From The Founder's Desk
columnist: Walt Thiessen

Topic: Government Regulation
New FCC Restrictions Likely Won't Accomplish Much

---

New FCC rules requiring that cable monopoly owners break down the pricing of popular cable TV channels to individual channels rather than being sold as packages won't accomplish as much as it should.

---

by Walt Thiessen
(Libertarian)
Monday, November 12, 2007

Articles by the Washington Post and the New York Times among others are suggesting today that the Federal Communications Commission is planning to implement new rules that would require cable companies to open access to their markets. In general, this sounds like a good thing to most people. Indeed, I would be very happy to see my own cable TV bill reduced. We clearly are asked to pay rates that are far too high. I doubt that many would disagree that they are monopolistic rates. But the FCC's new proposals, while perhaps well intended, will likely produce counter-productive results.

Oh sure, they may force cable to open up the pricing and access structures of their markets to satellite TV, but there doesn't appear to be anything in the regulations that would bring cable pricing down. They might also succeed in preventing Comcast and Time Warner from acquiring any more local markets to add to their empires. But the sad fact is that, as the late Harry Browne was so fond of saying, "Government doesn't work." What he meant is that whenever government tries to regulate something to benefit people, the net result of its actions is usually to create circumstances that cause more harm than good, often harming the most the very same people it was trying to help in the first place.

The really sad thing about the cable TV industry is that it didn't have to turn out the way it did. To understand how that can be, we must turn our attention back 23 years to the year 1984 (that great Orwellian year) to this Cato Institute article which explains how the cable industry became a monopoly in the first place. Let me take a moment here to quote extensively from that article:

"Cable as a 'Natural Monopoly'

"Nearly every community in the United States allows only a single cable company to operate within its borders. Since the Boulder decision in which the U.S. Supreme Court held that municipalities may be subject to antitrust liability for anticompetitive acts, most cable franchises have been nominally nonexclusive but in fact do operate to preclude all competitors. The legal rationale for municipal regulation is that cable uses city-owned streets and rights-of-way; the economic rationale is the assumption that cable is a 'natural monopoly.'

"The theory of natural monopoly holds that 'because of structural conditions that exist in certain industries, competition between firms cannot endure; and whenever these conditions exist, it is inevitable that only one firm will survive.' Thus, regulation is necessary to dilute the ill-effects of the monopoly. Those who assert that cable television is a natural monopoly focus on its economies of scale; that is, its large fixed costs whose duplication by multiple companies would be inefficient and wasteful. Thus, competitive entry into the market should be proscribed because it is bound to be destructive.

"Most natural monopolies turn out to be self-fulfilling prophecies. Once a governmental entity has determined that a certain activity is a natural monopoly, it is within its power to so decree by limiting entry into the market to a single producer. Such is the case with cable television.

"The typical municipal government will not permit wiring for cable television until it has solicited bids through issuance of a Request for Proposals (RFP), which establishes minimum prerequisites for all bidders (such as channel capacity and allocation, community access, and construction requirements). The bidders tacitly understand that they are bidding for the exclusive right to serve the community, and base their proposals on an expectation of monopoly profits. After submittinq proposals, the bidders battle one another through the use of such weapons as cocktail parties, media campaigns, and prominent community advocates known in the industry as 'rent-a-citizens.' The RFP process itself effectively excludes all but a few companies from offering services to potential subscribers, in that most companies do not have the financial backing to meet the city's articulated prerequisites or to engage in the political gamesmanship involved in nearly every contemporary franchise contest.

"The Denver franchise, awarded in 1982, provides an example of this process. Of 53 companies expressing an interest in serving Denver's citizens, only 3 submitted proposals. Each of the bidders spent approximately $1 million in the political contest to win the franchise. The massive regulatory scheme imposed on the winner is embodied in a permit and contract of over 100 pages that incorporates by reference a four-volume proposal. Among other requirements, the franchisee must

- pay 5 percent of its annual gross revenues as a franchise fee, plus an additional 2 percent for community programming;

- defray the city's expenses for the RFP process ($80,000);

- provide a $1 million construction bond and a $100,000 letter of credit;

- grant $1.5 million in loans and capital to small businesses and minority groups;

- wire the entire city according to a fixed construction schedule based on political rather than practical considerations;

- agree to pay $1,000 penalty per day for franchise violations;

- submit to rate regulation;

- allow the city to veto programming changes;

- set aside all or part of 22 channels for programming access, and cede editorial control over them !

- build studios and other facilities for access to selected special-interest groups at a cost of $7.34 million; and - provide an emergency override system that enables city officials to turn on subscribers' sets, adjust the volume, and broadcast 'emergency' messages into their homes at any hour of the day or night.

"In exchange, the franchisee receives a de facto exclusive 15- year franchise and is insulated from some of the effects of competition through a guaranteed rate of return.

"The franchise process is an excellent arrangement for revenue-starved cities and power-hungry bureaucrats. For cable companies, it is a mixed blessing: Winners of franchises can reap windfall rewards, but, by defending the franchise process against the free marketplace, they provide carte blanche to regulators by conceding the natural monopoly premise. As Cablevision's Charles Dolan warns, 'As an industry, it is really bad for us to have an articulated view that cable can operate successfully only...in a monopoly environment. That view is an invitation to a regulatory response that would set us up as common carriers,' just like telephone and utility companies.

"The clear losers, however, are the subscribers. Instead of cities purchasing the desired public-interest services and paying for them through general taxes, the costs of the cable company's giveaways are passed along to subscribers through a hidden tax built into monthly rates. A recent study by the Ernst & Whinney accounting firm reveals that typical cable regulatory costs amount to $5.60 Per month per subscriber. In addition to rendering cable unaffordable to many, the regulatory burden limits choice, investment, and innovation. These are the costs of replacing market competition with political competition."

Today, it's almost laughable to read that last paragraph. Regulatory costs of $5.60 per month? If you look at your entire cable bill it becomes clear that the true cost of local government-mandated cable monopolies is a lot more than that. The fact that many of us are paying $50 to $75 a month just for basic cable makes a bad joke out of that claim. Add in the ridiculously high cost of the various premium channels and you find most cable households with monthly cable bills of $100 or more per month. Yet, at the time, $5.60 in regulatory costs (which actually represented nothing more than the literal fees paid for cable companies to honor government regulations) seemed quite high. Now that government has successfully entrenched cable monopolies throughout the USA, those direct costs don't amount to a hill of beans. They don't need to, because the damaging regulation they caused has long-since driven cable prices through the roof.

What essentially happened is that our local governments decided that in their view, since cable monopoly was going to happen anyway (a view which defied reality, since the CATO report clearly indicated that there were hundreds of suitors in each major locality at the time), they were therefore justified in forcing the industry to allow only one cable provider in each local area, and then to charge large fees to that company in exchange for the right to the advantages of that monopoly, fees which filled (at the time) the local government coffers. It was a classic win/win/lose scenario. The winning cable company bidders, which were the ones that had the wealthiest investors behind them, won. The local governments won in the short term. The consumer lost, and the high price of that loss continues until this day.

Most people don't realize that those same local regulatory boards still exist, and they still function to keep out competition. This suits the FCC just fine, because the FCC doesn't really want competition at the local level. They have long-since bought into the fallacious argument that competition between cable companies for a single market isn't possible.

The sad fact, as most satellite TV owners know, is that cable's quality and continuity of service far surpasses satellite service. I don't mean that their customer service is better. Very often, it's not. No, I mean that the quality of the TV signal is better. Cable can't avoid doing better in this regard because cable TV sends its signal over an electrical cable that is protected from the weather elements, whereas satellite TV is subject to the whims of thunderstorms, hurricanes, and other forms of bad weather. So long as cable companies are permitted (actually required) by law to be monopolistic providers in local areas, there really won't be any relief for cable customers.

Did you like this article?
If you did, Thumb It!
6 thumbs so far

2007 Walt Thiessen, all rights reserved.
Published: Monday, November 12, 2007
Last modified: Monday, November 12, 2007

The views expressed in this article are those of Walt Thiessen only and do not represent the views of Nolan Chart, LLC or its affiliates. Walt Thiessen is solely responsible for the contents of this article and is not an employee or otherwise affiliated with Nolan Chart, LLC in his/her role as a columnist.

Report violation by Walt Thiessen of Nolan Chart LLC's terms of use policy.