Cable Television: An Unnatural Monopoly - Assignment Example

Proposal I propose a research project that will investigate and analyze the cable television market to determine if it fits the definition of a truemonopoly. There is anecdotal evidence and consumer sentiment that indicates that the cable companies are in a position to implement monopolistic pricing and eliminate the competition. In addition, the cable companies are seen almost as a government protected public utility. However, there have been several recent developments that have impacted the monopoly position of the cable companies. The cable television companies no longer have a monopolistic hold on television delivery, as they have been subjected to competition from new technologies and deregulation. The paper will draw on previously published reports that address the topic. These reports and articles will help define what a monopoly is as well as determining the present status of the cable companies. The paper will define the various forms of monopoly and report on current trends and legislation that affect the cable television industry. It will, when appropriate, put the issue into a historical context to determine if the industry is moving towards a greater or lesser monopolistic hold. The paper will be written with the premise that a monopoly does not exist in the cable television market. It will present evidence of this point of view, while remaining open for the presentation of opposing viewpoints. It will conclude by presenting a synopsis of the data and drawing a conclusion. Do Cable Companies Represent a Monopoly In the face of rising cable bills and falling levels of service it is tempting to seek out a culprit and point to the cable company that has a seeming monopoly on the delivery of television viewing and broadband delivery. It is reasonable to believe that since we have one cable coming into the house and only have the choice of one content provider that a monopoly exists and we are left without any consumer selection. However, that anecdotal information alone would not necessarily qualify the cable company as a monopoly. There is the bidding process that takes place that determines the provider to consider. There are also suitable substitutes available that may limit the use of the word 'monopoly' when applied to television and broadband. The cable television companies no longer have a monopolistic hold on television delivery, as they have been subjected to competition from new technologies and deregulation. When we speak of a monopoly, the classic vision is the company that has a total market share and there are no competitors and no substitute products. The word is often used in a negative context as monopolies have historically had the ability to raise prices above the point that a competitive market would allow. As an example, private railroads in the past were able to act with monopolistic characteristics, as there was no competition from other transportation means. However, monopolies may also be the result of the economics of scale. If the fixed costs or startup costs are of a value that prevents others from entry, it may form a natural monopoly, where one company is able to produce and sell the service at a lower cost that having two or more companies competing for the same market share. A monopoly may also exist if there are simply no competitors that wish to enter the market, but the company does not act like a monopoly in the distribution of its services or the pricing of its goods. In addition, there is a difference between a regulated industry and a monopoly. According to Bollick (1984), "because of structural conditions that exist in certain industries, competition between firms cannot endure; and whenever these conditions exist, it is inevitable that only one firm will survive. Thus, regulation is necessary to dilute the ill-effects of the monopoly". For the purposes of this paper, a company will be considered to be a monopoly when it willfully acts to eliminate competition through its business practices and practices monopolistic pricing policies. Cable companies were originally designed by the government to be monopolies, but this has changed as deregulation has affected the ability of competition to enter the industry. According to Dana and Spier (1994), "Most cable television companies in the United States were originally regulated monopoly franchises, although in some areas cable began without franchises (with free entry) and in other cases two or more directly competing cable franchises were awarded. However, most cable television rates were deregulated by federal law in 1984. Today there are as many as three dozen cities in which cable companies have overlapping areas of competition and this number appears to be increasing since deregulation" (p.142). The telecommunications act of 1984, while called a deregulation act, simply took control from the Federal government and placed it in the hands of local municipalities. Had this been the end of the story, cable television companies would still enjoy a monopoly as Kamery (2004) states, "Cities blocked competition in order to ensure revenue from the franchise fees of the current cable companies" (p.111). . However, the introduction of satellite television introduced direct competition to cable. Initially, satellite was unable to carry local channels (local news and advertising) and was not considered a true competitor. New technology and broadcast agreements have made it possible to get local channels via satellite. Satellite broadcast signals and local channels are available almost everywhere, and DSL has added to the competitive forces. This is an indication that cable television is not a single source product, and may not be viewed as a monopoly even on a regional or local level. Even in areas and cities where competition has been kept out due to the expense of entry or by local regulations, monopolies have little potential to exist. In addition to deregulation, cable companies have seen rapidly falling costs that have traditionally protected them from new entrants into the marketplace. Costs have fallen across the board, from delivery systems to the infrastructure required to carry broadband and digital information. Economides (1996) reports, "Costs of transmission have fallen dramatically with the introduction of fiberoptic lines. Switching costs have followed the fast cost decreases of microchips and integrated circuits. These cost reductions have transformed the telecommunications industry from a natural monopoly to an oligopoly" (p.5). These same cost reductions are experienced in the cable television sector as transmission has become digital and opened up the door to the cost saving technologies that accompany that technology. A company can no longer be seen to have a monopoly if the barriers to entry are significantly low as to allow other competitors into the market. Simply because companies may not choose to enter the market in some areas, does not indicate that the existing company has a true monopoly. With falling fixed costs, companies can enter the cable market in select areas and eliminate the monopoly. Competition has entered the cable market recently and legislation has made it even more likely that consumers will enjoy the effects of competition. There has been considerable pressure from consumer advocates to eliminate the stranglehold that the cable companies have on the marketplace. According to Cooper (2003), "The ability of cable operators to raise rates and increase revenues, even with rising programming costs, stems from the market power they have at the point of sale. They would not be able to raise prices and pass program price increases through if they did not have monopoly power" (p.3). Governments have responded to this sentiment in favor of the consumer. In Aug 2006, California legislators passed a bill that would "allow competition into a sector -- cable television -- where prices have been elevated and service depressed by the most pernicious monopoly in America" (Economists view, 2006). The California law streamlines the application and franchise process making it easier for telecommunications companies to enter the cable market, without having to negotiate with local municipalities. This has the effect of further reducing the official local government sanction over the monopoly that cable companies had previously held. Rather than being threatened by mergers and takeovers as a way of eliminating competition, the current trend is in the direction of favoring market forces as a way to reduce costs and improve services. To maintain a monopoly, there needs to be no suitable substitute for the product and no similar goods or services. The public highway system has a monopoly because there are no suitable substitutes for the public roads. However, this cannot be said of cable television or broadband services. Satellite television competes with the cable company for television viewing. Wireless and DSL services compete for the broadband Internet services provided by cable. In almost all cases, these alternatives are available almost everywhere, and the consumer has his choice of provider. Cable television companies have even been mandated to advertise for their competitors such as DSL under existing anti-trust laws (Singer, 2006, p.328). "Markets can no longer be defined cleanly. In reality, media companies tend to supply products in many different markets, in competition with other providers" (Downing, McQuail, Wartella, and Schlesinger, 2004, p.302). There are a plethora of video products available from several different sources and the cable company is simply one more entrant in the market fighting for market share. Likewise, broadband Internet can now enter the home from numerous satellite and wireless providers as well as DSL subscriptions on wire lines. Critics will contend that in many cases the ability to compete with the cable companies simply does not exist and the consumer is left to purchase from a single provider. This has no doubt been true in the past and in the early days of highly regulated cable television. Ten years ago critics of cable television's lock on the market were reporting, "More than 99 percent of the cable markets in the United States are served by only one cable company. An FCC survey found that cable systems with monopolies charged an average of 65 cents a channel per month while those that faced competition charged only 48 cents per channel" (Bovard, 1998). In addition, people will point to anecdotal information that indicates only one cable television provider is available in many areas. However, these cases overlook the increased competition from new technologies such as satellite TV and DSL. Video compression has made every broadband Internet connection capable of delivering television services and network television has taken advantage of this. As has been shown, the last decade has opened up competition on several fronts. Cable companies have been allowed greater and easier access to local markets, costs of entry have been reduced, and deregulation has reduced the federal governmental barriers that once existed. By the year 2000, the signs of increased competition were being seen across the country. Knight (2000) reported in the Indianapolis Star, "Two high-tech companies are poised to enter the Indianapolis market, battle the cable monopoly and as much as triple consumers' choices of phone, Internet access and cable service providers. Franchise agreements between the city and communications newcomers Totalink and Digital Access, negotiated early this month, are to be voted on Monday by the City-County Council". This sentiment has been mirrored across the country, and as new technologies emerge and become cost efficient, the monopoly that the cable companies once enjoyed has been largely dissolved. In conclusion, the concept of the cable company as a true monopoly has been altered in recent years as competition and deregulation has opened the video and broadband distribution market to a number of new entrants. Fixed costs and entry costs have been reduced as the price of the technology has steadily fallen over the last 20 years. In addition, cable companies face competition from a variety of new sources such as satellite and DSL services. Governments have been reactive to the rising costs of monopolistic pricing and have opened the door for competition in areas such as Indianapolis and California by easing the application and franchise process. The era of the cable company monopoly is over. Cable companies are forced to compete based on product and price or face the elimination from the marketplace by suitable substitutes. References Bolick, C. (1984). Cable television: An unnatural monopoly [Electronic version]. Cato Policy Analysis, 34. Bovard, J. (1998, May). Needed: The separation of cable and state. Freedom Daily. Retrieved November 11, 2008, from http://www.fff.org/freedom/0598d.asp Cooper, M. (2003). Cable mergers, monopoly power, and price increases. Consumers Union, 1-14. Dana, J. D., & Spier, K. W. (1994). Designing a private industry Government auctions with endogenous market structure. Journal of Public Economics, 53, 127-147. Downing, J., McQuail, D., Wartella, E., & Schlesinger, P. (2004). The SAGE handbook of media studies. London: Sage. Economides, N. (1996). The economics of networks. International Journal of Industrial Organization, 14(2), 1-36. Economists view: Competition in cable (2006, September 29). Retrieved November 11, 2008, from http://economistsview.typepad.com/economistsview/2006/09/competition_in_.html Kamery, R. H. (2004). The deregulation act of 1984 and its effect on the market. Proceedings of the Academy of Legal, Ethical and Regulatory Issues, 8(2), 109-114. Knight, D. (2000, August 26). Sun sets on cable provider's monopoly. The Indianapolis Star. Retrieved November 11, 2008, from http://www.indygov.org/eGov/Cable/News/Agency/2000-08-26.htm Singer, H. J. (2006). The competitive effects of a cable television operator's refusal to carry DSL advertising. Journal of Competition Law and Economics, 2(2), 301-331. Read More