An Analysis of Cable TV Services:

Are Older Consumers Losing Out?[1]

Executive Summary

Cable TV services are an important aspect of consumer’s daily lives, providing vital information, news and entertainment.  Americans aged 50 and above are most reliant on television services, viewing on average 5.5 hours per day.[2]  However, this study finds that consumer are needlessly overpaying for cable TV services.  The major findings of this study are:

• Televisions and cable TV services represent a substantial portion of consumer spending, exceeding the annual costs of many critically important products and services, such as drugs (prescription, nonprescription and vitamins), tuition, and personal care products.[3]
• Each year, compared to other consumers, older consumers pay on average a greater proportion of their income on cable TV services. 
• The increasing prices for cable TV services pose an accelerating risk for consumers.  Cable television prices have risen much faster than the prices for other network services, such as telephone and Internet services.  Over the last five years, according to FCC survey data, cable prices have increased 7.5% per year. Compared to the Bureau of Labor Statistic’s Consumer Price Index, telephone and Internet prices have actually declined by 4% and 2% per year, respectively.  To put this increase in perspective, cable service prices have increased faster than prescription drugs, nonprescription drugs, and medical care commodities, which represent another critical area of spending for older consumers.
• The lack of competition appears to be a key reason for the high (and increasing higher) cable TV service prices.  FCC data show that consumers would realize a 27% price decrease when alternative wireline cable TV and video service providers compete against incumbent cable TV providers. 
• The benefits of competition appear to be significant.  This study estimates that competition would lead to more competitive pricing and result in savings of $107 billion over the next five years.  In addition, competition would hold future price increases in check and stimulate more demand for cable TV and video services, further increasing consumer benefits. 
• Due to their reliance on television services for their information and news, older consumers are most harmed by noncompetitive pricing.  This study estimates that American seniors would save $1,156 over the next 5 years, if competition were increased.     

The lack of wireline competition is an area that public policymakers must address, if consumers are to see these consumer benefits.  While wireline competitors are attempting to enter the cable TV and video services market, regulators need to understand the high stakes involved and develop policies that speed market entry.  For older American consumers, failure to encourage competition into the cable TV and video services market will put billions of dollars of savings on hold. 

An Analysis of Cable TV Services:

Are Older Consumers Losing Out?

I. Spending by Older Consumers

On March 10, 2005, Lavada DeSalles, a member of AARP’s Board of Directors, provided compelling Congressional testimony that the government mandated conversion from analogy television to digital television would impose significant costs on Americans.[4]  She also pointed out that older Americans, those 50 years and older, watch the greatest amount of television, averaging nearly 5.5 hours each day.[5]  Referring to television as an “essential service” for older Americans, in her testimony, DeSalles pointed out that the costs incurred by consumers during the transition from analog to digital television “will be disproportionately imposed on those least able to afford it,” requiring consumers to buy more expensive digital TVs or upgrade existing TV’s with a converter box.[6]  While her points are well taken, not mentioned one important observation – that for most American consumers, the annual cost of a television set or a converter box pales in comparison to what consumers pay for cable TV services.  While public policy needs to be very mindful of DeSalles concerns, and while we support her recommendations, greater public focus is needed to address the high costs for cable TV services. 

Annual television expenditures, essentially the spending on televisions and cable TV services, exceed consumer spending for drugs (prescription, nonprescription, and vitamins), personal care products, or college tuition.  Of television expenditures, cable TV service makes up the bulk share of television expenditures by consumer.  To put these costs in perspective, as Figure 1 (on the next page) shows, in 2003 households spent on average $91.49 for television equipment, while spending $423.79 on cable TV services.  We estimate that the average consumer will spend $490 in 2005 for cable TV services.[7]

Older householders spend ten times more on cable television services than they did for television equipment.  While those householders aged 35 to 64 spent the most on cable TV services, they also earned more income and tended to have more individuals living in those households.  When taking this into account, as Figure 1 shows, older householders spend a higher proportion of their income on cable TV service than other householders.  This fact agrees with Ms. DeSalles point that older consumers are more reliant on the television.  In terms of individuals per household, again, older consumers tend to buy more cable TV services than younger consumers.  Thus, cable TV services are an important part of consumer expenditures, and more so for older Americans who face the highest cost burden for these services.   This study will investigate the high costs of cable TV services, and the affects on older consumers. 

II. Prices and Inflation

As the previous section showed, cable television amounts to a sizable portion of consumer’s annual expenditures, with the highest cost burden falling on older American consumers.  One reason for the sizable cable expenditures is that cable prices are high and are increasing faster than other goods and services.  For example, over the last five years, cable TV service prices have increased faster than prescription drugs, nonprescription drugs, and medical care commodities – all critical products for the elderly.[8]  As Figure 2 shows, cable TV service prices have increased twice as fast as the price for other goods (measured by the CPI for all items), and much faster than other network communications services, namely telephone and Internet services.[9]  According to government statistics, in the last five years, cable prices have increase 25%, while telephone and Internet service prices have fallen by 4% and 2%, respectively.[10]  

What the data in Figure 2 do not show is that the CPI index for Cable TV services underestimates the actual price increase for cable TV services, since these indexes include other services, such as satellite and radio services, which have not experienced similar price increases.  Another estimate of cable television price increases comes from a survey of cable TV operators published by the Federal Communications Commission (FCC).[11]  In their survey report, the FCC compared the CPI for cable TV services to its survey of cable operator prices and found that cable TV prices are actually increasing 3% faster than indicated in the CPI index for cable TV services.  Figure 3 compares the CPI price changes to the FCC price changes and confirms that cable TV prices have increased on average 7.5% per year over the last five years. 

The FCC survey provides compelling evidence that consumers are subject to steep price increases at the same time that network service prices, such as telephone and Internet services, are declining.  These price increases pose an accelerating cost for low-income consumers.  When analyzing the various component costs of cable television services, Figure 4 shows that cable TV service prices are increasing for basic services, expanded services, converter and remote, and programming and equipment.  The data shows that some cable prices have increased (on average) more than ten percent per year – or three times faster than worker wages, pensions and social security.  The fact that cable television services account for a significant part of consumer expenditures and prices continue to increase faster than the price of other commonly purchased goods suggests that consumers are being harmed.  The cause of the high and increasing higher cable TV service prices is that cable television operators face limited competition.  Currently, the biggest competitor for cable TV services is satellite TV services, though there is some question to satellite’s competitiveness.  According to a GAO report, satellite services are significantly less competitive when facing cable TV operators that offer advanced services, presenting a problem in most markets.[12]  As for over-the-air broadcast, these services cannot compete on quality or programming variety.  There are some other wireless cable providers, but their geographic presence is limited.[13]  Therefore, with few competitive options, consumers are paying too much for cable TV services.

III. The Lack of Competition

The FCC survey results document the importance that cable TV service competition can have in reducing consumer prices.  The FCC collected price data on non-competitive and competitive cable TV service operators, and analyzed differences between these operators.  The FCC found that, when subtracting non-competitive cable TV prices from competitive TV prices, the difference in prices was positive, indicating that non-competitive prices were more expensive than competitive prices.  The FCC also found that the difference in cable channels was negative, indicating that non-competitive operators offered fewer channels than competitive providers.  Figure 5 shows these positive price differences and negative channel differences, and finds the most significant differences were those between non-competitive cable TV operators and competitors using a wireline network, called a wireline overbuild.  As Figure 5 shows, non-competitive cable TV prices were 16% higher than wireline overbuilders, and non-competitive cable TV operators offered 6% fewer programs than wireline overbuilders.  On a price per channel basis, a common industry measure of price performance, non-competitive cable TV operator prices were 27% higher than competitive wireline overbuilders.  These FCC results are consistent with earlier studies that found cable competition would result in a 30% price reduction.[14]  Therefore, competition can provide consumers with significant savings and benefits.  

          Figure 5:                Competitive Differentials 

Non-competitive Prices/Channels Minus Competitive Prices/Channels

Example: Non-competitive operators offer prices per channel that are 27.2% higher than prices that competitive operators offer. See the outlined box (as shown above).

IV. Immense Consumer Losses

This study has shown that cable TV services represent a sizable portion of consumer expenditures, cable TV prices are increasing much faster than other goods, and competition would provide significant savings to consumers in the form of lower prices.  Lower prices would also stimulate consumer demand and lead to additional consumer benefits.  In addition, competition would also tend to hold future price increases in check and create pricing pressures on all other cable TV and video service providers, including satellite and multichannel video program distributors. 

What savings could consumer expect from additional cable TV competition?  In 2003, cable TV revenue was $53 billion, and predictions are that the cable TV revenues will increase to $117.7 billion over the next ten years.[15]  The National Cable & Telecommunications Association (NCTA) estimates 2005 revenues to be 63.1 billion.[16]  Using the NCTA estimate and the FCC survey’s 5-year average growth for cable TV prices, if competition were to hold cable TV prices in check, consumers would realize about $5 billion dollar savings off the 2005 base of cable TV revenues.  Using the FCC survey’s estimate of savings from competition, competition would result in another 27% decrease in cable TV prices, an annual savings to consumers of  $17 billion off the 2005 base.  Using the 5-year inflation rate for cable TV price inflation, the consumer benefits from cable TV and video service competition is projected to reach $107 billion over the next five years. 

With American’s aged 50 years and above accounting for 40% of consumers over 20 years of age, the potential benefits for older American would be significant, amounting to billions of dollars each year.  To illustrate this savings, consider those consumers aged 65 and older.  Using the consumer expenditure data presented in Figure 1 of this study, and assuming the average inflation rate estimated by the FCC survey, consumers aged 65 years and older will save (on average) $1,156 per household over the next five years, if cable TV competition increased and if price levels remained stable.  

In addition to these benefits, consumers stand to see other economic gains from increased cable TV and video competition.  Lower prices will stimulate additional demand for cable TV services.  For instance, given 73.2 million basic cable subscribers as of February 2005,[17] a 27% drop in price (say from $45.32 to $33.08)[18] would yield a 22% increase in the demand for basic cable services (16 million more subscribers) and yield addition consumer benefits and savings.[19]  There will also be stimulated demand for premium and pay-per-view services, which also will yield consumer benefits and savings.  Additionally, falling cable TV prices would affect other market competitors, such as satellite and non-cable multichannel video program distributors, leading to across-the-board declines in prices, all of which would benefit consumers. 

In summary, if cable TV services were more competitive, consumers would realize at least $107 billion in savings over the next five years.  For this reason, public policymakers need to encourage market entry, which would speed these benefits to all consumers – both young and old. 

V. Conclusion

In summary, this study finds that cable TV operators charge consumers more for cable TV services in the absence of competition, resulting in billions of dollars of losses for consumers.  Older consumers, who are very reliant on television services, face the highest cost burden for cable TV services and stand to lose from the lack of competition in the market. 

Public policymakers need to take steps to speed competition and save consumers from needlessly high and increasingly higher cable TV prices.  This study shows that speeding competition would lead to price competition and drive cable TV service prices 27% lower than they are today.  The result of competition would save consumers at least $107 billion dollars over the next five years, and stimulate more demand.  The benefits to consumers aged 65 years and above are estimated to be $1,156 per household over the next five years.  Clearly, consumers are losing out to the high costs of cable TV services.