GAO’s Cable Report Smacks Down A La Carte Regulation

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On October 24, the U.S. General Accounting Office released itslong-awaited report on cable industry rate competition, "IssuesRelated to Competition and Subscriber Rates in the Cable TelevisionIndustry." Despite earlier fears of many in the cable sector,the report ended up sending Congress a very clear message regardingcable industry rate reregulation: Don't bother. In addition toconfirming that cable industry deregulation has benefited consumers andresulted in increased competition in the video programmingmarketplace, the GAO report also makes it clear that the costs ofreregulating the cable sector would far outweigh the benefits.Additionally, the report should serve as the nail in the coffin ofrumored à la carte regulation of the cable sector, whichwould require that cable operators separate and sell eachindividual channel that they offer. A la carte regulation wouldrepresent backdoor rate reregulation of the cable sector and wouldcompletely upend the industry's traditional business model andpricing structures. The clear implication of the GAO's findings inthis report is that deregulation of the cable sector has worked andthat reregulation won't improve consumer welfare. Consequently,Congress lacks grounds for reregulating cable in any capacity.

Stating the Obvious. Most of the findings inGAO's report are fairly unsurprising and uncontroversial. Forexample, the report notes that the rise of the Direct BroadcastSatellite industry has become a formidable competitive threat tocable and helped encouraged intense rate and quality rivalry forvideo programming consumers. And in true GAO form, the reportbecomes overly preoccupied with government process. Specifically,the GAO is concerned about the reliability of the FCC's annual cable rate survey and calls on theagency to take steps to improve the survey by providing moredetailed information about cost changes in the industry so Congresscan exercise better "oversight" of the industry.

But the real meat of the study involves a discussion about howcable operators currently package and price video programmingoptions for consumers and the impact of those business models onoverall rates. This is where the GAO could have easily tread intodangerous regulatory waters by endorsing either direct or indirectreregulation of cable rates. Instead, the GAO navigated the issuewith surprising acumen and provided a balanced overview of the insand outs of cable industry regulatory policy.

For example, the GAO report provides a very level-headedanalysis of current cable industry rates. Although the report notesthat cable rates rose faster than the general rate of inflationover the past five years, the GAO notes that many factors havecontributed to the rising cost of cable service: increasedprogramming expenditures (especially sports); substantialinfrastructure investments and upgrades ($75 billion since 1996);and increased customers service expenditures. In other words, whilenominal cable rates have risen over the past few years,the amount and quality of the service the industry has provided hasincreased. When the number of new channels and increased viewingtime are taken into account, it becomes clear that thequality-adjusted price of cable programming is actuallyquite reasonable and that "cable viewers appear to be substantiallybetter off now than they were six years ago" as Michigan StateUniversity economist Steven Wildman found in an important new study. Moreover, the GAO alludes to the fact thatthe inflation rate may not be a very meaningful yardstick by whichto compare cable rates anyway. Indeed, the price of many goods andservices routinely rise faster than the inflation rate during anygiven period, but that tells us little about consumer value orwelfare.

Break Up the Tiers? Several of the channelsthat cable operators offer have become very expensive in recentyears and contributed to the rising nominal cost of the various"tiers" of service from which consumers choose. In particular,skyrocketing sports programming costs and expensive newentertainment channels are major cost drivers for cable carriers.Ultimately, those costs will get passed on to consumers when theypurchase a basic or enhanced tier of cable service that includesthose stations. This fact has generated enough concern on CapitolHill that legislation has been discussed-at least by Sen. JohnMcCain (R-AZ), head of the Senate Commerce Committee-which wouldrequire cable operators to breakup their programming tiers andoffer consumers the ability to choose channels on an individualbasis. Such an à la carte mandate would presumably givecable subscribers more choice and help lower overall rates sinceconsumers could reject more expensive channels that inflate thatcost of any given tier.

In reality, however, mandatory à la carte regulationwould have potentially devastating implications for the cableindustry and consumers alike. Consider first the issue of the costof time for both industry and consumers. Presumably, an à la carte mandate would require that cable operators provide eachhousehold a channel checklist (either on paper, online, or over thephone) that would need to be filled out. How long will this take?In a 500-channel universe, how many hours will consumers need tospend on their computers, or on the phone with cablerepresentatives? Second, consider the technology upgrades thatwould be necessary to make à la carte a reality. An"addressable converter box" would need to be installed in each hometo ensure that channel selections could be properly scrambled ifthey were not selected by the consumer. So say goodbye to "cableready" TV sets; everyone will need a set top box under an à la carte system, and that means higher costs for many householdssince most currently do not have such boxes.

Third, à la carte regulation would undermine theeconomic model that has driven the success of the cable sector. Ala carte proponents foolishly assume that program bundling hurtsconsumers when, in reality, the exact opposite is the case.Sometimes the whole is much greater than the sum of theparts. For example, newspapers bundle issue sections togetherinstead of selling them individually because an à la carteapproach would not attract as great a customer or advertiser base.The same is true of cable television. Programming tiers thatinclude a diversity of channels increase value for advertisers andconsumers alike. And if advertising dollars dry up, it means cablebills will likely increase as well.

Finally, à la carte regulation would likely curtail theoverall amount of niche or specialty programming on cable networks.The current tiering approach keeps many smaller channels afloat. Infact, as a contractual matter, many programmers refuse to selltheir channels to cable operators unless they are included in aspecific tier. An à la carte regulatory mandate would needto nullify existing contracts in order to immediately offerconsumers unrestricted channel choice. But doing so would likelycut back the overall range of consumer choices in the long term.And how would consumers even find new niche channels in an à la carte environment? As the GAO report notes that, "subscribersplace value in having the opportunity to occasionally watchnetworks they typically do not watch." In other words, viewersplace a high value on channel surfing since it allows them tosample new channels and programs. But à la carteregulations would discourage that process and suppress thedevelopment of new niche programming options.

For these reasons, the GAO report argued that à la carteregulation would have unintended consequences and costs that woulddiscourage consumer choice and likely result in increased rates forservice. Let's hope Senator McCain and other members of Congressheed this warning.