North Carolina Cooperative Extension

You Decide: Competition or regulation in the cable market?

By Mike Walden | Mar 28, 2014

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.

Comments (8)
Posted by: Scott Lilly | Mar 29, 2014 14:48

Regulation rarely works or works inconsistently.  Any regulated industry gets approved increased rates/revenue as they become justified.  The successful regulated company is skillful at justifying cost increases.  Extra cable channels that nobody wants or watches, brand new power company trucks, a new dorm at the state university with integrated swimming pool -- create the need and the "justified" funding will follow.



Posted by: Charles Zimmerman | Mar 29, 2014 15:13

               Regulation exists to protect not just the consumer but small business from oppression. when too much power is concentrated in too few hands regulations were too weak.

             Break-up the monopolies and return to smaller more centralized businesses.

              I prefer the large satelite dishes of years gone by, with no pay per view.

 

              C.Z.



Posted by: Scott Lilly | Mar 30, 2014 08:13

"Break-up the monopolies and return to smaller more centralized businesses." -- The same could be said about the public schools.

 

I would be willing to bet that if Haywood public schools became "individualized" and able to be free from state regulation, they would be some of the best in the world.  Little (if anything) is lacking from teachers.  The brick-and-mortar facilities are adequate to facilitate learning.  Let them be free to do what they want to do best: teach children.  They are held hostage by politics.  (Unions, lobbyists, legal teams, and regulation.)  Regulation rarely works or works inconsistently.  Competition works much better.



Posted by: Charles Zimmerman | Mar 30, 2014 09:57

            Mr. Lilly;

 You have not taken the time nor trouble to read the N.C. Constitution, have you?



Posted by: Scott Lilly | Mar 30, 2014 14:28

"You have not taken the time nor trouble to read the N.C. Constitution, have you?" -- I've read enough to know that government can not require me to buy health insurance.  I know that I have the freedom to be as religious as I want wherever I want.  I know that I can bear arms.  I know I can buy or sell any sized beverage I want.  I know my private property can not be taken.  I know there's nothing that prevents the State from creating any benefit program that could be applied toward unemployment or education.  And I know that government has disrespected the Constitution on many occasions and issues -- quite horribly to the approval of the Judicial system. 



Posted by: Charles Zimmerman | Mar 31, 2014 08:59

                     You do not know why. That is the problem. But don't feel alone. Most do not either. Most local/state government agencies that pass laws willy-nilly without regard for the confining limitations of OUR shared Constitutions are completely shocked to find out they are wrong. Costs communities like McCreary county, Ky. great amounts of money to be taught the error of their ways. They had a local judge post a ten commandments in their courthouse. Citizen engaged ACLU. Community was outraged. Had anti-ACLU celebrations/fundraisers. Went all the way to Supreme Court with another county. They lost. ACLU awarded court costs. They added "historical documents". ACLU pursued the issue again to the Supreme Court. This time the Supremes had no sense of humor about it and one juror compared McCreary's action as something to the extent of putting lipstick on a pig. ACLU awarded more court costs. Judge pushed McCreary county to buck-up and not pay and to once again change the display and go to the Supremes again. Some N.C. citizen not from McCreary but married to a woman born there wrote a letter to the editor and informed the citizens thereof that they were being led astray and posted their own religious freedom clause and its significance. McCreary negotiated with ACLU to pay. Judge is history and lost his influence in the community. And they say one person can't make a difference!

                     I'd suggest you not promote the Founding Principle of "limited government" until you actually know where it is derived.

 

                     C.Z.



Posted by: Scott Lilly | Mar 31, 2014 09:48

"I'd suggest you not promote the Founding Principle of "limited government" until you actually know where it is derived." -- Let me school you on this.  :-) A REPUBLIC is defined by a government LIMITED by a Constitution.  A Democracy is "majority rules".  Democrats use a strategy to create a voting mob to persuade legislation that skirts or violates the Constitution.  That's how "private property" can be taken by the government in the name of "economic development".  That's how "gun control" becomes something that perpetually risks violating the 2nd Amendment.  And that's how this awful NSA phone tapping program violates the 4th Amendment.  Whatever "the majority" lets government get away with.  Yes, sir, I have an acute understanding of how "limited government" should be a cornerstone of the Republican party and why TEA Party folks are influencing our legislators to remain true to the Constitution.  We are a Republic before we are a Democracy.



Posted by: Charles Zimmerman | Mar 31, 2014 11:03

            You didn't read Federalist No. 10 did you. You do not get to define OUR Government as you wish it to be. That is how most civil liberties lawsuits are created.

            From Madison's Federalist No. 10:

            

"A republic, by which I mean a government in which the scheme of representation takes place, opens a different prospect, and promises the cure for which we are seeking. Let us examine the points in which it varies from pure democracy, and we shall comprehend both the nature of the cure and the efficacy which it must derive from the Union.

The two great points of difference between a democracy and a republic are: first, the delegation of the government, in the latter, to a small number of citizens elected by the rest; secondly, the greater number of citizens, and greater sphere of country, over which the latter may be extended."

            OUR Constitution establishes laws be passed by majority vote. Jefferson wrote the Rules of Order that OUR Congress has used since the Founding.

             To fail to educate yourself in the Founding Principles creates a void in understanding that will be hard to negate. While you recognize the Founding Principle of "limited government", you do not accept how it was created. Like looking at a building without knowing its foundation.

 

                C.Z.



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