Public Policy Toward Cable Television: The Economics of Rate Controls.

By Thomas W. Hazlett and Matthew L. Spitzer.

Cambridge, MA: The MIT Press and Washington, DC: The AEI Press, 1997. Pp. xii, 253. $32.50.

The cable television industry has been at the center of regulatory initiatives perhaps more than any other contemporary industry. Over much of the past three decades, the cable television industry has undergone numerous episodes of regulation and deregulation. Hazlett and Spitzer do an excellent job of telling the story of the regulatory impact on the industry and of the effects on consumer welfare of price controls in cable television.

The book is organized into nine chapters. Following the introductory chapter, Chapter 2 provides an outstanding overview of the history of cable rate regulation. The authors provide a thorough review of the literature here (and throughout the book), as well as a brief primer on the interest group theory of government regulation. This provides a good, quick introduction to those not terribly familiar with the history of cable regulation.

Next, Hazlett and Spitzer analyze market power in multichannel video markets. Analyzing pricing in markets where head-to-head competition exists, they find that a highly significant price differential exists compared with markets without competition. Customers who subscribe in markets with competition face cable rates that are 13.6% lower than in markets without competition (p. 34). While lower rates improve welfare, it is noted that they might also serve to deter entry and thus maintain monopoly pricing. It is unclear, however, that this opens the door for welfare-enhancing regulation. The test, according to the authors, is whether price controls outperform unregulated markets from the consumer's perspective.

In Chapter 4, Hazlett and Spitzer take the reader through an interesting discussion and review of the cable operators' battles to obtain and maintain their First Amendment rights as "electronic publishers," which was extended to a telephone company (Bell Atlantic) in 1993. Without any ability to control the content of the saleable product, it becomes quite difficult to regulate price. Moreover, the cable industry has historically been regulated with rate caps rather than on a rate-of-return basis. The ability to raise rates was accomplished by the cable firm asking permission from a city council, which generally would approve or disapprove the request without much analysis of the firm's cost structure. As a consequence, an incentive for cable firms to overinvest developed.

The remainder of the chapter delves into the regulatory episodes in cable television spanning from 1979 to 1996. A general framework for analyzing the consumer welfare effects of cable rate controls is presented prior to examining the impact of California rate deregulation in 1979, national rate deregulation in 1984, national rate reregulation in 1992, and deregulation once more in 1996. The model focuses on price and output as well as on interest group support or opposition to regulatory initiatives, with the underlying notion that if rate controls "work," price and output move in opposite directions following a change. The authors explain that in California, the regulatory controls had, in effect, created a tax on expansion. Even if cable operators were likely to be granted a rate increase, the process of seeking and gaining permission was costly and often avoided. Deregulation allowed firms to pay a small fee per subscriber annually to escape rate controls, and while prices did rise (along with the quantity demanded of cable television), the effects of the higher prices were relatively harmless and were balanced by an increase in quality.

Moving on to examine federal deregulation, Hazlett and Spitzer show that the Cable Communications Policy Act of 1984 removed price controls in almost all U.S. cable systems (96.5%) but did anything but pave the way for competition. The reason was simple: The Act created an advantage for incumbent firms by saddling potential entrants with the burden of obtaining municipal franchises. Rather than promoting competition, the Act effectively entrenched incumbent firms and preserved their market power in monopoly franchises by eliminating rate (and product) controls and by erecting entry barriers.

Finally, with The Cable Television Consumer Protection and Competition Act of 1992, consumers were supposed to see relief as cable services were reregulated. The Act called for (among other things) expanded programming, definition of "reasonable" rate levels (defined as those obtained in duopolistic cable markets), and rate controls. Over the next two years, the pendulum swung back and forth as Congress pressured the FCC to revise the rate controls, culminating in the Telecommunications Act of 1996, which brought about the deregulation of rates once more. This Act facilitated the immediate deregulation of small cable systems and phased out regulation for larger cable systems.

The following two chapters analyze in greater detail the economic effects of deregulation (1987-1992) and reregulation (1993-1994). Using extensive data analysis, including data from the Government Accounting Office (GAO), Federal Communications Commission, and other sources, Hazlett and Spitzer confirm that while basic cable rates had risen under deregulation, "programming quality, service quality, or both rose sufficiently to more than offset such rate increases so that households were more, not less, likely to subscribe," (p. 86). Moreover, what the GAO surveys reveal, according to the authors, was that in the absence of price controls, cable operators responded by "consolidating packages, adding basic channels, upgrading basic program quality (spending more per channel), marketing basic service more aggressively, and dropping premium rates," (p. 101). Hence, while rates increased, the evidence reveals the rate hikes were matched with significant quality enhancements, all of which improved consumer welfare, an often-ignored fact with the more typical focus on rate increases.

Hazlett and Spitzer also examine in great detail in Chapter 6 the reregulation of cable television that followed, revealing that in general, the reregulation was ineffective in holding cable rates in check when adjusted for quality. Moreover, they suggest that the real cost of the reregulation was slower growth and more specifically, the "lost surplus from the services not sold, the program services not begun, and the infrastructure not built," (p. 177), all of which clearly contribute to a diminution in social welfare.

Following this analysis is the authors' discussion of the interest group activity surrounding the 1992 Cable Act and the tightening of controls in 1994. This is one of the most interesting chapters in the book. Hazlett and Spitzer do a great job of identifying the interests and telling the story of their support of or opposition to regulation and deregulation. The actors in the play are not a surprise and include cable operators, cable programmers, television broadcasters, and telephone companies. The authors maintain that rents were indeed created by the legislation and that rate regulation also "produced 'third dimensional' payoffs to various outside constituencies" (p. 189). In addition and significantly, it is found that rate regulation actually lowered program quality without a corresponding quality-adjusted decrease in rates.

Before concluding the study, Hazlett and Spitzer discuss new forms of competition that are emerging, including direct broadcast satellite (DBS) and wireless cable. At the present time, cable systems still retain significant market power. As these alternatives have expanded, however, they have altered the long-term growth forecasts for the cable industry, as well as its marketing strategies, and have led to more strategic decision making. While DBS entered the market with a pricing structure significantly higher than that of cable, over the past two years prices have dropped dramatically, making dish systems a viable alternative for many more consumers. The end of this story remains to be told, but it seems that as technology continues to evolve, the entrenched status of incumbent cable operators will erode.

In their concluding comments, Hazlett and Spitzer arrive at the result that "unregulated cable monopoly works better for consumers than regulated monopoly even in the face of anticompetitive barriers (yielding substantial market power) and during relatively brief adjustment periods" (p. 217). Moreover, they argue for a shifting in the "burden of proof" in the sense that regardless of the difficulties associated with promoting competition, the viability of rate regulation is what must be proven.

This study is highly recommended for anyone interested in the evolution of the cable television industry as well as those interested in the regulatory process and its effects. Hazlett and Spitzer provide page after page of evidence that stacks up against government regulation and exposes the rent-seeking interests behind such regulation of the cable industry.

Audrey B. Davidson University of Louisville