March 9, 2004
An Open Letter to Members of the Subcommittee on
Antitrust, Competition Policy and Consumer Rights,
Committee on the Judiciary, U.S. Senate
I write to offer my thoughts on the regulatory implications of GAO’s February, 2004 report, “Wire-Based Competition Benefits Consumers in Selected Markets.” This study of broadband “overbuilds” of cable television networks touches on key issues of interest to member of your committee, including cable price regulation and the appropriateness of “access” requirements on cable networks or programming.
Because the GAO report addresses only a tiny segment of the electronic entertainment market, it would be a bad plan to read any of its findings as support for renewed federal regulation of cable television prices, programming, or networks. Particularly because law and policy are with us for the long run, a long run view of competition makes for better policy.
The GAO Report—Findings in a Nutshell
The GAO report found that cable television prices were generally lower in the six markets it studied with broadband overbuilds. It further noted that broadband over-builders reported several obstacles in entering the market, including local franchise and construction permit requirements and problems getting access to programming. Those inclined to support re-regulation of cable might argue that this supports a) some form of price regulation of cable in general or b) further program access requirements. As I explain further in the next section, this would be an error.
By way of comparison, a 2001 study of cable overbuilders on a larger scale than the GAO report (though still over a short period of time) emphasized the cost of capital, stiff competition from DBS, cable, and DSL, and local franchise and construction requirements as the main obstacles to broadband overbuilder entry. It noted great uncertainty about overbuilders’ prospects for profitability, given that they were experimenting with new business models. This study also notes that most overbuilders were electing to serve as “open video service” (OVS) providers to take advantage of the FCC OVS licensing process, relatively rapid compared to local franchising. This raises the unfortunate possibility that regulatory arbitrage is playing a role in the selection of their business model and is distorting the outcome of the market process.
The differences in emphasis between the studies alone raise some red flags. The GAO study may be too small to give an accurate overview, OR the market is changing overnight. It’s possible, even likely, that both are true.
Cable Competition Looks Good in the Big Picture
While an interesting case study (as it was intended), the GAO report is too limited in scale and scope to offer a standard of what cable competition ought to look like or what cable prices “ought” to be. Competition is a long-run process, not a static state of affairs. A study of the stomach that took a quick snapshot of a small portion would probably conclude there’s something terribly wrong with the human digestive process. (There’s all this acid! Where’s the waste going to go?). But a longer view offers a more healthy perspective.
Likewise, the GAO report’s focus on trees might lead lawmakers to miss the forest. As the FCC has found, there’s good news in video competition lately. Despite difficulties with franchise and construction requirements and capital costs, facilities-based broadband overbuilders are entering cable markets, joining competitors like DBS and DSL! Non-network content like Netflix (a net-based DVD rental operation) also competes with cable (my husband, just opted for this instead of standard cable TV subscription). Compared to the stagnant (and more heavily regulated) traditional telephone market, this is pretty amazing. How this will all shake out and which investments, offerings, and pricing plans are sustainable in the long run depends on a lot of factors, including the regulatory environment and consumer demand.
Policy Recommendations: Stay the Course
So should lawmakers focus on the short-run data or look to the big picture in the long run? Practical necessity and good policy coincide. Legal and regulatory processes are very slow; these policies have to focus on the long run or they will be outdated the moment they are laid down.
In this case (and in many or most other cases), this means just leaving markets alone.
- Constant regulatory adjustments and readjustments will create uncertainty that “chills” capital markets and increase the cost of capital to everyone.
- Cable price regulation will discourage new entrants from trying to undercut cable prices; if cable prices are “too high” in some areas (whatever that means), that is precisely what will tempt even more new competition into the market.
- Had we seen rules forcing cable operators to offer “open access” to competitors a few years ago, there probably would never have been any broadband overbuilders at all.
- The above observation on network “open access” should serve as a “red flag” for advocates of more “program access;” rules that encourage everyone in the market to look to one regulated source make it less likely that competition will ever emerge.
The entertainment market is just beginning to recover from recent difficulties in capital markets. Overall, though, the growth in competition in this sector since rate deregulation has been remarkable. The Senate will not regret holding steady on this deregulatory course.
If you or any of your staff have further questions about this topic, please feel free to contact me at [email protected].
Cc: Members of the Subcommittee on Antitrust, Competition Policy and Consumer Rights, Committee on the Judiciary, U.S. Senate.
 The Strategis Group, “Cable Overbuild Competition: Emerging Operators,” February, 2001.