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
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.