If cable systems were forced to pass on any substantial portion of the costs of PEG channels to subscribers, more of the most price-sensitive customers would shift to satellite services and other video entertainment sources, resulting in lower revenues for local governments from franchise fees and lower viewership of government public access channels.[*] Moreover, such unintended consequences could remain even if much of a PEG fee increase were paid out of cable company profits, rather than passed on to consumers.

Currently, cable companies face pressure from major competitors who have access to the same upstream content providers cable companies do. Even during the period in which most local cable systems had monopoly power, they also had to acquire programming from strong content providers upstream, who captured a large share of the cable monopoly surplus. Reductions in the companies' net revenues because of higher PEG fees could compromise the companies' market position by reducing their ability to pay for popular programming or new technology. This competitive disadvantage would risk a loss of quality-sensitive customers, once again leading to lower revenues for local governments from franchise fees and lower viewership of government public access channels.

It may be possible for cable systems to make more of an effort to use their local channels to differentiate themselves from DBS services. DBS services broadcast their signals in wide beams covering a large area, so that they cannot provide one set of local channels in one area and a different set in communities 20 or 50 miles away.

The problem with this approach, however, is that the cable system needs to have an audience to watch PEG channels. Unless PEG channels offer substantially more than government meetings, school broadcasts, and public access programming with limited appeal, the niche for public access programs will remain small. If there were any untapped demand for PEG content, we would expect to see the availability of PEG channels inducing viewers away from DBS to cable systems.

If there were any reason to believe that higher PEG channel funding, paid for with price increases passed on to customers, would increase the demand for cable systems relative to DBS systems that do not deliver local PEG channels, then it would be in the interest of cable systems to expand PEG services even without government mandates. Instead, the growth of PEG channels has always been driven by regulatory requirements rather than competitive incentives. Hence, there is little reason to expect that raising cable fees to expand PEG facilities would have any effect other than to drive more viewers away from cable systems and away from the very PEG channels the legislation is intended to promote.

[*] Although (as noted earlier) there is some debate about how closely DBS competes with cable, there is at least some evidence that cable and DBS services compete intensely. The mere fact that DBS and cable systems direct so much of their advertising at each other is strong evidence that they see each other as competitors for the same subscribers.