When it comes to cable reform, the Cato Institute fears the free market

Broadcast | Access/Network
In October, the Government Accounting Office investigated a number of possible reforms for the cable industry, including à la carte cable pricing. As I write in my review of à la pricing, it is supported across the spectrum, by left-leaning consumer groups and by Republicans in Congress. Nonetheless, libertarian groups like the Cato Institute and the Competitive Enterprise Institute have objected to a proposal which would introduce read competition in cable programming.

Here’s the Cato Institute’s report, “GAO’s Cable Report Smacks Down à la carte Regulation”. I cannot find any other critique of this report on the web, so I offering one here. I will list each of their four main points and refute each one.

“Presumably, an à la carte mandate would require that cable operators provide each household a channel checklist (either on paper, online, or over the phone) that would need to be filled out. How long will this take? In a 500-channel universe, how many hours will consumers need to spend on their computers, or on the phone with cable representatives?”

It would probably take less time than going to change the oil on your car. Let’s get serious here. We’re past the age of technological ridicule, where it was said that the average American couldn’t program his VCR (the lucrative business of blank videotape sales through the 80’s and 90’s should dispel that myth). Programming digital services has become even more use-friendly. To save $500 over the course of the year, I’m sure that the customer will be able to figure it out. To manage the customer changes, the cable companies will offer both web-based and TV-based selections. It can’t be an easier than the TV screen saying “You do not subscribe to this channel. Press 1 to pay $2/month subscribe. You could also buy the whole Viacom package of 6 channels, which only costs $8/month” I suppose the cable companies have more lobbyists whining about this then they have designers who could supply specifications to the equipment manufacturers.

“Second, consider the technology upgrades that would be necessary to make à la carte a reality. An “addressable converter box” would need to be installed in each home to ensure that channel selections could be properly scrambled if they were not selected by the consumer. So say goodbye to “cable ready” TV sets; everyone will need a set top box under an à la carte system, and that means higher costs for many households since most currently do not have such boxes.”

We’ve already started saying goodbye to analog cable here in Brookline. As a result to the push towards digital television, Comcast is phasing out the bandwidth-wasting analog spectrum. As they move all of the channels to digital, they are requiring each set to get a digital convertor box. The extra $4 for each is certainly an annoyance to people. But it doesn’t have to be, if we completely overhaul the way cable is priced.

“Third, à la carte regulation would undermine the economic model that has driven the success of the cable sector. à la carte proponents foolishly assume that program bundling hurts consumers when, in reality, the exact opposite is the case. Sometimes the whole is much greater than the sum of the parts. For example, newspapers bundle issue sections together instead of selling them individually because an à la carte approach would not attract as great a customer or advertiser base. ”

We’re absolutely crying for the cable companies here. The economic model is the same one that propelled the Bell system to success for over 80 years: government-sanctioned monopoly.

The newspaper bundling makes sense– but would only be a true parallel if you had to subscribe to every newspaper. It would make economic sense, and should be legal, for media conglomerates to bundle their offerings, for a reduced cost.

In addition, subscribers could finally have the power to punish networks they don’t like. Given the public excoriation of Viacom after their CBS and MTV networks, customers could finally make a real boycott happen. And just as in any other business, the executives at the NFL and Viacom would have to make a real public effort in order to win consumers’ loyalty back.

“Finally, à la carte regulation would likely curtail the overall amount of niche or specialty programming on cable networks. The current tiered approach keeps many smaller channels afloat.”

We should applaud when the Cato institute champions an economic safety net for those poor victims of capitalism– in this case, the cable networks that can’t cut it! It’s not like the NFL, where revenue sharing is necessary to bring competitive parity to the game (As Art Modell has said, “We’re 28 Republicans who vote socialist”). If there is a utility for a certain channel, people will pay for it.

Yes, there will be market changes. Consider the how the number of general-readership magazines has dwindled to just a handful: The New Yorker, the Atlantic Monthly, Harper’s. Incidentally, even these magazines aren’t kept afloat by the market, but by the munificence of their publishers (respectively: the Conde Nast corporation, multimillionaire David Bradley, and the Harper’s Foundation). On the other hand, niche magazines have done very well financially, partially as a result of getting specifically targeted advertising, and partially as a result

À la carte pricing should be seen as something as revolutionary as airline deregulation. They are similar in that they both moved away from centralized control (whether by the government, or by an oligopoly, in doesn’t matter). There was certainly painful consolidation in the airline industry, and travelers flying to or from medium-sized cities had to use more connecting flights. But consumer choice has ultimately benefited; if you don’t want to pay for Boston to Miami, you can fly Providence to Fort Lauderdale. In fact, if you miss your flight back from Fort Lauderdale, the airlines could figure out how to send you from Miami.

Another group, the Competitive Enterprise Institute, also has a soft spot for enterprises that are less than competitive. In their response to the GAO report, they ask: “How many people will pay for C-SPAN? The Weather Channel? The Food Channel? The Science Channel?”

Perhaps the Food and Weather and Science Channel can merge into one. Or maybe the Weather channel, which likely has the least production cost of any channel on cable, will be entirely funded by the lodging industry. If you want esoteric, about the proposed Tennis Channel. Sure, 20 million people play tennis in America, but how many of them will pay for a channel that shows it 24/7? On the other hand, there’s a nice two-week period in August where Americans get all the tennis fix they need, the early rounds of the US Open on the USA Network. This provides a simple value proposition for viewers to choose that network instead of its often indistinguishable counterparts from Time Warner Turner, the “superstation” TBS and its spinoff TNT.

The dig at C-SPAN is a valid worry voiced by groups such as Citizens for C-Span. Contrary to popular belief (as was my belief for the past three months), C-Span is funded by cable carriers and carried by many (but not all) of them without any requirement by the government. Since there is no formal agreement, this is a favor that might be in jeopardy should the cable industry be forced to reform their pricing structure. But it wouldn’t be life-threatening. For one, local public access sponsorship is a common requirement of cable franchisees. Secondly, I can think of no other outlet which is universally treasured by members of Congress. And it only costs 5 cents a month to each customer.

Another possible change: if I can cut my cable bill by $500, I’d probably take a nice chunk of that money and give it to my local PBS affiliate, WGBH. I don’t think I’d be the only one. And it’s certainly possible that private cable networks, which also peddle in documentary television like Learning/History/Discovery channels, might put together a network which can act as a counterpart to PBS.

The bottom line is that à la carte pricing is technically feasible and economically feasable. Changes to cable pricing will be revolutionary, but no more than any other deregulated industry. Consumer choice and direct market power will dramatically increase, and will be in fact a force to reckon with. Any organization which opposes such a change must rethink whether they are in fact in support of free markets– or just in support of entrenched business.

June 8th, CORRECTION: In the original (March 7, 2004) version of this article, I stated that C-SPAN’s funding by the government is “mandated by the government”. It is not, as Brian Lamb has articulated at length. I am gracious to the C-Span Community Forums for bringing this error to my attention. I have changed my explanation about the C-Span concern above to reflect this in the republished version of this article.