Tuesday, May 10, 2005

The cable monopoly: Why cable costs so much

The venerable Consumer's Union is the familiar producer of reliable ratings of everything from toasters to cars to "lawn tractors" (current best buy lawn tractor: John Deere L111/L118/L108). The organization is funded by its members and so is beholden only to them. Its no-advertising magazine, Consumer Reports, is known for its dissection of the value of a product for the consumer; its ruthless exposure of which "features" are worthless sales gimmicks; and its implacable record of the repair and failure frequency of major consumer products. Want to know who makes the most trouble-free car? This is the place to go.

All that is to say: these guys are on your side. They don't have to toady to advertisers and aren't a commercial product in some large media conglomerate's holdings that might find it "improper" to criticize another product owned by its masters. They are fearless and are solely in the business of watching out for the consumer's interests; your interests.

So when the Consumers Union goes on a tear about a consumer issue, it's something worth listening to. And they've gone on a tear about your cable bill. Want to know why your cable bill is so high? The Consumers Union, in a report, CABLE MERGERS, MONOPOLY POWER AND PRICE INCREASES, tells you in no uncertain terms why: The cable companies are a local monopoly and they charge monopoly rents. (In a sense, it's not their fault. They are natural monopolies--but the effect it has on your pocketbook is the same.)

What you need to know:
Cable operators are blaming the rate increases on a number of things in an effort to hide the underlying cause – the greed of the nation’s most persistent monopolists in the midst of a costly and anti-consumer merger wave. In keeping with justifications used for previous price hikes, they are blaming programming costs and capital investments needed to make new services available. Those claims simply do not withstand scrutiny...
It's not programming costs. Don't believe that your rate increases are attributable to ESPN and HBO...
If costs were really the cause of rising prices, then the cable industries’ operating margins -– the difference between its revenues and costs -- would not be rising. The facts are just the opposite. Operating margins have been increasing dramatically since 1997 (see Exhibit 2)...

The ability of cable operators to raise rates and increase revenues, even with rising programming costs, stems from the market power they have at the point of sale. They would not be able to raise prices and pass program price increases through if they did not have monopoly power.
Besides, maybe high-priced channels don't really bother the cable companies all that much:
One can also question the vigor with which cable operators resist program cost increases. Approximately 40 percent of the top channels (measured by subscription or prime time ratings), which command the highest prices, are owned in whole or in part by cable operators or companies that have large ownership stakes in cable companies...In other words, for a substantial part of the industry, rising programming prices are just a transfer from one subdivision of the cable company to another, which comes out of the consumer’s pocket.
You're getting this, right? Even the cable company's best excuse, rising prices, is a dodge. The cable companies own almost half of the expensive channels they claim are forcing them to raise your prices.

But you will, with some fairness, say: cable companies have poured huge amounts of money into networks. True, but they did it to develop new services for which they fully intended to charge. And that is working:
Another claim by cable operators is that they need the increased profit margins to pay for the system upgrades that are being put in place. Again, by looking at revenues we find that this argument does not stand up.

The digital upgrades are intended to make a new range of services available. By selling these services, the upgrades pay for themselves (see Exhibit 4). If we compare the build up of capital expenditures (a large part of which is claimed as a cost of system upgrades) we observe that revenues from services that are made possible by these upgrades have increased very rapidly. The cable operators do not need to and should not be raising basic cable rates to pay for this upgrade. They would not be able to raise basic rates to cross-subsidize advanced services if they did not have monopoly power.
Besides, infrastructure investment has not been where they've incurred the greatest expense. What they are really using your ratepayer dollars for is a buying each other out. That huge expense is something the ratepayer ends up paying--without receiving anything tangible in return.
While the cable industry has certainly increased capital expenditures to upgrade its plants, it has actually sunk a lot more capital into another activity – mergers and acquisitions. It is the outrageous prices that have been paid to buy each other out and consolidate the industry that is helping to drive the rate increases (see Exhibit 5).
Not surprisingly competition is the solution, as it is for most American businesses.
If all cable companies faced meaningful competition – as those serving about five per cent of consumers do, through head-to-head competition with other cable companies -- the cable industry could not pay inflated prices (and incur excess debt) through the merger/acquisition process, and could not pass along these excess costs to their customers. The General Accounting Office recently found that, in communities where there are two cable companies (and two satellite providers) cable prices are on average 17 per cent lower for comparable services than in communities with two satellite providers and just one cable company.
Notice, please, that real, wireline competition makes everyone's cable cheaper. As studies like the GAO's regularly document that satellite providers make no such difference in prices—evidence, should anyone care to admit it, that satellite and cable are not participating in the same market. Price competition is at the heart of the definition of markets. No price dependency = different markets.
On the other hand, competition with a fiber optic-based "Broadband Service Provider" (BSP) is demonstrably competing in the same market as the cable companies. The GAO is regularly commisioned by Congress to study whether or not a law is having the intended effect. A case study of one such law (The 1996 Telecom Act) shows:
The rates for telecommunications services were generally lower in the 6 markets with BSPs than in the 6 markets without a BSP. For example, expanded basic cable television rates were 15 to 41 percent lower in 5 of the 6 markets with a BSP when compared with their matched market.
That's even better than the 17 percent from the head-to-head cable competition cited in the first study. The added competitive advantage of fiber generally drives prices even lower.

As is usual in the American economic system, competition is the key.

And LUS promises to provide fiber-based competition. The evidence is that we will all benefit—customers of LUS and customers of Cox alike.

9 comments:

GumboFilé said...

Cable Rates and Consumer Value
July 25, 2003
Cato Institute

http://www.cato.org/tech/tk/030725-tk.html

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 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.

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.

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.

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.

www.gumbofile2.blogspot.com

John said...

David Hays,

Somehow this doesn't strike me as a week in which we can make a plausible case that the cable guys are good-hearted, open-handed providers. The most recent local demonstration of how unlike their real character this is the recent push poll that was designed to make sure that everyone in town heard a set of disinformation that ranged from the absurd to the malicious. (See my previous post.)

The line of reasoning pushed here by you and elsewhere by the likes of the Cato institute uses a "value" for your dollar ploy to distract us from our legitimate concern with monopoly pricing. Is cable giving us a better value than the did a decade ago? Quesionable, considering what comes in on my TV. But that is hardly the point.

The point of this post, to get back to the issue at hand, is that cable companies almost everywhere they are found are effective monopolies. And they act like it. You can demonstrate this by looking at the few cases where they have real, wireline competition. There is NO competition,satellite included, that can force a downward change in rates for almost all subscribers--and Lafayette is, for now, one of the places where we have no choice. The studies cited in the body of the post demonstrate this more than amply.

Here is the simple, clear, and well supported truth: if LUS builds a fiber-optic system its competition will bring the benefits of real competition to this community. We'll get lower prices from both providers and better service. That is the way real competition works. It works that way with grocery stores. And it would work that way with telecom providers—if we had LUS to provide it.

No amount of distraction should keep us from seeing that. Oppose this benefit on ideological grounds if you like--and I know an ideological case can be built--but the economic and practical case is clear.

I P Freely said...

http://www.americancable.org/news/other/on_03-0506_gleason-oral-testimonty-notes.htm
So if programming rate hikes dont happen what is this ?? Get your facts straight you keeping telling yourself what you want to hear typical

Anonymous said...

Down with cable Monopoly said:

I thought it was illegal to have any sort of Monopoly? What makes cable companies so special?

Anonymous said...

Down with cable Monopoly said:

I thought it was illegal to have any sort of Monopoly? What makes cable companies so special?

John said...

Anon,

Monopoly is a economic, not a legal term.

What makes Cox, and BellSouth, and other "natural" monopolies monopolies is that the cost of the infrastructure is so great in relation to the product offered that no one can afford compete. (Think about water: Water is cheap and the pipes very, very expensive. Almost all of the cost of providing water is in the pipes, the infrastructure, and it would only double the price of water to build two "competing" systems.

Cable is not so extreme but the same principle is at work. No one can compete with a company that has already paid for the infrastructure and half of the revenue would not pay for the bill...hence, in the "natural" course of events there would be only one provider.

Anonymous said...

A cable company will raise prices... Ok fine tell me what I am getting and maybe it is worth it...

THe cable company will claim just like someone else here has... "oh well you know you get 400+ channels now and you used ot only be able to get up to 100"

This is a load of you know what!

Why should you have to pay for 300+ channels you WONT watch, tons of music channels, channels that dont even speak your language, ect ect

If we had a choice of which cable company we wanted, not "if you live here you use us!" then cable companies would come up with more user friendly plans...

Heck even if I cant have who I want let me get rid of some channels I dont use and save some cash...

Keith said...

The Cable Monopoly is an outrage to everything this country was built upon! It all comes down to one word, 'GREED'. Cable Co. is greedy and they are going to continue to take advantage of the situation until something is done to stop it. In fact, most of you reading this would do the same thing if you had the chance. If you could make billions upon billions of dollars and nobody stopped you, would you stop? Of course you wouldn't!

Here is what I propose if you have it in you to make a stand and do something about this:

Dump your Cable Company for TV service and switch to either DIRECTV or DISH Network. Dump your Cable Company for telephone service and use your cell phone or get a service like Vonage (VOIP). That leaves your measly little internet bill.

Just keep your internet with your Cable Company unless you can live with wireless broadband service like I do. What is the result of this? The cable company simply could not operate on just the revenue from internet service and they would crumble to their knees.

Now, that leaves companies like DIRECTV, DISH Network and Vonage to pool their resources and develop a faster wireless internet service to officially put those greedy cable bastards out of business which is what they deserve.

I had enough of this shit and I did something about it. When are you going to step up and do your part.

If you still have Cable for more than just internet you are fueling the Monopoly and you should be quiet and not say anything at all. You are the reason they can still continue to do what they do.

Stand up and be accounted for, will ya!

Keith C.

John said...

Keith C.

The solution is not to further fund the monopolists by "just" buying their broadband--nor is much help to buy satellite TV since it is demonstrably true that it doesn't help drive down monopoly prices of your cable provider....including your internet.

No, the solution is the one that was being discussed in 05 when this sting was originally posted: Build your own network, let your own community get the benefit. That is what we've done here in Lafayette and what we'd strongly recommend to the rest of the nation. Muni Fiber to the Home for all.

The real way to stand up and be counted is to fight for an alternative.