Cable Rates and Consumer Value

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If there's one subject in the field of telecommunications policythat never seems to go away, it's the issue of cable rates. If weare to believe the unremitting annual tirades of certain members ofCongress and the self-anointed "consumer advocates," the cableindustry is a gaggle of gougers that have nothing but contempt fortheir customers. The solution to them is clear: re-regulate ratesand all will be put right again.

This mindset was so prevalent for a time that Congress actuallydid impose price controls on industry via the Cable Act of 1992over the veto of President George H.W. Bush. Luckily, theTelecommunications Act of 1996 undid much of this mischief byphasing out rate regulation by the late 90s. But the Cable Actincluded another stipulation that lives on: the FederalCommunications Commission is required to issue an annual report oncable prices, which leads to the perennial cable-bashing campaignsby regulatory-minded consumer groups and legislators. When this year's report was issued on July 8, itgenerated expected levels of hysteria after the agency revealedthat the average monthly rate for cable service increased by 8.2percent from $37.06 to $40.11 for a 12-month period ending July 1,2002.

Senator John McCain was one of the first out of the gateswith caustic comments. "The cable industry has risento new heights in their apparent willingness and ability to gougethe American consumer," he proclaimed. Hearings on the issue arelikely to follow this fall after another report on cable rates bythe General Accounting Office is released. Senator McCain andothers might introduce legislation at that time proposing ratere-regulation once again.

The reality of today's video programming marketplace is fardifferent than what Sen. McCain and his fellow cable-bashers claim,however. Indeed, by all measures, the cable industry'scontributions to consumers and the broader economy have beensignificant. From data culled from FCC reports, industry trade association reports, and a majorrecent report by the Bortz Media & Sports Group,the industry's real impact on the U.S. economy and consumersbecomes apparent:

* Substantial Employment Impacts: The Bortzreport found that since 1990 the direct and indirect employmentattributed to the cable sector doubled, increasing by more than570,000 jobs. That represented nearly 3 percent of all net new jobscreated in the U.S. over a 12-year period. The report alsoestimated another 137,000 jobs were created in related industriesover the same period thanks to cable industry activities.

* Impressive Investment: The cable industry hasinvested a staggering $75 billion in network upgrades since 1996 inan attempt to migrate from an analog, one-way, low-bandwidthservice to a digital, two-way, high-bandwidth system. Whereas theindustry only offered roughly 450MHz or less of system capacitythroughout the '90s, today the industry's massive investment hasallowed over 80 percent of all American homes to be served bybandwidth of 750MHz or greater. This not only makes cable a bettervalue for consumers by offering more channels and services, but italso allows cable to put greater competitive pressure on otherservice providers, such as telephone companies and satellitefirms.

* More Channels: Whereas cable subscribers onlyhad access to an average of 27 channels in 1986, today they have anaverage of 58 channels. Of course, the total number of channelsavailable on any system can go into the hundreds if all servicesare considered, including music channels and video-on-demand. Infact, while not available on every cable system, there now existover 300 different national cable programming networks compared to87 in 1992. Importantly, as channel capacity has exploded, more andmore niche audiences are being served with highly tailoredprogramming, such as Black Entertainment Television, Oxygen and WE:Women's Entertainment, a wide variety of foreign language channels,and a long list of family, children's and religious channels toonumerous to list.

* Improved Quality: While programming qualityis a subjective issue, it's hard to deny that the quality of cableprogramming has improved markedly over the past decade. Seventeendifferent cable networks earned almost 200 Emmy nominations lastyear and won 41 total awards. First-run shows like HBO'sSopranos and Sex in the City or Showtime'sQueer as Folk are notable examples of cable programs thathave won praise from critics and consumers alike. And viewers mustagree, since they tuned in to cable shows in record numbers lastyear and for the first time ever primetime cable viewership exceedsthat of the major broadcast networks.

* New Services: While cable companies have beenbusy expanding upon their core mission to become better videoprogramming providers, they have simultaneously made impressivestrides in an entirely new sector-data delivery-and becomeAmerica's primary provider of high-speed Internet access. Cablemodem service is now available to roughly 80 percent of the nationand already has 12 million subscribers. Better yet, the cablesector's deployment of high-speed data networks has it poised tobecome a major player in the telephone sector through revolutionaryvoice over Internet protocol (VoIP) technologies. VoIP allows phonecalls to be made through a consumer's Internet connection, largelybypassing traditional telephone networks. Finally, high-definitiontelevision programming is being rolled out by many operators.

With these facts in mind, we can return to the accusationleveled by Sen. McCain and others: That because cable rates rose bya few bucks last year, consumers are being "gouged" and only pricecontrols can rectify this great consumer harm. As the facts aboveillustrate, however, consumers are getting a lot for the money thatthey voluntarily pay their cable providers today. While the nominalprice of cable may have risen, the quality-adjusted priceof cable programming is actually quite reasonable; we get a heck ofa lot more now for our money than we did 10 years ago.

But critics will persist: Why have nominal prices risen at all?Well, simply put, all these new services cost money. Skyrocketingsports programming costs and expensive new entertainment channelsare also big cost drivers for cable carriers. If legislators reallywanted to address escalating cable rates, perhaps they should dropa bill placing price controls on athletes and celebrities whosalaries inflate the overall cost of cable programming forconsumers! (Wait, sorry I said that. There'll probably be a billintroduced in Congress soon proposing that silly idea.)

Of course, another way to look at this issue is through theprism of property rights. Cable operators own their networks andhave the right to charge whatever they want for service, even if itwasn't as good as it is today. No one has an inalienable right tocheap video programming. Consumers voluntarily sign up for cableservice and if they're dissatisfied for any reason with it they cango get a satellite dish or just watch over-the-air broadcasttelevision.

So instead of threatening to punish success through there-imposition of price controls, Congress should acknowledge thecable industry's achievement as a great capitalist successstory.