals	$2.67	0.70%	$3.26 Billion	-29.00%	95 Million HHS
DVD Movie Rentals	$3.20	0.60%	$2.95 Billion	60.00%	50 Million HHS
Movie Theaters	$6.00	3.30%	$9.8 Billion	-4.00%	165 Million
Live Music Concerts	$51.81	1.90%	$1.3 Billion	24.00%	26.0 Million
NFL Game	$50.02	6.00%	$4.8 Billion	14.30%	34.0 Million
ML Baseball Game	$18.30	11.80%	$3.5 Billion	-0.04%	61.1 Million
*2003 numbers are either year to date, or projections. NFL numbers are 2002 accept for avg. price and change, which are both 2003.
VHS and DVD customers are households with VHS and/or DVD players