Cable TV Rates: Not A Pretty Picture  | American Journalism Review
 AJR  Columns :    THE ECONOMICS OF TELEVISION    
From AJR,   July/August 1998

Cable TV Rates: Not A Pretty Picture   

Skyrocketing bills cause concern in Washington.

By Douglas Gomery
Douglas Gomery is the author of nine books on the economics and history of the media     


Today most of us watch TV via cable. Thus, when President Clinton signed a new telecommunications law in February 1996 we were promised deregulation would lead to vigorous competition and lower rates.

The reality is that since then cable TV rates have increased more than four times faster than inflation. According to the government's most recent figures, cable TV prices rose 7.9 percent for the 12 months ending March 31, 1998. General inflation was just 1.4 percent during the same time period.

On Capitol Hill a mood of celebration has turned to finger pointing. No one now wants to take credit for pushing through the bill that promised so much and delivered so little.

As the average monthly fee nears $1 per day, approaching $30 per month, Americans have started to notice. TV used to be free; now cable operators openly talk of separating out popular networks – like ESPN – and charging $1 to $4 per month for that set of sports channels alone.

Add in all those pay channels, pay-per-view events and bills for the plethora of choices cable TV offers could mean a monthly bill in three figures.

The 1996 Telecommunications Act placed the Federal Communications Commission in charge of monitoring rate increases but gave it a weak stick. Critics from both sides of the aisle agree the commission has not done an adequate job holding the line.

But don't blame the FCC. The problem is that the two alternatives that were expected to provide competition to cable and thus lead to lower prices – delivery through local telephone wires and direct broadcast satellites – have proven impotent threats.

The local telephone companies have largely passed on cable and instead placed their corporate bets on the Internet. These phone executives learned TV was a whole different business, requiring management skills not in their portfolios.

Home delivery via pizza-sized satellite dishes (DBS) has only attracted about one household in 13 and now is stagnating. Many who signed up have returned to cable once they realized the added channels were simply pay-per-view movies, and they could no longer get their local news.

FCC Chair William Kennard correctly told a congressional panel that DBS "is not a perfect substitute for cable."

Look for there to be a great deal of pressure on Congress to free DBS to offer local affiliates as a way to make satellites a stronger competitor. Cable industry representatives say in return they want DBS to carry every local channel, as cable is required to do. DBS wants to include only the profitable network affiliates.

As the stalemate ensues, cable has consolidated its forces and captured more and more of the most attractive TV programming. We can see this with baseball. In 1995 nearly two-thirds of all broadcast baseball games were on free TV. Now more than half are available on cable. In Chicago, for example, one used to see the Cubs on WGN, free to anyone with a TV set. This year, in a measure of its vertical power, the Tribune Co. has moved 50 games off WGN to ChicagoLand, its local cable channel. Cubs fans now need to subscribe to cable or miss the games.

This has made local cable franchises more and more valuable. Just to play the game now requires billions. Thus, when Paul Allen, who cofounded Microsoft, recently bought a controlling interest in Marcus Cable Co., he forked over $2.78 billion – in cash. Likewise, Cox Communications Inc. agreed to buy 80 percent of Prime South Diversified Inc. for more than $4,000 per subscriber. A year ago the average cost per sub was just $2,000.

These are not isolated instances, but indications of the long term growth expected in the cable business. Savvy investors are voting with their pocketbooks. And they will pass on these costs of doing business to customers. Congressional critics like Rep. Edward Markey (D-Mass.) correctly call this "cable rate El Nino."

Rep. W. J. (Billy) Tauzin (R-La.) agrees "price gouging" has been going on but blames the FCC: "The amount of rate increases that have been allowed is unconscionable."

In response to the congressional backlash, Decker Anstrom, president of the National Cable Television Association, has publicly proclaimed his member companies will hold down price increases. This voluntary solution is the one many Republicans support.

In the middle, FCC Chair Kennard gently reminded the companies at their annual convention in May that his agency has an obligation to protect consumers and urged the cable companies to "show restraint" in rate increases.

In the end, I predict many will side with FCC Commissioner Gloria Tristani, who has called for Congress and the president to extend the FCC's ability to regulate cable rates beyond the March 1999 expiration, when cable rates would become unregulated. l

###