The Heritage Foundation

Executive Memorandum #319 on Economy

January 21, 1992

January 21, 1992 | Executive Memorandum on Economy

Cable TV: Restraining Prices by Competition, Not Re-Regulation


(Archived document, may contain errors)

MUM 319

CABLE TV: RESTRAINING PRICES BY COMPETITION, NOT RE-REGULATION Cable television has become a major medium, bringing information and entertainment into 62 percent of American homes. This ap parently is tempting Congress to mess with cable TV. Ostensibly concerned over rising prices charged by most local cable companies, Congress soon will act on legislation to re-regulate cable TV rates. Rather than lowering prices, however, this re-regulati o n would raise costs for consumers and reduce the quality of service and variety of programs offered. Instead of regulating rates, an approach that failed in the past, Con- gress and the Administration should try to remove barriers to competition imposed b y state and local govern- ments and by Congress itself. Allowing firms to compete for customers is the proven way to provide consumers better service and lower prices. The current rules of the Federal Communications Commission allow local governments to re g ulate local cable rates only in communities where there are fewer than six over-the-airTV stations or fewer than two multichannel providers, such as a satellite broadcast system or competing cable service. Under these FCC rules, 61 percent of America's ca b le systems, serving 34 percent of all TV viewers, can be regulated. Under present law, meanwhile, only local governments regulate cable TV rates. This local control of cable TV would be transferred to the federal government by the "Cable Television Consum e r Protection Act of 199 1 " (S. 12), introduced in the Senate by John Danforth, the hfissouri Republican. The bill would impose federal rate regulation in any community in which there are not at least two multichannel video competitors available to a majo r ity of homes; each of these competitors would have to have, moreover, at least 15 percent of the market. Since only a handful of com- munities have more than one multichannel provider, virtually all local cable markets would be subject to regula- tion by W ashington. The Bush Administration has threatened to veto S. 12. A few Republican senators, however, are working on a compromise bill that would be little better than S. 12. The Administration should reject this compromise. Lack of Competition. Proposals t o re-regulate cable TV have been prompted by concern over the seemingly sharp rise in cable rates since the federal government deregulated rates in 1986. According to the General Ac- counting Office, for example, average cable rates rose 39 percent during the first three years following deregula- tion. This rise was not unexpected, however, since regulation had kept rates well below the rate of inflation before 1986. Adjusting for inflation, the price per channel has increased only slightly if at all. The n umber of channels offered, moreover, has increased since deregulation. Where rates are high, the problem seems to be not lack of regulation, but lack of competition. Some 99-5 percent of the cities that have cable have only one provider, usually because l o cal governments restrict market entry. Sometimes local governments confer explicitly exclusive franchises and thus explicitly prohibit entry by other would-be service providers. In most instances, however, f1ranchises are nominally avail- able. to more th a n one firm but are so difficult to get and have so many conditions attached to them, that effective- ly only one firm can obtain a franchise. Nine states have enacted legislation making it even more difficult for a second firm to obtain a franchise. And e ven where a franchise is not required because no public rights of way are crossed, cities have sued or changed their zoning ordinances in an effort to keep new entrants out of the market.

Cides that have done this include Chicago, Dallas, Los Angeles, Ne w York, and Washington, D.C. Government- im osed barriers rather than economic factors are the true source of cable's monopoly status, and are the true .p cause of such pricing problems as may exist. ,.:.,.Cutting.Costs. There are some fifty local jurisdi c tions, including Cleveland, Allentown (Pennsylvania), Orlan- do, Omaha, and Sacramento, that allow competition, with two and sometimes three cable TV providers serving the same geographic area. Several studies have found that prices in these markets for b a sic cable service are about.18 percent lower, or a little over $3 per month on average, than they are in markets where government prevents cornpetition. Cable companies in competitive markets. also tend to offer more channels than those with government-gr a nted monopolies, 21 percent more on average. This makes the price per channel almost 33 per- cent lower-in communities that allow competition. These data indicate that the real problem has not been the &regulation of cable rates in 1986 but the absence of competition. evkIence suggests that rate regulation is not very effective at holding down prices. Although cable TV rates grew slower than the rate of inflation before cable deregulation in 1986, some 94 percent of all rate in- crease. requests were grant e d in full by local governments. Since cities typically collect 5 percent of cable firms' gross revenues as franchise fees, it was in the cities' interest to grant rate increases. At the same time, the ability to deny or delay a rate increase enabled local politicians to extract valuable political concessions from cable com- panies, such as coverage of city council meetings, "local origination" shows extolling the mayor's new programs, "public access" programming that paying customers rarely watch, and even outright campaign contributions. Rather than limiting cable TV prices, a return to rate regulation would benefit mainly politicians. At the same time, by limiting cable companies' prices, regulation would tend to limit the quality and expansion of service . If their revenues would be capped, cable firms could maximize their profits only by holding down their costs, for example, by not upgrading their equipment or adding new channels. By making cable markets less profitable, moreover, regulation would underm i ne the incentive for technological innovations that would enable new firms to enter the market in competition with existing cable providers. nding the Artificial Monopoly. The best way to hold down cable rates while maintaining or even expand- ing service is to remove cable's artificial monopoly status and to allow competition. Direct competition by a second or third cable company often will result. Even where it is impractical or inconvenient to string wires on utility poles or to dig up city streets to l a y underground cable, local telephone companies, which already have their own sets of wires in place, could deliver video signals to the home. The technology for this promising alter- native already exists, but federal law prohibits the telephone companies from offering such service. -Other technologies also can spur competition with cable companies. Satellite dishes can receive signals which are then sent over wires on private land, usually to residents of large apartment complexes. Such "private cable" sy s tems have already- been installed in parts of Chicago, Dallas, and New York. "Wireless cable," another alterna- tive, uses microwaves to send signals to an antenna on the roof of the customer's home. Under a third approach, called "DBS" (for Direct Broadc a st Satellite), about 600,000 homes in Britain receive broadcasts direct from a satellite. The current legislation being considered by Congress or any "compromise" regulation bill will harm con- sumers. George Bush and Congress would do well to point out t h at local governments can help consumers by removing restrictions on competition. And Bush and Congress can help as well by removing restrictions on cable services provided by telephone companies. No kind or amount of regulation will help consumers. Only c ompeti- tion will. William G. Laffer M McKenna Fellow in Regulatory and Business Affairs

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