The FCC Won't Let Cable Be

by publius

As the NYT reports, big things afoot at the FCC. In particular, Chairman Martin seems poised to pass a number of regulations aimed at cable companies to increase video competition. The new regulations would, among other things, cap the size of cable companies, increase competitors’ access to programming, and require providers to offer channels on an a la carte basis.

Sounds great, but before we celebrate, it’s worth asking – “Why is Martin – a deregulatory Republican – pushing this hard?” As you might expect, there are some cynical explanations.

But first, some credit where credit’s due. Martin is a fierce partisan, and a skilled DC political infighter. But, he does seem genuinely concerned about anti-competitive markets. It was Martin, after all, who sided with the Dems to get the (perhaps fleeting) open access provisions in the 700 MHz spectrum auction.

Unlike much of the modern institutional GOP, Martin’s position is pro-market, not necessarily pro-big business. There are important differences. When I worked in DC (having come of age in the Gingrich/Bush era), I remember asking an experienced telecom hand why on earth Reagan’s DOJ would have ever broken up AT&T. The response was simply that, at least back then, some Republicans actually believed in making markets work. It was about more than simply subsidizing industry donors.

Ok, now for the cynical explanations. First, regulations against cable help the Bell phone companies (AT&T, Verizon). Martin has long been accused of being a Verizon hack. And while that’s unfair, it’s not altogether wrong either. Phone and cable companies are competing for phone and broadband users, with video service just around the bend. These new regulations – along with the franchise reform Martin pushed earlier – will inevitably strengthen the phone companies’ positions.

Second, as the NYT hints, Martin is planning to jump back in the media consolidation fray – a political minefield. Taking strong stands against consolidation in the cable industry gives him some cover on that front.

Finally, it’s widely rumored that Martin will return to North Carolina and run for Congress or for Governor. Coincidentally, he takes strong ostentatious stands on issues near and dear to religious conservative voters' hearts (e.g., obscenity). The a la carte system (which allows you to pick and choose your channels) falls into this category. Religious groups support such a system because they want to keep smut out of the house.

Ah, DC – the city where nothing is what it seems. I love it.

Comments

[Bruce Baugh]

Said it before, will again: I really appreciate your round-ups and reporting on telcom-related news and business, Publius. Much thanks.

This is interesting. I suppose it's a sign of my political maturation + fatigue that I'm much more willing these days to say "If this step is a good one, actually good on its own terms, I'm just going to be glad of it and go for it."

[OCSteve]

Interesting. I’ve never been a fan of the cable monopolies so I’m all for it.

The a la carte system (which allows you to pick and choose your channels) falls into this category. Religious groups support such a system because they want to keep smut out of the house.

I’m sure they do but most modern TV’s come with the ability to block channels. I think it a lot simpler – as in why do I have to pay for 70 channels when I only watch 6?

I love the linked article though. The Christian networks are against a la carte because its obvious to them no one would pay for their programming. So, you know, never mind about the smut.

[yave begnet]

I thought some religious groups were against a la carte since then certain religious channels couldn't be foisted on everyone as they are now.

[yave begnet]

right, what OCSteve said.

[Gary Farber]

"I love the linked article though. The Christian networks are against a la carte because its obvious to them no one would pay for their programming. So, you know, never mind about the smut."

It's perfectly simple: the interests of people who own cable tv networks, and the interests of people who are viewers, are quite different, regardless of whether either set is Christian, secular, or worshippers of the Flying Spaghetti Monster.

Owners of cable tv networks want to force you to have their networks included in a fixed package so they can make money from you, like it or not. Christian, Home Shopping Network, the Hitler Channel, the Tropical Fish Network, whatever. It's that simple.

And only the brutal, evil, government, using threats of violence backed up by jack-booted thugs willing to kill can prevent that kind of abuse, by passing laws and enforcing them: in this case, to force a la carte cable choice.

But despite the sleight of hand the spokespeople for Christian broadcasters in that article played, by referring to the interests of Christian viewers and the interests of Christian broadcasters as one and the same, their interests are no more identical than are those of other viewers and owners of other cable networks.

That Christian broadcasting, and huge commercial empires based on preachers and preaching, is a multi-billion dollar industry shouldn't need to be mentioned, of course, nor that Elmer Gantry isn't novel, nor, perhaps, that it's not entirely clear Jesus was big on either the whole getting rich, or ostentatious praying, things.

[Mike Schilling]

Elmer Gantry isn't novel

It was too a novel.

It also said everything it had to say about five times and was at least 50% too long (in other words, it was written by Sinclair Lewis). One of the rare occasions when the movie is far better.

[OCSteve]

I agree its simple Gary. All you said is very true. I just enjoy how smut is apparently not such a big problem when allowing people to opt out of smut also allows them to opt out of religious programming. Call me easily amused…

[superdestroyer]

The cable companies that provide services will not be around much longer. Between Satellite and the phone companies, they stand little chance of surviving. Their fixed costs are too high to survive.

The ala carte pricing will destroy many of the current cable channels. Not only will they have to offer a product worth watching but they will have to offer a product worth paying for and contacting the cable company to order.

However, since the religous and shopping channels do not charge the cable companies (the shopping networks kick back a percentage). there is little chance of them going away. Channels like Sci-Fi, Golf Channel, or DIY will be the ones that go away.

When the networks go ala carte, the existing cable channels will have their current customers locked in while having little ability to develop new customers. (See PPV sports).

[Bruce Baugh]

OCSteve, I'm amused about the same thing for the same reasons, for what it's worth.

[Incertus (Brian)]

I'm just wondering how many people would actually take advantage of an a la carte system, since it's likely to be more expensive to choose 15 channels than to have a package of 40, even if it includes stuff you'll never watch. The closest I've ever come to making a decision to not purchase channels was when my satellite provider told me it would cost my more to get Fox News and Fox Sports. I laughed.

[Brett Bellmore]

"since it's likely to be more expensive to choose 15 channels than to have a package of 40, even if it includes stuff you'll never watch."

The problem with channel packages has never been that you want to watch 6 channels, and have to buy a package with 40 channels to get them. It's that you want to watch 6 channels, and 2 of them are in this package, and one is in that package, and a couple are in this package over here... And you have to buy ONE HUNDRED AND FIFTY channels to get the six you want.

And, since they all have the "pay per view" mechanisms in place to parcel out channels on an individual basis, this package scheme is NOT mandated by technological limits. Ala carte is feasible, it's just not as profitable.

And it's no accident the packages are set up that way. The cable companies are like a donut house that only sells assortments designed so that you have to buy six dozen donuts to get six chocolate donuts with sprinkles. They can only function that way because they're usually local monopolies.

And they're local monopolies because of government only granting monopoly franchises.

Fortunately, I think the whole problem is going away, as internet bandwidth grows enough to provide high quality video. But it is a real problem, and one government caused. Local government, that is.

[Incertus (Brian)]

I understand what you're saying Brett, and I agree that cable companies ought to be forced to offer a la carte options to their subscribers. I just don't think it's going to make much of a difference in the marketplace. Sure, some consumers will say "I don't want that filthy Nickelodeon coming into my house" and some will opt for the "sports channels and nothing else" menu, but I'm guessing that most families will look at the choices--stick with the package you have or pick and choose individual channels (because choosing a package and opting out of channels won't likely be available) and will decide to lump it and go with a package.

Another option cable companies might use--assuming they are forced into this--would be a package-plus arrangement, where you can get a discounted package, and then add on channels as you like. There's a channel or two in the next tier of my satellite system that I'd like to have, but it's not worth the extra 20 bucks a month (and the knowledge that I'd be getting Fox News as well) to have that couple of channels. But if I could get them for a buck or two extra a month, I'd consider it.

[Hartmut]

Newsagents have (or at least had when I last heard about it) the same problem over here. In order to get the papers that sell they have to take packages also containing lots of shopkeepers (primarily prawn of the kind that is not as reputable as e.g. Playboy).

[Nate]

Actually, cable companies local monopoly has more to do with the Last Mile Problem. The cable companies own the actual physical network, which is expensive to install. However, they also often have dark cable, just like the phone companies do with the fiber optics they installed. It's why satellite is the only meaningful competition to cable, because they get around the last mile problem somewhat. Just like how the local phone monopolies manage to stay monopolies. Government could actually help here, if the infrastructure for information delivery were owned by the government and space on it were rented at an equal rate to whoever wanted to use it. Or if the phone and cable companies were required to open their networks to competitors, which the phone companies were supposed to do, but never really did.

So the problem of local cable monopolies is one of physical networks, not of a government granted monopoly.

[Michael Cain]

Speaking as a someone who was a technologist for phone and cable companies for 25 years, there would seem to be some follow-ons to such a decision.

1) Unless the FCC has decided to make decisions about which technologies succeed and which fail, they will have to drop either the requirement on cable companies about "can't require a set top box" or the requirements on delivery of analog signals. It is completely impractical to implement a la cart with analog filters.

2) Unless the FCC has decided to make decisions about which technologies succeed and which fail, they should impose the same a la cart requirement on the satellite companies. No bundling is no bundling.

3) If they impose a la cart requirements on all of the providers, at least half of cable channels will disappear. Channels will have to increase their per-sub fees in order to compensate for lower ad revenues. The ad revenue is based in part on the number of households which receive the signal -- if viewers can no longer surf past, say, Animal Planet and stop to see how the injured puppies do, there is no chance they will see the ads. The fees which the channel commands for that ad space will decrease. And the number of people who will pay $2 for a month of Animal Planet are quite limited.

[superdestroyer]

Michael,

Ala Carte Pricing transform the business model from getting one million viewers a day to getting one million households to pay to view your product. Many of the cable channels will not survive and few new ones will start up. A network goes from having to convince views to watch to convincing subscribers to pay.

All that will be left on cable are sports, porn, movies, a few other channels. Netflix is probably the biggest winner in such a market.

[Brett Bellmore]

"Government could actually help here, if the infrastructure for information delivery were owned by the government and space on it were rented at an equal rate to whoever wanted to use it. Or if the phone and cable companies were required to open their networks to competitors, which the phone companies were supposed to do, but never really did."

Local government could help by not giving out exclusive franchises. Where they refrain from that, you DO get competition between multiple cable companies laying out physical cable to the same houses. That the companies wouldn't do this is flat out wrong, they DO where it's permitted. I know this, because my sister lives in a town with non-exclusive franchises, and just switched cable companies to get a better deal on the VOIP they were offering.

"The ad revenue is based in part on the number of households which receive the signal"

Which is just silly, since receiving the signal, (Really, not having it locked out, since that's how they do it, the signal goes to all the houses.) for a channel you have no interest in results in virtually no eye time on the ads.

Under ala carte, ad rates should go UP, substantially, because they will be rates for channels which are actually being watched.

[Nate]

It appears there's more to the local cable monopolies than I thought. The Last Mile problem is still a significant player that would hold down competition, though.

You might get competition in urban areas that are close enough together that the installation rates are cheap, but not out in suburbs, exurbs, or rural areas. Much like with mail delivery. Fedex and UPS won't deliver a letter anywhere in the US, like the Post Office is required to, for 41 cents.

Or, to run cable to all these different places would require an essentially duplicate network. I'm not really against redundant infrastructure, but building two (or more) cable connections to each house seems like a lot of money wasted. A better result would be to separate the ownership of the physical lines from the ownership of the information that moves across them. Either by having the government own the network, and allow everyone on at the same rates, or have a separate entity which is required to do the same. As it stands now, even without exclusive franchises, the incentives are all screwed up because data producers also own the data transmission lines.

[Brett Bellmore]

"You might get competition in urban areas that are close enough together that the installation rates are cheap, but not out in suburbs, exurbs, or rural areas."

Bzzzt! Nope, my sis lives in one of those suburbs, and it's even an older one, with fairly spacious lots.

Out in the rural areas, you don't get cable, period. I suppose it's just barely possible that there's some marginal density condition where the market will only support one cable company profitably, but the evidence, in the form of what actually happens in communities which don't give the companies exclusive franchises, does not support this.

That monopoly franchise are required by the cost of installation is just a rationalization: They're offered to the companies because the companies in return provide local governments with various forms of kickbacks, such as AV equipment for the local schools, a free government channel, and other ways of buying that monopoly.

[Jim Satterfield]

The Last Mile question and infrastructure costs are very real issues. While I don't know if government "ownership" of the infrastructure and rental is the answer, encouraging a similar system with the infrastructure owned and managed by a not-for-profit third party that the government could help establish had occurred to me.