Cable Rates and Consumer Value

July 25, 2003 • TechKnowledge No. 53

If there’s one subject in the field of telecommunications policy that never seems to go away, it’s the issue of cable rates. If we are to believe the unremitting annual tirades of certain members of Congress and the self‐​anointed “consumer advocates,” the cable industry is a gaggle of gougers that have nothing but contempt for their customers. The solution to them is clear: re‐​regulate rates and all will be put right again.

This mindset was so prevalent for a time that Congress actually did impose price controls on industry via the Cable Act of 1992 over the veto of President George H.W. Bush. Luckily, the Telecommunications Act of 1996 undid much of this mischief by phasing out rate regulation by the late 90s. But the Cable Act included another stipulation that lives on: the Federal Communications Commission is required to issue an annual report on cable prices, which leads to the perennial cable‐​bashing campaigns by regulatory‐​minded consumer groups and legislators. When this year’s report was issued on July 8, it generated expected levels of hysteria after the agency revealed that the average monthly rate for cable service increased by 8.2 percent 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 gates with caustic comments. “The cable industry has risen to new heights in their apparent willingness and ability to gouge the American consumer,” he proclaimed. Hearings on the issue are likely to follow this fall after another report on cable rates by the General Accounting Office is released. Senator McCain and others might introduce legislation at that time proposing rate re‐​regulation once again.

The reality of today’s video programming marketplace is far different than what Sen. McCain and his fellow cable‐​bashers claim, however. Indeed, by all measures, the cable industry’s contributions to consumers and the broader economy have been significant. From data culled from FCC reports, industry trade association reports, and a major recent report by the Bortz Media & Sports Group, the industry’s real impact on the U.S. economy and consumers becomes apparent:

* Substantial Employment Impacts: The Bortz report found that since 1990 the direct and indirect employment attributed to the cable sector doubled, increasing by more than 570,000 jobs. That represented nearly 3 percent of all net new jobs created in the U.S. over a 12‐​year period. The report also estimated another 137,000 jobs were created in related industries over the same period thanks to cable industry activities.

* Impressive Investment: The cable industry has invested a staggering $75 billion in network upgrades since 1996 in an attempt to migrate from an analog, one‐​way, low‐​bandwidth service to a digital, two‐​way, high‐​bandwidth system. Whereas the industry only offered roughly 450MHz or less of system capacity throughout the ‘90s, today the industry’s massive investment has allowed over 80 percent of all American homes to be served by bandwidth of 750MHz or greater. This not only makes cable a better value for consumers by offering more channels and services, but it also allows cable to put greater competitive pressure on other service providers, such as telephone companies and satellite firms.

* More Channels: Whereas cable subscribers only had access to an average of 27 channels in 1986, today they have an average of 58 channels. Of course, the total number of channels available on any system can go into the hundreds if all services are considered, including music channels and video‐​on‐​demand. In fact, while not available on every cable system, there now exist over 300 different national cable programming networks compared to 87 in 1992. Importantly, as channel capacity has exploded, more and more niche audiences are being served with highly tailored programming, 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 too numerous to list.

* Improved Quality: While programming quality is a subjective issue, it’s hard to deny that the quality of cable programming has improved markedly over the past decade. Seventeen different cable networks earned almost 200 Emmy nominations last year and won 41 total awards. First‐​run shows like HBO’s Sopranos and Sex in the City or Showtime’s Queer as Folk are notable examples of cable programs that have won praise from critics and consumers alike. And viewers must agree, since they tuned in to cable shows in record numbers last year and for the first time ever primetime cable viewership exceeds that of the major broadcast networks.

* New Services: While cable companies have been busy expanding upon their core mission to become better video programming providers, they have simultaneously made impressive strides in an entirely new sector‐​data delivery‐​and become America’s primary provider of high‐​speed Internet access. Cable modem service is now available to roughly 80 percent of the nation and already has 12 million subscribers. Better yet, the cable sector’s deployment of high‐​speed data networks has it poised to become a major player in the telephone sector through revolutionary voice over Internet protocol (VoIP) technologies. VoIP allows phone calls to be made through a consumer’s Internet connection, largely bypassing traditional telephone networks. Finally, high‐​definition television programming is being rolled out by many operators.

With these facts in mind, we can return to the accusation leveled by Sen. McCain and others: That because cable rates rose by a few bucks last year, consumers are being “gouged” and only price controls can rectify this great consumer harm. As the facts above illustrate, however, consumers are getting a lot for the money that they voluntarily pay their cable providers today. While the nominal price of cable may have risen, the quality‐​adjusted price of cable programming is actually quite reasonable; we get a heck of a 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. Skyrocketing sports programming costs and expensive new entertainment channels are also big cost drivers for cable carriers. If legislators really wanted to address escalating cable rates, perhaps they should drop a bill placing price controls on athletes and celebrities who salaries inflate the overall cost of cable programming for consumers! (Wait, sorry I said that. There’ll probably be a bill introduced in Congress soon proposing that silly idea.)

Of course, another way to look at this issue is through the prism of property rights. Cable operators own their networks and have the right to charge whatever they want for service, even if it wasn’t as good as it is today. No one has an inalienable right to cheap video programming. Consumers voluntarily sign up for cable service and if they’re dissatisfied for any reason with it they can go get a satellite dish or just watch over‐​the‐​air broadcast television.

So instead of threatening to punish success through the re‐​imposition of price controls, Congress should acknowledge the cable industry’s achievement as a great capitalist success story.

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