Competition Leads to Lower Cable Rates and Improved Quality and Service among Cable Operators

Competition from a wire-based provider—that is, a competitor using a  wire technology—is limited to very few markets, but where available, has  a downward impact on cable rates. We found that cable rates were generally lower in the 6 markets we  examined with a BSP present than in the 6 markets that did not have BSP  competition. Cable  franchises responding to FCC’s 2002 survey did not complete in a  consistent manner the section pertaining to the factors underlying cable  rate increases primarily because of a lack of clear guidance. FCC’s cable rate report also does not appear to provide a reliable source  of information on the effect of competition. Because the Congress and FCC use this information in their monitoring  and oversight of the cable industry, the lack of reliable information in  FCC’s report on these two issues—factors underlying cable rate increases  and the effect of competition—may compromise the ability of the  Congress and FCC to fulfill these roles. As a result, we recommended that the Chairman of FCC  improve the reliability, consistency, and relevance of information on cable  rates and competition in the subscription video industry by (1) taking  immediate steps to improve its cable rate survey and (2) reviewing the  commission’s process for maintaining the classification of effective  competition. In commenting on our report, FCC agreed to make changes  to its annual cable rate survey in an attempt to obtain more accurate  information, but questioned, on a cost/benefit basis, the utility of revising  its process to keep the classification of effective competition in franchises  up to date. We recognize that there are costs associated with FCC’s cable  rate survey, and we recommend that FCC examine whether cost-effective  alternative processes exist that would enhance the accuracy of its  effective competition designations. Programming expenses and infrastructure investment appear to be the  primary cost factors that have been increasing in recent years. We found that cable  networks that have an ownership affiliation with a broadcaster did not  have, on average, higher license fees (i.e., the fee the cable operator pays  to the cable network) than cable networks that were not majority-owned  by broadcasters or cable operators. Industry representatives we interviewed also told us that cable networks  owned by cable operators or broadcasters are more likely to be carried by  cable operators than other cable networks. 3). The manner in which an à la carte approach might impact advertising  revenues, and ultimately the cost of cable service, rests on assumptions  regarding customer choice and pricing mechanisms. Industry Participants Have Cited Certain Options That May Address Factors Contributing to Rising Cable Rates

Industry participants have suggested the following options for addressing  the cable rate issue. However, any modifications to  the DBS carry one, carry all rules would need to be examined in the  context of why those rules were put into place—that is, to ensure that all  broadcast stations are available in markets where DBS providers choose  to provide local stations. Using data from the Federal Communications  Commission’s (FCC) 2001 cable rate survey, the model considers the  effect of various factors on cable rates, the number of cable subscribers,  the number of channels that cable operators provide to subscribers, and  direct broadcast satellite (DBS) penetration rates for areas throughout the  United States. To address the third, fourth, fifth, and sixth issues (examine reasons for  recent rate increases, examine whether ownership relationships between  cable networks and cable operators and/or broadcasters influence the  level of license fees for the cable networks or the likelihood that a cable  network will be carried, examine why cable operators group networks into  tiers rather than sell networks individually, and discuss options to address  factors that could be contributing to cable rate increases), we took several  steps, as follows:    We conducted semistructured interviews with a variety of industry  participants.
Why GAO Did This Study

In recent years, rates for cable service have increased at a faster pace than the general rate of inflation. GAO agreed to (1) examine the impact of competition on cable rates and service, (2) assess the reliability of information contained in the Federal Communications Commission's (FCC) annual cable rate report, (3) examine the causes of recent cable rate increases, (4) assess the impact of ownership affiliations in the cable industry, (5) discuss why cable operators group networks into tiers, and (6) discuss options to address factors that could be contributing to cable rate increases. GAO issued its findings and recommendations in a report entitled Telecommunications: Issues Related to Competition and Subscriber Rates in the Cable Television Industry (GAO-04-8). In that report, GAO recommended that the Chairman of FCC take steps to improve the reliability, consistency, and relevance of information on cable rates and competition in the subscription video industry. In commenting on GAO's report, FCC agreed to make changes to its annual cable rate survey, but FCC questioned, on a cost/benefit basis, the utility of revising its process to keep the classification of effective competition up to date. GAO believes that FCC should examine whether cost-effective alternative processes could help provide more accurate information. This testimony is based on that report.

What GAO Found

Competition leads to lower cable rates and improved quality. Competition from a wire-based company is limited to very few markets. However, where available, cable rates are substantially lower (by 15 percent) than in markets without this competition. Competition from direct broadcast satellite (DBS) companies is available nationwide, and the recent ability of these companies to provide local broadcast stations has enabled them to gain more customers. In markets where DBS companies provide local broadcast stations, cable operators improve the quality of their service. FCC's cable rate report does not appear to provide a reliable source of information on the cost factors underlying cable rate increases or on the effects of competition. GAO found that cable operators did not complete FCC's survey in a consistent manner, primarily because the survey lacked clear guidance. Also, GAO found that FCC does not initiate updates or revisions to its classification of competitive and noncompetitive areas. Thus, FCC's classifications might not reflect current conditions. A variety of factors contribute to increasing cable rates. During the past 3 years, the cost of programming has increased considerably (at least 34 percent), driven by the high cost of original programming, among other things. Additionally, cable operators have invested large sums in upgraded infrastructures, which generally permit additional channels, digital service, and broadband Internet access. Some concerns exist that ownership affiliations might indirectly influence cable rates. Broadcasters and cable operators own many cable networks. GAO found that cable networks affiliated with these companies are more likely to be carried by cable operators than nonaffiliated networks. However, cable networks affiliated with broadcasters or cable operators do not receive higher license fees, which are payments from cable operators to networks, than nonaffiliated networks. Technological, economic, and contractual factors explain the practice of grouping networks into tiers, thereby limiting the flexibility that subscribers have to choose only the networks that they want to receive. An ` la carte approach would facilitate more subscriber choice but require additional technology and customer service. Additionally, cable networks could lose advertising revenue. As a result, some subscribers' bills might decline but others might increase. Certain options for addressing cable rates have been put forth. Although reregulation of cable rates is one option, promoting competition could influence cable rates through the market process. While industry participants have suggested several options for addressing increasing cable rates, these options could have other unintended effects that would need to be considered in conjunction with the benefits of lower rates.