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Event Transcript
November 21, 2003


Cable TV Rates: Has Deregulation Failed?

TOM HAZLETT: Hi, I知 Tom Hazlett. I知 with the Manhattan Institute in Washington, D.C. That痴 just to confuse everybody. And sort of like wireless cable, you know. And here we are. Here we are for the debate in 2003 on cable TV regulation. And so this is the new and improved debate. It痴 been going on for some number of years. We池e in the next iteration of this debate, and here to sort of outline the forum, we have and are delighted to have one of the journalists that really understands this industry and understands some of the regulatory issues, Ted Hearn. He値l introduce the folks on the debate today and I知 delighted of course to have Ted with us, and delighted as well to have Mark Cooper for this forum. So we値l get to the debate and Q&A and have a good time. Ted?

TED HEARN: Thank you. I知 Ted Hearn, the Washington news editor for Multichannel News. Thank you, Tom Hazlett, and welcome everyone to what should be a lively debate on the regulatory issues associated with the cable industry. As many know, our retail cable rates have been on the Washington, D.C. radar screen for more than two decades. In 1984 Congress removed local price controls on the industry, a step which spurred investment in new cable systems and programming and caused millions of consumers to sign up for pay TV service for the first time in their lives. Some were so happy, in fact, that they literally chased the cable truck down the street begging for immediate service.

In 1992 Congress abruptly changed direction and re-regulated cable operators, disturbed by rate increases, customer service complaints, and reports that would-be cable competitors could not obtain cable-owned programming at reasonable rates. Just four years later, in 1996, another mood shift. This time Congress decided, effective March 31, 1999, to de-regulate the expanded basic tier, which is the cable home of such channels as CNN, Discovery, and C-Span, while keeping the broadcast basic tier rate regulated until certain competitive conditions were met.

The pendulum could be moving again. Over the past four years, nominal cable rates have continued to rise faster than inflation, renewing calls by some for more comprehensive rate controls. And some see the solution in legislation that would allow consumers to select cable channels on an a la carte basis rather than in large bundles.

Here to discuss and debate these points in greater detail are two experts in the field, Dr. Mark Cooper and Dr. Thomas Hazlett. The format for today痴 program is straightforward. Mark Cooper will speak for about 15 minutes and Tom Hazlett will speak for about the same length of time. Mark Cooper will conclude with about a five-minute rebuttal. Following all that we値l open the floor to some questions.

Now Dr. Mark Cooper holds a Ph.D. from Yale University and is a former Yale University and Fulbright fellow. He is director of research at the Consumer Federation of America, where he has responsibility for analysis and advocacy in the areas of telecommunications, media, digital rights, economic and energy policy and energy policy. He has provided expert testimony in over 250 cases for public interest clients, including attorneys general, people痴 counsels, and citizen intervenors before state and federal agencies, courts, and legislators in almost four dozen jurisdictions in the US and
Canada. He is the author of 溺edia Ownership in Democracy in the Digital Information Age, and 鼎able Mergers and Monopolies.

Dr. Cooper, the floor is yours.

MARK COOPER: Thank you. Fifteen minutes. I知 speaking very quickly, but I知 from the Bronx. Every dog has its day and every monopolist has his profit maximizing price, but unlike the hapless canine who after his day is over he goes back to that dog痴 life, the monopolist continues to collect his excess profits.

Now in defending cable price increases, the industry ignores the abuse and focuses on the scraps of consumer surplus left on the table. They analyze the tip of the iceberg, so to speak, and to divert policymakers attention they argue that consumer advocates fail to take into account the fact that the number of channels in the bundle has increased and they fail to report real prices.

They are wrong. I will show that we are right when we say that cable rates have been increasing between two and three times the rate of inflation. This is a properly adjusted statement which gives the reference points, the numerator and denominator of the real price fraction, which is actually easier for consumers and policymakers to understand.

Now Exhibit 1, which is taken from an NCTA filing at the FCC, shows the part of consumer surplus that the industry would have us focus on. That is, consumer surplus is the value minus the cost, and that痴 what痴 left in the consumer痴 pocket. Exhibit 2 embeds that analysis in the monopoly pricing paradigm. It is well known that the monopolist prices where marginal revenue equals marginal cost, extracting consumer surplus, a wealth transfer, creating inefficiency, but of course leaving some of the scraps on the table. Consumers are paying too much in this analysis.

Now the monopolist can do various things to increase his profits when he hits that profit maximizing price. He can seek to stimulate demand, he can, by bundling or by adding value, he can shift his costs by lowering his costs, or changing the structure of his costs. This is all a very complex empirical question about what the outcome is. And there are at least some commenters in the current round of finger-pointing between the programmers and the cable operators that actually admit the outcome is an empirical question, not a theoretical question.

But let me make no mistake about it. I allege that the extraction of consumer surplus has gotten larger, both in absolute size and in the rate of profit. In other words, the abuse is still there and growing worse.

The first empirical question is, is there market power? That痴 the underlying premise of this whole discussion. A recent GAO report, I think, gives us the answer. There is. That is, each and every one of the major flaws in the market structure that has afflicted the American public for two decades has in fact been corroborated.

First, head-to-head wire-line competition is the only market structural feature that disciplines monopoly pricing. Now these are all their elasticities calculated from both the FCC and the GAO econometric model. Head-to-head wire-line competition between cable operators lowers prices by 15 percent for basic and expanded basic. The FCC analysis finds similar impacts for three different kinds of head-to-head wire-line competition.

Unfortunately, only about two percent of the American people hold have that competition, head-to-head wire-line competition. That means that 98 percent of the rest of them who don稚 might be paying as much as $4.5 billion a year in overcharges. That痴 a very big iceberg that痴 submerged.

Second of all, the GAO finds that bigger monopolies are worse when it comes to consumer prices. In the GAO analysis, if a cable system is part of a large MSO, its prices are almost 5.5 percent higher. The FCC has found a similar effect, over and over again. And in fact, when the FCC adds independent effects of clustering, it increases prices. It doesn稚 decrease prices. So in other words, at least 5 percent of an overcharge results from concentration and clustering. This is independent of the lack of head-to-head clustering. That痴 another $1.5 billion. So the iceberg is very large.

The GAO also finds that intermodal competition between cable and satellite does not effectively discipline cable pricing. The GAO found a very small price effect that actually wasn稚 even statistically significant at the traditional 5 percent level. They reported a significance at the 10 percent level, and it is the only 10 percent level significance in the document. Very bothersome to me. But at any rate, head-to-head competition is worth 40 times what the satellite competition is in terms of price.

Now they did find an effect in terms of quality. Where cable operators are facing satellite that has added local-into-local, they tend to offer about 5 percent more programs. In other words, our claim that satellite cannot discipline cable as priced but competes as a high-end niche product is affirmed.

Vertical relationships also affect the industry. The GAO found that one-fifth of the top 80 or 90 shows are majority owned by cable operators. The GAO does not find price discrimination. It does find carriage discrimination. That is, cable operators do not pay themselves more for their shows, but they are 64 percent more likely to carry those shows. Obviously with their market power at the point of sale, they can pass through the general price increase and ensure they get a larger share of the general price increase by favoring their own programming.

The cable industry is extending its market power into the high-speed Internet market. GAO recognizes the penetration of that market, showing a dramatic increase in the revenues flowing from advanced services and high-speed Internet. Cable operators dominate the high-speed part of the high-speed Internet. That is, they have a 75 percent market share of fast Internet it is defined by the FCC as 200K in both directions a 65 percent share of all residential high-speed Internet. Of course, telephone companies with their DSL offerings have a 98 percent market share in the business market. There has been vigorous market segmentation.

Cable has scoffed at the price moves of DSL and there痴 a good reason. None of the competing systems can match it on a megabit per month basis. Quality adjusted, dial-up is expensive, accelerated dial-up, DSL discount is actually very expensive because it痴 slow. Satellite is expensive and slow. Normal DSL is quite slow. Cable is down here on a megabyte per month basis.

Now I want to remind you that the Koreans and Japanese are down here, which is why they have an immense amount of penetration. That is, they池e down at $5 a month per megabyte and offering between 5 and 8 megabytes a month. So there is muted competition in the Internet service market, and in fact of course the cable operators have foreclosed their platform, forcing all competition into the intermodal approach, which is ineffective.

Now, to sort out the costs in this multi-product system, we really do have to look at all the costs and all the revenues and try and figure out what is going on. Here are cable revenues from 95 through 2003, and 2003 has been projected modestly on the basis of continued growth of cable, modem and advanced services, and over that period total revenue for subscriber more than doubled. If you do it on a total absolute basis, it increased by about 120 percent, $400 a month.

Revenue per subscriber, which is the way people calculate this industry the GAO did it, the ESPN analysis did it, the Cox analysis did it the same way. Revenue per subscriber, operating revenue per subscriber, revenue minus operating costs increased by $125 a month a year, excuse me. Sixty-nine percent per subscriber, 75 percent in total. That is, of course, the cash flow available for capital service and excess profits.

Now how do we allocate this between traditional video and advanced services? That痴 the great debate out there right now. So we took a look at some of the changes before and after the roll-out of advanced services. If we look at 1995 to 1998 operating costs, total operating costs were increasing by about 4.5 percent per year. In that period the number of subscribers added was about 3.3 million, more than in the following four years. The number of networks added was more than in the following three years. So in fact, basic services, basic and expanded basic, were increasing more before 1995 to 1998 than after, but operating costs after 1999 went up by 14 percent. What was driving that? The costly addition of advanced services and Internet and perhaps to some extent telephony.

So let痴 allocate the operating cost increases between the two. I致e done two assumptions, two sets of assumptions. One, all operating cost increases before 1998 uh, 1999 are attributable to traditional video, and after I assume 40 percent of the operating cost increases are attributable to traditional video. In the alternative, I assumed that all operating cost increases prior to 1999 were attributable to traditional video, and then I added a four percent 4.5 percent increase to the base, added a dollar a month per subscriber per year for the increased programming costs, and we come up with this picture.

In either case we see the same story a dramatic increase in the operating cash flow from traditional cable, up until the rollout of advanced services, and then it slows down, probably because I have over-attributed the non-operating cost to traditional video services, and also because of the increase in programming costs.

Advanced services were of course slightly positive when they weren稚 rolling much out. They became severely negative in the initial roll-out, and now revenues have started to flow in. In my view that demonstrates a simple fact the rate of profit and the absolute value of profit on traditional video has in fact increased dramatically. The first part of our proposition is demonstrated.

But the question remains, what about changes in consumer surplus? If it is growing rapidly too then that could certainly blunt the public policy concern well, you池e paying you池e getting ripped off a lot more but you池e getting a lot more value as well. And in fact, NCTA seeks to demonstrate in one of their papers that there is a substantial increase in consumer surplus by claiming that the quality adjusted price has declined, and a lot more than the Bureau of Labor Statistics suggests. I conclude otherwise and suggest that the NCTA analysis involved a series of errors of commission and omission.

First of all, it mis-specifies the units of analysis. It counts the total number of hours of viewing on the X axis, which is the quantity, and then on the Y axis it should count the total amount paid for the entire bundle that they view, but they use the BLS quantity adjusted figures on the Y axis. They double-counted quantity.

Second, NCTA chose to start 18 months after the 1996 act was passed, missing a large set of price increases. Third, there appears to be a mismatch between the period of increased viewing and the analysis of increased prices. Fourth, bundling wreaks havoc with the NCTA estimate of consumer welfare. The failure of cable operators to offer cable channels on an unbundled basis makes it very difficult to divine the demand curve for any one of those shows that have been pounded into the bundle. NCTA assumes that demand is linear and the elasticity is constant across time, both of which are dubious.

Fifth, NCTA痴 welfare analysis assumes a full hour of increased welfare when a consumer switches from watching cable switches from watching broadcast to cable. For instance, if I知 watching Law and Order on NBC and I switch to watching Law and Order on USA you値l note that NBC now owns both of those cable networks the NCTA assumes a full hour of increased value, but there may be zero increase in value. I知 watching the same show. I致e just shifted from over the air to through the wire.

Now if I had shifted from watching Law and Order on NBC to West Wing on Bravo and again, remember that the same entity owns all those shows now there might be some increase in value but it痴 a marginal difference. It痴 not the total hour. I believe that NCTA has made a mistake there. If the total increase in cable viewing were equal to the total increase in TV viewing then you壇 have a legitimate case to say that you池e watching that many more hours and therefore you池e getting that much more value, instead of just substituting hours. But in fact, the rate of increase in viewing is far smaller than the rate of increase in cable viewing. So there痴 a great deal of substitution which does not have a full hour of value.

Interestingly, if you assume, for example, that the increase in cable viewing is worth half an hour, as opposed to a full hour, what you discover is that there has been approximately a 48 percent increase in the cost per hour of viewing, and lo and behold, that痴 exactly what the BLS told us. Now I致e calculated each of the relevant quantities, adjusting for all of the issues, and the fundamental point is that instead of a 15 percent decline in the cost of viewing, there痴 a five percent increase, which is a fairly substantial number. And if we adjust for the amount of viewing increased, we actually come out concluding that the BLS is a pretty good number. In fact, you might even argue, since we know that viewing has increased so much less than cable viewing, that the value of the programs banged into the bundle are not nearly as great as the number suggests.

It is possible to argue that BLS is over-adjusting for quantity and quality, not under-adjusting, an interesting prospect, but let痴 take BLS for what it痴 worth and look at the trend lines for prices. Essentially we have a CPI all on the bottom. We have de-regulated cable price, the momentary regulation of cable price, the de-regulated cable price, and the trend line for competitive cable prices. I didn稚 even just add CPI. I took the endpoint of what the GAO told me would be the competitive price if all the 98 percent had competition, and I discover that the gaps have gotten larger, again confirming my hypothesis of usage growing.

MR. HEARN: Mark, about one minute.

MR. COOPER: One minute. Quick on bundling.

Bundling wreaks havoc with all the analysis. Comcast gives an example of a greengrocer who charged $2 per pound of tomatoes, but also who might give a five-pound bundle for $7.50. That痴 a volume discount, a fairly restricted form of bundling. But every greengrocer I know gives me a wide range of choices. I can buy half a pound, one pound, two pounds, four pounds or five pounds. Cable operators don稚. They give me three choices: take nothing, take almost nothing, which is basic, and take almost everything, which is expanded basic. In other words, I have to buy the five pounds of tomatoes and five pounds of every fruit and vegetable in the shop.

Now of course if I want to make spaghetti sauce and I only want two pounds of tomatoes, I致e got this problem of all this other stuff that I had to buy. My next-door-neighbor, who wanted to buy an apple pie, has to buy five pounds of apples, even though she only needed two pounds of apples and she痴 got to buy all those tomatoes. Now because of the nature of commodity, we cannot recapture that surplus through trade. That is, if I I could subscribe and have my neighbors traipse through my house and watch the shows they want, but that痴 not very convenient. Or I could wire my neighborhood and distribute the signal to everybody else from one signal, but that痴 illegal and they壇 throw me in jail for stealing their signal.

The finger-pointing on pricing and so forth has given us some really interesting data on ESPN. This is the implicit demand curve for ESPN, which has now been put in the ballpark, finally revealed. It turns out that 78 percent of the people say they wouldn稚 pay two bucks for ESPN, but 100 percent of the people are paying $2.61. If we do a welfare analysis of the unbundled demand curve compared to the implicit demand curve, what we discover, and these are at the Comcast numbers, which have been put in the public domain, we discover that the wealth transfers from those people who wouldn稚 buy it are equal to the entirety of the consumer surplus. The simple fact of the matter is that to get one dollar of value, we池e paying one dollar of tribute. That痴 not very consumer-friendly economics.

I値l do policy after Hazlett responds. Thank you.

MR. HEARN: Thank you, Mark Cooper. Thomas W. Hazlett is a senior fellow at the Manhattan Institute for Policy Research, a senior research fellow at the Columbia Institute for Tele-Information, and a columnist for the Financial Times new economy policy forum on ft.com. His research focuses on law and economics, with a particular emphasis on telecommunications policy. Dr. Hazlett received his Ph.D. in economics from UCLA in 1984.

From 1984 until 2000 he was a professor at the University of California at Davis, where he taught economics and finance and served as the director of the program on telecommunications policy. In 1991-92 he was chief economist of the Federal Communications Commission. Dr. Hazlett痴 academic research has appeared in such publications as the Journal of Financial Economics, Journal of Law and Economics, Journal of Legal Studies, Columbia Law Review, and the University of Pennsylvania Law Review.

He has also written for the Wall Street Journal, Barron痴, Forbes, the New York Times, New Republic, and The Economist. His book with Matthew L. Spitzer, 撤ublic Policy Toward Cable Television, was published by MIT Press in November 1997. Dr. Hazlett.

DR. HAZLETT: Thanks very much, Ted. I had to give a talk in New York City last week and they wouldn稚 let me do Powerpoint. Man, it was terrible. They did let me take up my mouse, though. They wouldn稚 let me plug it in, and so I fiddled with it while I was speaking. It helped get me through the experience, you know.

So that痴 the debate, and I want to talk about this regulatory mirage and the burden of proof. You値l find that this debate comes down to a very simple methodological discussion, and that is, should we be looking at the market place and trying to measure the monopoly rents, which I知 perfectly willing to do and have done and will continue to do, or are we going to do something that痴 much more useful in terms of the policy debate, and that is, look at the effectiveness of regulation in producing something of value for consumers. So it turns out that, yes, we should be looking at marketplace evidence, but we should be looking at the effect of regulation on the marketplace. So this is what we池e going to talk about for the next few minutes. And I want to just briefly go through the continuous cycle.

Some years ago I got interested in cable TV regulation and it痴 a good thing because you don稚 want to end up in some sort of regulatory dead-end. You want to be able to amortize these investments over an entire career. And so far people who are tired of hearing me say the same thing decade after decade will testify to the fact that I am taking this capital generations into the future.

We致e been through a lot of different things. I値l leave out the state regulation and de-regulation stuff. Actually the first paper I ever wrote on this was in 1991 on the California de-regulation in the early 1980痴, but here we have regime switches, we had de-regulation, de-control with the federal pre-emption in 1987. That was pursuant, of course, to the Cable Act of 1984. Then we had re-regulation that kicked in somewhere around May 1, 1993. It痴 not exactly clear when it did take effect. There was a rate freeze and two we think there were two rollbacks that were ordered by the FCC. November 10, 1994 was the Blair-Levin de-regulation, also known as the going forward rules, by the FCC. And then pursuant to the 1996 Telecommunications Act we had a de-regulation on March 31.

Now of course all these regime switches are put in place essentially so that Tom Hazlett, an economist, can study the effects. So that痴 what we ought to do here. I will briefly just mention the fact that there are wholesale rate controls as well in this industry, so this really is a full agenda. I encourage young economists to go into the field. There痴 lots of room to talk about leased access, video dial-tone, another great success of wholesale price controls, OVS, open access for cable modems. Of course I知 rooting for that. Lots of papers can be written about that.

Now, deconstructing the rate regulation regime, let痴 start with the series that痴 done by the CPI, and Mark talked a little bit about this. This series is a bit deflated for the overall CPI, so this is real rates, and one thing you notice about real rates by the way, there痴 some adjustment for quality, some adjustment for the number of channels in here. At the CPI they don稚 adjust for the quality of each channel. They do try to adjust for some of the size increases of the package.

But you notice one thing. This goes from 1983 to the end of 2002. Real cable rates go up. As a general rule, real cable rates go up. It痴 like real men don稚 eat quiche. Real cable rates go up. Hal, I知 glad you smiled at that. The interesting exception to the rule is that right here in 1993-94, when in fact the federal rate control regime seems to have put the kibosh. And if you sort of measure this from trend, you can see that the average customer bill went down something about 9 percent from trend over that two-year period, October 1992 to October 1994. And then of course prices went up. In fact, you see something quite interesting here. Prices under rate regulation in the 1992 Cable Act are going up during this period, up to the decontrol of March 1999 that was in the 96 act. They池e going up at about the same rate as they went up in the pre-regulation phase. You also see something else that痴 interesting. After the decontrol actually kicks in in 1999, the rate of price increase moderates.

Now this goes up to the end of 2002. If you come in 2003, there has actually been an uptick in rate increases but there痴 no regulatory change. It痴 not interesting from a regulatory standpoint. And we could talk about what is interesting about that. Maybe we will. But here痴 another way to deconstruct those rate increases. Let痴 take the annualized changes in the deregulated excuse me, in the run-up to deregulation in 1987, you saw prices, real prices for cable increasing a little over two percent a year. Then the price increases under rate decontrol shoot up to almost four percent a year. A lot of screaming about prices going up too fast. We put on the rate controls and, sure enough, for a two-year period there痴 actually a decline in the annualized real cable rate of almost one percent a year.

When the sort of the implicit deregulation takes place with the going-forward rules, then under rate controls and not only under rate controls anyway you have the same increase, about four percent a year annualized, up through March of 1999. Then we can look at this in a slightly well, after March 1999 come out here to the end. You actually see the price increases moderate, just over two percent a year. March 1999 through 2002. If you take the entire period of rate regulation, September 1992 to March 1999, you actually have price increases that are slightly higher than what痴 been seen since decontrol.

So it痴 fine to have a philosophical discussion about how these rents are being distributed in the industry, but this is actually what regulators have done in terms of the actual real price increases. It immediately leads us to think, I think, more critically of rate regulation. First of all, we can see that the regulation of rates has been fairly ineffective and there are actual reasons why the regulators did in fact relax controls in November of 1994. Quality was being wiped out in that sector, and we値l take a look at that in a second. But the price data alone can tell us how ineffective rate regulation has been.

Part of the reason that rate regulation was complicated was that quality adjustments are complicated, and so the regulators are not stupid. There was a big effort done. The FCC hired 220 people to do the rate regulation scheme, had a new cable services bureau put together for this. And they made a good run at it. They tried to do price per channel regulation because they knew that you could sort of evade controls if you didn稚 adjust for that, or you allow adjustments on a per-channel basis, not to be adequately reflected in the constraints. But it was tough.

There痴 a debate about how you adjust for audience share. Mark got a little bit into that. Do you price per audience rating point, or how do you measure the value? Very, very tough to do that. Regulators can稚 escape that. That痴 not a problem you can just sort of push off on the market and say, well, the market has a problem with it. It痴 the regulators problem. They池e the ones who are supposed to be constraining rates in an explicit way.

And of course one thing that痴 very troublesome is just look at these rates. Particularly you look in the last year, you say, well, the rates are kicking up now. The entrant comes in with higher rates, DBS being the primary competitive entrant. What痴 that about? Well, it痴 very easy what it痴 about. It痴 about quality. They bring in a bigger package and a more valuable service and they charge a lot more for it. So when you talk about market power ending up in high prices, you certainly have a problem there.

Now I want to say just one last thing about the rates here before we go to the actual consumer reactions to rate controls, look at the more interesting output statistics. Rising rates are always given as the regulatory rationale for price control. Rising rates are not a regulatory rationale for price controls. Rising rates are not synonymous with high rates. In fact, they undermine the argument that rates have been set too high because they池e rising. They were lower last month. The monopolist sets a high the monopolist doesn稚 say, gee, how much can we raise our rates over the next six years? The monopolist sets the rates at a monopoly level and maximizes the return from the market power, okay.

So the fact that rates are rising is an indication not of monopoly power that may or may not be there with the rising rates. It痴 an indication that demand is shifting. Now there are also arguments about supply shifting, but the important thing that you observe in this market is actually demand shifts. And the real increase in demand, of course, is that the cable product is becoming more valuable. So there are different ways to model this. But the bottom line on this is that in fact demand is increasing for these services and that痴 why in fact the cable competitor DBS, satellite TV, comes in with a higher priced package. Demand is higher for those services.

Now output responses to rate changes. This is really where the rubber meets the road. The consumers like rate regulation, and we have two wonderful regime switches 1987-1988 and 1993-1994. We can see what happened when rates went up in response to decontrol, and when rates went down in response to price re-regulation, and we can see what happened.

By the way, this is the definitive answer. You can read all about it. It痴 a copy of the book. It really has all the answers. If you buy if you do go on amazon.com and buy one, you can probably flick back and see that it might set it up to the top 850,000 id you buy a copy. I think you can move it at least 50,000 places if you buy one. So if you do that and it flips up a lot, if you壇 just send me an e-mail with that link, I壇 appreciate it.

So what we you know, what Spitzer and I did back in 1997, and you can certainly do it today, and I have some new data that actually does it very nicely, you can look at what I call channel subscribers. This is a nice measure of all subscribers to all cable TV channels, so I僧 adding up all TBS channels and USA channels and Comedy Central, subscribers to all these channels, because that adjusts for the increase in quality and the increase in subscribership to cable TV. And these are the percentage annual changes, and here痴 the series from 1985 through 2003, 2003 of course being a projection. But what you notice is the two worst years in history for growth in cable product, cable programming, 1993 and 1994. We saw before those were the years in which rates were actually constrained by regulation.

What are the best years? The two best years in the history of channel subscribership growth, 1987 and 1988. Now, you know, I致e led a good life, I知 a nice person. Usually I don稚 get data that痴 nearly this good to work with, but this tells the story. This tells the story.

Now this is sort of the cost side of this. Mark talked a lot about cost and there痴 a lot of bilateral monopoly bargaining goes on between programmers and cable and programmers and other distribution media, but it痴 quite interesting here. This license fee is the average license fee that痴 paid for a programming channel, and this is just adding up all those fees per subscriber, how much the cable operator痴 paying to content providers, essentially, in those monthly license fees. And these are the monthly annual changes, annualized changes in those monthly fees. Here again you see that the worst year in history is 1994. That was the year when prices dropped substantially because of rate regulation.

So what did the operators do? They simply lowered their demand for inputs and they gave the customers less you know, less quality. So what happens is, the customers are getting lower prices. They should buy more, right? We all know what a downward sloping demand curve looks like. In fact, the customers are backing away from cable, and this was the real problem. You look at growth rates, you can look at them and define them in a lot of different ways.

I actually like these data. They say it pretty well. Just look at the universe as defined by USA, ESPN, and TBS, the top cable TV networks in terms of distribution, the three top networks. And you just look here, and again, this is 1985 through 2003. These are annual percentage growth numbers. The thing that absolutely strikes you is that the years in which prices were constrained by regulation, did customers flock to the service because they had lower rates, they all wanted cable now? Well, at lower rates customers rejected the programming. There must be something about the marketing, something about the quality, something about the actual inputs, about the efficiency of those rate reductions mandated by the domination of the FCC and the local government regulators that were mandated to act with the FCC in the 1992 act.

So this is what a failure looks like when it comes to consumer when it comes to consumer protection. Now you go back here to 1987, 1988, gee, it痴 funny. De-regulation, yeah, rates went up, nominal rates did go up substantially. We saw there were these four percent annualized increases for that whole period 1987 through 1992, but wow, lots of programming. Investments are being made, lots of marketing investments are being made by the firms. Consumers are responding very, very positively to de-regulation.

Now there is another way to take a look at this and good paper in the Rand Journal of Economics did this a few years ago. Willis Emmons and Robin Prager, and they actually looked at the price differentials between regulated and unregulated firms. Excuse me, between competitive and non-competitive firms. Competitive firm is defined in essence as the cable operator in a market that has a head-to-head cable competitor. So Mark talked a little bit about these markets, so-called over-billed markets. In the Emmons and Prager paper, they looked at data from 1983 and 1989 to get the differentials. In 1983 rates were largely regulated by local governments. In 1989 of course rates had been local rate regulation had been pre-empted, so the rates were in essence free market rates.

They looked at the differential between regulated and unregulated excuse me, competitive and non-competitive firms. You can call it a non-competitive or monopoly price premium. And they said it was about 18 percent in both years, 1983 and 1989. So what did that lead them to believe about the effectiveness of regulation? Nada. The regulated rates are not coming down in the 1983 period, and you have the same differential then as you have in 1989, so they concluded from that, quite straightforwardly, that rate regulation was ineffective.

And here is some FCC data. Now these are in essence raw data. It does not come out of the regression. You can adjust for other things, you can attribute other factors in here. Not likely, but you could. More research remains to be done, but it痴 quite interesting that here the non-competitive price premium in the last years of rate regulation are, you know, just as large as the price premia in the so-called non-competitive markets as soon as you relax the controls. So this is just straightforward evidence that the rate regulation itself is not not effective.

Now, just the fun comment here to conclude this thing. This is not rocket science. You look at this in 1988, 1990, and who痴 got their fingerprints all over the campaign for rate regulation? Well, the broadcasters. Now there are various other issues involved here, including, to the side of this, must-carry, retransmission consent and all that other stuff that was in the 1992 Cable Act and has been well, it痴 still with us today. But rate regulation itself has always been strongly supported by television broadcasters. Interesting. Why would the competitive medium want the price of their direct competitor to be lower? I mean, how much sense does that make?

In 1993, when the FCC was taking comments to figure out where to set rates, in fact, the NAB had a proposal that the basic cable rate should be $4.52. Okay, that痴 low. That was a lot lower. They wanted the big rollback. They wanted cheap cable. Well, what does that strategic does the NAB not actually operate in the financial interest of their television station members? Please. They know exactly what those financial interests are, and the reason they池e in favor of rate control is they know that consumers tend to reject what happens after rate controls, which is that quality goes down as rates come down. So they wanted real tight price caps.

The telephone companies also offered this kind of a low priced thing and were in favor of rate regulation, again on the idea that they might be a direct competitor in the multi-channel video. Quite interesting that the competitive sectors were so in favor. The programmers, on the other hand were apoplectic about the rate regulation scheme, and Blair probably still has scars from perhaps some of the intense lobbying that was centered at the FCC by programmers, that said, look, yeah, you can lower rates for customers but it痴 just going to result in a lower demand for the inputs. We sell the inputs. Hello, over here. We want to do new networks. And new networks are not being purchased. In fact, they had this whole switcheroo where they, you know, the new networks had to start paying to get channel coverage during the height of the rate regulation.

So this actually did convince regulators to significantly relax controls, and you can see the data. There were large price increases that were allowed even before the 1992 cable rate re-regulation scheme was turned around.

So this is how I figured out cable rate regulation. In an FCC filing in 1990 by the broadcasters, and it was pretty darned apparent that it wasn稚 going to help consumers. And so I wrote this up in an Op Ed in a newspaper and it provoked it provoked a reaction from the Consumer Federation of America. So I went and got this letter that your predecessor at the CFA, Gene Kimmelman, wrote that again attacked the idea that de-regulation was good for consumers, and said that price increases are three times the rate of inflation and that the legislation which became the Cable Act of 1992 should provide consumers with long overdue rate relief. Then he also made a comment about me. It said, only ivory tower free market ideologues like Mr. Hazlett would expect Congress to correct all the policy imperfections involving the industry.

Now I壇 like to say I do know some ivory tower free market ideologues, and I don稚 know any of them that think that Congress is going to correct any imperfections, let alone all.


[TAPE CHANGE.]


-- on limited information, because we had not done re-regulation in 1990. Fortunately Congress complied with my research agenda and did give us the experiment here in the 1990s, and this is what happened. Rates did go down. The earnest effort was made to lower those nominal rates. Constraints were applied, and consumers lost. And the evidence was that consumers stopped subscribing. You ca look at any correct measure of output, and output slowed during 1993 and 1994 in the cable TV sector, and broadcasters got in essence what they wanted, a benefit in terms of hurting the competitive alternative to their product.

De-regulation of cable, both the implicit regulation of the FCC that kicked in in late 1994, and then of course de-regulation in the Telecommunications Act helped cable programmers. It helped competition with broadcasters, and today we池e seeing again competitive entry into the sector, including the DBS entry into the markets, and in some markets over-built entry is also helping consumers, and should certainly be where we put all of our chips in terms of helping customers because we致e gone the other way and we致e found that when the burden of proof is properly placed on regulation that the rate controls in fact are anti-consumer.

MR. HEARN: Your time is up. Mark, you have five minutes for rebuttal.

MR. COOPER: Yes, a couple of quick points. Obviously Blair is in the audience, so I don稚 want to say evil things, but talking about going-forward as rate regulation essentially was capitulation. The cable networks the cable operators went on strike. They said they weren稚 going to invest, and the FCC blinked. People with market power tend to do that, and the question is, do you have the discipline to stay the course. And eventually they have to make a choice between letting their assets depreciate and earning an honest profit as opposed to a profit based on market power. So there痴 a different behavioral explanation here, is that they would have started adding programming when they perceived that telco痴 might get into it since they had been foreclosed, or DBS might actually become a significant competitor as they were finally given access to programming in the 1992 act.

So we池e out barely a year and a half of the new regime and the FCC capitulates, so I知 not convinced that that comparison demonstrates anything about the long-term effects of a sensible regulatory regime.

Clearly the FCC痴 recent numbers show that competition results in both lower prices and more quantity. That comes out of their analyses. You don稚 have to have abusive high prices to get good quality and quantity. Competition is supposed to be a disciplining force.

The calculations the interesting calculations of the top networks. The entire analysis is constantly frustrated by this bundle proposition. It痴 quite clear that bundling can be anti-consumer. The economics profession has known that for two decades, and Cox actually identified the conditions under which it is in their comments. Essentially when you have negative correlations in demand, the demand for the bundle is higher than the demand for the individual services. Tom calculates the price per per program, the subscribers per program, and obviously we致e increased the number of channels available to people, but the number of people watching is actually almost non-existent when you get down to the bottom of that bundle. For every one person watching the bottom 30 shows, there are 250 people who aren稚 watching. But all those 250 people are paying, and that is a massive transfer. It痴 a cross-subsidy. Essentially the proposition is that we maximize the value by cross-subsidizing the viewing habits of my neighbors. We would actually like to see the opportunity to buy these programs independently. Clearly the demand for ESPN on a stand-alone basis is much more elastic than ESPN rammed into the bundle.

So you look at ESPN, TBS and USA, and I suspect that there痴 a negative correlation between the demand for those products when sold on a stand-alone basis. They would have to carry their weight. The proposition that advertisers buy homes instead of eyeballs, which is the justification given for why we need to keep all the smaller viewer programs in the bundle, presumes that advertisers are irrational, buying blank screens, and that consumers are interested in subsidizing their neighbors.

So essentially the proposition of the empirical test of the de-regulation in the 1990s, and the value of that bundle is frustrated by the forced bundling, which in fact not only has anti-consumer effects, but in the last which has been known for 20 years but in the last decade we now know it can have anti-competitive effects. And clearly the denial of access of independent programmers has shrunk that market dramatically. There痴 almost no independence left. The bundling of basic TV and high-speed Internet is an assault on the satellite as a potential competitor in the high-end niche market.

There is a brutal bundle. If you call the cable operator and say, give me high-speed Internet alone, they say 60 bucks. If you say, I値l take basic too, the price goes down to $45. That痴 a marginal cost for basic of negative $15. I know there痴 a big debate on whether predation exists, but a negative price is an interesting prospect.

So from my point of view, the intellectual test that has been applied is confounded by the failure to actually apply a regulatory regime for a significant period of time. The value proposition is compounded by the anti-consumer bundling that has gotten much worse since the mid-90s. You can certainly drive demand and penetration by forcing people to buy tomatoes and apples when they only want one, and would clearly maximize their personal welfare by being allowed to make that choice.

MR. HEARN: Okay. We池e going to jump to some questions now, and I値l ask the first one. When we turn to the floor, please state your name and your affiliation.

The GAO report, the General Accounting Office report that came out last month noted that in markets with two cable companies, rates were 15 percent lower than markets where there was a single cable company. I thought it was interesting that the GAO didn稚 mention even in passing what happens to DBS rates in so-called cable over-built markets. My guess is that nothing happens to DBS rates in cable over-built markets.

What痴 the explanation for that, and should it be a concern that in over-built markets cable rates go down but DBS rates remain the same?

MR. HAZLETT: Well, let me just ask clarification on that. By rates you mean the price or the penetration rate?

MR. HEARN: The price, the retail price.

MR. COOPER: Well, the simple fact of the matter is that if DBS charges, as far as we can tell, a national uniform price and they market to a specific niche market, and they don稚 compete on price. They never have. They致e done some promotional discounting lately, but they simply have not set out to compete on price. If you go back and look at the debate when they were given the right to do local into local, they said, don稚 expect us to compete on price. They made it absolutely clear.

So the market segmentation, if you go back to my slide, I had a lot of market segmentation there. I only mention the Internet market segmentation between business in residential, DSL and cable, but there痴 a market segmentation in in in multi-channel video as well, in which DBS markets to a high volume and I agree on this a very high volume, high cost market segment, and they池e simply not going to compete on price. The fact that GAO could find 15 cents a month significant at only the 10 percent level compared to 5 bucks a month for head-to-head competition simply reaffirms that.

Should I be concerned about it? I sure would love DBS to compete, but Hazlett has made the point that they are a higher cost operator and so when the back痴 up, technology is more expensive, you create the opportunity for rent collection by the incumbent.

MR. HAZLETT: Yes, let me just I知 glad you clarified that because I didn稚 catch that. That痴 actually an error, if you池e saying it痴 a 15 cent monthly differential that they found. They said it was 15 cents for each 10 percent of DBS additional DBS penetration in markets where DBS carried local into local, and they said the average was a 40 percent increase. So it痴 a 60 cent a month cable price lowering, and that痴 not trivial. That was probably, to me, the most interesting thing in the GAO report, outside of their very nice treatment of bundling, that I was very interested to find.

They have found this statistical effect, that in fact cable rates are lower where you allow local into local, or you have local into local DBS. Now that obviously should be a clue for policymakers to figure out ways that that can happen. The FCC and the DOJ couldn稚 wait to say no to the Echostar-Direct TV merger. They were tripping all over themselves to be first to reject it.

But they really should think seriously about this finding in the GAO report. They should also think seriously about other competitive entrants into this market that they have for some years refused to license, whether it be satellite entrants or MBDDS entrants and so forth and so on. Yes, there is certainly a lot of room for competition.

The competition with DBS is very, very nice. It doesn稚 look like the CFA wants it to look. That is to say, it痴 not just price competition. In fact, it痴 primarily non-price competition. Why we should want one over the other is a mystery to me. The fact that we池e getting all this abundant product and there痴 been an enormous reaction by the cable industry to entry by satellite.

Just think about it. The conventional wisdom now in the cable sector is that digitization of those cable systems, and the massive investment to digitize essentially the entire US overbuild of the phone network called cable that痴 taken place in the last five years, that, I don稚 know, $60 (billion), $80 billion investment was driven by a reaction to what they used to call the death star. They had to have digital programming to go head to head with that big package that was killing them among, you know, what Mark calls the upscale niche, which is now about 25 percent of the United States and 100 percent of the Hazlett household. That digitization left cable in a pretty good place to respond with digital cable, and also in a great place to push you know, push the envelope on high speed broadband, which was just sort of the happy, very small incremental investment beyond the digitization that had taken place for that response to satellite TV.

So cable modems came in. We now have about 15 million cable modems in the United States, subscribers, monthly subscribers. You like to say that that痴 not as good as Korea and so that痴 a problem, but I知 saying it痴 a lot better than what we would have had without that platform competition between the two. And in fact, it痴 kicked DSL into action, and DSL has responded to cable. There痴 no question about that. Everyone says that, particularly people that are trying to make fun of the phone companies, that they have waited until they got far enough behind that they had to do something about high-speed broadband.

So this competition that does not involve two or three cent price reductions going back and forth to hit the so-called competitive pricing level and leaves us some rents on the table is, in the real world rivalries of actual markets, has been enormously productive in putting advanced technologies in the marketplace, in giving consumers better value, and in fact allowing competition to run the table in a very productive way.

The answer to this, when people say it hasn稚 done as much as it could, which I absolutely agree with, and Mark knows I agree with him on that, is to is to say, well, how can we get more competition in the marketplace? I知 perfectly willing to have that discussion another time in the First Amendment room.

MR. COOPER: If it were two or three cents, we wouldn稚 be here. It痴 five or six bucks, which mounts up to 5 or 6 billion, and that kind of gets people痴 attention.

The second point and interesting point, and Tom mentioned this, is that the build-out of the platform is identical for high-speed Internet and digital tier. There痴 no incremental cost. Telephony has a significant incremental cost, which is why people didn稚 bother with surface switch, and we値l see what they do with VOIP. But the fascinating thing then is if you look at the strategic pricing of digital tiers versus high-speed Internet, you could argue that the price of high-speed Internet ought to be within a few bucks of the price of a digital tier because there痴 no capital cost difference and the operating cost difference is fairly small. The cable operators have suggested it might be five or six bucks, so that we might expect to see digital tier, which is now priced at, what, I guess 15, 10 to 15. We would expect to see high-speed Internet at 20 to 25, and we池e looking at it on a stand-alone basis at 60.

The strategic pricing of high-speed Internet has been driven by a central concern of the cable operators to prevent competition against the from a video stream that developed a package that would look like multi-channel video. That foreclosure of the preferred platform, the telephone platform is not very good for multi-channel video. That foreclosure has denied us the benefit of competition for the core franchise of the cable operators. So there痴 a lot more than a few pennies on the table here. There痴 dollars and dollars in the video package. There痴 tens of dollars in the high-speed Internet package. And there痴 the whole proposition of whether or not we池e going to get any applications now that as the cable operators control access to the preferred high-speed Internet platform.

Q  Yes. I had two questions for Mark Cooper. I just wanted you to clarify a couple of things. What is it you said that clustering actually increased pricing, and that confused me because I thought the whole point of clustering was to bring down, get a volume discount on on video product.

And then you just sort of made the statement that in terms of high-speed Internet that for cable companies they were only looking toward intermodal competition. Aren稚 some cable companies actually carrying competitive ISP痴?

MR. COOPER: Well, a couple of answers there. First of all, the clustering was open kept falling out of the FCC痴 econometric analysis and it drove the heck out of the industry and they complained to the FCC and they re-did it and it came out again, and so the FCC didn稚 do it this last year. Heaven forbid they should upset the industry. But they looked at clusters several times and they found a statistically significant increase in price for clustered systems, and then the question is, how did it happen, and the answer is, well, you know what? When you get a big cluster in a local area, you get leverage over keeping potential competitors out, you get exclusive deals on contracts, on programming, you宋e got more muscle. You may actually be able to terrestrially distribute your signals, which denies competing delivery systems access to popular programming. If you池e in Philadelphia, who needs cable if you can稚 get the local sports team? So that has turned out.

Now the buying power is not necessarily at the cluster level. It痴 at the MSO level. Comcast has shown that they are going to flex their monopsony power, and while they池e extracting reductions in programming prices, they致e also announced a complete full set of well, they致e announced their initial price increases, so as far as we can tell none of that is being passed to the consumer. All of it is ending up as producer surplus, and actually Cox tells in their analysis that they値l negotiate a lower price from ESPN, but they値l keep a part of it for producer surplus. First answer.

Second answer, the few ISP痴 that have been allowed on cable systems were primarily driven by the political process. Obviously the FTC consent decree caused Time-Warner to have an obligation to allow a couple of others on. During the height of the political fury, AT&T said they might let a few others on, and I don稚 think they ever actually finished their their decision to allow. So they were going to run a closed platform if they could, and they have, by and large, successfully done so. That was not voluntary and they have no interest in in having ISP痴 running over their platform, nor do the telephone companies have an interest in having ISP痴 running on their platform as well.

And if you look I mean, if you look at the cable ISP痴, you know, in Comcast service territory they have 100 percent of the cable modem customers and zero percent of anything else. They never compete as an ISP in any other market. The same thing is roughly true with the telephone company.

So essentially what people are being sold is a bundle, virtual or otherwise, of Internet access and Internet service, and the net effect has been to devastate the Internet service provider industry who can稚 compete for access.

Q  Howard Vestric (ph), Telecommunications Report.

The backdrop of this debate today I think was the GAO report, and basically, you know and the reason for the GAO report to begin with was you had a member, Senator McCain, who at least was looking at what can Congress do, what can we do. Every time we talk to him he says, well, prices are going up at too fast a rate and we致e got to do something, and I知 not sure exactly what the answer is but we池e going to look at that. And you know, I think the indication now is that he plans to come back next year with some hearings.

Do either one of you expect to see anything realistically out of Congress, the 108th Congress, and I assume, Mark, that you would like to see something. What would you like to see Congress do?

MR. COOPER: Well, the industry and the sensible people in the industry make the point that if you just unbundling is only part of the question, but we would certainly like to see a significant extent of unbundling. Cox has said, we noticed with respect to ESPN, we want to fix it, but we値l be more efficient at fixing it than the regulators, an assumption that Tom would certainly share. The problem is it took them an awfully long time to notice. We池e not sure they have the clout to carry it out. Comcast appears to have the clout, but they致e made it clear they池e not going to share any of the surplus with the consumer, having simultaneously announced.

So we certainly would like to see consumer sovereignty. Give us choices. Let us demonstrate our demand in the marketplace. We would certainly like to see the cable modem platform open in a non-discriminatory fashion. This is an infrastructure. It痴 advanced telecom services, the 9th Circuit has told us that. So if that were open, we would have had the distinct possibility of people developing sets of packages of streaming video. Small bundles, if you will, but it turns out that, you know, this market may easily be segmented by the negative correlation between demand.

So those are two things that would, I think, establish a great deal more discipline in the industry. And I don稚 think you値l lose quality because competition is what produces quality, not necessarily rents. Rents produce rent protection, which is the kind of bundling we池e seeing the cable operators engaging in.

MR. HAZLETT: There are policies that the government can enact, and they all have to do with competition. The regulatory policies will not work. We have a long track record on it now. We know what will happen. There痴 lots of politics, there痴 lots of Washington that wants the regulation. It痴 all about Washington politics and not at all about what consumers are getting in the marketplace. So, I mean, there痴 lots of things. Congress is considering overruling the FCC and giving North Point a license to compete in each one of the local TV markets, and that ought to be done.

The FCC ought to also be instructed to liberalize the process so the satellite entry is much easier. They致e been very restrictive on that and forced companies that wanted to enter satellite to do it in a roundabout way, and in essence to just sign up with the incumbents.

The interesting thing, you talk about the market power issues in regards to clustering. Mark talks about Philadelphia, which is the example of where you seem to have some evidence of this. There was a competitive entrant that did attempt to get permission to serve Philadelphia, and does serve the Philadelphia suburbs, RCN, and for two years they tried to get a Philadelphia city franchise. After two years they gave up, and the mayor of Philadelphia took credit. Ed Rendel said, we did not want those guys coming in there and just offering some flim-flam fly-by-night competitive company. We held their feet to the fire and we池e glad that they proved not to be serious and went away.

So that was a political victory in, you know, given the regulatory incentives. I think that痴 a problem and it ought to be addressed. It was addressed in the 1992 Cable Act, that the cities were supposed to give out the franchise for competitive entrants, but there was no sanction against the city for not doing so, and there was no incentive provided to the city to do so if the politics worked the other way. So there痴 a lot that can go on there.

You mentioned the GAO report, and I just touched briefly on this bundling issue. I just want to clarify something, I think. That is, because Mark makes a lot about bundling, that bundling is anti-competitive and so forth. Bundling is largely very pro-competitive in the way the economists actually model and investigate and run the empirics on this. It痴 possible it can be anti-competitive. It depends upon the circumstance.

The interesting thing, though, is this idea that Mark says that when you take the big package, if you don稚 watch, you know, half of the channels or the last six channels, you池e paying for those channels. Are you? What痴 the marginal cost of those channels? The marginal cost of those channels is zero. If you池e a consumer advocate, certainly you want all the channels out there in as many homes as possible with the lowest marginal pricing on those channels.

The question then is how do you pay for the system? Well, it turns out that the ways that have been developed in multi-channel video is that you pay it痴 sort of an admission, you know, fee to the park and then you get a lot of the amusements at zero marginal cost, which is exactly the way you want. And the GAO actually found out that there are two important things you have to first confront when you attack bundling. One, it痴 going to be costly to start charging people, and it痴 not just costly in terms of the technology and now we池e going to go to 100 percent addressability and then it痴 all over. It痴 costly to sell customers. The marketing gets very complicated when people have to decide at the beginning of the month or the beginning of their contract what channels they池e going to have to watch. It just turns out to be very efficient to give somebody a big bundle of things and say, go ahead and surf.

Of course, access to the Internet does not work very well if you charge people up front and say you致e got to have a fee for it. There痴 a lot of zero-priced access on the Internet that just works very, very well in fact. Your high-speed modems and so forth, they basically just give you an all-you-can-eat menu for access to the Internet. So in a lot of products, including multi-channel video, it turns out that offering people a pretty big bundle works pretty well.

Now some of the services, if you get the high-value stuff, like HBO, maybe sticking a price on that channel makes sense. Maybe charging, you know, $49.95 for a two or three-minute heavyweight prize fight, that makes sense. And so that痴 what you see out there. But simply chopping this down and going to an a la carte pricing system, the GAO hit a home run talking about the costs and the ambiguous outcome for customers under that kind of a regime, and essentially counseled caution on that. I certainly would endorse that conclusion by the GAO.

MR. HEARN: Let痴 just work our way down. Back of the room.

MR. COOPER: Let me just

MR. HEARN: We致e got to get some other people痴 questions.

MR. COOPER: Well, I mean, the notion that the GAO痴 discussion of bundling, abstracting, leaving aside the question of addressable boxes, which is a real cost, but a cost that痴 disappearing very quickly since the cable operators want addressable boxes out there for other things, the GAO痴 explanation, they simply repeated the jive of the industry. That is, if you break the bundle then the advertisers will stop paying their share of the low viewer stations, and the question is, how much are advertisers paying for blank TV screens. That痴 not a very rational reaction on their part, to pay for blank TV screens.

The second question is that the small number of people who watch those niche channels would have to pay a higher price. The assertion there is that I am better off subsidizing my neighbor痴 viewing habits. Neither of those assumptions, assertions, the irrationality of advertisers or the irrationality of consumers so that 800 people pay and one person watches makes an awful lot of sense. Complete a la carte pricing obviously would be very challenging, but obviously Cox has discovered that, well, ESPN has gotten to be sufficiently like HBO and sufficiently of a nuisance that maybe we want to break that out too. Each of those, the premium channels that drive the bundle, it would be interesting to give people a choice of those and see what happens.

The conditions for anti-consumer bundling are clearly a distinct possibility in this industry, but none of their economists will analyze that prospect.

MR. HAZLETT: I just want to note Mark, we have to get this on the record. You are against all cross-subsidies. Is that right?

MR. COOPER: By and large, I don稚 like subsidies. When they promote

MR. HAZLETT: You池e not against cross-subsides?

MR. COOPER: When they promote universal service and things, we we like them, but when they池e

MR. HAZLETT: What about universal access to cable programming? You said it was a cross-subsidy and that was bad and you wanted to get rid of it. Do you have a rule against cross-subsidies?

MR. COOPER: Universal access to the 250 shows that don稚 even register on the Nielson scale, at the price of $5 (billion) or $6 billion. That痴 almost as much as we pay for universal service of telephones. To me that痴 not a value.

Q  Steve Effros, at Effros Communications. Mark, I, like you, am not an economist and I don稚 understand regression coefficients and dummy variables and a lot of other things, but I do understand the concept of garbage in and garbage out. You keep using the example of the $4 billion or the $6 billion, and you池e using that on the basis of the numbers that the GAO came up with regarding the alleged 2 percent competitive systems. Except the GAO acknowledges that it didn稚 investigate what that pricing represented.

For instance, I have in some of these cases, and the pricing represents a system that has a very low subscriber price but they add to the property tax in the community to cover the additional cost of that system. We also have systems with remarkably low prices that have gone out of business. Several of the companies that were cited in the GAO study as the competitive systems with lower prices are now bankrupt.

We haven稚 added the cost to the community, and that may be why Mr. Rendel said, we want to make sure they can actually build this thing before they half rip up the city.

MR. HAZLETT: You can do that with bonding requirements.

Q  But the point being that the numbers that are being used, the underlying number that you池e using to get to your $4 billion or $6 billion is based on numbers that hadn稚 been investigated as to what they actually represent and what the true subscriber cost is for that system. I知 curious, given that you have other firm supports, in the 1992 Act the Consumer Federation supported the 1992 Act, supported must-carry, supported retransmission consent, all of which lead to bundling.

Are you now saying that the CFA does not support must-carry and does not support retransmission consent, and therefore I as a consumer can buy my cable service without being forced to buy CBS? Is CFA now going to say, we are against must-carry?

MR. COOPER: No, we池e not against must-carry. Let me respond to the first question. In fact, the FCC, when they do it, they break out the different kinds of systems. So they sort out the 杜unies (ph), which you were complaining about raising property taxes, which, in fact, we recently filed comments that munies do not necessarily we don稚 see them as subsidized. So the FCC breaks out the different kinds of over-builders and do not include low they find a price effect for each type of system.

The low penetration systems do not necessarily imply head-to-head competition. Who knows what they imply, but the FCC separates that out. So each of the independent types of systems, and particularly the head-to-head wireline systems, have all had that price effect, that will be larger or smaller depending on how you convert the elasticity. So this is an effect that has been found repeatedly, broken down by separate types of competitors, and so competition is good for us. We actually are perfectly happy to say that.

Tom痴 use of RCN RCN is not a munie. That was private investor capital, and of course the cable industry aggressively prevents anyone from entering the market with head-to-head competition. The telcos were prevented from doing so until 1996. They started to do so, and then they exited the business fairly quickly, complaining among other things they couldn稚 get programming variety.

So first of all, the competition finding is solid. Repeatedly broken down by separate types of entities, and I壇 love to have more munies. We致e doubled the number of munies in the last five years, and I壇 like to double them again and again and again.

With respect to must-carry, must-carry was a and retransmission were a compromise between programmers and cable operators, and clearly the broadcasters have used retransmission to monetize their access to the system. That was

Q Excuse me. You said that that was a compromise

MR. COOPER: Well, it was a deal. It was part of a package in an industry that had become incredibly abusive, foreclosing competition.

MR. HEARN: We have time for one more question.

Q  Don Fishman, D.C. government, Office of Cable Television. If the real goal is to for consumers and lower prices but rate regulation is not the way we池e going to get it, but Ted cited the GAO痴 report on competition as yielding results. Then what should the federal government do? What should states do to encourage competition, if that痴 the way we want to go?

MR. HAZLETT: Well, certainly the municipal governments have a big impact on whether or not you get local entry, and the D.C. government is probably doing better than the Philadelphia government in getting local entry because there is a local entrant that has offered head-to-head competition, you know, in D.C. So maybe you池e on the right track there and can do more. Certainly there are I致e actually written quite a bit, and I壇 be happy to talk to you later, about some of the interplay between the established incumbents and the entrants, and some of the problems that develop, both in the marketplace and through the regulatory structure. Regulators can be very pro-entry and do a good job on that.

There痴 also program access issues, and a lot of those were addressed in the 1992 Cable Act. In fact, I was in favor of some of that. The FCC has provided some kind of a backstop to allow entry there and the local governments can be involved there, and the local governments have also in some cases instituted uniform pricing rules to try to stop reactions that are to preempt competitive entry.

So there is a range of pro-competitive actions certainly that local governments can engage in. With help from wireless competitors and others that are going to be able to come in only through federal action, I think a lot of competitive entry can take place.

MR. COOPER: Six things. Pull your own wire when you open your trenches, and go into the cable business operated in the public interest, maximize output, not profit. Simple proposition. Efficiency can be equally achieved through output maximization.

MR. HAZLETT: If the government does it.

MR. COOPER: The local government, not the federal government. Local governments do certain things. And publicly owned municipal systems have done wonderful in electricity compared to lots of the privately owned systems.

Close the terrestrial loophole and get rid of exclusive contracts, which are going to get worse and worse as industry is bulked up, so that痴 access to programming. Tom and I might or might not agree on that. Open the platform, the advanced telecommunications platform so we can stream some video in and the cities can try and fight about that. They are, and they should, and we may prevail in the 9th Circuit and so forth.

You might give DBS some relief on the local, inter-local, which is burdensome the way it痴 structured. Tom and I might have agreed that the effort to get one good competitor by adding transponder capacity to the one DBS would have been consumer friendly with the proper protections. We might or might not have agreed on that.

You do have to worry about predatory responses to over-builders. The incumbents have a tremendous advantage and this elective discounting is a problem. And frankly I would like to see unbundling so that we have some consumer sovereignty. Not completely a la carte but obviously multiple tiers.

MR. HEARN: All right. That wraps it up. Thank you, panelists. Thank you, audience, and maybe we can do it again some time soon.


(Applause and end of event.)

(END OF TAPE)

 


Center for Digital Economy.

EMAIL THIS | PRINTER FRIENDLY

CENTER FOR THE DIGITAL ECONOMY DEBATE

Participants:

Mark Cooper, Research Director, Consumer Federation Of America

Thomas Hazlett, Senior Fellow, Manhattan Institute

Moderator:

Ted Hearn, Washington News Editor, Multichannel News

THIS TRANSCRIPT HAS NOT BEEN EDITED, AND MAY CONTAIN TYPOGRAPHICAL OR PHONETIC ERRORS.


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