Monopoly is More Than a Game:
U.S. Senate Hearing on Cable Hears Calls for Competition and Choice     5/24/2004
By Martha Kleder

Will a la carte cable pricing will lead to higher overall prices and less choice for consumers?

A la carte cable pricing will lead to higher overall prices and less choice for consumers, cable industry leaders told a Senate committee recently.

"A la carte distribution schemes," George Bodenheimer, president of ESPN and ABC Sports, told the committee, "will only produce higher prices for all cable customers, less choice and the extinction of many channels that serve specific but important audiences. A la carte will force consumers to pay more for their programming and to rent or buy set-top boxes they don't need or want."¹

That doomsday prediction is the often-repeated mantra of the cable industry. It's a prediction that may come true with few consequences, due to the lack of competition in the industry. Even though newspapers parroted the cable industry claims in their business sections the next day, the real focus of the Senate Commerce, Science and Transportation Committee's March 25, 2004, hearing was on the growing monopoly power of the cable industry.

Cable's Gentleman's Agreement: Don't Compete
You can choose your grocery store, your mechanic, your long-distance-service provider, but not your cable company. Have you ever wondered why? Today, our nation has 10 major cable companies, but none of them compete with each other. That head-to-head competition between wired cable services within a community is called "overbuilding," and it occurs in only 2 percent of the nation's markets. Where it does occur, cable bills decrease sharply.²

"It is apparent that cable operators understand that other wireline providers provide the greatest competition," said Marilyn Praisner, a member of the Montgomery County Council in Maryland, in testimony before the U.S. Senate.

As a county councilwoman, Praisner deals with franchising cable companies, fields citizen complaints about cable service, and does both with the interests of citizens in mind. She has also seen what happens to small cable companies that try to compete with the entrenched cable giants.

"Overbuilders have complained of incumbent cable operators using aggressive marketing tactics to drive these small competitors out of the market entirely - including deeply discounted introductory rates, e.g., $24.95 per month for 200 channels compared to $77.90 per month in a neighboring community without wireline competition; cash bonuses, e.g., $200 to switch to the incumbent's cable service and another $200 to switch to the incumbent's Internet service; and forgiveness of old debt owed by subscribers to the incumbent," she testified.³

Praisner, also the chair of the National Association of Counties' Telecommunications & Technology Committee, said the association supports the idea of a la carte cable pricing because it would help temper the lack of competition in the marketplace.

"A la carte could be a means to provide consumers greater control over what they purchase. It might reduce some cable operator monopsony [a market in which goods or services are offered by several sellers but there is only one buyer, giving that buyer greater control over prices] pricing power over programmers," she said. "We also agree that a la carte offerings could permit parents greater control over what programming comes into their home."⁴

Monopsony pricing power over the programmers and monopoly pricing power over cable subscribers means cable companies can negotiate to lower the rates they pay for programming, yet raise prices on their customers with little loss of subscribers.

Praisner noted the difference between the cost of programming reported to her by the franchise-level, and the actual cost paid for the programming by the parent company.

"According to the 2001 Annual Report Comcast filed with the [Securities and Exchange Commission]: 'On behalf of the company, Comcast secured long-term programming contracts. … Comcast charged each of the company's subsidiaries for programming on a basis which generally approximated the amount each subsidiary would be charged if it purchased such programming from the supplier … and did not benefit from the purchasing power of Comcast's consolidated operations," Praisner reported.⁵

This ability to command lower prices from program providers, yet pocket the difference rather than passing the savings onto consumers, should trouble those who claim "the market" should decide all matters of public interest. Clearly, the cable industry is not operating under the laws of a free market.

Satellite video systems have been found to be of little competition to wireline-cable companies as they are unable to offer customers high-speed Internet connections. Cable giants have begun to bundle Internet service and even telephone service with their cable packages, further complicating price comparisons for consumers and regulators.⁶

Cable's New Vertical Integration
Ever since the rapid increase in cable subscription prices caught the attention of lawmakers, cable companies have been blaming the cost of programming for the excesses - ¯even though studies from both the Federal Communications Commission (FCC) and the Government Accountability Office note that programming can account for only 25-30 percent of rate increases to consumers.⁷

After the Telecommunications Act made changes in 1996, deregulated cable companies began merging at a rapid rate, creating regional monopolies. Now the FCC has approved vertical mergers, allowing program producers to merge with video distribution systems.

The first vertical merger was News Corp. (FOX) with Direct TV. With this deal, News Corp. is able to set high programming prices with Direct TV without feeling the pinch;, essentially moving money from one pocket to another. That base price, however, is in turn charged to other distribution outlets, like EchoStar, and wireline cable providers.

Just recently, merger talks between the Comcast cable system and Disney fell through. If it had been approved, this merger would have given Comcast an ownership stake in some of the nation's most popular programming, including ESPN, A&E, ABC, the History Channel, Lifetime and the Disney Channel.

With only four media conglomerates large enough to vertically integrate with a distribution channel, NBC Universal, Disney/ABC, Viacom/CBS and Time Warner - which already owns a cable distribution network; - the merger of even one of these would spark what Gene Kimmelman, director of the Consumers Union, calls "an arms race of cable-programming price increases."⁸

"Will one of these giants refuse to pay top dollar for the other's channels, running the risk that the other will retaliate in kind? Not likely," he told the committee.

Kimmelman says the only way to head off this inevitable anti-consumer consolidation is to restore competition in the cable industry. That competition can be achieved by giving consumers power over what they buy, or a la carte cable, competition between cable providers for subscribers, and meaningful and enforced limits on media consolidation.

"By requiring that cable operators offer 'a la carte' programming in conjunction with any other packages they wish to offer - the market power of the consumer's pocketbook can be unleashed to begin to help lower programming costs, increase incentives for programmers to provide quality fare to customers, and give viewers the opportunity to not pay for content they find objectionable or too expensive," he said.⁹

Cable Industry on the Cusp of Regulation
The FCC's Tenth Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming notes that the Multichannel Video Programming Distribution (MVPD) industry - cable, direct to home satellite, etc. ¯ exceeds the threshold for a moderately concentrated market as defined by the Department of Justice/Federal Trade Commission Merger Guidelines.

However, the FCC says it's unclear if it should be alarmed by the trend, because "the delivery market is local, not national, and because the main competitors to cable in both the upstream and downstream markets continue to grow in size."¹⁰

Kimmelman notes that the FCC's latest assessment of competition muddies the issue by using two different figures for the number of households subscribing to cable. Unable to determine that number on its own, the FCC relied on two outside sources for the data; those sources differed by 5 million customers. The FCC used the lower figure for the financial assessment and the higher figure for the competitive assessment. The previous year's report used the higher number for both calculations.

"Slipping the lower figure into this report may be strategically motivated," said Kimmelman. "If the FCC uses the higher figure and growth persists at the rate implicit in those figures, by this time next year cable will be well above 70 percent of the TV market. This is a threshold that would trigger petitions to the FCC to regulate cable. If the FCC shifts to the lower figure, or claims the conflict between the two creates uncertainty, the regulation trigger would be put off several years."¹¹

Regulators look at the problem from the national level, seeing many providers and a wide range of programming. However, it is clear from consumers' rising bills and lack of choice that local cable operators have little to fear from market forces. Many who testified before the Senate agree that giving customers the ability to vote with their feet and their wallets is a needed first step in restoring balance to the market. Not only will cable choice give citizens control over rising bills, but it will give them control over the programming that comes into their homes.

An Idea From the North to Become an Amendment This Year
Senators on the committee received a summary of Canadian digital cable plans that allow customers to choose channels a la carte.

Committee Chairman Sen. John McCain (R-Arizona) has stated he will sponsor a measure requiring cable companies to offer cable choice or a la carte pricing. That measure is likely to surface as an amendment to an authorization or spending bill sometime this year.

Printer Friendly Version