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Monday, February 7, 2005

Do No Harm: Re-writing a Prescription for Cable Competition
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The FCC's release of two reports on pricing and other aspects of competition in the cable industry evoked the usual reflexive sound bites from those who purportedly speak for consumers. Despite a number of positive signs for consumers, they hone in on the reported 5.6% increase from last year in the average price subscribers pay for cable, excluding certain programming such as premium and pay per view channels. They point out that this increase exceeds the general inflation rate as reflected in the consumer price index (CPI), which went up by only 1.1% over the same period. Based on these two numbers, they conclude that consumers are being harmed, regulators have fallen asleep at the switch -- blah, blah, blah.

This simple comparison is certainly convenient for those hoping to contrast the "white hats" they claim to wear with those of the evil monopolists and toothless bureacrats against whom they wage rhetorical war. But it also (just as conveniently) leaves out a number of facts that suggest consumers are not hurting significantly and, indeed, may see continued improvements -- if regulators don't rush in to "save" them.

Several factors suggest that the difference between the cable rate increase and the CPI may not be particularly troubling. The CPI itself reflects a composite of prices for various goods and services in the economy. Thus, some parts of that composite, of necessity, must be higher than the CPI itself, just as other parts of the composite must be lower. This may be especially true for cable service where the prices of critical inputs outside the cable company's control have jumped, as the General Acccounting Office has shown with respect to jumps in costs for cable programming. Further, as cable companies often state, the average price increase for non-premium cable service does not compensate for the fact that the number of channels the subscriber receives for that service continues to climb. Indeed, the FCC clarifies that the cost per channel for non-premium programming only rose by 1.2% -- an increase nearly indistinguishable from the inflation rate.

The possibility of consumer harm is made even more remote by the beneficial choices consumers face in subscribing to video service. Much of this choice arises from the fact that most Americans can choose from at least three video service providers: a local cable company and two competing DBS providers. Consumers have or soon will have additional choices where cable companies' service areas overlap and where emerging technologies are being deployed, such as fiber-to-the-home, VDSL and other high-speed technologies. And these choices appear to be making a difference, even with repect to the rates consumer advocates suggest are the sole litmus tests of competition. Indeed, the average cable rate in communities with greater competition increased by only 3.6%, while the average cost per channel actually declined in those same communities.

Consumers also have choices in terms of the service they take from the cable company. In particular, to the extent consumers are concerned about price, they can take only basic service. This offering entitles them to roughly two dozen channels -- including equipment, leased access, educational and public TV, major broadcast networks and some others -- all for under $20 on average. And the price for basic service only went up by 2.6%, far less than the overall 5.6% increase, which includes the more expensive non-premium channels. Cable companies also, of course, offer consumers an expanding array of non-video services, such as cable modem and telephone services.

Despite these "inconvenient" facts, the weakest aspect of consumer champions' argument concerns not their diagnosis of consumer harm, but their prescription. At times, they offer no prescription at all, perhaps hypnotized by their own familiar siren song of impending doom. At other times, their prescription is stated or implied to be a return to cable rate regulation. But they fail to explain why this approach would make the consumer "patients" they have chosen to treat any healthier.

Undeniably, competition has had some downward effect on rates. Also undeniably, the cable industry has spent tens of billions of dollars upgrading cable plant to provide more reliable service and expanded video and non-video offerings. The cable industry argues they have been pushed into making such expensive outlays to counter DBS, other emerging technologies, the eventual availability of video over the Internet and other forms of current and future competition. Consumer advocates offer no credible response to this argument. Even worse, the advocates fail to explain how their prescription of rate regulation would improve the current situation for consumers.

Perhaps the advocates recognize that rate regulation would do nothing to increase competition. Rate regulation imposes administrative costs and constrains revenues, thereby making investment less attractive. Thus, such regulation discourages, rather than hastens, companies' efforts to invest in competing networks -- the very type of competition that has spurred cable companies to offer more channels, better service and, in some cases, more competitive prices.

So if consumer advocates, despite the contrary evidence, really believe that consumers are being harmed by inadequate cable competition, they probably should at least offer a prescription that heals, rather than worsens, that condition.

posted by Kyle Dixon @ 7:10 PM | Cable

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