Introduction: Cable Television and the Major Alternatives

Under House Bill 5047 and Senate Bill 636, the Michigan Legislature would make it easier for a local government to require companies providing local cable television services to pay fees of up to 2 percent of their gross revenues to support public, education and government access cable television channels. If the bills pass in their current form, local governments that have not been levying such "PEG fees" are more likely to do so, and local governments that already levy them are expected to raise the fees above their current levels.

Proponents of the bills generally argue that such "PEG fees" help generate valuable local programming and provide cable viewers with important alternatives to conventional national television programs. To evaluate these bills and their likely ramifications, however, it is important to understand the history and the nature of the cable television market.

A cable television system is a wired network connecting viewers with a central source of programming distribution (the "headend"). It is simpler in structure than a telephone network or the Internet because the cable network is designed primarily for one-way distribution of signals from the headend to the television set of the viewer. (Telephone networks, by contrast, allow for complicated switching of signals back and forth over the network.[*]) The headend collects open-air signals from local broadcast stations, signals from distant stations via satellite or microwave transmission, and often some local programming via a wire or open-air transmission. The system delivers programming over a distribution network of cables. These cables can be run to consumers' homes only after cable television companies obtain "rights-of-way" for the lines from local governments.

The cable system operator packages the signals into bundles of services to offer, usually in packages of programming designed to target customers at different price points. The least expensive package is a "basic tier," sometimes called a "lifeline" tier. The basic tier normally includes retransmission of the channels available for antenna reception in the area, a small number of national channels (e.g., ESPN, Discovery Channel, CNN), and some or all of the PEG channels on the cable system. More expensive packages offer one or more "expanded basic" tiers, in which the cable operator includes additional national channels in the basic package. The most expensive tiers incorporate premium services like HBO and Showtime, either as part of a more expensive package or as à-la-carte add-ons to an expanded basic package. Cable systems also often offer pay-per-view channels that typically carry high-profile sports events, entertainment events and movies not yet available on premium channels.

Cable television is part of a multichannel video distribution industry, in which the competitive relationships among service providers have evolved largely as a result of regulatory classifications that have emerged over time. Within this industry, a major cable provider, such as Comcast and Charter, is known as a "multiple system operator," recognizing that it typically operates cable systems in multiple locations that may be separated geographically. MSOs' two major competitors are "new cable entrants" and "direct broadcast satellite services."

New cable entrants are similar to cable systems in that they provide their own wireline infrastructure in the areas in which they compete with cable systems.[†] These entrants are often local telephone companies that can deliver television programming over the same lines used for telephone service. Electric utilities have also considered using their electricity distribution lines for delivery of television programming.

Direct broadcast satellite companies deliver programming directly to the customer without passing though a headend. DBS providers reach the few rural and remote areas that are not served by cable systems, but they miss a few customers who cannot position a reception dish to point to the satellite from which the signals are sent. DBS services are national services and typically carry only about a half-dozen local channels. The local channels carried by DBS systems generally include the local affiliates of the major networks, as well as one or two additional channels.

The two major DBS providers are DirecTV and Dish Network, both of whom offer their service nationally. The satellite services that preceded DBS never achieved a significant market share because the reception dishes were several feet in diameter. The smaller reception dishes introduced by DBS services in the 1990s are typically about 19 inches across.

New cable entrants have proven to be effective competitors to established cable systems. According to the U.S. Government Accountability Office, rates in markets where new cable entrants compete with established cable systems are about 15 percent below rates in markets with only one cable television service provider.[2] DBS providers also appear to compete with cable systems, although it is more difficult to measure the competitive impact of satellite services on cable rates because the DBS providers offer their service nationally, preventing comparisons of cable prices between areas with and without DBS services.[‡]

[*] Recently cable networks have begun to be used for some two-way communication between the viewer and the service provider. For example, many systems now allow viewers to order pay-per-view and other services through their television set, with the signal sent back to the cable system operator over the same wire. This limited addition of two-way communication is still much less complicated than telephone system network communications, because the viewer typically communicates back and forth with the cable provider only, and not with other cable subscribers.

[†] These new cable entrants used to be described as "overbuilders," because they built a network over the existing cable network. Of course, if existing telephone or electricity wires are used to deliver television programming, no additional network building may be needed.

[‡] Diane S. Katz, an adjunct scholar with the Mackinac Center for Public Policy, has argued that satellite services do not constrain prices of cable as effectively as new cable entrants. Diane S. Katz, "Policy Brief: Assessing the Case for Cable Franchise Reform," Mackinac Center for Public Policy, September 19, 2006.

The U.S. Public Interest Research Group, which advocates reregulation of cable television rates, has taken the argument further. PIRG points to the limitations of DBS services, including their inability to reach certain subscribers and their lack of any two-way services to compete with the emerging two-way services offered by cable companies. PIRG does note that in areas where DBS was faster to offer local channels to better compete with cable, the cable companies responded by increasing the number of channels offered on their systems, so that there was a competitive response to DBS. U.S. Public Interest Research Group, "A Blueprint for Creating a Competitive Pro-Consumer Cable Television Marketplace," (August 2003), 32-34.

Andrew Stewart Wise and Kiran Duwadi, two economists on the staff of the FCC, found that DBS does compete with cable with measureable effects on cable prices and output. It appears likely that DBS competition provides some level of competitive constraint on cable prices, although probably less than new cable entrants provide, and it is worth noting that DBS services are increasing their number of subscribers at a much faster rate than cable systems. Andrew Stewart Wise and Kiran Duwadi, "Competition Between Cable Television and Direct Broadcast Satellite: The Importance of Switching Costs and Regional Sports Networks," Journal of Competition Law and Economics, Vol. 1(4) 2005 pp. 679-705.