Cable TV Needs Competition; J. Merline

Once the cable company is in place, protected by government from competition, the expected inef ficiencies result, producing higher prices and poor quality with little hope for improvement. Underlying all this is the assumption that cable TV, because of the high fixed costs involved in providing it, must operate as a "natural mo nopoly," much like the utilities. A survey by Consumers' Research magazine (see opposite page) shows this nostrum to be invalid. According to the survey,cable can compete suc cessfully for consumer dollars, and when it does, prices, on average, are lower to consumers, and service (measured in the number of channels pro vided) is better. The survey covered 26 competitive markets John Merlineis Editorof Consumers'Research,800Mary landAvenue,N.E., Washington,DC20002. and compared these markets with 26 comparably sized non-competitive markets in clo~e proximity.

In these 52 markets, rates for basic cable (cable with no premium channels) were 18 percent lower in competitive markets than in non-competitive markets ($14.23per month vs. $17.33per month). Further, in areas where more than one cable com pany existed, more channels were provided on average (39 vs. 33), making the cost per channel about 33 percent lower (37 cents per channel vs. 55 cents per channel). In some locations, such as Chula Vista, Califor nia, Orange County, Florida, and Cumming, Georgia, cable rates were lower in areas where cable competed, but higher in directly adjacent areas where it did not. For example, Cox Cable charges $11.85 a month in areas of Chula Vista where it competes directly with Ultronics, but hikes its rate to $17.95 in those neighborhoods where it doesn't compete. In many areas, such as Vidalia, Georgia, Hen derson, Tennessee, and Troy,Alabama, the mono poly provider lowered its rates after a competitor entered the city. In Henderson, the city govern ment had fruitlessly attempted to get Multivision, the monopoly provider, to lower its rates. Frustrat ed, it asked a competitor to come into the market, and Multivision slashed cable rates from about $20 to $9, while adding channels to its service.

In Troy,Storer lowered its rates in 1990to cele brate its 10th anniversary. In nearby Montgomery, where Storer currently faces no competition, rates were raised to $18.25.As Harold Freeman, presi dent of Troy Cablevision, notes, "When you have competition, you don't need a regulatory agency. That's evident by what's going on here in Troy."

383 BASICCABLE RATES IN SIMILARLYSIZED COMPETITIVEAND NON-COMPETITIVEMARKETS1 Competitive 2 Non-Competitive Monthly Number of Price Per Monthly Number of Price Per City Rate Channels Channel City Rate Channels Channel Troy, Ala. $11.98 42 26 cents Montgomery,Ala. $18.25 29 63 cents Mesa, Ark. 16.45 44 37 Phoenix,Ariz. 18.95 36 52 ChulaVista, Calif. 11.85 33 36 ChulaVista, Calif.3 17.95 29 62 Sacramento,Calif. 16.23 33 49 San Francisco,Calif. 19.00 31 62 Cape Coral, Fla. 12.60 54 23 Fort Myers, Fla. 17.75 41 43 CitrusCo., Fla. 12.16 43 28 Brooksville,Fla. 17.61 30 59 OrangeCo., Fla. 9.62 42 23 OrangeCo., Fla.3 16.95 30 56 Orlando,Fla. 15.50 31 50 Ft. Lauderdale,Fla. 16.20 33 49 Brunswick,Ga. 12.48 54 23 Waycross,Ga. 15.75 41 38 Cumming,Ga. 19.45 43 45 Clarkesville,Ga. 15.95 29 55 Vidalia,Ga. 14.25 35 41 Louisville,Ga. 17.50 19 92 WarnerRobbins AFB, Ga. 11.98 34 35 Macon, Ga. 17.25 34 51 BooneCo., Ky. 17.63 55 32 Covington,Ky. 19.30 54 36 Frankfort,Ky. 7.00 30 23 Lexington,Ky. 13.00 34 38 Glasgow,Ky. 11.23 43 26 BowlingGreen, Ky. 18.35 32 59 Anne Arundel Co., Md. 13.08 37 34 Leonardtown,Md. 17.50 33 53 Monroe,Mich. 15.73 42 37 Adrian, Mich. 16.95 29 58 Omaha, Nebr. 15.83 35 45 Lincoln,Nebr. 15.95 30 53 Hillsboro,N.C. 18.23 32 57 Carrboro,N.C. 17.95 28 64 Paramus,N.J. 17.70 30 59 PalisadesPark, N.J. 16.50 33 50 Cleveland,Ohio 14.47 41 35 Akron, Ohio 18.50 30 61 Allentown,Pa, 14.73 47 31 Reading,Pa, 18.62 50 37 Pottsville,Pa, 13.30 30 44 Lebanon,Pa, 15.95 30 53 Henderson,Tenn. 10.48 38 28 Jackson,Tenn. 16.95 36 47 Carollton,Tx. 17.95 38 47 Addison,Tex. 17.95 32 56 Sandy, Utah 17.95 31 58 Ogden, Utah 17.95 24 75 Average $14.23 39 37 cents Average $17.33 33 55 cents 1. Communities are similarly sized and/or in close proximity to one another.

2. Figures are averages for the rates and number of channels provided by competitors in these cities. 3. Rates are for basic cable in this area where not competitive. SOURCE: March 1990 telephone survey by Consumers'Research. NewTechnologyand "Natural Monopoly" The notion that cable is naturally monopolistic is further undermined by technological develop ments that allow companies to provide cable with out the need for stringing or laying cable through out a city. These technologies include private cable, wireless cable, direct broadcast satellite, and the use of common carrier lines. In addition, local telephone companies could easily provide cable to people in their jurisdictions. With private cable, the operator pulls cable channels in from a satellite and transmits them to residents of a large apartment complex or housing development. He can then send the cable signal to other buildings using microwave transmissions.

Wireless cable operates like over-the-air T~ in the sense that its signals are sent from a main trans mitter to antennas mounted on the roofs of sub scribers' homes. There are currently about 32 wireless cable companies in the United States. Direct broadcast satellite, a new development, allows the direct transmission of cable signals from 384 THE FREEMAN • OCTOBER 1990 a satellite to people's homes. The new technology allows for the use of smaller dishes to pick up the signal than are currently in use, making it a more viable cable option to urban dwellers than current satellite cable. Common carrier lines are installed by one com pany, usually the phone company, and then rented to any company that wants to send its signal over the wire. This method of delivering cable is cur rently being attempted in Chicago. The local phone companies, or Baby Bells, are also trying to offer cable as part of their phone ser vice; their efforts have been widely reported in the news. Currently, the Baby Bells are prohibited by law from providing any service other than local phone service, a prohibition which the Federal Communications Commission claims "no longer serves the public interest."

If allowed to develop, these methods of provid ing cable could quickly spur competitive forces in the industry. RoadWocbtoCompennon But if cable can compete, as seems obvious from the available data, then why does so little competi tion exist? Primarily, the reason is that city govern ments, cable operators, and cable programmers, each with a vested interest in the heavily regulated and non-competitive market, have thrown up countless barriers to entry into the cable market place. Far from a natural monopoly, cable's current status is, in reality, the result of deliberate policy. City governments prevent competition in several ways. According to James Mooney, presi dent of the National Cable Television Association, competition almost never occurs because cities "require so many commitments that only one fran chise could survive economically." (A franchise is a permit to use rightsof-way to string or lay cable in a city.) When most cities set out to award cable fran chises, they did so with the understanding that cable offered a source of potentially huge revenues flowing from cable subscribers to city coffers. In what amounts to a consumer tax on cable, most cities charge cable franchises 5 percent of their gross revenues, along with requirements for elab orate public access facilities, free telecommunica tions for local government, and other goodies.

These costs are, of course, borne by consumers. According to Thomas Hazlett, an economist at the University of California at Davis, 20 to 30 percent of an average consumer's cable bill pays for these city-mandated benefits. Just winning a franchise can be exorbitantly expensive. Cable companies have spent millions of dollars trying to convince city officials that they should be the sole provider of cable services. In Denver, for example, three companies spent more than $1 million each in advertising, promotion, and lobbying to win the city's franchise. To keep the franchise money flowing in, cities have a strong incentive to keep competitors out. As Mark Tauber, a lawyer who represents private cable companies, notes, cities "have attempted to curtail development of [competitive cable ser vices] in order to ensure that the traditional fran chised system, from.which they receive a percent age of gross revenues in the form of franchised fees, controls the lion's share of the local market."

A famous example of this is the Preferred Communications v. City of Los Angeles suit, in which the company, Preferred, has been attempt ing for seven years to obtain the right to build a competitive system in the depressed Watts area of Los Angeles. The city, oddly enough, cites as one of its reasons for denying Preferred a franchise the possibility that allowing competition might jeopar dize "cable service to all regardless of income." In addition, city governments have vigorously litigated against even those competitors that don't need franchises to build cable systems, such as pri vate or wireless cable. Such legal actions have occurred in Dallas, Indianapolis, New York, New Jersey, Chicago, and Washington,D.C. Having bought into this regulated market, incumbent cable operators are extremely reluctant to give up their monopoly position. As one large cable operator put it: "When the city has held your feet to the fire and is taking 5 percent [in franchise fees] off the top, it infuriates you to see them not take action against someone who comes in and cuts into your business."

Cable operators in Kentucky, the Bronx, Chica go, and Florida, among other locations, have bit terly fought new entrants into their markets, not by competing, but through lawsuits, ad campaigns, and complaints to city officials. In Glasgow, Ken tucky, for instance, the monopoly provider, Tele scripps, filed two lawsuits attempting to keep a competitor out.

Incumbent operators will sometimes go to absurd lengths to convince city officials that one cable company is better than two. In Cape Coral, Florida, Cablevisionran a series of advertisements in local newspapers claiming that competition from Telesat cable would mean that "600 to 700 trees would be damaged," that cable rates would be higher, and that "competition rarely endures." Meanwhile, in Collier County, Florida, the monopoly provider, Palmer Cable, invited the media and community leaders to a complimentary breakfast "and then proceeded to blow its own horn" and attack "Telesat and any other cable com pany that may want to invade Palmer's territory," according to an article in the Marco IslandEagle. Chicago Cable TV, the franchised operator in the area, convinced the city to bring suit against 21st Century, a private cable company, effectively shutting down its operations. The "CrownJewels"of Cable If this weren't bad enough, potential competi tors face one final obstacle: getting quality pro gramming. The way cable works, an operator must obtain programming from various suppliers, such as ESPN, TNT, the Discovery Channel, and oth ers. These programs make up the "crown jewels"

of basic cable service, without which it is nearly impossible to sell cable TV: According to Gene Kimmelman, executive director of the Consumer Federation of America: "Virtually all of the major programmers deny access to or discriminate against [competitive] operators in.provision of programming." A recent surveyby Information Age Economics, Inc.,of the 32wirelesscable companies in the Unit ed States bears this out. The survey found that 25 wireless systems were denied access to HBO, 14 were denied access to ESPN, 26 were denied the SportsChannel, and 31 were denied TNT. "Even when programming is made available to wireless cable systems," notes the report, "it is often avail able only on a restricted basis," that limits distribu tion to certain geographic areas. In Cleveland, for example, MetroTEN can transmit HBO only to those areas where it has a franchise, but not to near by neighborhoods where it does not.

According to some industry analysts, program mers are reluctant to sell to competitive cable operators either because the programmers are CABLE TV NEEDS COMPETITION 385 owned outright by large "multiple system opera tors" (or MSOs, cable companies with franchises in several cities), or because the MSOs use their market power to convince programmers not to sell to smaller competitors. According to Sol Schild hause, a lawyer active in promoting competitive systems, "The MSOs' clout with the major cable networks is turning out to be sufficient to assure that the second operator will have to try to com pete without being able to offer cable program ming that viewers have demonstrated they willpay for." Without these crown jewels, competitors are at a serious disadvantage. In the absence of local regulation, the cable industry would likely have developed very differ ently. For example, because of the high costs imposed by city governments on cable franchises, only larger, better financed companies were equipped to compete for franchises. Smaller com panies simply could not afford to pay for the advertising and promotion involved in swaying city councilmen, let alone pay for all the perks mandated by city officials. (In Sacramento, for instance, the winning franchise agreed to purchase 20,000trees for the city.) Upon winning a franchise, the monopoly providers of cable were able to use their profits to buy up franchises in smaller markets. In almost all the areas surveyed by Consumers'Research,the incumbent cable operator wasowned by one of the large MSOs, such as TCI, Cablevision, or Multivi sion. In other words, the current system, with huge mandatory initial costs and monopoly profits, fos tered concentration of the industry in a few hands.

It was this market power held by a few compa nies that led, in turn, to the MSOs' having the abil ity to convince programmers not to sell to smaller competitors. Cable companies appear able to assure programmers that selling to the competi tion would be bad for business, which they would likely be unable to do if competition were the norm rather than the exception. (In the cable industry, competition is referred to as "overbuild ing," a term that carries with it a subtle pejorative meaning that competition in the industry is "wasteful." Does having two supermarkets in a neighborhood mean that the area is "overbuilt"?) When competition is allowed, the other road blocks are likely to fall. That is, if programmers realize that it is in their best interest to sell to all cable systems, they probably will do so. In a com386 THE FREEMAN • OCTOBER 1990 petitive environment, such as in supermarket sales, it does a supplier no good to sell to only one company if a large number of the area's customers are buying from another company. There is anec dotal evidence, for instance, that in competitive cable markets, "penetration" (the number of homes that can receive cable) increases. That is because each firm is fighting to win as many sub scribers as possible, and so they wire areas that previously had been skipped. This was the case in Troy, Alabama; Anne Arundel, Maryland; Boone County, Kentucky, and other areas. Many of the competitive firms claimed that the first areas they wired for cable had been left unwired by the in cumbent cable companies.

When cable companies compete, lower prices occur. More people are likely to subscribe to the service when it is less expensive. It is not likely, however, that this common-sense principle willbe understood by programmers unless more areas in the country are competitive. As it stands, the only information comes from the powerful cable monopolists, who chant to programmers that new cable can't compete and that the competitors are probably fly-by-night operations who will provide few customers. Cable TV suffers not from too much deregula tion, but from too little. What is needed is a rever sal of local government policies that prevent com petitors from entering the marketplace. When cable does manage to compete, despite all these obstacles, the lesson is clear: the free market exerts downward pressure on prices, and upward pres sure on quality. D 387 On the Right to Strike by Charles W. Baird S trikes have re-emergedas a political and labor relations issue. During most of the 1980s, private sector unions used their strike-threat weapon very sparingly. Many em ployers and unions pointed out that if American industry is to regain its competitive strength, the adversarial union relations model of the National Labor Relations Act (the Wagner Act of 1935, amended by the Taft-Hartley Labor Act of 1947 and the Landrum-Griffin Act of 1959) must be replaced by more cooperative labor relations.