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Tuesday, July 19, 2005

A Refresher Course on the Pitfalls of A La Carte Regulation
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In an interview with The Wall Street Journal today (p. A4), FCC Chairman Kevin Martin said he might consider "a la carte" mandates on cable and satellite operators as a possible way to clean up content on pay TV. He told the Journal, "I saw a quote recently where one person said 'I can call up and order HBO, I don't understand why I can't call up and cancel any of my cable... programming.' I think that there could be additional control over that."

Well, before the Chairman rushes to impose a sweeping new regulatory regime on cable based on what he heard one guy say in the papers, I would hope he would consider what more rigorous research has revealed regarding the potential pitfalls of a la carte mandates. He might start by re-reading the report his own agency issued on the subject just 8 months ago. He should also take a second look at an important report issued by the General Accountability Office in October 2004.

These government reports, like the vast majority of serious academic reports penned on this topic, came to the conclusion that a la carte regulation would be devastating for the industry and consumers alike. (I should point out that I filed comments in the FCC proceeding as did my colleagues Randy May and Tom Lenard.)

Here's why a la carte mandates, while sounding so good on the surface, would really be a disaster for consumers in the end:

* First, the issue of the cost of time for both industry and consumers could be considerable. Presumably, an a la carte mandate would require that cable operators provide each household a channel checklist (either on paper, online, or over the phone) that would need to be filled out. How long will this take? In a 500-channel universe, how many hours will consumers need to spend on their computers, or on the phone with cable representatives?

* Second, consider the technology upgrades that would be necessary to make a la carte a reality. An "addressable converter box" would need to be installed in each home to ensure that channel selections could be properly scrambled if they were not selected by the consumer. So say goodbye to "cable ready" TV sets; everyone will need a set top box under an a la carte system, and that means higher costs for many households since most currently do not have such boxes.

* Third, a la carte regulation would undermine the economic model that has driven the success of the cable sector. A la carte proponents foolishly assume that program bundling hurts consumers when, in reality, the exact opposite is the case. Sometimes the whole is much greater than the sum of the parts. For example, newspapers bundle issue sections together instead of selling them individually because an a la carte approach would not attract as great a customer or advertiser base. The same is true of cable television. Programming tiers that include a diversity of channels increase value for advertisers and consumers alike. And if advertising dollars dry up, it means cable bills will likely increase as well.

* Finally, a la carte regulation would likely curtail the overall amount of niche or specialty programming on cable networks. The current tiering approach keeps many smaller channels afloat. In fact, as a contractual matter, many programmers refuse to sell their channels to cable operators unless they are included in a specific tier. An a la carte regulatory mandate would need to nullify existing contracts in order to immediately offer consumers unrestricted channel choice. But doing so would likely cut back the overall range of consumer choices in the long term. And how would consumers even find new niche channels in an a la carte environment? As the GAO report notes that, "subscribers place value in having the opportunity to occasionally watch networks they typically do not watch." In other words, viewers place a high value on channel surfing since it allows them to sample new channels and programs. But a la carte regulations would discourage that process and suppress the development of new niche programming options.

For these reasons, the GAO and FCC reports concluded that a la carte regulation would have unintended consequences and costs that would discourage consumer choice and likely result in increased rates for service. As the Commission concluded: "although an a la carte option would allow consumers to pay for only the programming they choose, given current viewing practices, few consumers would experience lower bills for multi-channel programming."

Hopefully Chairman Martin takes a second look at these reports before imposing such an intrusive and costly regulatory regime on pay TV providers. Moreover, I want to conclude by asking a question that everyone seems to avoid in debates over cable TV. That is, by what right does anyone in government decide how cable or satellite television services--which remain a luxury item and not a birthright entitlement--get priced or packaged in this country? If enough citizens complained about the bundled laces in their shoes or bundled tires and radios for their cars, or the sports or food sections bundled in their local newspapers, would that be enough to justify government action to remedy such a non-crisis? The same principle holds for video programming services. Just because a certain number of consumers do not like a particular business model, it does not give the government license to upend an industry's private business arrangements and substitute a grand industrial policy scheme in the name of "consumer choice." One would hope a conservative chairman of the FCC, who supposedly believes in free markets and limited, constitutional government, would understand and defend such a principle.

posted by Adam Thierer @ 10:14 PM | Cable , Mass Media

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