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July 1, 2005
The Case for Cable Choice
Consumers should be able to choose their own cable company, not have regulators force it upon them.
By: Clark Bowers, FreedomWorks
In the modern economy Americans can choose their own bank, phone service, insurance policy, automobile, brand of coffee, and even favorite type of chewing gum among a myriad of goods and services we consume, but not so with cable service. Freedomworks believes consumers should be able to choose their own cable company, not have regulators force it upon them. The great technological advances in consumer goods over the last century has been made possible by the competitive free market which encourages businesses to develop better products at affordable prices. The cable television industry has been insulated from this process, and cable prices have been steadily rising across the country as a result. In most markets, cable providers may offer service only if granted a cable franchise by the local government(s). In exchange for access fees, municipalities grant a cable provider a franchise over wireline cable access in the area. As a result, the FCC classifies only 3.7 percent of the 33,760 municipalities with cable service as having effective wirebased competition. [1] Moreover, the GAO has found that 83 percent of all cable subscribers are served by seven cable providers that do not compete against each other in any market. [2] While cable franchises offer an easy means for politicians to collect cash without directly taxing constituents, the costs is still passed on to the consumer in the end. When faced with poor service and consistently rising prices, consumers have few viable alternatives to the local provider. With their market share assured, cable providers have less incentive to cut prices and innovate for our benefit. According to the FCC, cable prices were 15.7 percent lower on average in markets where overbuilders construct their own wireline cable infrastructures to compete with an existing cable company [3] A separate GAO report shows rates were 41 percent lower in one highly competitive market compared to its noncompetitive counterparts. [4] Competitive markets also enjoyed more channels and paid 11 percent less per channel. [5] Cable providers often claim that increased prices are the result of higher programming cost, but this is only part of the picture. Cable rates have grown more than double the rate of inflation over the last decade, substantially higher than the increase in programming costs. Moreover, revenues for cable companies have increased over the same period, indicating that in closed markets, rising programming costs are passed on to the consumer and then some. The empirical evidence shows that cable providers facing effective competition are able to lower prices and improve quality. In Montgomery County, Maryland where cable provider Comcast faces little competition, cable rates have been rising at more than 3 times the rate of inflation annually. [6] In the neighboring competitive market of Washington D.C, customers pay $5.50 less a month for basic cable and $3.00 less a month for Internet access. [7] In Allentown, Pennsylvania where franchises are not required and cable companies have competed since the 1960s, dueling providers RCN and Service Electric offer state of the art service with lower prices and record fewer complaints than the national average. [8] Municipal governments that rake in easy money from access fees often assert that cable franchising is necessary to prevent denial of service to poorer areas that offer a lesser rate of return, but in Allentown both providers offer service to 90 percent of the city, a higher penetration rate than the national average composed predominantly of franchised cable markets. [9] The experience of the telephone market also demonstrates the promise of the deregulatory approach. For decades the heavily regulated telephone industry was thought to be a natural monopoly, using the same obsolete rationale justifying cable franchises today. The "Ma Bell" telephone company was granted a monopoly and dominated the market for decades, but since its breakup in 1984 and further deregulation in subsequent legislation, consumers have seen falling prices and an explosion of service options. Most telephone customers are now able to choose between at least two local providers and dozens of long distance providers, choosing the price and service options that fits them best. Such innovation was only made possible by the removal of outdated regulations and opening up the market. Direct broadcast satellite (DBS), the primary alternative to cable, has increased its market share to 25% in recent years, but inherent disadvantages to satellite make it unlikely to create a highly competitive video programming market in the near future. First, DBS is unable to provide local channels in all U.S. television markets because of limited spectrum availability. In addition, DBS faces high installation costs and suffers more frequent reception problems than cable. A recent GAO report on the subject concludes that cable prices have not dropped in markets where DBS is the only competitor. [9] The majority of consumers show a consistent bias toward wireline video programming and DBS will not open up the cable market. However, phone companies are offering new digital video services that can directly compete with cable and offer the potential for great technological breakthroughs in video programming. But incumbent cable operators are hiding behind local franchises to deny telephone companies access to their protected markets. As legal fights delay the entrance of new competitors into the market, consumers are losing out on potential revolutionary advances in service that can only be brought about by the free market. The only long term solution to rising cable prices and poor service is open competition. Lawmakers around the country should give cable subscribers the freedom to choose their own cable company by abolishing cable franchises. [1] FCC Eleventh Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-05-13A1.pdf, p. 74. [2] Praisner, Marilyn, Testimony before the Committee on Senate Commerce, Science, and Transportation, Federal Document Clearing House, LexisNexis, 3/25/04. [3] FCC Report on Cable Industry Prices, http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-05-12A1.pdf, and see FCC News http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-256564A1.pdf. [4] General Accounting Office, Telecommunications: Subscriber Rates and Competition in the Cable Television Industry, http://www.gao.gov/new.items/d04262t.pdf, p. 7. [5] See n1 and FCC News http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-256564A1.pdf. [6] See n2 [7] FCC Petition of RCN Telecom Services, Inc., To Deny Applications or Conditioned Consent, http://www.fcc.gov/transaction/att-comcast/rcn_petdeny042902.pdf, p. 9. [8] Hazlett, Thomas W., Cable TV Reregulation: The Episodes You Didn't See on C-SPAN, Regulation, 2001, http://www.cato.org/pubs/regulation/reg16n2d.html and Hazlett, Thomas W., The Case for Cable Competition, City Journal, Winter 1992, http://www.city-journal.org/article02.php?aid=1568. [9] See n7 [10] See n4
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