The American Consumer Institute Applauds Recent State Legislative and Federal Communications Commission Initiatives to Reduce Cable TV Prices
A January 2006 survey found that cable TV monopolies served 98% of cable TV consumers, and another study found that cable TV prices have increased nearly three times faster than inflation. However, when competition was present, cable TV prices were almost 30% lower than in monopoly served markets. Therefore, consumers stand to see billions of dollars in consumer benefits – by one estimate, $23 billion per year – but only if public policies encourage cable TV competition. This ConsumerGram reports how policymakers are now beginning to take steps to speed competition and bring these benefits to cable TV consumers.
Positive Change May Soon Be Coming
With the leadership of Kevin Martin, the Federal Communications Commission (FCC) chairman, cable TV reforms may soon be underway. In its recent notice of proposed rulemaking, the FCC tentatively concluded that the current cable franchise process serves as a barrier to entry and inhibits competition. The Department of Justice, commenting on the FCC proceeding, agreed that actions to reduce market barriers would benefit to cable TV and broadband consumers. While the FCC has yet to outline what actions it will take, the mood for change is sweeping across country. So far, eleven states have changed their laws to encourage cable competition in their states – namely, Texas, Virginia, Indiana, Kansas, Oklahoma, Connecticut, South Carolina, North Carolina, New Jersey, California and Michigan. A number of legislative proposals will be up this year, including Florida, Georgia, Massachusetts, Missouri and Pennsylvania.
Monopoly Prices Harm Consumers
An American Consumer Institute study (2005) reported that consumers would save $107 billion over the next five years if cable TV markets were competitive. The lack of competition is particularly bad news for seniors, who – according to Congressional testimony of the AARP – use the service on an average of 5.5 hours per day. With cable service prices increasing faster than the prices of other key items, including prescription drugs, nonprescription drugs and medical care services, seniors are adversely harmed by excessively high cable prices. In fact, the American Consumer Institute study found that a senior citizen household will pay $1,200 too much for cable TV services over the next five years in monopoly cable TV markets.
Consumer Benefits of Price Competition
Numerous studies have found that increasing wireline competition – competition from new cable providers like Knology, OneSource, RCN, AT&T and Verizon – would lead to lower cable TV prices and significant consumer benefits. Here are the facts:
- A Federal Communications Commission study (FCC, 2005) concluded that wireline competition would produce the biggest savings for consumers, lowering cable TV prices by 27% per channel.
- A Bank of America report (2006) showed that incumbent prices have declined 43%, 39%, and 29% in three newly competitive markets, for an average price reduction of 37%.
- Based on a survey of consumers (American Consumer Institute, 2006), cable customers living in competitive markets reported saving (on average) $22.30 per month. The same survey uncovered the fact that customers who attempted to switch, but were enticed to stay with the existing cable TV provider, reported saving (on average) $26.83 per month.
- Newspapers articles have cited sizable price reductions when cable services are bundled with other communication services, with some reporting 50% price decreases. Senior Fellows for the Brookings Institute, Dr. Crandall and Dr. Litan (Criterion Economics, 2006), estimated that competition would result in price reductions of 14%.
- Similarly, Ford and Koutsky (Phoenix Center, 2006) estimated that competition would result in 15% lower cable TV prices, and they estimated that legislative delay would cost consumers at least $8.2 billion each year.
- Former FCC Chief Economist and Professor Tom Hazlett (George Mason University School of Law, 2006) estimated that the lack of competition amounts to an annual $9 billion consumer welfare loss.
- The U.S. General Accounting Office (GAO, Feb. 2004) found cable TV prices to be 28% lower in competitive markets.
- Professors Ellig and Brito (Mercatus Center, 2006) estimated that cable monopolies create $10.4 billion in losses for consumers, due to high prices and forgone benefits.
There are many other studies, but they conclude similar results – cable competition leads to lower consumer prices. Obviously, when prices fall, consumers benefit. However, competition also produces other benefits for consumers. By adding competitive discipline to the market, consumers get choice, better service quality and improved customer service.
Indirect Benefits of Cable TV and Video Competition
Beyond direct consumer benefits from lower prices (cited above) and better quality of service, communities benefit from cable TV and video competition in one important way – competition grows the economy. For example, studies by the FCC and GAO estimated that, for every 1% decrease in price, demand for cable TV services would increase by 2.2% and 3.2%, respectively. This means that price competition grows the cable TV and video market, adds investment, creates jobs (101,000 jobs by one study’s estimate), facilitates economic development, and increases the tax base for local communities. The American Consumer Institute survey (2006) found that competition led to increased broadband service use. In short, there is no downside to more competition.
End Monopoly Pricing
While Congress introduced its own cable reform bill last year, the measure fell short, and put the benefits of competition on hold for millions of consumers. However, the FCC investigative proceeding and important state legislative actions are moving to end monopoly pricing. These actions will clear regulatory barriers, speed competitive entry and bring the benefits of cable TV competition to Consumers.