December 21, 2005

December 21, 2005 | WebMemo on Regulation

Parents, Pricing, and TV Programming: The Competition Option

Federal Communications Commission (FCC) Chairman Kevin Martin caused a stir recently when he said that cable television firms should offer customers more choices about what channels they receive, including the ability to buy channels one at a time, on an "a la carte" basis. Martin's proposals come in response to the concerns of the many American parents who are increasingly worried about what their children are seeing on television. Their concerns are understandable. And Martin's goal-giving viewers more choice-is a good one. How that goal is achieved, however, is the critical issue: policymakers should remove barriers to competition in video services that prevent greater choice rather than impose new regulations.

 

Martin's Proposals

Television is not what it used to be. Twenty years ago, most American homes had access to only a handful of channels. Today, thanks to new technology, viewers may choose between dozens or hundreds of channels. And while the programming of twenty years ago was aimed at the mass market and carefully screened for all audiences, today's television provides a broad variety of content directed at different ages and tastes. That is a great advance for consumers, but has made life difficult for parents who want to keep inappropriate or offensive programming out of their homes.

 

While FCC rules ban indecent content from broadcast television, they do not apply to cable and satellite programming.[1] Chairman Martin's recent proposals are intended as an alternative to this kind of direct content control for cable television. Instead of content restrictions, he wants cable firms to increase individuals' ability to choose the television programming that enters their homes.

 

In a statement before the Senate Commerce Committee, Martin put forward two ideas. First, cable firms could offer a separate tier of "family-friendly" programming. The cable industry quickly announced plans to do this, although these plans have been met with some skepticism over content, price, and, ultimately, control.[2]

 

Martin's second and more controversial proposal is that consumers should be able to choose channels on an individual, or "a la carte," basis. Under this approach, subscribers would be able to forgo choosing a programming package and instead buy only those channels that they want to receive.

 

Martin stressed that his recommendations are for voluntary action by cable providers, not government mandates. At the same time, he left open the door to regulation, stating, "If cable and satellite operators continue to refuse to offer parents more tools such as family-friendly programming packages, basic indecency and profanity restrictions may be a viable alternative that should be considered."[3]

 

Today's Parental Controls

Can parents' desire for greater control over television programming be met without regulation? Clearly, it can. Already, substantial parental controls are available. Cable subscribers with set-top boxes, for instance, can easily block particular channels with a few remote control clicks. Those with digital set-top boxes (soon nearly universal) can block individual programs by date and time, or even by rating.[4] Further advances in technology will empower subscribers even more, perhaps allowing screening by specific language or visual content.

 

Some argue that this is insufficient because subscribers still must pay for all the channels in a package, regardless of how many they block, and thus subsidize content that they find objectionable. This has led to calls for a la carte purchasing of cable programming.

 

The A La Carte Debate

Would an "a la carte" programming system leave consumers better off? Martin argues that this is a basic issue of consumers' right to choose. Bundling together content is unnecessary, he says, pointing out that the New York Times, for instance, does not come exclusively bundled with the Wall Street Journal-each can be purchased separately. Yet, the business section of the Times does come bundled with the sports section. Whether bundling makes economic sense and benefits consumers varies from case to case and market to market.

 

In the cable market, the predominant view has been that bundling is beneficial. Allowing consumers complete control over channel selection can be expensive, at least with current technology. The economics of advertising are an even more significant factor in determining what cable choice might cost. Cable providers and programmers earn revenues not just from subscriber fees, but also from advertising. Advertisers demand some assurance that someone may be watching their ads. In part, this is because Nielson surveys of cable-channel viewership are spotty at best for many cable channels. Tiering helps to guarantee that a large number of people will at least have access to each channel and thus to the commercials on those channels. Under a la carte pricing, the number of people with access to any particular channel would decrease, threatening advertising revenue. The result would be higher rates for consumers.[5] Moreover, because the audiences for new and niche channels would fall the most, the number of program choices available to consumers would also be reduced. For these reasons, both the Government Accountability Office and the FCC itself have warned against limits on cable television's ability to package programming.[6]

 

Chairman Martin and others, however, challenge this view. They argue that the negative effects of a la carte are exaggerated, and that a la carte and other pricing systems could be implemented without raising prices, especially for customers of digital cable service.[7] At least one cable firm, Cablevision, agrees, though the bulk of the industry does not.

 

Who is right? No one knows for sure. It is clear, though, that policymakers are poorly placed to pick winners and losers from among business models, especially in quickly changing high-tech markets. These questions are best answered in the marketplace, with rival firms testing alternative ways to serve consumers.

 

A New Set of Competitors

The good news for parents and other consumers is that a set of new competitors to traditional cable providers is now emerging and is well positioned to offer enhanced control of content to consumers. This competition comes primarily from two firms that formerly offered only telephone services, Verizon and AT&T.[8] In recent months, Verizon has begun to offer video service to consumers in several cities, and AT&T will do so shortly. Both employ an Internet-based technology known as "Internet Protocol Television," or "IPTV," that allows consumers great control over what they see on television. Users can pause and playback video and order video on demand, which is programming selected individually from a menu.

 

This technology also promises to further enhance parents' ability to protect their children. AT&T's service, for instance, would allow parents to block or filter programs using their cell phones, even if they are far from home.[9] More broadly, the service could make a la carte pricing more feasible by reducing the cost of offering individualized channel lineups. In addition, the technology may be able to provide more and better information to advertisers as to which shows are being watched, thereby reducing the advantages of channel packaging.

 

Although neither firm now offers a la carte service or a family tier, both are considering these options. A spokeswoman for AT&T recently stated that if "consumers want a la carte programming, we will be happy to offer it, so long as we are able to obtain access to the programming in that manner."[10] AT&T's marketing strategy, in fact, seems to be to win over customers by providing more choice. As the spokeswoman explained, "Our goal is to provide more choices to our customers when they want it, in the way they want it."[11] This would set up a clear marketplace contest between different ways of providing video service-to the benefit of cable viewers.

 

There are obstacles that new entrants seeking to offer a la carte service will have to overcome. One, hinted at by AT&T, comes from content providers. Media firms that own cable channels, such as Disney and Time-Warner, are expected to resist a la carte pricing for fear that their less-popular channels would lose viewers and cable-system placement. As a result, a new entrant with an a la carte business model might find it difficult to obtain programming for a la carte sale.

 

However, this needn't be an insuperable barrier. Instead of the potential audiences that the current system provides, new forms of compensation could work: increased cash payments, explicit audience guarantees, or risk-sharing arrangements. If all else fails, the new entrants could obtain independent programming or even create new programming of their own.

 

Removing Barriers to Competition

A second set of barriers facing new entrants stems from the government itself. Under current law, any new cable television competitor must receive a franchise from local cable officials before offering service, typically a slow and cumbersome process. So far, such approval has been granted in only a handful of jurisdictions. Completing the process in the thousands of remaining jurisdictions could take years, and there is no guarantee that the new entrants' franchise applications would be approved in all areas.

 

By lowering this barrier to entry, policymakers would boost competition and enhance prospects for increased consumer control over television content. Several bills now pending in Congress would streamline or eliminate local franchising procedures. For example, S. 1504, proposed by Sen. John Ensign (R-NV), would eliminate local franchising authority.[12] Other bills, such as S. 2113, proposed by Sen. Jim DeMint (R-SC), would strictly limit franchising authority. In addition, the FCC itself could act because existing law already prohibits localities from unreasonably refusing to grant a franchise. In early November, the Commission started a formal proceeding to determine whether current franchise procedures violate this requirement.[13]

 

Conclusion

The concerns that many parents have about the content of cable programming are understandable. The best way to give consumers more control over that content is not new regulation, but new competition. The entry of new competitors, however, is slowed by unnecessary regulation. If policymakers want to help families and other cable consumers, they should reduce or eliminate these barriers, thereby making possible greater choice for viewers.

 

James L. Gattuso is Research Fellow in Regulatory Policy in the Thomas A. Roe Institute for Economic Policy Studies at the Heritage Foundation.



[1] According to a recent Congressional Research Service report, such restrictions on cable or satellite programming would likely be found unconstitutional in the courts. Henry Cohen, "Constitutionality of Applying the FCC's Indecency Restriction to Cable Television," Congressional Research Service Report to Congress, December 1, 2005 at /static/reportimages/A77B7F16D13DA2B630B319DE3CACEAD6.pdf. The current broadcast rules are also problematic, for several reasons. See, James L. Gattuso, "Broadcast Indecency: More Regulation Not the Answer," Heritage Foundation WebMemo No. 666, February 15, 2005, at http://www.heritage.org/Research/Regulation/wm666.cfm.

[2] See, David Lieberman, "Cost of Time-Warner's New Family Tier Raised Eyebrows," USA Today, Dec. 15, 2005, at http://www.usatoday.com/money/media/
2005-12-15-time-warner-family-tier_x.htm
.

[3] Oral Statement of Kevin J. Martin, Chairman, Federal Communications Commission, before the Committee on Commerce, Science and Transportation, United States Senate, "Open Forum on Decency," November 29, 2005, at  /static/reportimages/F8EABAB83CCA96D95099ECD9103ACB05.pdf. Given that Martin specifically raised the prospect of regulation if cable providers did not act, as well as the fact that the FCC already has considerable regulatory leverage over the cable industry, such statements were no doubt received as more than mere suggestions. See Adam Thierer, "A 'Voluntary' Charade: The Family-Friendly Tier Case Study," Techliberation.org, December 13, 2005.

[4] See controlyourtv.org. Regulation proponents argue that these "parental controls" are insufficient because the rates paid by consumers do not decrease with the number of blocked channels or programs. This misses the point. The controls can screen out unwanted programming just as effectively - and perhaps more effectively - than changes in the tiering system. The difference is an economic one - the cost attributable to the blocked programming. Moreover, given pricing changes that would occur (described below), no net savings are likely.

[5] Another unresolved issue is how rates would be set. Could providers set a la carte or family tier rates so high as to make them undesirable? If not, does that imply a return to rate regulation of the cable industry?

[6] See Federal Communication Commission, "Report On the Packaging and Sale of Video Programming Services To the Public," November 18, 2004, at http://hraunfoss.fcc.gov/edocs_public/
attachmatch/DOC-254432A1.pdf
, and and Government Accountability Office, "Issues Related to Competition and Subscriber Rates in the Cable Television Industry," October 2003 at  http://www.gao.gov/atext/d048.txt. Chairman Martin has criticized the 2004 FCC report and stated that a new report will soon be released.

[7] He stated a second study of this issue by the FCC will be released soon.

[8] Until last month, the company now known as AT&T was called SBC.

[9] Steven Lawson, "SBC, Others See New Breed of TV," InfoWorld, October 25, 2005, at  http://www.infoworld.com/article/05/10/25/
Hnsbccingular_1.html
.

[10] "AT&T Backs A La Carte TV Channels," Reuters, Dec. 2, 2005. at http://news.com.com/AT38T+backs+a+la+carte+TV+channels/
2100-1034_3-5979986.html
.

[11] Ibid.

[12] See, James L. Gattuso, "Waiting for the Telecom Godot," Tech Central Station, August 11, 2005, at  http://www.techcentralstation.com/081105G.html, and "Telecom Reform: DeMint Does DACA," Techliberation.org, Dec. 16, 2005, at http://www.techliberation.com/archives/027619.php.

[13]Federal Communications Commission, "In the Matter of Implementation of Section 621(a)(1) of the Cable Communications Policy Act of 1984 as amended by the Cable Television Consumer Protection and Competition Act of 1992," Notice of Proposed Rulemaking, MB Dkt. 05-311, November 3, 2005, at http://hraunfoss.fcc.gov/edocs_public/
attachmatch/FCC-05-189A1.doc
.

 

About the Author

James L. Gattuso Senior Research Fellow in Regulatory Policy
Thomas A. Roe Institute for Economic Policy Studies