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Sunday, April 11, 2004

Shocking News! Regulation of cable rates held prices down...

Today's Star-Telegram ran another stunning article on cable prices, intimating that current rates are an outrage. I don't know, cable is much better today than it was in the early 1990s, there are more sports, movies and news channels than there were during the last Gulf War.

The demands are for a la carte cable. It is likely that this will occur in the near future, but remember that a la carte does not guarantee that the ultimate price on your cable bill will decline.
"Look at what Canada is doing," said Kenneth DeGraff, a policy analyst with Consumers Union. "There are tons of cable operators in Canada who are offering a la carte services. ESPN Canada, MTV Canada, even some of the smaller channels they allow consumers to individually purchase. There is no reason to expect any different from our cable companies."

Once again, our system is compared unfavorably to the Canadians, who according to Kenneth seem to have the cable (and I asume the prescription drug) thing going in the right direction. However, I don't see people leaving the U.S. in droves to go to Canada, so it must not be that good. Perhaps it is too cold? Or perhaps hockey is too hard to understand?

Perhaps it is because unbundling products can be cheaper for some but might be more expensive for others. For example, if you have a car and need to replace a certain part, you rarely purchase a whole new car - you purchase the unbundled part a la carte. However, the summed prices of all the unbundled parts of your automobile - including everything from head light switch to trunk release - would be much more than when you purchase them "bundled" together in a product called "a car."

It is true that bundling can be a way for firms to raise prices to all consumers above what individuals are willing to pay for the separate components of the bundle. However it is also possible for bundling to provide efficiency gains for sellers that are then passed on to the consumer in the form of lower prices. In the end, it is not clear which case prevails in the cable industry - it is what economists call an "empirical question." However, empirics rarely seem to play an (honest) role in policy debates. Consumers (and their activists) naturally assume that cable channel bundling is designed to extract more money from them while sellers (and their activists) naturally state that bundling is intended to improve efficiency. Both groups of activists go to Washington, lobby Congress with dinners, wine, and dollars, and whoever has the deeper pocket or more political blackjack wins, empirics be damned.

My prediciton is that , in the end, cable companies will likely offer a la carte subcriptions, but the price per channel will probably be higher and in the end the price we pay for cable will be about the same. In Arlington we pay $55 per month for digital cable with 250 channels. I don't watch them all, or even a plurality, but those that I do watch are probably worth the $55. If I purchased only the 12 channels I watch, I would be willing to pay something like $55. Cable companies know this because we are already paying $55 per month for the 250 channels (238 of which aren't watched). It isn't rocket science, it is economics.

However, the best quote in the news story was: "Industrywide, cable rates have risen 56 percent since 1996, nearly three times the overall inflation rate." No, really? Shockingly, pre-1996 Telecommunications-reform cable rates were regulated by local and state agencies to be lower than the market clearing price. Some have suggested that we turn back the clock and go back to regulated rates - blindly assuming that cable companies would offer the same selection of channels, quality of programming, and universality of service (it would be legislated, right?). However, having limited competition from other land-based cable systems seems to reduce cable rates according to this GAO report from last October. From the Star-Telegram story again: "Subscribers in areas with a wire-based competitor had monthly cable rates about $5 lower, on average, than subscribers in similar areas without a wire-based competitor," the report said. That competition exists in only 2 percent of the nation's markets." (more on the report here and here).

I am with the GAO, instead of passing yet another ill-informed and badly implemented policy dealing with a la carte cable services, local and state governments might do well to simply revoke or fail to renew local cable franchises and encourage competition. IN this election year, Congress is itching to appear like it has a connection with the average consumer and therefore might try to pass some legislation intending to save the average household $60 per year (while blowing $21,000 per year per household). I hope they put some Calamine lotion on that itch.

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