You Decide: Competition or Regulation in the Cable Market?

Date posted: March 28, 2014

Dr. Michael Walden is William Neal Reynolds professor of agricultural and resource economics at N.C. State University.Dr. Michael Walden is William Neal Reynolds professor of agricultural and resource economics at N.C. State University.

Dr. Mike Walden

North Carolina Cooperative Extension

 

I’m old enough to remember two things about television viewing: a limited number of channels and poor reception quality. Growing up in the 1950s, television viewers had only three channels to watch. Also, reception was via “rabbit ears” mounted atop the TV. My father would constantly fiddle with the position of the “ears” in an attempt to improve the picture quality. The best position was usually different for each channel, and even then the “best” picture had a considerable amount of fuzziness – which we playfully called “snow.”

The coming of cable TV changed all of this. Now it’s possible to receive hundreds of channels, and picture quality – especially in high definition – is exceptional. The difference between cable TV today and the TV of my youth is like the difference between today’s jet aircraft and the Wright Brothers’ first plane!

But there’s controversy in the cable industry, and it has to do with company size, market power and the level of competition. Like many new industries, the cable TV industry began with many small companies, most operating in tiny areas across the country. Then, following the path seen in many industries – such as autos, phone service and meat processing – consolidation occurred.

Recently, the largest cable consolidation ever was announced. Comcast and Time-Warner, the top two cable companies, have stated they want to merge. If the deal goes through, the combined company will have territories serving just shy of one-third of the cable market. It would be a giant telecommunications company.

Which raises the question: Will the company be too big? This is not a new question in economics. Since the start of the modern industrial age more than a century ago, economists and policy-makers have worried about company size.

Some see benefits from a larger company. Such firms can often take advantage of “economies of scale” and deliver products and services at a lower per-unit cost. Also with size can come a greater ability to develop a wider range of products and services that’s simply beyond the scope of smaller firms.

But others see downsides to big companies. The most important may be a lack of competition. If one large company comes to dominate a market area, then customers may have no choice but to purchase from that firm – or do without the product. The firm may become a virtual monopoly.  Economists have shown that monopolies tend to charge higher prices for the same product compared to markets where many firms compete for customers’ business. Also, economists worry that monopolies may rest on their laurels and be less motivated to innovate and improve the quality of their product or service.

So a big issue with cable service is whether providers are a near monopoly in a local area. If the answer is “yes,” then there could reason for cable firms to have their rates (prices) regulated by the federal government. There might also be reason for the federal government – who must approve mergers of large companies like Comcast and Time-Warner – to put up a red light to cable companies trying to get bigger.

It is the case that in most local areas, only one cable firm exists. Sometimes this is because local governments give only one company the exclusive right to operate within their boundaries. But it can also be because, once the first company lays the lines and signs up customers, other companies don’t want to bear the expense of laying their own lines if they can’t rely on attracting a sufficient number of customers.

Yet is simply counting how many cable companies operate in a local area the best way to judge competition? Phone companies with wiring into homes can also deliver signals, especially for internet use. And satellites can beam TV signals to homes for people who have bought or rented receivers. In fact, in evaluating competition in the cable market, the federal government does consider all these alternative modes of receiving service.

However, if there’s anything we know from the last 20 years, it’s that the telecommunications industry can quickly change.

For example, a game-changer for the reception of both TV and internet content would be improvement in the strength, capacity and reliability of non-cable – or wireless – signals. There are companies working on this right now. Also, local governments could change their approach and permit multiple cable firms to provide service in neighborhoods. Both of these factors have the potential to dramatically increase competition in the delivery of TV and internet signals.

Many of these issues will likely be discussed and argued during the federal examination of the proposed Comcast and Time-Warner merger. In my opinion, this is a good thing, because these are important issues. Let’s face it: Most of us depend on — and enjoy — watching TV and using the internet. Indeed, many of us rely on these services. Therefore, the options and prices of the services are important to household budgets. In the end, we’ll have to decide if competition or regulation gets us the best services at the best prices.

 

Dr. Mike Walden is a William Neal Reynolds Distinguished Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of North Carolina State University’s College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The College of Agriculture and Life Sciences communications unit provides his You Decide column every two weeks.

Previous columns are available at http://www.cals.ncsu.edu/agcomm/news-center/tag/you-decide

Related audio files are at http://www.cals.ncsu.edu/agcomm/news-center/category/economic-perspective

 

 

 

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