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Democracy & Technology Blog Micromanaging cable

Kevin J. Martin, politically-savvy and a highly effective chairman of the Federal Communications Commission, has a strong free-market orientation. So why would the New York Times report that the FCC may be on the verge of enacting new regulation which would:

  • Force the largest cable networks to be offered to the rivals of the big cable companies on an individual, rather than packaged, basis;
  • Make it easier for independent programmers, which are often small operations, to lease access to cable channels; and
  • Set a cap on the size of the nation’s largest cable companies so that no company could control more than 30 percent of the market?

Martin believes “[i]t is important that we continue to do all we can to make sure that consumers have more opportunities in terms of their programming and that people who have access to the platform assure there are diverse voices,” according to the New York Times article. In other words, regulators (i.e., philosopher kings) should intervene to improve on the free market.
There are already plenty of opportunities for independent programmers to lease access to spare cable channels. The independent programmers aren’t excluded from cable networks. Making it “easier” for independent programmers to lease access to cable channels, according to one report, is code for a government-mandated rate reduction of 75 percent.
The FCC and state public utility commissions embarked on a similar crusade some 10 years ago when they tried to introduce competition in telecommunications. It was a complete failure.
In his recent book, Competition and Chaos: U.S. Telecommunications Since the 1996 Telecom Act (2005), Brookings Institution Senior Fellow Robert W. Crandall points out that efforts by the FCC and the states to promote competition in telecom was “not only wasteful but unnecessary.” Wasteful, because the policies “simply transferred billions of dollars from incumbent telephone companies to fund marketing campaigns required to sell the same services under a different name.”
Unnecessary, because most of the competitive local exchange carriers declared bankruptcy due to the fact they couldn’t offer a compelling product while “competition has developed in ways totally unanticipated by regulators, namely through unregulated wireless providers and cable platforms” — sectors which regulators ignored.

Fortunately, federal and state regulators were denied the right to regulate wireless rates and services, and cable television regulation was scaled back considerably in 1996. As a result, the wireless sector began to launch an unregulated competitive rate war and to offer national calling plans as soon as it could consolidate into six national players after new frequencies were auctioned in 1995-96. At about the same time, cable operators began to expand their capabilities to meet satellite competition and were thus poised to be early movers in the broadband race …. [W]hen unregulated voice over Internet protocol (VoIP) services began to appear, cable operators were forced to offer voice services rather than allow third-party carriers to siphon revenues from their cable modem customers. None of this new competition required the guiding hand or patient nurturing of regulators.

In a current FCC proceeding about whether to continue some of these failed policies, a trade association representing the new entrants claimed that its members “have to offer extremely steep discounts” relative to the prices charged by incumbent telephone companies to remain competitive. And obviously, they also need to be able to demonstrate profitability to raise capital. The only way regulators can guarantee that new entrants can profitably offer steep discounts is to ignore actual costs incurred by the incumbents. If the incumbents have to sell at a loss, why would they commit to risky investments in network infrastructure when they could safely invest in government bonds?
There have been several failed attempts to micromanage the cable industry in the past 20 years or so. In 1984, Congress had to pass legislation to prevent local franchise authorities from regulating and taxing cable companies into oblivion. Cable companies thereupon made massive investments in new channels and compelling content. In 1992, Congress responded to popular pressure to control cable rates and the resulting price controls nearly bankrupted the cable industry. (The FCC chairman at the time, Reed E. Hundt recounts in his book how the Wall Street Journal “ran an editorial awarding me their supreme insult: ‘French bureaucrat.’ In their cartoon I looked lobotomized.” Aside from drafting the cable retail pricing regulations of the early 90’s, Hundt made the same effort to lower wholesale access prices in telecom that Martin is now making in cable.) In 1996, Congress scrapped the regulation and ushered in a decade in which cable companies invested $110 billion upgrading their networks. Now, Verizon and AT&T — whose broadband offerings were recently deregulated — are spending billions of dollars to deliver video, and the cable companies are being forced to invest more money to keep up.
Even when well-intentioned, regulation of competitive markets — whether perfectly competitive, like a commodity market; or imperfectly competitive, like all the rest — should be avoided because it usually leads to bad things. As Crandall describes in the same book:

Students of regulation are generally wary of regulated competition. Airline, trucking, railroad and petroleum regulation in earlier decades became a form of cartel management, keeping prices artificially high and entry low in order to protect competitors.

Alfred E. Kahn, who served in the Carter administration, counsels that “even very imperfect competition is preferable to regulation” in The Economics of Regulation: Principles and Institutions (1988).
The solution, again according to Crandall (who is hardly a lone voice), is for regulators to get out of the way:

The economic lesson from the history of regulation is that regulation and competition are a bad emulsion. Once the conditions for competition exist, it is best for regulators to abandon the field altogether. This is particularly true in a sector that is undergoing rapid technological change and therefore requires new entry and new capital. The politics of regulation favor maintaining the status quo, not triggering creative destruction.

Hance Haney

Director and Senior Fellow of the Technology & Democracy Project
Hance Haney served as Director and Senior Fellow of the Technology & Democracy Project at the Discovery Institute, in Washington, D.C. Haney spent ten years as an aide to former Senator Bob Packwood (OR), and advised him in his capacity as chairman of the Senate Communications Subcommittee during the deliberations leading to the Telecommunications Act of 1996. He subsequently held various positions with the United States Telecom Association and Qwest Communications. He earned a B.A. in history from Willamette University and a J.D. from Lewis and Clark Law School in Portland, Oregon.