On Dereg's 'Federal Holiday,' It's Time for Rate Reflection

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For the cable industry, March 31 could be considered a federal holiday — a sort of Independence Day without the parade and fireworks.

On that day three years ago, federal rate controls were removed from all cable-programming services, except the broadcast basic tier. Although Congress partially deregulated the industry in the Telecommunications Act of 1996, it postponed the effective date until March 31, 1999.

Over the past three years, cable critics have routinely complained that Congress unleashed a monopolist that exploited the event to engage in serial price-gouging.

Countering that argument, the cable industry has said it poured $50 billion into its networks to add digital programming, high-speed Internet access and, in some cases, voice telephony.

But the cable-bashing continues metronomically, even though direct-broadcast satellite providers have signed up 16 million subscribers in eight years, claimed 17 percent of the national pay-TV market and now control 25 percent of the multichannel-TV market in 19 states.

Examples of cable sniping are not hard to find.

At a Senate Commerce Committee hearing earlier this month, Sen. John McCain (R-Ariz.) said "cable rates are up 36 percent" since the 1996 law passed. He said the measure has failed to lower prices and produce a competitive market.

In March 6 testimony before a subcommittee of the Senate Judiciary Committee, Consumers Union Washington office co-director Gene Kimmelman also cited the 36 percent figure. "For about 90 percent of consumers, the problem with television is cable monopoly," he concluded.

At the same hearing, former Federal Trade Commission chairman Robert Pitofsky embraced the Kimmelman thesis.

"Mr. Kimmelman is absolutely right," he said. "Cable rates have gone up an average of 7 percent a year, every year since 1996 or thereabouts."

DBS kingpin Charlie Ergen — the chairman and CEO of EchoStar Communications Corp. — has attempted to use cable rates as a weapon in his battle with Washington policymakers and regulators.

HAZLETT'S REBUTTAL

Ergen has often said that cable rates would continue to rise three times faster than inflation, unless his proposal to merge with DirecTV Inc. parent Hughes Electronics Corp. is approved — and the new company is permitted to offer local over-the-air TV signals in all 210 U.S. markets, thus competing with cable on a nationwide basis.

Economist Thomas Hazlett of the Manhattan Institute for Policy Research finds a lot of humor in comments that cable rates have been spinning out of control.

Hazlett has spent years poring over government data, and has drawn at least two conclusions. One is that cable rates have risen modestly since March 31, 1999.

The second: Cable rates went up more quickly when they were regulated by the Federal Communications Commission that they did during the first 33 months after March 31, 1999.

Hazlett reviewed the data in a way that cable critics did not, although all involved relied on pricing data collected by the U.S. Labor Department's Bureau of Labor Statistics.

Cable critics base their claims on nominal rates. For example, if a monthly cable bill stood at $20 in the first year and $30 in the second year, cable's critics would argue that rates went up 50 percent.

That approach is misguided, Hazlett said, because it fails to take inflation into account.

In his analysis, Hazlett took nominal cable rate data and backed out inflation in order to calculate "real" changes in cable prices.

The FCC regulated cable rates from Sept. 30, 1992, until March 31, 1999. During that period, cable rates rose an annual 2.37 percent in real terms (nominal rates, minus inflation).

From March 31 through Dec. 31, 2001 — a period in which the FCC did not have rate-setting authority — cable rates rose an annual 1.25 percent in real terms, Hazlett said.

"The bottom line is that rate regulation was a flop for consumers," Hazlett said. "In the almost three years since deregulation, the rate of increases has been half, essentially, of what it was in the six-and-a-half years of regulation."

Cable critics always make reference to price increases since the passage of the 1996 law, Hazlett added. But that method was flawed, he said, because the FCC retained the power to regulate cable rates for three years after the Telecommunications Act's enactment.

"They talk about the fact that prices have gone up such-and-such since the '96 act. The deregulation was delayed until March 1999," he said.

Perhaps predictably, National Cable & Telecommunications Association spokesman Marc Osgoode Smith agreed with Hazlett's data.

"Prices have moderated since deregulation took effect, when you compare prices [from] when they were regulated," Smith said.

In response, Kimmelman maintained that cable rates have far outstripped the rate of inflation, even though he continues to rely on 1996, instead of 1999 as his benchmark for deregulation's onset.

"When we cite the fact that cable rates have gone up about 36 percent since the Telecom Act was passed, we usually add that inflation went up about 14 percent during the same period," Kimmelman said. "In other words, cable rates have risen two to three times as fast as inflation since the law was passed."

IMPACT OF DEBATE

The debate over what constitutes nominal and real cable rates has not been a purely academic one. In 1989, the General Accounting Office studied cable rates from 1986 to 1989 (after the 1984 Cable Act deregulated rates, effective in 1986) and found that nominal rates had risen an average of 39 percent to 43 percent.

That finding overwhelmed other GAO data which showed that, on average, the number of channels had risen 18 percent, and that revenue per-channel remained flat in nominal terms but declined in real (or inflation-adjusted) terms.

It also buried the fact that as cable rates were supposedly surging out of control, cable operators added 10.5 million subscribers — a 28 percent increase — and the number of cable systems built increased by 1,500, or by 20 percent.

"In the wake of the GAO's finding, public pressure began to build for tighter regulation of cable service," wrote economists Harold Furchtgott-Roth and Robert Crandall in their 1996 book, Cable TV: Regulation or Competition?

In response to the GAO report, the FCC cracked down on cable in 1991. Congress passed a reregulation law a year later.

Comparisons between nominal and real cable rates often subordinate consideration of cable rates on a per-channel basis.

When it surveys cable operators each month, the Bureau of Labor Statistics collects data on cable programming packages and makes slight adjustments for added channels.

"If there is a channel change, I quality-adjust it," BLS cable economist Heidi McGlone said.

As a result, the bureau tends to show smaller nominal increases in aggregate cable rates than the FCC surveys, which are not adjusted for channel additions.

PER-CHANNEL FLATNESS

But unlike the BSL, the FCC does collect per-channel data from cable operators.

In its most recent price survey, the FCC found that per-channel cable rates remained essentially flat in nominal terms. In real terms, per-channel cable rates have declined.

But Kimmelman insists that a per-channel rate analysis is deceptive because cable networks, for the most part, are not sold à la carte, and because all programmers are not of equal value.

"Cable companies often defend their rate hikes by pointing out that they are offering some consumers more channels than the past," he said. "But how much value do these channels really add to people's cable package?

"Consumers aren't given a choice in whether they'd like to pay more for an extra channel that they may never choose to watch. The 10 most popular cable channels have remained mostly the same over the last 10 years," he said.

Hazlett said consumers are not stupid. They see their cable bills and make decisions to continue to subscribe based on the quantity and quality of the channels that are offered.

"It's always a matter of what you can get for the dollar," he said. "Prices go up as services are added. That is because demand for the product is increasing."

FCC chairman Michael Powell recently appeared on CNBC to answer questions about cable rates. He said it was important to look at rates in terms of what subscribers receive for their money.

"If you look at the average number of cable channels that are available, the wide variety of choices in that medium to consumers — yes, I would

concede that prices have gone up, but I think that arguably, so has value."

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