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December 17, 1998


Re: Annual Assessment of the Status of Competition in Markets for the Delivery of Video Programming, CS Docket No. 98-102

Today we transmit the Fifth Annual Report of the FCC to Congress regarding the state of competition in video programming. I wish to offer my view on how to interpret some of the most noteworthy facts contained within this report.

First, a word about concentration in the multi-channel video market. I take issue with some of the analysis in this report designed to quantify the extent of concentration in this market. I am not convinced that the product markets are properly defined and I question the value of hypothetical concentration analysis to produce an HHI index. But it really does not matter. By any measure, cable commands the lion's share of the multi-channel video market, though that share continues to steadily decline. Indeed, having started from a position of near total monopoly, it would be surprising if it did not control a large market share only three years since the passage of the 1996 Act. What must be understood is that market share alone does not support the conclusion that a given cable operator is exercising market power to the detriment of consumers.

As antitrust scholars well know, monopoly (or near monopoly) is not per se illegal, nor does the presence of a monopolist necessarily mean that there are anti-competitive effects flowing from its dominant position. A multitude of competitive alternatives certainly is always preferred, but the existence of only a few is not sufficient to pronounce anti-competitive harms to consumers. What must be examined is (1) the ability of the monopolist to raise prices substantially in excess of marginal costs, (2) whether a monopolist can restrict output, and (3) whether the lack of competition results in a lack of innovation. When one examines the state of the cable industry, I do not believe one can fairly conclude that consumers are suffering from cable's dominant position.

Price Increases: Many of cable's critics quickly point to the increases in cable prices as evidence that there is a lack of competition. Perhaps, but one cannot proclaim that prices are increasing faster than the consumer price index and rest the case. Price increases, of course, are not anti-competitive unless they substantially exceed the private firm's costs. If price increases are largely a consequence of increases in cost, it is incorrect to cite price increases as evidence of competitive harm. In the case of video programming, it is indisputable that programming licensing fees MSO's must pay have increased dramatically (18.4% last year) as have programming costs (20.9% last year). This report squarely acknowledges these facts. Moreover, it is not monopolistic behavior to increase prices to upgrade infrastructure and facilities that will ultimately benefit consumers in the market. In this report, we find that capital expenditures to upgrade cable facilities were up 21% last year. It is particularly dubious to cite price increases to demonstrate lack of competitive discipline when prices have been regulated.

Undoubtedly, in areas where there is direct competition to cable, the prices have been lower than non-competitive systems, but not by that much. In 1997, the price difference between competitive and non-competitive systems was $1.57, down from $1.69 the previous year. In short, most competitors are entering the market at similar price points.

Output and Value: With a medium such as multi-channel video that is sold in different pricing combinations in different systems across the country, it is risky to examine aggregate price increases across the industry and the full range of pricing packages. It is my understanding that, while aggregate prices have increased, the price per channel has not increased. Cable operators have steadily increased the number of channels and programs available to consumers. In economic terms, they have increased output. They have not restricted output, which is the hallmark of monopolistic behavior. Price per channel measures also more fully incorporate the concept of value. Consumers do not care solely about price. They want a good value - the ratio of price to product. More channels, more original programming, higher quality programs are consumer benefits for which many may be willing to pay more. In fact, with this expansion has come continued growth in subscribership suggesting that consumers do value the product.

Many respond to this point by rightly pointing out that many consumers do not wish to pay for 500 channels, or greater (more expensive) sports programming, or premium movies. This is true enough. But, there appear to be many low cost alternatives available to those customers and those basic packages have not increased significantly in price. Many cable providers offer a relatively low priced ($12 or less) basic tier of service. One operator, Cox, reported that it offers a 20-channel basic service tier to its customers for $11 per month and that 5% of its subscriber choose to use only this service. Another provider, Comcast, reported that it offers a basic service consisting of local broadcast signals and C-Span for about $9-12 per month. All reports that I have seen indicate that these basic tier prices will remain relatively low. Moreover, they will continue to be regulated even after the March 31, 1999 sunset of upper tier rate regulation.

Innovation: Finally, when looking at monopoly behavior to determine if one sees signs of anti-competitive effects, one looks to see if the firms are innovating. Here, it is clear that cable is doing so. Not only have there been steady increases in the quality of programming as discussed above, but also this industry has been investing significant sums to upgrade plant for high speed, two-way capability. This is allowing the industry to begin to offer residential phone service in direct competition with incumbent phone companies--a development Congress clearly hoped for in the 1996 Act. Moreover, the rapid innovation of cable plant is accelerating the universally shared desire to bring broadband internet services to homes and residences.

Competitors and Barriers to Entry: All this said, I too would love to see greater competition to cable. I believe it will provide some price discipline, but just as importantly, competition will accelerate product innovation. While there are many ways to skin the cat, DBS clearly is shaping up as the singularly most significant competitive alternative to cable. And, it is coming on strong. DBS subscribers increased by 40% last year. Two out of three new subscribers of multi-channel video chose DBS over cable. And, DBS is now very competitively priced, having slashed equipment costs and developed comparable or superior packages of programming. With the flurry of acquisition activity we have seen by the leading DBS providers in recent weeks, DBS's future looks bright.

There are clearly many barriers to breaking into this market. The inability to offer local signals, the challenge of getting dishes set up in some areas, and access to programming are just a few of them. But, it is worthy to note that many of the "barriers to entry" are regulatory, rather than a consequence of a monopolist's market power or control of essential facilities. I sincerely hope the Commission, the States and Congress work to lower some of these barriers over the coming year.

Overall, I believe that the factual story this report tells is a positive one. The report indicates that there are promising trends in the video programming industry. Despite some entry barriers, we continue to see forays by telephone companies and other utilities, satellite companies and wireless providers into this market. Investment in this arena is strong. I believe this is so not just because the video business is a good one, but also because of the promise of the coming broadband market. Broadband offers the potential for new revenue streams for MVPD providers and, in turn, will provide consumers with new products and new choices. We should be careful not to take actions that would threaten further growth.