From meager beginnings, the market for cable TV and other video services (collectively called Multichannel Video Program Distribution) has undergone tremendous growth. Indeed, the average household watches more television today than at any time in history — some eight hours and 11 minutes per day. Of the 110 million households with a television, nearly 86 percent subscribe to cable, satellite or other video service. There are nearly 15.4 million households with television that do not subscribe to a video service, and thus rely solely on over-the-air broadcast television for their programming.
Cable firms serve the largest percentage of the video market, with a share of 69.4 percent. Home satellite services such as DIRECTV and the DISH Network rank a distant second, with a market share of 27.7 percent.
Consumer groups have complained for years that cable’s dominance, fostered by monopolistic franchise regulations and federal law, has kept rates artificially high and service quality abysmally low. Indeed, the Cable Communications Policy Act of 1984 explicitly prohibited the Baby Bells, the most likely competitor to cable, from providing video service.
"With this near impenetrable protection from competition … Congress enabled cable operators to exploit their monopoly power," notes Jonathan Samon, of the Georgia Institute of Technology.
The cable industry disputes such claims, citing satellite as a competitive check on its market power. This might be more accurate were satellite services to be a true substitute for cable. But researchers have determined that satellite competition has not exerted meaningful pressure on cable rates. Technological constraints diminish the competitive force of satellite service. For example, the quality of satellite service varies considerably depending on a subscriber’s location; clear reception often requires a home with a southern view. Buildings, inclement weather and even trees may cause signal interference. Moreover, some satellite services do not carry local TV channels, which cable systems are required to broadcast. Satellite also suffers from high installation costs relative to cable.
"We find that if you raise the price of cable, not that many people switch to satellite," said Austan Goolsbee, the University of Chicago’s Robert P. Gwinn Professor of Economics. "This suggests that cable is not very price sensitive and, therefore, has a fair degree of market power. Satellite, on the other hand, is extremely price sensitive."
Government researchers likewise have found that competition from satellite service has little affect on cable rates. However, satellite competition does tend to induce cable operators to add new program choices to their line-up.
What does constrain high cable TV rates is competition between cable providers or from wire line firms, such as a telephone company. A 2003 study by the U.S. General Accounting Office found that competition from a wire line provider resulted in cable rates that were "substantially lower" (by 15 percent) than in markets without such competition. The GAO also assessed the impact on cable rates where a broadband service provider offers competing video service. In markets with competition from broadband, the study found cable rates ran 23 percent less, on average, and service quality improved.
Many consumers have access to both cable TV and satellite service. But only about 1.5 percent of households with video service nationwide enjoy effective competition based on the presence of a wire line competitor, according to the FCC. While federal law prohibits municipalities from granting exclusive franchises, cable firms have long exercised a de facto monopoly.
Government interference in the video market, notably the monopolistic nature of the cable franchise regime, is a significant factor in this lack of competition.