![](media/image1.png)

**Testimony of**

**GENE KIMMELMAN**

**On behalf of**

**CONSUMERS UNION**

**and**

**CONSUMER FEDERATION OF AMERICA**

**Before the**

**Senate Committee on Commerce, Science and Transportation**

**on**

**Escalating Cable Rates: Causes and Solutions**

### **March 25, 2004** 

### Number range CHAPTER

Consumers Union[^1] and Consumer Federation of America[^2] believe that
cable television\'s continuous upward pricing spiral reflects a major
failure of market forces and public oversight since Congress launched
cable deregulation in 1996.[^3] In that time, cable rates have ballooned
nearly three times faster than the rate of inflation. Indeed, according
to the Bureau of Labor Statistics which measures cable rate increases
and adjusts cable price increases by crediting the industry when it adds
channels rates have shot up a staggering 56% since January 1996, while
inflation increased by only 21% over that same period.[^4]

One major explanation for these extreme price increases is the lack of
competition facing cable companies. The fact is large cable operators
simply do not compete with one another. Not one of the incumbent cable
operators has ever expanded its infrastructure into an already-wired
community and competed head-to-head. Instead, the major cable operators
have through mergers and acquisitions become national firms, operating
in regional clusters. These regionally dominant firms are positioned to
keep out the few potential competitors who consider entering the cable
arena.[^5] In markets where 98 percent of Americans live, a single cable
operator dominates multi-channel video distribution with a market share
exceeding 80 percent. (See Appendix A for a thorough analysis of cable's
excess market power.)

Another contributor to soaring cable rates is the inability of satellite
television to provide the pressure needed to keep cable rates down.
Satellite has yet to emerge as an effective competitor to cable despite
its growth in reaching more consumers and congressional efforts to help
make satellite more competitive with cable. The General Accounting
Office recently found that the presence of a second cable operator to
compete head-to-head leads to consumers saving 15-41 percent[^6] off
their bills, or an average of over \$5.00 per month.[^7] In contrast,
the presence of satellite had almost no effect on prices, lowering rates
an average of only about 20¢ per month.[^8] If we had head-to-head
competition nationwide, consumers could save more than \$5 billion a
year on those bills.[^9]

Satellite\'s growth as an effective competitor to cable has been
hampered by technological constraints. For instance, satellite has so
far failed to provide local TV channels in many areas, subscribers\'
homes must have unobstructed south-facing views to pick up signals, and
satellite often requires more expensive equipment than cable. Also,
cable has a competitive edge because it can offer consumers the
advantage of television programming and a high-speed Internet service
bundled together that delivers more capacity at a lower cost per
megabit.

Unfortunately, just as satellite seemed positioned to begin to
discipline cable pricing, the News Corp./DirecTV merger eliminated
DirecTV's incentives to drive down cable prices, leaving EchoStar with
virtually no capability to check cable price increases. This merger
created a behemoth that has the power to raise prices across the board.
News Corp\'s Chairman and CEO Rupert Murdoch publicly confessed this
strategy after the purchase when he said, "we're not going into a price
war with anyone."[^10]

While the Federal Communications Commission (FCC) appropriately imposed
merger conditions that prevent News Corp. from discriminating against
cable and satellite providers, or unfairly bundling their most popular
channels, the Commission failed to address News Corp. incentives to
charge itself and all other distributors inflated prices for News
Corp.'s programming.

In this transaction, the largest satellite provider has combined with
one of the largest programming providers to create an unmatched vertical
conglomerate. Even if News Corp. has to bargain with cable, it has every
incentive to drive up the price it charges to itself, to its cable
competitors, and to EchoStar using programming as its profit center. Mr.
Murdoch is able to maximize his profits by raising programming prices
for the more than 80 million potential cable/satellite viewers, rather
than drive down prices to slowly grow his 12 million DirecTV customer
base (which he controls, but reaps about 30 cents for every dollar of
DirecTV profits). By charging DirecTV a high price for News Corp.
programming, he is able to establish a price floor for programming that
the rest of the cable industry and EchoStar will have to pay to obtain
those same channels.

To make matters worse, the proposed merger between Comcast and Disney
signals where the market as a whole is moving---towards significant
vertical consolidation, where each big multichannel distribution system
owns popular programming channels. Whether Comcast is eventually
successful in a bid for Disney or not, cable and satellite distributors
have plotted a course towards owning the most popular programming
entities. For example, Comcast wants to own the most popular marquee
programming, which will put the company in the driver's seat for and
give them a cut of the prices it charges for ESPN, the ABC network, the
Disney Channel, A&E, Lifetime, the History Channel, and ABC Family.

What's next? There are currently only about four companies logically
positioned to combine with a cable distributor to create this kind of
vertical firepower: GE/NBC, Time Warner, Viacom/CBS, and Disney/ABC. It
seems that now the vertical genie has popped out of the bottle, there
can only be greater pressure to combine programming and distribution
assets. Collectively, these deals are likely to result in an arms race
of cable programming price increases. Each vertically integrated media
giant will have the same incentives to get top dollar for their
programming. Will one of these giants refuse to pay top dollar for the
other's channels, running the risk that other will retaliated in kind?
Not likely. We believe it is much more probable that each media giant
will pay high prices for each other's channels, knowing that all cable
and satellite providers will have to pay as much or more for the same
programming. The result: prices will keep spiraling upward for cable and
satellite customers.

What is to be done? We urge Congress to intervene aggressively and force
the FCC to do its job to ensure cable competition. The FCC has turned a
blind eye to these obvious problems, failing to impose meaningful
horizontal or vertical constraints that would keep these trends in
check. But even if the agency reversed course today, it could not change
fundamental market problems overnight. In the interim, we urge Congress
to help empower consumers so they can begin to lower their cable bills
by allowing them choose and pay for only those channels they watch.

By requiring that cable operators offer "a la carte" programming in
conjunction with any other packages they wish to offer\-- the market
power of the consumer\'s pocket book can be unleashed to begin to help
lower programming costs, increase incentives for programmers to provide
quality fare to consumers, and give viewers the opportunity to not pay
for content they find objectionable or too expensive.[^11]

Although cable operators vastly overstate the role of programming costs
as a cause of rising cable rates, programming costs are a part of the
problem. Cable operators have proven unwilling or incapable of
bargaining down programming costs. As discussed earlier, this reflects
the fact that they own a significant part of the most popular and
expensive programming and they do not face effective competition from
subscribers. Therefore, ownership weakens their interest in controlling
these costs and they know they can always pass them through to consumers
in the basic or expanded basic tiers. The best way to introduce
discipline into the market is to let consumers vote with their feet (and
their pocketbooks) by refusing to pay for channels they think are too
expensive.

Few people regularly watch all the channels they must buy on cable. To
purchase the small number of channels that consumers watch most, they
must buy large service tiers from cable operators, ranging from 40, 50
to 75 channels or more. As the GAO cited, recent Nielsen Media Research
data show the average consumer watches about 17 channels regularly[^12],
with the top 20 channels accounting for approximately three-quarters of
all viewing.[^13] Unless cable companies charge outrageous prices for
each channel, many consumers could save significant money on their
monthly cable bill by selecting only the channels they actually watch.
As Appendix B demonstrates, most of the channels consumers watch today
are the very channels they watched years ago.

Giving consumers the choice to select only those channels they want also
provides a unique solution to the growing public concern about violent
and indecent programming. While technology such as the V-Chip allows
consumers to block distasteful programming, many consumers find it
insulting to have to pay for the very programming they find offensive.
Instead of forcing consumers to buy service tiers that include programs
they never watch or channels they find objectionable, policymakers
should require cable operators to let people pick and pay for only those
channels they want.

Some cable operators might argue that technology prevents them from
offering a la carte programming. While cable operators likely will have
to make software adjustments inside the cable network to offer a la
carte, systems that have been upgraded for digital cable would not
require new technology in consumers\' homes. And as cable operators will
have to build in functionality to fight piracy (i.e. the plug-and-play
proceeding at the FCC) in the next year, now is the right time to
consider enabling equipment to handle a la carte options. In Canada, a
number of cable companies already offer consumers a la carte
options.[^14]

Cable operators have voiced concerns that they will have diminished
advertising revenues if consumers are permitted to choose the cable
channels they want to pay for and watch. However, advertising is based
on total television viewership. Those who claim more choice in cable
television programming means fewer advertising dollars are saying, in
effect, that a la carte means people will watch less television. In
fact, the opposite may be true; as consumers choose from a wider palette
of options that will better cater to individual tastes, more TV
viewership may be the result. People will simply be watching and paying
for the programs they want.

Furthermore, the use of a la carte selection would enable advertisers to
know more about their audiences, allowing the possibility of enhanced
revenues from more targeted demographic information. Programmers should
be able to charge more and advertisers should be willing to pay more for
access to the viewers, because of the preference indicated by a
willingness to pay for the programming. This will be a win-win situation
because advertising will be more efficient at reaching a targeted
audience.

We would also like to allay some of the concerns that may be raised
about certain cable channels suffering in an a la carte world. Appendix
C shows that the most popular national cable channels are financially
backed by broadcast networks or large cable companies. These entities
need no special bundling "subsidy" to launch their programming. And
Appendix D shows a sample of national channels launched by independent
companies. Since most of these channels find it hard, if not impossible
to be carried in cable's expanded basic tiers, it is difficult to
imagine that they would be worse off under an a la carte system.

Rather than allowing each and every spurious argument raised now by some
cable operators to delay action on this issue, we urge Congress to
instead listen carefully to what the industry itself said about a la
carte pricing little more than a year ago. In testimony before this
Committee in 2003, cable operators big and small endorsed pricing cable
channels a la carte.

James Gleason, President and Chief Operation Officer of CableDirect, a
small cable operator serving just 20,000 customers in the Midwest said,
"To give customers choice and allow the market to determine what gets on
TV, programmers should be required to make their services available as
part of a separate programming tier. One solution might be to offer the
expensive programming in tiers or a la carte."[^15]

Charles Dolan, Chairman of Cablevision, one of the largest cable
operators with over 4 million homes in the Northeast, told this panel:
"Cablevision, as a policy, wants its customers to be able to pick and
choose among its services, selecting what appeals to them, rejecting
what does not, determining for themselves how much they will spend, just
as they do every day in the supermarket or shopping mall." He continued
with an analogy I've heard repeated since then, "To help the dairy
industry, I ask, would the government insist that all customers be
required to buy a dozen eggs and a quart of milk before they can
purchase their bread?"[^16]

If the FCC can force manufacturers to rebuild entire classes of
technology to fight piracy and adhere to the Plug and Play
specifications, and if the FCC can plant a Broadcast Flag to expedite
the transition to digital television, surely policymakers can also give
consumers more choice in cable programming. It is time for Congress and
the FCC to put consumers' interest on equal footing with industry goals,
and let market forces begin to provide much needed discipline on
exorbitant cable rates. And it is also time for policymakers to empower
consumers to keep distasteful programming out of their homes.

![](media/image2.png)

**the continuing abuse of market power by the cable industry:**

**rising prices, denial of consumer choice, and discriminatory access to
content**

**February 2004**

**table of contents**

Contents

IV. **[EXECUTIVE
    SUMMARY...............................................................]{.smallcaps}
    i**

I.
INTRODUCTION...............................................................................
1

A.
Purpose..........................................................................................
1

B. The FCC's Failure to Ask the Hard
Questions.................................... 1

II\. THE SUPPLY
SIDE...........................................................................
3

A. Market Power
101...........................................................................
5

B. GAO's Video Market Structure
Analysis........................................... 5

1\. Horizontal Market
Power.....................................................................
5

2\. Vertical Market
Power.........................................................................
5

C. High-Speed
Internet.........................................................................
8

D. Cash Flow
Analysis..........................................................................10

1\. All Revenues, All
Costs.........................................................................11

2\. Cash Flow for Traditional Video
Services..................................................14

III\. THE
DEMAND-SIDE........................................................................18

A. Estimation of Quantity Adjusted Price
Changes.................................18

B. Bundling, the Demand Curve and Consumer
Surplus.............................20

IV\. LONG-TERM
TRENDS.....................................................................22

A.
Price...............................................................................................22

B.
Quantity..............................................\...........................................................25

v\.
CONCLUSION..................................................................................25

ENDNOTES..........................................................................................27

![](media/image4.png)

**the continuing abuse of market power by the cable industry:**

rising prices, denial of consumer choice, and discrimination in access

EXECUTIVE SUMMARY

Eight years after the passage of the Telecommunications Act of 1996,
which deregulated cable prices, this study shows that cable operators
still possess market power in the multichannel video market. The result
is price increases that far exceed the rate of inflation -- almost three
times faster than inflation in recent years --and the continued
restriction of consumer choice to a small number of ever larger, ever
more expensive bundles. The cost imposed on consumers by this abuse of
market power is between \$4.5 and \$6 billion per year, compared to what
prices would be in a competitive market.

Cable operators attempt to obscure the existence and abuse of market
power with two arguments. First they claim that programming costs
explain the massive increase in the price of basic and expanded basic
service. Second, they claim that consumers are getting much greater
value for their dollar; so that quality adjusted prices have declined.
Neither claim stands up to close scrutiny.

# [Exercise of Market Power on the Supply Side]{.smallcaps}

# Prices

Econometric studies by the General Accounting Office and the Federal
Communications Commission show that where cable faces direct
head-to-head overbuilder competition the price of cable service is much
lower.

-   A recent GAO report found that in situations where cable faces
    competition overbuilders, prices are 15% lower. Econometric analyses
    have consistently found this result of a decade. Unfortunately, less
    than two percent of cable customers enjoy the benefits of that
    competition.

-   A recent GAO analysis found that a cable system owned by a large
    national operator has prices that are over 5 percent higher than if
    it is not. FCC econometric models show even larger effects.

-   When the FCC models add in a specific variable for regional
    clustering, a dramatic trend in the industry, they find that
    clustering has an added effect of further raising price.

-   The vast majority of cable subscribers are now served by one of a
    handful of huge-multiple system operators that have expanded their
    grip on the industry through mergers and clustering, who adds as
    much as an additional 8 percent to the consumers bill.

# Market Structure

Cable's market power stems from a lack of effective competition. Even at
the national level, the multichannel video market has become
concentrated; the problem is much greater at the local level.

-   In markets where 98 percent of Americans live, a single cable
    operator dominates multichannel video distribution with a market
    share that exceeds 80 percent.

The largest cable operators never compete with one another. Instead they
have grown to huge national firms through mergers using swaps of systems
to create regional clusters that undermine the ability of overbuilders
to launch competition. Large operators and clustered systems have more
muscle to thwart competition and impose price increases.

-   They can distribute programming terrestrially and refuse to make it
    available to competing distribution systems. This is becoming
    increasingly important as vertically integrated companies dominate
    "must have" regional sports programming.

-   They can extract exclusivity deals from independent programmers,
    thereby denying programming to competing distribution media.

-   They have more leverage over local governments to obstruct the entry
    of overbuilders

Direct Broadcast Satellite does not have a significant or substantial
ability to discipline cable pricing abuse. Satellite is a niche product
that has had its greatest success in areas where cable was unavailable
or among customers who wanted high quality digital services with large
numbers of channels (before cable could offer such a package).

-   Cable has surpasses satellite in the number of subscribers to
    digital video service.

-   It is bundling high-speed Internet and basic cable service to
    further erode the ability of satellite to compete.

# Discrimination in Access 

Cable operators discriminate against unaffiliated service providers in
both the video and the high-speed Internet product space. Cable
operators are 64 percent more likely to carry networks that they own,
than the networks provided by others. Broadcasters have used their
retransmission rights to also gain preferential carriage deals for their
shows. As a result, independent programmers are placed at a severe
disadvantage.

Cable operators dominate the residential market for advanced high-speed
Internet access, with an 83 percent market share. By refusing to allow
unaffiliated Internet Service Providers to compete for Internet access
customers over the cable modem platform, cable operators have foreclosed
a critical high-end market, which dramatically reduces competition for
Internet service. Virtually no voluntary carriage agreements have been
signed by cable operators.

# Cash Flow

A close look at cable's financial operations shows that rising costs
cannot explain the rising price of traditional video services.

-   In the aggregate, price increases far exceed the increase in
    programming costs.

-   An allocation of non-programming operating costs based on historical
    patterns shows that operating cash flow from traditional video
    services has increased by approximately 70 percent on a per
    subscriber basis since the passage of the Telecommunications Act.

Sale of advanced services, digital tiers and high speed Internet, which
were the motivation behind the recent system upgrades, has skyrocketed.
The upgrades are paying for themselves.

-   High-speed Internet is now the second largest income stream and
    digital tiers are the third largest streams of income for the cable
    operators, bringing in a combined \$10 billion per year.

**The Shape of Market Power on the Demand Side**

Cable operators claim that adding more channels to their bundles
increases the value of he package. Unfortunately, consumers are not
given a choice of which channels to purchase. They must take nothing,
almost nothing (basic) or almost everything (expanded basic). With the
addition of the digital tier, they have another option, but cable
operators have been moving popular channels (like HBO) to the digital
tier to drive consumer bills up even farther.

Because the cable operators restrict consumer choice to this small set
of bundles, it is impossible to know how consumer welfare has changed
and wrong to claim that every show adds equally to consumer value.

-   The average consumer watches about 17 channels regularly, but the
    bundles have four times that number.

-   The top twenty shows account for approximately three quarters of all
    viewing.

-   Almost nobody watches the bottom 30 channels in the bundle. Only
    about one out of every 250 households where these shows are
    available watches them on any given day.

The economics literature has long recognized that bundling by firms
possessing market power can be anti-consumer and anticompetitive. When
different consumers have strong preferences for different channels,
putting them into bundles forces each consumer to pay for many channels
he or she does not want in order to get the channels he or she does
want.

A detailed analysis of one of the most popular and expensive channels,
ESPN, which has been a focal point of controversy, shows that
approximately four-fifths of cable subscribers would not pay the price
of ESPN if they were given a choice. By forcing consumers to pay for the
show in a bundle, wealth is transferred from consumers to cable
operators (and the programmer).

A recent analysis that claims that the BLS over states price increase
and that prices have fallen on a quality adjusted basis is riddled with
analytic and measurement errors. The analysis double counts the quantity
of programming and vastly overvalues the shift from viewing over the air
to viewing cable. Watching an hour rerun of the same show on cable,
instead of a broadcast station is assumed to increase consumer value by
one hour, even though the exact same show is watched. Correcting these
errors shows that the BLS cable price index yields, at best a lower
limit on the quality adjusted price increases.

-   In contrast to the 15 percent real decline that the NCTA analysis
    claims, the BLS shows a 27 percent increase. The actual quality
    adjusted price increase could be as high as 40 percent.

The embedded base of excess prices and the entrenched market power of
the cable operators, reinforced against satellite and extending into the
high-speed Internet, confront policy makers with a critical problem.
After two decades of abuse, and eight years after the Telecom Act of
1996, it is clear that policymakers made a mistake in deregulating
cable. It is time for policymakers to take steps to promote real
competition and protect consumers from further abuse.

**i. Introduction**

**A. [Purpose]{.smallcaps}**

Proceedings at the Federal Communications Commission (FCC),[^17] a
series of General Accounting Office (GAO) reports[^18] and contract
negotiations between cable operators and programmers[^19] have
stimulated an unprecedented round of finger pointing and release of data
about the cable television industry. The goal is to justify and/or place
blame for the dramatically increasing price of cable service.[^20] Cable
operators claim the programmers made them do it. Programmers have fired
back, suggesting that basic rates have been increasing to support the
rollout of advanced video and new, non-video services. The finger
pointing drives home a simple point: consumers are paying a dramatically
higher price for their monthly cable service. Or, are they?

Several of the existing industry studies are framed as responses to
consumer analyses that have documented the abuse of market power by
cable operators. Comcast[^21] and the National Cable Telecommunications
Association (NCTA)[^22] assert that when consumer advocates complain
about the total price of cable service, they are failing to take into
account that the monthly bill includes more networks and are confusing
real prices with nominal prices. NCTA goes so far as to offer a new
approach to indexing cable prices as an alternative to the Bureau of
Labor Statistics (BLS) cable Consumer Price Index (CPI). The FCC's
*Tenth Annual Report (In the Matter of Annual Assessment of the Status
of Competition in the Market for the Delivery of Video Programming)*
cites this analysis as further support for its conclusion that
competition in the multichannel video market is robust and repeats the
industry arguments.[^23]

This paper shows that the most frequent complaint voiced by consumer
advocates -- that cable "rates have risen and continue to rise almost
three-times faster than inflation,"[^24] -- is correct. The consumer
advocate comparison of cable rates to inflation states the numerator and
the denominator of the real fraction in a fashion that is more
meaningful to consumers and policymakers because it gives the reference
points. Moreover, the paper argues that, if anything, the BLS cable
price index is more likely to be understating price increases than
overstating them.

The bottom line is that the market power-based abuse of consumers by
cable operators has been growing since the passage of the
Telecommunications Act of 1996. After two decades of blatant abusive
pricing, cable operators have begun to encounter some resistance, so
increases may slow, but that does not mean the abuse will be reduced or
eliminated. In response to criticism, the cable operators have simply
launched new bundling strategies that shift the focal point of price
increases and anticompetitive harm to other areas.

**[B. The FCC's Failure to Ask the Hard Questions]{.smallcaps}**

The FCC's Annual Reports have steadfastly refused to address the serious
questions raised about the cable market in a rigorous manner, but the
*Tenth Annual Report* sinks to new lows. The FCC cannot even figure out
how many cable subscribers there are. The two sources on which it relies
for data (it never generates its own independent data) disagree by
almost five million subscribers. In response, the FCC takes a most
remarkable approach -- it uses both sets of numbers -- the lower figure
for its financial analysis and the higher figure for its assessment of
competing technologies (contrast Tables 1 and 4 to Table B-1). The
*Ninth Annual Report* used the higher figure for both the financial and
the competitive assessment analyses.

As with most analyses at the Commission these days, slipping the lower
figure into this report may be strategically motivated. If the FCC uses
the higher figure and growth persists at the rate implicit in those
figures, by this time next year cable will be well above 70 percent of
the TV market. This is a threshold that would trigger petitions to the
FCC to regulate cable. If the FCC shifts to the lower figure, or claims
the conflict between the two creates uncertainty, the regulation trigger
would be put off several years. Here, as elsewhere, the failure of the
FCC to develop solid independent data may harm consumers substantially.

The FCC recognizes the dramatic increase in cable prices, but, like the
industry, it emphasizes that "concurrently with these rate increases,
however, the number of video and non-video services increased, including
a substantial increase in the number of video channels, increased use of
cable (as measured by a substantial increase in cable viewership), and
the addition of advanced service offerings which, of course, are paid
for separately by consumers."[^25] Unfortunately, the FCC admits that
its approach to measuring prices cannot address the fundamental issue,
since it is based on an assumption that this paper shows to be doubtful
-- "Per channel rates, however, value all additional channels the same
even if consumers do not want new channels that are added to cable
systems."[^26] This paper shows that such an assumption is contradicted
by consumer behavior. The cable video industry's bundling harms
consumers.

The FCC regurgitates the industry claim that rising programming costs
have driven basic rate increases, but does not examine the contradictory
evidence embedded in its own numbers. For example, it notes that
programming costs went from \$7.5 billion in 1998 and will exceed \$9
billion in 2003. [^27] It later cites a figure of \$9.2 billion for
2002.[^28] Over the 1998-2003 period, revenues for basic and expanded
basic services increased by \$7.3 billion. Thus, three quarters of the
price increases cannot be explained by rising programming costs. Price
increases exceeded programming cost increases by more than \$5 billion.

The challenge of explaining away the excessive rate increase for basic
and expanded basic service is made all the more difficult in light of
the dramatic increase in revenues from advanced services. The FCC notes
that dramatic rise of advanced service revenues citing "Kagan World
Media reports it was high-margin, high-speed-data services that drove
operating cash flow growth in 2002."[^29] Moreover, it notes that Kagan
sees this trend growing in 2003, since "they expect high-speed data
service 'to contribute 12.4% to total residential revenue, the largest
piece of the revenue pie after basic service."[^30] Digital tier
services are the third largest revenue stream for cable operators,
having surpassed local advertising for the first time in 2003.[^31] The
fact that these two advanced services now bring in \$10 billion in
revenue should force the Commission to challenge the claim that basic
and expanded basic prices had to rise to pay for the upgrade of the
system. This issue, which the Commission has never addressed, is a
central theme of this report.

The FCC's report goes on to claim that the bundling of advanced services
with basic service "may provide some discount on basic or expanded
basic,"[^32] a proposition it does not even attempt to analyze, let
alone prove. This paper shows that this bundling is anti-competitive.

The FCC notes several cable industry milestones in this report, but
fails to follow up on them. For example, it notes that the national
Multichannel Video Programming Distribution (MVPD) market exceeds the
threshold for a moderately concentrated market as defined by the
Department of Justice/Federal Trade Commission *Merger Guidelines*. The
FCC hastens to add that "it is unclear whether this is a potential
competitive problem, because the delivery market is local, not national
and because the main competitors to cable in both the upstream and
downstream markets continue to grow in size."[^33] This observation is
not comforting for several reasons.

As has traditionally been the case, the FCC makes no effort to assess
the level of concentration in the local market. If it did so, it would
find that local MVPD markets are generally six times as concentrated as
the national market on which it focuses.[^34] Here the FCC encounters
another contradiction. It continues to maintain that the clustering
strategies of large multiple system operators might benefit
consumers,[^35] even though the Commission's own analysis has
consistently shown that clustering results in higher prices.[^36]

While it is true that the MVPD market is expanding, the FCC fails to
note that its competitive assessment analysis shows that cable operators
added more subscribers than all the other MVPD competitors
combined.[^37] (Of course, the FCC may erase this observation by
switching the numbers next year.) Moreover, the FCC fails to note that
cable surpassed satellite in the number of digital subscribers for the
first time in 2003.[^38] Thus, the competitive threat from satellite
that the FCC claims should ease our concern about concentration in the
cable market may be subsiding, if it ever existed. In fact, this paper
reviews the evidence that satellite has failed to discipline cable's
pricing abuse.

The FCC's simplistic parroting of the industry arguments and failure to
conduct rigorous, independent analysis continues to disserve consumers.
As cable prices mount and the industry extends its market power into new
areas, "congress and American consumers deserve a better effort from the
FCC."[^39]

**II. THE SUPPLY SIDE**

**[A. Market Power 101]{.smallcaps}**

All of the industry studies, as well as the FCC report, ignore the
fundamental public policy issues raised by the consumer analysis. Simply
put, every dog has his day and every monopolist has his
profit-maximizing price. Unlike the hapless canine, however, who goes
back to a dog's life when his day is done, when the monopolist hits his
profit-maximizing price, he goes on collecting excess profits. The abuse
of consumers persists. What the cable industry economists have done in
their recent papers defending cable industry prices is to focus on the
scraps of consumer surplus left on the table by cable operators and
ignore the submerged danger, the transfer of wealth and deadweight
efficiency loss that result from the abuse of market power.[^40]

Launching from the simple observation that every monopolist leaves a
little surplus in consumers' pockets, the cable industry analyzes the
tip of the market power iceberg (see Exhibit 1a).[^41] The shaded area
in Exhibit 1a is the focal point of the NCTA paper. Consumer surplus (or

![](media/image6.png)

consumer benefits as the paper calls them) is measured as the difference
between the value of a service to the consumer (as indicated by the
demand curve) and the price the consumer pays for the service. If the
value exceeds the price, the consumer buys the product.

Exhibit 1b places the consumer surplus analysis in the framework of the
complete picture of cable pricing[^42] as a classic diagram of the
exercise of market power over price.[^43] It is well known in economics
that the monopolist sets his price at the point where marginal revenue
equals marginal cost. Even at that price there are consumers who are
willing to pay the price because the value of the service exceeds the
price for them, but consumers are still paying too high a price for the
service. The monopolists have captured part of the consumer surplus and
transferred it to their pockets (wealth transfers). Also, there are some
consumers who give up cable or do not take it, when they would have if
the price had been at a competitive level. Their loss is a deadweight
efficiency loss. Because the elasticity of demand for cable service is
low, wealth transfers are large relative to efficiency losses.

The monopolist can do various things to increase his profits when he
hits the profit-maximizing price (see Exhibit 1c).[^44] He can stimulate
demand by adding value or by bundling. He can shift the supply curve by
lowering his cost or changing his cost structure (and pocket an extra
share of the cost savings because he does not face competition). Either
or both of these may appear to be welfare enhancing because the quantity
consumed increases, but the abuse actually may be increasing on a
relative basis because more consumer surplus is being extracted.[^45]
The relative size of the effects depends on the specific supply and
demand curves. This is an empirical question. As depicted in Exhibit 1c,
this paper demonstrates that both the total profit and the rate of
profit on traditional video services have increased since the passage of
the 1996 Act.

**[B. GAO's Video Market Structure Analysis]{.smallcaps}**

The critical first question that must be answered is simple -- is there
evidence that market power is being exercised on the supply side? The
GAO provides an affirmative answer. The GAO report affirms each of the
supply-side problems of the multichannel video market that has afflicted
the American public since the industry was prematurely deregulated in
1984 and further deregulated in 1996. Exhibit 2 shows the elasticities
for dummy variables measuring various structural characteristics that
affect the extent of competition, which were included in the regression
analyses conducted by the GAO and the FCC.

**1. Horizontal Market Power**

**Head-to-head, wireline competition is the only market structure
feature that significantly disciplines monopolistic pricing**. In its
most recent report, the GAO finds that head-to-head, wireline
competition between cable operators lowers prices by 15 percent for
basic and expanded basic service.[^46] Its earlier report had found a 17
percent difference.[^47] Ironically, the *Tenth Annual Report* notes
that the first report on cable competition found that head-to-head
competition lowered prices by 16 percent.[^48] Recent FCC econometric
models, which identified three types of head-to-head competitors (local
exchange carriers (LECs), publicly owned systems (munis) and other
private overbuilders (comp)), have consistently found large price
effects from head-to-head, wireline competition.[^49] Unfortunately,
less than two percent of American

**EXHIBIT 2:**

# Impact Of Market Structure Characteristics On Monthly Rates

(Regression Coefficients, dummy variables)

![](media/image7.wmf)

Sources: Federal Communications Commission, *Report on Cable Prices,*
April 4, 2002, Attachment D-1; General Accounting Office, *Issues
Related to Competition and Subscriber Rates in the Cable Television
Industry,* October 2003, Appendix IV, Table 3.

households enjoy the benefit of head-to-head, wireline competition.[^50]
The result is an abuse of market power that costs the American public
about \$4.5 billion per year in cable rates alone.[^51]

**Bigger monopolies are worse when it comes to consumer prices.** In the
GAO analysis, if a cable system is part of a large national operator,
its prices are 5.4 percent higher than if it is not.[^52] The GAO called
this horizontal concentration. FCC econometric models have been finding
this to be the case for several years, with even larger effects of being
part of a multiple system operator (MSO).[^53] When the FCC models add
in a specific variable for regional clustering, a dramatic trend in the
industry, they find that clustering has an added effect of further
raising price.[^54] Being served by one of the mega-multiple system
operators, who have been expanding their grip on the industry through
mergers and clustering, drives prices higher by more than 5 percent and
perhaps as much as 8 percent. Thus, there could be as much as an
additional \$1.5 billion in consumer savings that could be wrung out of
the cable market if it were deconcentrated.

The important implication is that the theory used to allow large cable
operators to become larger is not supported by the empirical
evidence.[^55] That theory claimed that the combination of larger,
clustered systems would create efficiency-based cost savings that would
be passed on to the public because one big monopolist is no worse that
two, contiguous smaller ones. Since large incumbents never overbuild
one-another and compete, this theory claimed there was little to be
lost. The econometric evidence suggests that there is considerable harm.
It turns out that large operators and clustered systems have more muscle
to thwart competition and impose price increases. They can distribute
programming terrestrially and extract exclusivity deals from independent
programmers, thereby denying programming to competing distribution media
(overbuilders and satellite). They have more leverage over local
governments to obstruct the entry of overbuilders.

The large incumbent cable operators never competed by overbuilding a
neighbor, they grow by merger. Policymakers surrendered to the cable
urge to merge too easily. If cable operators knew they could not grow
through mergers and really cared about size, they might compete by
overbuilding one another.[^56]

**Intermodal competition -- between cable and satellite -- does not
effectively discipline cable's pricing power.** In contrast to
head-to-head, wireline competition, which lowers cable bills by \$5 per
month, competition from satellite lowers bills by a mere \$.15,
according to the GAO.[^57] In other words, head-to-head, wireline
competition is almost 40 times as effective as intermodal competition
when it comes to price. In fact, in the GAO report, even satellite's
very modest pricing effect is not statistically significant by
traditional standards. It fails at the 5 percent level of significance.
The FCC's econometric analysis does not find even this small price
effect. It finds a statistically significant effect in the opposite
direction.[^58]

To the extent that satellite has any competitive effect, it drives cable
operators to offer more channels, but this effect stems from the
decision of satellite to offer local programming. Where satellite offers
local programming, cable operators offer about 5.4 percent more cable
channels. Thus, satellite appears as a niche product that cannot
discipline cable pricing abuse for the vast majority of cable
subscribers who take only basic and expanded basic.[^59]

Exhibit 3 explores the implications of the most recent econometric
findings on horizontal market power. Using the traditional measure of
market power and the standard measure of the pricing abuse that results
-- the Lerner Index -- it explores the relationship between the number
and size of firms in cable markets and the mark-up of price over cost. A
more advanced approach uses the level of concentration in the market (as
measured by the HHI) in the Lerner Index instead of the simple number of
firms. The mark-up of price above cost is inversely related to the
extent of competition and the market elasticity of demand. The more
competitive the market and the more elastic the demand, the less the
ability to increase price. The analysis uses the econometric estimate of
the elasticity of demand and the implicit levels of concentration The
econometric estimate of a 20 percent mark-up from a lack of head-to-head
competition and horizontal concentration is consistent with, even a
conservative estimate of, the pricing power suggested by the market
structural conditions (demand elasticity and market shares) implicit in
both the GAO and the FCC analyses.

**2. Vertical Market Power**

**Vertical relationships are exploited by cable operators.** GAO finds
that cable operators are majority owners of one-fifth of the top 90
national networks. The GAO does not find price discrimination but it
does find discrimination in carriage. That is, cable operators do not
pay themselves more for their own shows, but they are much more likely
to air them. The effect is quite large. Cable operators are 64 percent
more likely to carry the programming in which they have a majority
ownership stake. Cable operators who have a stake in programming also
carry fewer channels overall. This result is consistent with prior
academic studies.[^60]

A one-fifth share of the most popular programs is a very substantial
stake in the programming market and it blunts cable operators' incentive
to resist price increases. Cable operators own minority stakes in other
networks. With their market power at the point-of-sale, cable operators
know that they can pass costs through to consumers and they can assure
that their own programs are carried much more frequently than those of
others, thereby gaining a disproportionate share of the overall increase
in programming costs.

While no cable operator had pricing power in the programming market
until recently, Comcast appears to have gained pricing power as a large
purchaser of programming. Having achieved a large enough market share,
it now has monopsony power over sellers of programming. Comcast is
squeezing programmers to lower their fees at the same time it is
announcing price increases for basic and expanded basic. It is both
reallocating rents from programmers to itself [^61] and increasing the
rents collected from consumers.[^62]

**Rights of carriage matter a great deal in the cable industry**. The
decision of Congress to give broadcasters must carry/retransmission
rights has enabled the broadcasters to gain a significant advantage for
their programming, in terms of carriage. Programs owned by broadcasters
are 41 percent more likely to be carried by cable operators. Clearly,
independent programmers are at a severe disadvantage, as has been
demonstrated time and again. Although the GAO report concludes that 38%
of the cable networks are majority owned by non-cable, non-broadcast
firms, a much smaller percentage, less than 20 percent, do not have a
least some minority ownership of broadcasters or cable operators.

**EXHIBIT 3:**

**Comparison of Empirical Estimates of Mark-Up**

**Using Alternative Measures of Concentration and Dummy Variables**

SOURCE CONCENTRATION MEASURES

Non-competitive Competitive

FCC (E~d~ = 2.2) [HHI = 6800]{.underline} [HHI = 3912]{.underline} L

45.1 17.8 -27.3

DIRECT

# ESTIMATE

Head-To-Head - 9.1

Concentration [-25.6]{.underline}

Total -34.1

GAO (E~d~ = 1.54) [HHI = 7312]{.underline} [HHI = 3418]{.underline}

47.4 22.2 -27.3

# 

# DIRECT 

ESTIMATE

Head-To-Head -15.1

Concentration [- 5.4 to --8.0]{.underline}

Total -20.5 to 23.5

Sources: Federal Communications Commission, *Report on Cable Prices,*
April 4, 2002, Attachment D-1; U.S. General Accounting Office, *Issues
Related to Competition and Subscriber Rates in the Cable Television
Industry,* October 2003, Appendix IV, Table 3. Viscusi, W. Kip, John M.
Vernon and Joseph E. Harrington, Jr., *Economics of Regulation and
Antitrust* (Cambridge, MA: MIT Press, 2001), pp. 102-108, 147-149,
258-259. Lerner Index:

L = S~i~ [(P~m~-MC)]{.underline} = [HHI]{.underline} \* [1]{.underline}
(Nash Equilibrium)

P~m~ 10000 E~d~

While discrimination in carriage has implications for the pricing issue
that is the central concern of this paper, it has much broader
implications for public policy in the multichannel video market. Public
policy has expressed a concern about promoting independent production
and ensuring a diversity of content for decades. Two pending proceedings
at the FCC directly involve the question of how concentration of
ownership and the exercise of market power in the form of discriminatory
access to distribution affect the content available to the public. In
the horizontal limits proceeding, the FCC is charged with setting a
limit on the market reach of a single cable operator.[^63] Similarly, in
several of the media ownership proceedings the market reach of
broadcasters (and the availability of cable as a distribution
technology) is a central concern. The conclusion is overwhelmingly
clear. Those who have Congressionally mandated rights of carriage are
able to have their shows aired, those who do not have almost no chance
of success.

**[C. High-Speed Internet]{.smallcaps}**

Although high-speed Internet raises many important issues, from the
point of view of video services pricing, it plays two important roles.

First, it is cited by the industry and analyses as one of the causes for
the increase in cable prices. Since the plant upgrade supports other
streams of revenue, the GAO cautions, "\[f\]irst, depreciation expenses
(and therefore infrastructure investment) represent a joint (or common)
expense for both video-based and Internet-based services. Because these
expenses are associated with more than one service, it is unclear how
much of this cost should be attributed to video-based services. Second,
cable operators are enjoying increased revenues from these non-video
sources."[^64] The same is true for operating expenses. A large part of
the increased expense is associated with the selling and servicing of
advanced video, Internet and telephone service that "have been spread
across the entire revenue base -- i.e. they are reflected in the prices
paid by basic cable subscribers."[^65]

Looking at a short period, 1999 to 2002, the GAO finds that revenues
from Internet services alone are already almost equal to the increased
depreciation expense of the cable plant upgrade. The GAO estimates that
capital costs (depreciation expenses) have increased by \$80 per
subscriber, while Internet-only revenues increased by \$74.[^66]

Second, cable operators have rapidly achieved positive cash flow from
high-speed Internet services because of weak competitive forces. Cable
operators are aggressively bundling high-speed Internet with video
services to gain competitive leverage. Their market power over
high-speed Internet access gives them an important anticompetitive tool.
Cable has foreclosed competition for Internet access service over its
platform.[^67] Controlling the platform diminishes the potential
competition from video streaming over the Internet[^68] and becomes a
lever against competition from other distribution technologies. Cable
has an 83 percent market share of the residential advanced high-speed
Internet market.[^69] Moreover, cable provides overwhelmingly (87
percent) advanced service, while DSL is overwhelmingly (67 percent) not
advanced.

Discrimination was even more brutal in the Internet space as cable
operators applied their business model to high-speed Internet access.
Only a consent decree forced Time Warner to allow modest access, and
intense scrutiny forced AT&T to make some minor concessions, but the
recent AOL/AT&T carriage agreement is thoroughly anticompetitive.[^70]
AOL has been unable to actually execute any carriage agreements with
cable companies.[^71] Cable operators do not sell ISP services outside
of their service territories where they have the leverage of their
market power over cable facilities.

With intramodal competition foreclosed, cable faces only weak intermodal
competition. Cable has scoffed at the modest discounting efforts of the
telecommunications-based DSL service providers.[^72] In fact, Comcast
raised the price of stand-alone high-speed Internet on its newly
acquired AT&T systems. The reason cable can ignore intermodal
competition is simple; those discounted services are substantially more
expensive on a megabit basis (see Exhibit 4). The cable operators ignore
DSL pricing moves and harp on speed superiority in their advertising.
Exhibit 4 also shows why dial up is not a substitute for high-speed
access. It is far more expensive on a megabit basis. Moreover, dial-up
lacks the other key feature of high-speed service \-- it is not always
on. This distinction led the Justice Department to declare early on that
high-speed Internet is a separate product from dial-up.[^73]

Satellite lacks the ability to offer a bundle of video and high-speed
Internet to compete effectively with cable. Cable recognizes this and is
aggressively bundling high-speed Internet with basic cable service --
offering a 25 percent discount on a bundle of basic cable and Internet
compared to stand alone Internet service.[^74]

Looking carefully at specific product and geographic markets reveals
little competitive overlap of different facilities (see Exhibit 5).[^75]
Intermodal competition is weak at best. Technological differences give
different facilities an edge in different customer and geographic
markets.[^76] Cable dominates the advanced residential high-speed
Internet market, with a 75 percent market share for residential market
of speeds of greater than 200kbps in both directions.[^77] DSL, as
deployed, is ill suited to multimedia video applications,[^78] but DSL
dominates the non-residential market with a 95 percent market share
because businesses are disinclined to use cable.[^79] For the next
generation telephone network technologies, "most experts agree that the
VDSL business case isn't for everyone and won't[^80] realize its full
revenue potential for decades."[^81]

However, cable operators devote less than two percent of the capacity of
their systems to cable modem service. They could easily expand that if
they so desired. This gives them an immense advantage over telephone
companies.[^82]

**[D. Cash Flow Analysis]{.smallcaps}**

# 1. All Revenues, All Costs

To assess whether the rate increases of recent years have been abusive,
I analyze cash flow. I use 1995 as the base year, since the
Telecommunications Act of 1996 was signed in early February. For several
reasons, it is important to capture this whole period. Industry
analyses, including that of the GAO, choose a very short time frame,
1999 to 2002, and miss critical factors.[^83]

**EXHIBIT 4:**

**The Price of High-Speed Internet Service**

![](media/image13.wmf)

Source: Calculated by author from web site visits.

**EXHIBIT 5:**

**Market Segmentation Of Services Between Technologies**

![](media/image21.wmf)

Source: Federal Communications Commission, *In the Matter of Annual
Assessment of the Status of Competition in Markets for the Delivery of
Video Programming*, Fifth Annual Report, December 23, 1998, Table B-7;
Ninth Annual Report, December 2002, Table Appendix B. *High-Speed
Services for Internet Access,* December 2003, Table 1, 2 and 4; *Local
Telephone Competition: Status as of December 31, 2002*, June 2003,
Tables 1, 13; NCTA, Overview 2003: Mid-Year, p. 1.

First, the upgrade of the cable plant began well before 1999, as did the
post-1996 Act rate increases. By 1999, the cable industry had already
upgraded one-third of its plant. Rates for basic + expanded service had
already increased by 50 percent and net operating income (operating
revenue minus operating costs) had increased by over 25 percent. In
fact, just one year after the passage of the Telecommunications Act of
1996 the issue of cable rate increases had already arisen. The FCC's
January 1997 cable price report noted that "the Cable CPI increased at a
3.7% compound annual rate from January 1995 to December 1995, and at a
8.5% compound annual rate for the eleven months from January 1996 to
November 1996."[^84] The song and dance about the causes of the
increases had already begun, when the Commission declared:

we note from anecdotal evidence reported in both the trade press and the
general news media that cable operators have attributed the recent
increases in cable rates to higher programming costs, system upgrades
which provide additional channels, and the pass through of the effects
of general inflation on operators' costs.[^85]

Second, the GAO report does not examine all of the revenues and costs
consistently, since it never factors in advertising revenue. It appears
to underestimate an important source of revenue, digital tier revenue,
and an important cost stream, non-programming operating expenses. The
GAO did not break out the revenues from advanced video services that are
also made possible by the upgrade.

Third, the upgrade of the physical plant was largely (80 percent)
complete by year-end 2002 and capital outlays dropped off dramatically
in 2003.[^86] Since penetration of high speed Internet is in its early
stages, and advanced video services have not yet fully penetrated, cable
operators are set to reap huge profits as advanced digital video and
Internet services penetrate the market. In other words, capital costs
are set to decline sharply, while revenues from the services that are
supported by those capital costs are increasing sharply.

For the eight-year period (1995-2003), there has been a \$360 increase
in revenues per subscriber per year (see Exhibit 6).[^87] Revenues per
subscriber per year have almost doubled, while the number of subscribers
has increased by 10 percent. There for total revenues in absolute value
have more than doubled. [^88] The new services (advanced video and
Internet and to a much lesser extent cable telephony) have come to play
a large role in total revenue, projected to make up about one-fifth of
the total in 2003. Operating cash flow per subscriber (operating
revenues minus operating costs) increased by \$140 from 1995 to 2003.
This is an increase of 77 percent per subscriber and 90 percent in
absolute terms. This is cash flow that is available for capital service
and excess profits.

**2. Cash Flow for Traditional Video Services**

The GAO cautions that it is difficult to apportion capital costs between
the traditional video business and the new lines of business. The same
is true with operating expenses. An expert for Cox recognizes the
problem, but conveniently punts:

**EXHIBIT 6:**

**Increasing Revenues Per Subscriber**

![](media/image28.wmf)

Source: Federal Communications Commission, *In the Matter of Annual
Assessment of the Status of Competition in Markets for the Delivery of
Video Programming*, Fifth Annual Report, December 23, 1998, Table B-7;
Ninth Annual Report, December 2002, Table 4; Tenth Annual Report, Table
4.

In particular, it seems likely that a relatively large share of
increased capital costs and perhaps also operating costs may have been
incurred in order to permit firms to offer more advanced products than
expanded basic service, such as digital tiers of service (including pay
per view and video on demand), broadband internet connections and
telephony.

In my opinion, any attempt to allocate a portion of those cost increases
to basic analog service (in order to determine if prices for expanded
basic service have risen by more than would have been sufficient to
cover all cost increases of expanded basic service) would require a long
list of assumptions which would be open to question and
controversy.[^89]

Considering a plausible scenario to assess the run-up in cash flow from
traditional video businesses shows why the cable industry chooses not to
show how much the cost of basic and expanded basic service have
increased.[^90] Between 1995 and 1998, before advanced video and
Internet were being widely sold to the public, operating expenses
increased by about 4.5 percent per year.[^91] Between 1998 and 2002,
operating costs increased by over 14 percent per year, more than three
times the rate prior to the aggressive marketing of advanced and
Internet services. There is good reason to believe that the increase in
operating expenses was not due to traditional video services.

From 1995 to 1998, cable operators added 3.3 million basic subscribers,
just about as many as they added from 1998 to 2002.[^92] From 1995 to
1998, cable operators added 117 new advertiser supported cable networks,
over 50 percent more such networks than they added from 1998 to
2002.[^93] Thus a substantial expansion of subscribers and traditional
video services occurred with modest increases in operating costs.

There is no doubt that after 1998, operating costs to support advanced
video and Internet services increased sharply. One can argue that there
was some increase in non-programming operating costs attributable to
basic and expanded basic, but little of the capacity added to cable
systems was devoted to that purpose. Full upgrades add the equivalent of
70 or more 6-megahertz channels, only 10 of which have been dedicated to
basic and expanded basic tiers of service. A cautious approach shows the
impact.

Exhibit 7 splits the cash flow into two streams. One stream is made up
of traditional video (basic+expanded+pay tiers+pay per
view+equipment+shopping+local advertising). The other stream is made up
of advanced video and Internet. Operating cost increases have been
apportioned under the following two sets of assumptions. All of the
pre-1999 operating cost increases are attributed to traditional video.
In one scenario, forty percent of the post-1999 operating cost increases
is attributed to traditional video. This figure is suggested by an
analysis prepared for ESPN, which estimates that the increase in
programming costs in 1999 to 2002 was equal to 32 percent of the total
increase in operating costs.[^94] In the second scenario, the post-1999
increase is assumed to be 4.5 percent (the pre-1999 rate) plus \$1
additional each year for 2000-2003, which is the average annual increase
in programming costs per subscriber in the 1999 to 2002 period. In both
cases, the results are similar.

**EXHIBIT 7:**

## Cumulative Increases in Cash Flow Per Subscriber

**From Traditional and Advanced Cable Services**

![](media/image32.wmf)

Source: Federal Communications Commission, *In the Matter of Annual
Assessment of the Status of Competition in Markets for the Delivery of
Video Programming*, Fifth Annual Report, December 23, 1998, Table B-7;
Ninth Annual Report, December 2002, Table 4; Seventh Annual Report, p.
102. Tenth Annual Report, Table 4. See text for assumptions.

Cash flow grew sharply from traditional video service through 2001 and
then leveled out at a very high level. The leveling is due to a
combination of increasing programming costs and continually mounting
non-programming operating costs attributed to traditional video.
Non-programming operating expenses for traditional video are not likely
to continue to rise at the assumed rate, certainly not for traditional
video services. Therefore, the increase in the cash flow is likely to be
permanent. Cash flow from traditional services increased as a percentage
of revenue from those services. Cash flow from advanced video and
Internet services was slightly positive early. It became negative with
the major roll out of Internet services, but became sharply positive in
2003.

The market structure and financial analysis in this section present a
strong case that the conceptualization of the supply-side of the market
in Exhibit 1 is correct. There is a continuing exercise of market power
over traditional video services. Both the absolute size and the rate of
profits on traditional video services appear to have increased over the
period. In this sense, the consumer complaint about rising cable rates
is fully justified.

**III. THE DEMAND-SIDE**

If consumer surplus is also growing rapidly, however, then that might
blunt the public policy concern. NCTA seeks to demonstrate that there
was a substantial increase in consumer surplus by claiming that the real
price of quality-adjusted service has declined. Thomas Hazlett makes a
similar claim, based primarily on the growth of subscribers and
channels.[^95] In this section, I demonstrate that this basic claim is
incorrect and the whole welfare improvement argument overstated.

**[A. Estimation of Quantity Adjusted Price Changes]{.smallcaps}**

The cable industry estimates involve a series of analytic errors of
commission and omission and the general claims of increases in consumer
welfare have several fundamental flaws. First, there is a
misspecification of the units of analysis. Referring to Exhibit 1, the
quantity of cable consumed (measured on the X-axis) is counted by NCTA
as the total number of viewing hours. Since the X-axis is the total
amount of consumption, the amount paid (measured on the Y-axis) should
be the total amount paid for the products consumed. However, for the
Y-axis in their welfare calculation, NCTA uses the BLS consumer price
index for services. NCTA recognizes, however, **that the BLS index has
already been adjusted downward for increases in the quantity of channels
available and other factors**. Therefore, the NCTA double counts
quantity changes. In the analysis below, I use the actual price paid for
the total bundle of programs.[^96]

Second, NCTA chooses to start its analysis eighteen months after the
passage of the Telecommunications Act of 1996, conveniently excluding
eighteen months of the most rapid rate increases in the history of the
industry. Third, there would also appear to be a mismatch between the
estimate of increased viewing and the estimate of declining prices.
Since viewing numbers are seasonal and January is roughly the mid-point
of the season, I use January prices.[^97]

The cable industry estimates that in the 1995/1996 season, the average
cable household watched 23.4 hours of advertiser supported cable
networks per week (see Exhibit 8). I estimate

**EXHIBIT 8:**

## Cost of Viewing, 1996 & 2003

Market Condition Viewing Monthly Cost/ Cost/

Hours Cost Viewing Viewing

Hour Hour

Nominal Real

1/1/96 Noncompetitive 23.4 \$22.60 \$.966 \$.966

1/1/03 Noncompetitive 34.7 41.60 1.198 1.019

switching has

full value

\% Increase in

Viewing Cost

Nominal

1/1/96 Noncompetitive 23.4 \$22.60 \$.966

} 48.2

1/1/03 Noncompetitive 29.05 41.60 1.432

switching valued

½ at the margin

1/1/96 Noncompetitive 23.4 \$22.60 \$.966

> } 1.66

1/1/03 Noncompetitive 26.0 41.60 1.60

switching valued

¼ at the margin

BLS INCREASE (1/1/96 to 1/1/03) 48.5

Source: For hours of viewing, Cable TV Advertising, Weekly Viewing of
Ad-Supported Cable per Cable Household, and Source: NCTA, Steven S.,
*Assessing Quality Adjusted Changes in the Real Price of Basic Cable
Service,* attached to Comments of the National Cable Telecommunications
Association, in Federal Communications Commission, *In Re: The Annual
Assessment of the Status of Competition in the Market for the Delivery
of Video Programming*, MB Docket No. 03-172, September 11, 2003, p. 12.
Cable prices for noncompetitive systems from Federal Communications
Commission, *Report on Cable Prices,* January 2, 1997, p. 12, May 7,
1999, p. 9; June 15, 2000, p. 9; Feb 14, 2001; 9; April 4, 2002, *p. 8;*
July 8, 2003, p. 10; General Price increases from Bureau of Labor
Statistics, Consumer Price Index.

that in January 1996, which coincidentally is the month before the 1996
Telecommunications Act was signed, the average monthly bill was \$22.60.
The average cost per weekly viewing hour to the consumer was \$.966. The
cable industry estimates that in the 2002/2003 season, the average cable
household watched 34.7 hours of advertiser supported cable networks per
week. I estimate the average price in January 2003 to be \$41.60 per
month. The average cost per weekly viewing hour was \$1.199. That is a
nominal increase of 24 percent. Inflation over the period was 17.7
percent, so the real increase was 5.5 percent. This is a very different
picture than the 15 percent decline that NCTA claims by double counting
quality improvements.

**[B. Bundling, the Demand Curve and Consumer Surplus]{.smallcaps}**

These simple math problems are compounded by conceptual issues. Bundling
is the central character in the current drama surrounding cable prices
and this wreaks havoc with the NCTA estimate of consumer welfare. The
failure of cable operators to offer cable channels on an unbundled basis
makes it difficult to divine the demand curve for individual channels.
NCTA mentions, in passing, that viewing is not evenly distributed, but
that does not influence its calculation. NCTA assumes (or at least uses
in every example and hypothetical case) that demand is linear and that
elasticity does not change over time. Both of these assumptions are
dubious at best. Cox assumes demand is linear, equal and uncorrelated
across individual channels to work its example of consumer benefit from
bundling.[^98] This, too, is dubious, at best.

At least Cox recognizes that there are conditions under which bundling
results in consumer harm. The conditions are:

related to a firm's motivation to try to charge different consumers
different prices for the same product depending upon what they are
willing to pay for it. The essential idea is that when there is some
negative correlation between individual consumers' valuation of
different products, that firm can sometimes charge higher prices to
everyone by bundling goods together.[^99]

Although Cox notes that: "it is easy to create examples where bundling
can make consumers worse off but equally easy to create examples where
bundling makes consumers better off," it ignores the problem.[^100]
Bundling demands greater attention.

Comcast's approach provides a useful starting point. It presents cable
bundling as a greengrocer who sells tomatoes for \$2 per pound, but who
might also sell five pounds for \$7.50. The tomatoes are cheaper on a
per unit basis in the bundle (a volume discount) although the total bill
is greater. The fundamental problem is that greengrocers invariably give
the consumer a wide range of choices. The consumer can buy half a pound
of tomatoes, or three pounds, or take the five-pound discount, as his or
her needs may dictate. Cable operators do not give consumers that much
choice.

In fact, cable operators give consumers almost no choice. Essentially
cable consumers have three choices -- take nothing, take almost nothing
(basic), or take almost everything (expanded basic). If I really need
two pounds of tomatoes for my spaghetti sauce, I have to take all five
pounds and most of the other fruits and vegetables, even though the rest
of it is of little value to me.[^101] My next door neighbor, who really
needs two pounds of apples for her pie, is forced to buy five pounds of
apples and the tomatoes and all the other fruits and vegetables, too. We
both end up paying a higher price and, given the nature of the
commodity, we cannot recapture the surplus through trade. It is
conceivable that we could split the cost, but then I have to have my
neighbors in my house all the time. If we buy one subscription and try
to run a wire (or a wireless network) between our houses, the cable
operators have us arrested for stealing their signal.

NCTA's welfare analysis assumes a full hour of increased welfare when a
consumer shifts from watching a broadcast show to watching a cable show.
That is, if a consumer watches a rerun of "Law and Order" on USA,
instead of NBC, NCTA claims the full hour as an increase in the
consumer's welfare. There may be little welfare gain. If the consumer
had shifted from watching "West Wing" to watching "Law and Order," one
could argue that there is a welfare gain, but it is only the marginal
difference between the two. Because the shows are all forced into the
bundle, we cannot tell what consumers would pay for them on a
stand-alone basis.

If total hours of viewing had increased as much as cable viewing, the
assumption that every hour watched on cable represents a full hour of
gained consumer welfare would be more plausible, but that is not the
case. The increase in total viewing is considerably less than the
increase in cable viewing. In contrast to the 5.7 percent per year
increase claimed by cable operators for viewing of advertiser supported
cable networks, the FCC cites estimates of less than a 1.5 percent per
year increase in viewing over a similar period,[^102] while others show
less than a one percent per year increase. A well respected industry
source that estimates both total TV viewing hours and basic/expanded
cable network viewing hours puts the total increase at 25 percent of the
cable switching increase.[^103] Even if we assume that the entirety of
increased TV viewing occurred in cable households, we would still
conclude that the net increase in viewing was equal to slightly over
one-third of the total increase in cable network viewing.

If we assume that the actual increase in consumer welfare is equal to
half the total increase in cable viewing (leaving some room for a
marginal increase due to switching), the quality-adjusted cost would be
\$1.432 (see Exhibit 8). The increase in the price over the 1996 -- 2003
period would be 48 percent. Interestingly, the quantity and quality
adjusted price as reported by the BLS increased by 49 percent over this
period. If the increase in value in viewing were equal only to the
increase in total viewing (i.e. valued ¼ at the margin), the effective
price increase would be 66 percent over this period, almost fifty
percent higher.

The case against the BLS price index is not convincing. In fact, the BLS
may be over-adjusting for quantity and quality because many channels are
forced into the bundle that few people are watching. The top 10 cable
programs account for 50 percent of all viewing that is significant
enough to be registered by Nielsen. The top 20 shows account for 75
percent of all such viewing. The GAO reports that the typical household
watches only 17 channels. People are being forced to buy a lot of shows
they don't watch to get the ones they want. Although the bottom 30 shows
that register on the Nielsen scale pass an average of just under 70
million homes, only about a quarter of a million households watch them
during any given day. For every one household watching, approximately
250 who are forced to pay for it in the bundle are not. For the bottom
two shows, the ratio is 1 to 800. Over 250 additional cable networks do
not capture enough viewers to even register on the Nielsen scale. [^104]

A recent study by Deutsche Bank of the Cox -- ESPN controversy
reinforces the conclusion that bundling leads NCTA to overestimate the
welfare gains (see Exhibit 9).[^105] ESPN is one of the most popular and
the most expensive cable networks, yet seventy-eight percent of
respondents said that they would not pay \$2 per month for it if they
were given the choice. Cox confirms this estimate, noting that less than
a quarter of its subscribers are "avid sports fans."

There is good reason to believe that the elasticity of demand for ESPN
alone is a lot higher than for the bundle and that the bundling of
sports programming into the most popular package is harming consumers.
The three-quarters of cable viewers who say they would not pay \$2
dollars for ESPN, likely the three-quarters who are less than avid
sports fans, are paying over \$1.5 billion for it in the bundle (at
Cox's cost).[^106] Exhibit 9 shows the wealth transfers and efficiency
losses associated with ESPN. For every one dollar of consumer surplus,
there is at least one dollar of wealth transfer. This does not include
the wealth transfers associated with the overpricing of ESPN to those
who would take it, which may equal another quarter of the consumer
surplus. The deadweight efficiency losses are an additional cost
associated with this anti-consumer bundling.

**[IV. LONG-TERM TRENDS]{.smallcaps}**

**[A. Price]{.smallcaps}**

NCTA's hours of viewing approach to consumer welfare analysis vastly
overstates the gain in welfare and the BLS number of channels approach
may well be overstating the quality adjustment. Given this conclusion,
it is instructive to note the long-term trends of cable pricing. I have
pointed out that the FCC was already being challenged to explain
dramatic rate increases in the January 1997 report on cable pricing. In
that report, the Commission reproduced a graph it had used to show that
rate regulation in the 1993-1995 period had shielded consumers from
price increases (see Exhibit 10). The trend line and the price line,
extended through September 2003, show that the Commission had squeezed
out a small part of the excess profits during the short period of rate
regulation, but the 1996 Act launched the industry on a trajectory that
not only recaptured what had been lost during the short period of
partial regulation, but has gone beyond what it had been extracting in
the past. This reaffirms the depiction in Exhibit 1.

**EXHIBIT 9:**

**Wealth Transfer and Consumer Surplus For ESPN**

![](media/image33.wmf)

Source: Deutsche Bank, *Walt Disney Company*, October 27, 2003, p. 16.

**EXHIBIT 10:**

**Long Term Price Trends**

![](media/image34.wmf)

Source: Bureau of Labor Statistics, CPI. Deregulated trend is a linear
projections of January 1983- April 1993, Competitive, unconcentrated
from Exhibit 15.

**[B. Quantity]{.smallcaps}**

The aggressive bundling of cable programming, across video tiers and now
between video and non-video services, complicates the consumer welfare
analysis enormously. The claim that regulation hurt consumers is simply
wrong. The number of subscribers has grown virtually every year since
the inception of the industry (see Exhibit 11).

A model that uses the long-term trend in income growth and price changes
to predict cable subscribers explains 96 percent of the variance in
cable growth. It suggests that cable subscription performed somewhat
better than expected in the early-mid 1990, when rates were regulated
momentarily, but somewhat worse than expected since rates were fully
deregulated. Adding in competitive satellite (i.e. the number of
satellite subscribers who live in areas where cable is available)[^107]
fills the gap somewhat, but at the end of the period, there are fewer
households subscribing than projected. This is the deadweight
inefficiency we would expect to see as a result of the aggressive price
increases and bundling of recent years. It is exactly the opposite of
what the cable industry experts claim.

**[V. Conclusion]{.smallcaps}**

The basic comparison that consumer advocates have made to reflect the
pain inflicted by cable operators -- that cable prices have been rising
at almost three times the rate of inflation -- is a solid and proper way
to state the problem. The complaint that prices are rising too fast is
valid -- reflected in the increasing cash flow thrown off from
traditional video services. There is no doubt that consumers are being
harmed by a lack of effective competition for cable. That cable
operators have ridden the wave of rising incomes and changing
technologies does not demonstrate the positive quality of their
pricing/bundling strategy. The claim that deregulation helps consumers
because consumer welfare has increased begs the question of whether
abuse of consumers has increased even more rapidly.

The possibility of anti-consumer bundling has long been recognized in
the economics literature. The data suggests that cable operators have
pushed prices into the range where there is price resistance (i.e., the
more elastic portion of the demand curve). That does not mean the abuse
has stopped, it simply means it may not grow as quickly as in the past,
but cable operators are aggressively finding ways to keep their producer
surplus growing, like rebundling (retiering) programming to drive
penetration of digital tiers.[^108] The recognition of the possibility
of anticompetitive bundling in a dynamic or strategic sense is more
recent, but no less important, especially as cable market power is
"swung" into the high-speed Internet.[^109]

Bundling is one of the strategies that monopolists use to extract
consumer surplus and the evidence is consistent with such an
interpretation in this case. Public policy might attack bundling, but
policy that controlled the rents directly would be preferable. Of
course, real competition would be better still, but after two decades of
failure of competition to develop and with the cable operators extending
the anticompetitive, anti-consumer business model to the Internet, the
need for action is critical.

**EXHIBIT 11:**

**Income Growth as a Predictor of Cable Subscription**

![](media/image35.wmf)

Sources: Federal Communications Commission, *In the Matter of Annual
Assessment of the Status of Competition in Markets for the Delivery of
Video Programming*, Tenth Annual Report, January 5, 2004, Table 1; Ninth
Annual Report, December 2002, Table B-1; Sixth Annual Report, Table C-1;
for 1995 through 2002; Paul Kagan Associates, *History of Cable TV
Subscribers and Revenues,* 1997, for pre-1995; Income is real, per
capita disposable income from *Economic Report of the President*
(February 2003), p. 313.

**ENDNOTES**

Appendix B

Top Rated Cable Channels: Then and Now

## Compiled by Federal Communications Commission

## Annual Cable Competition Report

+---------------------------------+---------------+-------------------+
| # Network                       | **1996        | **2003 Ranking**  |
|                                 | Ranking**     |                   |
|                                 |               | **(Primetime)**   |
|                                 | **            |                   |
|                                 | (Primetime)** |                   |
+---------------------------------+---------------+-------------------+
| A&E                             | 7             | 8                 |
+---------------------------------+---------------+-------------------+
| Cartoon Network                 | 6             | 6                 |
+---------------------------------+---------------+-------------------+
| Discovery                       | 9             | 10                |
+---------------------------------+---------------+-------------------+
| ESPN                            | 3             | 14                |
+---------------------------------+---------------+-------------------+
| Lifetime                        | 5             | 2                 |
+---------------------------------+---------------+-------------------+
| Sci-Fi Channel                  | 14            | 15                |
+---------------------------------+---------------+-------------------+
| TBS                             | 2             | 5                 |
+---------------------------------+---------------+-------------------+
| The Learning Channel            | 12            | 12                |
+---------------------------------+---------------+-------------------+
| The Nashville Network (Spike    | 10            | 13                |
| TV)                             |               |                   |
+---------------------------------+---------------+-------------------+
| TNT                             | 1             | 1                 |
+---------------------------------+---------------+-------------------+
| USA Network                     | 4             | 7                 |
+---------------------------------+---------------+-------------------+

+-----------------------------------+-----------------------------------+
| # Channels                        |                                   |
| that moved into Top 15 after 1996 |                                   |
+-----------------------------------+-----------------------------------+
| Disney                            | MTV                               |
+-----------------------------------+-----------------------------------+
| Fox News                          | Nickelodeon                       |
+-----------------------------------+-----------------------------------+

**Sources:**

Federal Communications Commission, MB Docket No. 03-172, Third Annual
Assessment of the Status of Competition in the Market for the Delivery
of Video Programming at 180.

Paul Kagan Associates, Cable TV Programming, Prime-Time Ratings, July
1996, at 10.

Kagan World Media, *Day Part Ratings Averages, Prime Time (July*), Cable
Program Investor, Sept.12, 2003, at 16.

Appendix C

The Top Cable Channels

By Number of Subscribers and Primetime Ratings

## Compiled by Federal Communications Commission

## For Tenth Annual Cable Competition Report-- January 5, 2004

+-----------------------+----------------------------------------------+
|                       | **Owners (Independent in Italics)**          |
+-----------------------+----------------------------------------------+
| **ABC Family**        | ### *Disney--ABC*                            |
+-----------------------+----------------------------------------------+
| **AMC**               | Cablevision                                  |
+-----------------------+----------------------------------------------+
| **A&E**               | Disney--ABC / General Electric--NBC / Hearst |
+-----------------------+----------------------------------------------+
| **Cartoon Network**   | Time Warner -- WB                            |
+-----------------------+----------------------------------------------+
| **CNBC**              | General Electric -- NBC                      |
+-----------------------+----------------------------------------------+
| **CNN**               | Time Warner -- WB                            |
+-----------------------+----------------------------------------------+
| **C--SPAN**           | Cable Consortium                             |
+-----------------------+----------------------------------------------+
| **Discovery**         | Liberty Media -- Fox / Cox Cable             |
+-----------------------+----------------------------------------------+
| **Disney Channel**    | Disney -- ABC                                |
+-----------------------+----------------------------------------------+
| **ESPN**              | Disney -- ABC                                |
+-----------------------+----------------------------------------------+
| **ESPN2**             | Disney -- ABC                                |
+-----------------------+----------------------------------------------+
| **Fox News**          | NewsCorp -- Fox                              |
+-----------------------+----------------------------------------------+
| **Lifetime**          | Disney -- ABC / Hearst                       |
+-----------------------+----------------------------------------------+
| **MTV**               | Viacom -- CBS                                |
+-----------------------+----------------------------------------------+
| **Nickelodeon**       | Viacom -- CBS                                |
+-----------------------+----------------------------------------------+
| **QVC**               | Liberty Media -- Fox / Comcast Cable         |
+-----------------------+----------------------------------------------+
| **Sci-Fi**            | General Electric -- NBC\*                    |
+-----------------------+----------------------------------------------+
| **Spike TV (TNN)**    | Viacom -- CBS                                |
+-----------------------+----------------------------------------------+
| **TBS**               | Time Warner -- WB                            |
+-----------------------+----------------------------------------------+
| **The Weather         | ### Landmark Communications                  |
| Channel**             |                                              |
+-----------------------+----------------------------------------------+
| **TLC**               | Liberty Media -- Fox / Cox Cable             |
+-----------------------+----------------------------------------------+
| **TNT**               | Time Warner -- WB                            |
+-----------------------+----------------------------------------------+
| **USA Network**       | General Electric -- NBC\*                    |
+-----------------------+----------------------------------------------+
| **VH1**               | Viacom -- CBS                                |
+-----------------------+----------------------------------------------+

\* If General Electric/Universal merger is approved as pending

**Sources:**

Federal Communications Commission, MB Docket No. 03-172, Tenth Annual
Assessment of the Status of Competition in the Market for the Delivery
of Video Programming at 141-142.

NCTA, *Top 20 Cable Network*s, Cable Developments 2003, at 39-40.

Kagan World Media, *Day Part Ratings Averages, Prime Time (July*), Cable
Program Investor, Sept.12, 2003, at 16.

Appendix D

Examples of Independent Cable Channels

## Compiled by Federal Communications Commission

## For Tenth Annual Cable Competition Report-- January 5, 2004

  -------------------------------- --------------------------------------
  **Cable Network**                **Owners**

  ACNTV (America's Collectibles    America's Collectibles Network
  Network)                         

  ANA Television                   Middle East Broadcasting Centre (MBC)

  ART (Arab Radio & Television)    Arab Media Corporation

  Bloomberg Television             Bloomberg L.P.

  B Mania                          B Mania Television Network

  Canal SUR                        Canal SUR (Latin American and Mexican
                                   TV)

  China Central Television         State Administration of Radio,
                                   Television, and Film -- People's
                                   Republic of China

  Church Channel                   Trinity Broadcasting Network

  Classic Arts Showcase            The Lloyd E. Rigler \-- Lawrence E.
                                   Deutsch Foundation

  CSTV (College Sports Television) College Sports Television

  Deep Dish TV                     Deep Dish TV

  Destiny Channel                  Destiny Channel

  Do-It-Yourself Channel           Scripps

  Dream TV Network                 Dreamland Development -- Egypt

  ETWN: Global Catholic Network    Eternal World Television Network

  FamilyNet                        Southern Baptist Convention

  Filipino Channel                 ABS-CBN

  Fine Living                      Scripps

  Food Network                     Jones Media Networks

  Free Speech TV (FSTV)            Free Speech TV

  Galavision                       Univision

  GolTV                            Tenfield \--Uruguay

  Golden Eagle Broadcasting        Oral Roberts University

  Goodlife Television Network      Nostalgia Network, Inc.

  HDNet                            HDNet

  HDNet Movies                     HDNet

  HGTV (Home and Garden            Scripps
  Television)                      

  Horse Racing TV                  Magna Entertainment Corp.

  HSN America\'s Store (Home       IAC/InterActiveCorp
  Shopping Network)                

  HTV                              ITV1 West of Wales

  Inspirational Life Television    Inspiration Networks
  (I-LIFETV)                       

  Inspirational Network (INSP)     Inspiration Networks

  JCTV                             Trinity Broadcasting Network

  La Familia Network               Inspiration Networks

  Liberty Channel                  Jerry Falwell Ministries

  Locomotion Channel               Corus Entertainment / Hearst
                                   Corporation

  MBC Network                      MBC Network

  MBC America                      MUNHWA Broadcasting Corporation

  Mun2                             Mun2

  NASA Television                  National Aeronautics and Space
                                   Administration

  National Jewish Television       Hineni International

  Oasis TV                         Oasis TV

  TBN                              Trinity Broadcasting Network

  UBC                              Urban Broadcasting Company

  Univision                        Univision

  Video Rola                       Entretenimiento Satelital

  Weather Channel                  Landmark Communications

  WGN                              Tribune Company
  -------------------------------- --------------------------------------

[^1]: Consumers Union is a nonprofit membership organization chartered
    in 1936 under the laws of the state of New York to provide consumers
    with information, education and counsel about goods, services,
    health and personal finance, and to initiate and cooperate with
    individual and group efforts to maintain and enhance the quality of
    life for consumers. Consumers Union\'s income is solely derived from
    the sale of *Consumer Reports*, its other publications and from
    noncommercial contributions, grants and fees. In addition to reports
    on Consumers Union\'s own product testing, *Consumer Reports* with
    more than 4 million paid circulation, regularly, carries articles on
    health, product safety, marketplace economics and legislative,
    judicial and regulatory actions which affect consumer welfare.
    Consumers Union\'s publications carry no advertising and receive no
    commercial support.

[^2]: The Consumer Federation of America is the nation's largest
    consumer advocacy group, composed of over 280 state and local
    affiliates representing consumer, senior, citizen, low-income,
    labor, farm, public power an cooperative organizations, with more
    than 50 million individual members.

[^3]: Public Law 104-104, The Telecommunications Act of 1996.

[^4]: Bureau of Labor Statistics, Consumer Price Index (March 2004).
    From 1996 until March 2004, CPI increased 20.6% while cable prices
    rose 56%, 2.7 times faster than inflation.

[^5]: For example, in Philadelphia, where Comcast has used "terrestrial
    bypass" to deny must-have sports programming such as the
    Philadelphia Flyers and the 76ers from satellite competitors,
    satellite penetration is 3.7 percent, compared to 10 percent of
    TV-viewing households nationwide. See Patricia Horn, "As Competition
    Lags for Cable TV, Prices Continue to Rise," *Philadelphia
    Inquirer*, June 3, 2001, page C01.

[^6]: General Accounting Office, "Wire-Based Competition Benefited
    Consumers in Selected Markets": GAO-04-241, February, 2004, pg. 4.

[^7]: General Accounting Office, "Issues Related to Competition and
    Subscriber Rates in the Cable Television Industry," GAO-04-8,
    October 2003, Appendix IV, p. 60.

[^8]: Id., pp. 60-61.

[^9]: While we hope that satellite will ultimately have a price
    disciplining effect in those communities where satellite offers
    local broadcast stations, it is clear that the single most important
    variable in cable prices is whether there is a cable over builder in
    a particular community. Wire-to-wire competition does hold down
    cable rates and satellite does not seem to do the trick. The U.S.
    General Accounting Office describes this phenomenon:

    > Our model results do not indicate that the provision of local
    > broadcast channels by DBS companies is associated with lower cable
    > prices. In contrast, the presence of a second cable franchise
    > (known as an overbuilder) does appear to constrain cable prices.
    > In franchise areas with a second cable provider, cable prices are
    > approximately 17 percent lower than in comparable areas without a
    > second cable provider.

    In other words, where there are two satellite providers and one
    cable operator in a market, prices are 17 percent higher than where
    there are two cable companies and two satellite providers in a
    market.

[^10]: Ronald Grover, "Direct Talk about DirecTV." [Business
    Week]{.underline}, January 19, 2004, pg. 61.

[^11]: Consumers Union also believes that programmers should be required
    under a new set of nondiscrimination requirements to sell their
    channels to cable and satellite operators on a similar individual
    basis as we pointed out to the Committee in testimony last year. See
    written and oral statement of Gene Kimmelman before the Senate
    Committee on Commerce, Senate Commerce, Science, and Transportation
    Committee, *Cable Television and the Dangers of Deregulation*, May
    6, 2003.

[^12]: GAO-04-08 Issues Related to Competition and Subscriber Rates in
    the Cable Television Industry, October 2003

[^13]: Consumer Federation of America and Consumers Union, The
    Continuing Abuse Of Market Power By The Cable Industry: Rising
    Prices, Denial Of Consumer Choice, And Discrimination In Access, p.
    24

[^14]: A quick Internet search shows many Canadian cable
    operators---from the largest (Rogers) to some of the smallest
    (Northern Cablevision and Whistler Cable)---offer a la carte
    programming.

[^15]: Testimony of James Gleason, Hearing on Media Ownership, Committee
    on Commerce, Science and Transportation, May 6, 2003, p.53.

[^16]: Testimony of Charles Dolan, Hearing on Media Ownership, Committee
    on Commerce Science and Transportation, May 6, 2003, p. 56.

[^17]: Federal Communications Commission, In Re: The Annual Assessment
    of the Status of Competition in the Market for the Delivery of Video
    Programming, MB Docket No. 03-172.

[^18]: U.S. General Accounting Office (U.S. GAO), Issues Related to
    Competition and Subscriber Rates in the Cable Television Industry,
    October 2003; Telecommunications: Issues in Providing Cable and
    Satellite Television Service, October 15, 2003.

[^19]: Fabrikant, Geraldine and Bill Carter, "Cable's New Giant Flexes
    His Muscles," *New York Times,* October 20, 2003; "Testimony of
    James O. Robbins," *Senate Commerce Committee,* May 6, 2003.

[^20]: Eisenach, Jeffrey A. and Douglas A. Truehart, *Rising Cable
    Rates: Are Programming Costs the Villain?*, supported by ESPN, Inc.,
    October 23, 2003 (hereafter ESPN); Economists Inc., *Consumer,
    Operator, and Programmer Benefits from Bundling Cable Networks,*
    July 2002; Rogerson, William P., *Cable Program Tiering: A Decision
    Best and Properly Made by Cable System Operators, Not Government
    Regulators,* November 10, 2003, funded by Cox (hereafter Cox);
    *Correcting the Errors in the ESPN/CAP Analysis Study on Programming
    Cost Increases*, November 11, 2003, prepared for Cox Communications
    (Cox II).

[^21]: Katz, Michael, *An Economic Analysis of the Claims made by Dr.
    Mark Cooper in "Cable Mergers, Monopoly Power and Price Increases,"*
    Commissioned by Comcast Corporation, July 28, 2003 (hereafter
    Comcast). The target of the Comcast paper is a short study prepared
    in January 2003 entitled *Cable Mergers, Monopoly Power and Price
    Increases* (Washington, DC: Consumer Federation of America and
    Consumers Union, January 2003). This critique ignores several much
    longer documents including Consumer Federation of America, "Comments
    of the Consumer Federation of America, Consumers Union, Center for
    Digital Democracy, The Office of Communications of the United Church
    of Christ, Inc., National Association of Telecommunications Officers
    and Advisors, Association for Independent Video Filmmakers, National
    Alliance for Media Arts and Culture, and the Alliance for Community
    Media," 2002; and "Reply Comments of the Consumer Federation of
    America, Consumers Union, Center for Digital Democracy, and Media
    Access Project," 2003; Federal Communications Commission*, In the
    Matter of Implementation of Section 11 of the Cable Television
    Consumer Protection and Competition Act of 1992, Implementation of
    Cable Act Reform Provisions of the Telecommunications Act of 1996,
    The Commission's Cable Horizontal and Vertical Ownership Limits and
    Attribution Rules, Review of the Commission's Regulations Governing
    Attribution of Broadcast and Cable/MDS Interests, Review of the
    Commission's Regulations and Policies Affecting Investment in the
    Broadcast Industry, Reexamination of the Commission's Cross-Interest
    Policy*, CS Docket No. 98-82, CS Docket No. 96-85, MM Docket No.
    92-264, MM Docket No. 94-150, MM Docket No. 92-51, MM Docket No.
    87-154; and Cooper, Mark, *Cable Mergers and Monopolies: Market
    Power in Digital Communications Networks* (Economic Policy
    Institute, 2002).

[^22]: Wildman, Steven S., *Assessing Quality Adjusted Changes in the
    Real Price of Basic Cable Service,* attached to Comments of the
    National Cable Telecommunications Association, in Federal
    Communications Commission, *In Re: The Annual Assessment of the
    Status of Competition in the Market for the Delivery of Video
    Programming*, MB Docket No. 03-172, September 11, 2003 (hereafter
    NCTA).

[^23]: Federal Communications Commission, *Tenth Annual Report (In the
    Matter of Annual Assessment of the Status of Competition in the
    Market for the Delivery of Video Programming)* Washington, DC,
    January 28, 2004 (hereafter Tenth Annual Report).

[^24]: "Testimony of Gene Kimmelman," *Senate Commerce Committee,* May
    6, 2003, cited in ESPN, p. 4.

[^25]: *Tenth Annual Report,* para. 10.

[^26]: *Tenth Annual Report,* para 139.

[^27]: *Tenth Annual Report*, para 30.

[^28]: *Tenth Annual Report,* para 31.

[^29]: *Tenth Annual Report*, note 73.

[^30]: *Tenth Annual Report, note 203.*

[^31]: *Tenth Annual Report,* Table 4.

[^32]: *Tenth Annual Report,* footnote 11.

[^33]: *Tenth Annual Report*, para. 140.

[^34]: Cooper, Mark, *Media Ownership Democracy in the Digital
    Information Age* (Stanford: Center for Internet and Society, 2003),
    Chapter 6.

[^35]: *Tenth Annual Report*, para. 136.

[^36]: *Tenth Annual Report,* para 130-132.

[^37]: See *Tenth Annual Report*, Table B-1.

[^38]: Compare *Tenth Annual Report*, para 41 and 65.

[^39]: *Joint Statement of Commissioners Michael J. Copps and Jonathan
    S. Adelstein, Concurring"* January 28, 2004.

[^40]: The only evidence that the industry paper gives on market power
    is provided by Comcast, which points to one indicator of market
    power, Tobin's q (the system sales price in comparison to the
    reproduction cost). Citing numbers from the Federal Communications
    Commission, *Ninth Annual Report, In the Matter of Annual Assessment
    of the Status of Competition in the Market for the Delivery of Video
    Programming*, MB Docket No. 92-145, December 31, 2002, p. 16),
    Comcast points out that (p. 19): the "National Average Dollar Value
    Per Subscriber *declined* dramatically, falling from a peak of
    \$5755 in 2000 to \$2196 in January through June 2002." This
    statement fails to take into account the dramatic difference in the
    nature of the systems being transacted. The average number of
    subscribers transacted in the peak year Comcast cited was over
    250,000 per system in 45 transactions for a total of over \$66
    billion. The average number of subscribers in the first half of 2002
    was only 32,000 in 12 transactions for a total of less than \$1
    billion. If we compare small systems transacted in 2000 to the small
    systems transacted in 2002, we get a very different picture; see
    Federal Communications Commission, *Seventh Annual Report, In the
    Matter of Annual Assessment of the Status of Competition in the
    Market for the Delivery of Video Programming*, CS Docket No. 00-132,
    January 8, 2001, Table C-5*.* For example, there were 39
    transactions in 2000 for systems with fewer than 100,000
    subscribers. The average system price was approximately \$2,666 per
    subscriber. Thus, the system price has declined by about 18 percent,
    which is modest compared to the stock market declines (see Couper,
    Elise A, John P. Hejkal, and Alexander L. Wolman, "Boom and Bust In
    Telecommunications," *Economic Quarterly,* Fall 2003. The analysis
    also does not account for a decline in the reproduction costs, was
    also evident.

[^41]: Comcast, p. 14, states the proposition as follows: "As long as
    the increase in the monthly fee is less than the amount by which
    consumers value the new programming, they will be better off at the
    new 'higher' price coupled with the additional programs."

[^42]: Scherer, F. M. and David Ross, *Industrial Market Structure and
    Economic Performance* (Boston: Houghton Mifflin, 1990), pp. 21 --
    29.

[^43]: Comcast, pp. 12-13; Cox, Appendix, uses this model as well.

[^44]: Industry defenders frequently claim that rising prices cannot be
    caused by market power, since in frictionless theory the monopolist
    would immediately ascertain his profit-maximizing price and charge
    it (Comcast p. 14, Hazlett, Thomas, *Cable TV: Has Deregulation
    Failed?*, Manhattan Institute for Policy Research, November 21,
    2003). Reality, of course is more complicated than that. Monopolists
    price politically, searching for what they can get away with before
    they evoke a reaction, especially in an industry whose rapacious
    behavior caused it to be reregulated once.

[^45]: Cox, Appendix, argues that allowing the monopolist to reallocate
    rents from programmers will increase its rate of profit as well as
    consumer welfare under some circumstances.

[^46]: U.S. GAO, 2003, Appendix IV.

[^47]: U.S. GAO, 2002.

[^48]: *Tenth Annual Report,* para. 83, citing *First Annual Report,*
    para. 57.

[^49]: Federal Communications Commission, *Report on Cable Prices,*
    April 4, 2002, Attachment D-1; February 14, 2001, Attachment D-1;
    June 2000, Attachment D-1; May 7, 1999, C-1.

[^50]: *Tenth annual Report,* para. 16.

[^51]: I assume that 98 percent of cable subscribers lack head-to-head
    competition (Federal Communications Commission, *In the Matter of
    the Annual Assessment of the Status of Competition in the Market for
    Delivery of Video Programming: Ninth Annual Report,* MB Docket No.
    02-145, December 31, 2002, para. 115) and 90 percent of those take
    expanded basic service (ESPN, p. 2). Therefore, 62 million cable
    households are the victims of abuse of market power. Their bills
    could be reduced by \$8 per month as a result of genuine
    head-to-head competition and deconcentration of the industry.

[^52]: U.S. GAO, 2003, Appendix IV.

[^53]: FCC, *Report on Cable Prices,* April 4, 2002, Attachment D-1;
    February 14, 2001, Attachment D-1; June 2000, Attachment D-1; May 7,
    1999, C-1.

[^54]: FCC, *Report on Cable Prices,* February 14, 2001, Attachment D-1;
    June 2000, Attachment D-1.

[^55]: *Tent Annual Report,* para 132. Comcast once again has failed to
    notice the consistent empirical evidence that finds size and
    clustering increase prices, contradicting their claim that (pp.
    18-19) "there is no reason to think that consolidation of cable
    ownership at the national level will affect actual competition among
    cable system operators. Ironically, cable industry experts find that
    mergers of some monopolists matter (John B. Hayes, Jith Jayaratne,
    and Michael L. Katz, *An Empirical Analysis of the Footprint Effects
    of Mergers Between Large ILECS,* April 1, 1999, p. 1; citing
    "Declaration of Michael L. Katz and Steven C. Salop," submitted as
    an attachment to *Petition to Deny of Spring Communications Company
    L.P,* in *Ameritech Corp. and SBC Communications, Inc., for Consent
    to Transfer of Control*[,]{.underline} CC Dkt. No. 98-141 (filed
    Oct. 15, 1998) and *Petition to Deny of Spring Communications
    Company L.P,* in *GTE Corporation and Bell Atlantic Corporation for
    Consent to Transfer of Control*, CC Docket. No. 98-184 (filed Nov.
    23, 1998)) and that size and alternative distribution opportunities
    affect bargaining (see Rogerson, William P. "A Further Economic
    Analysis of the News Corp. Takeover of DirecTV," *In the Matter of
    General Motors Corporation, Hughes Electronics Corporation, and the
    News Corporation Limited Application to Transfer Control of FCC
    Authorizations and Licenses Held by Hughes Electronics Corporation
    to the News Corporation Limited,* MB Docket NO. 03-124, August 4,
    2003).

[^56]: Cooper, 2002, Chapter 7.

[^57]: U.S. GAO, 2003, Appendix IV.

[^58]: FCC, *Report on Cable Prices,* April 4, 2002, Attachment D-1.

[^59]: Cooper, 2002, pp. 21-32.

[^60]: See Cooper, 2002, pp. 44-47.

[^61]: Fabricant and Carter.

[^62]: Cox, Appendix A shows cable profits rising as programming costs
    fall.

[^63]: , "Comments of the Consumer Federation of America, et. al *, In
    the Matter of Implementation of Section 11 of the Cable Television
    Consumer Protection and Competition Act of 1992, Implementation of
    Cable Act Reform Provisions of the Telecommunications Act of 1996,
    The Commission's Cable Horizontal and Vertical Ownership Limits and
    Attribution Rules, Review of the Commission's Regulations Governing
    Attribution of Broadcast and Cable/MDS Interests, Review of the
    Commission's Regulations and Policies Affecting Investment in the
    Broadcast Industry, Reexamination of the Commission's Cross-Interest
    Policy*, CS Docket No. 98-82, CS Docket No. 96-85, MM Docket No.
    92-264, MM Docket No. 94-150, MM Docket No. 92-51, MM Docket No.
    87-154

[^64]: U.S. GAO, 2003, p. 27.

[^65]: ESPN, p. 9.

[^66]: Cox critics ESPN for comparing current revenues to total capital,
    a criticism that applies to Comcast even more forcefully, since ESPN
    at least reports annualized increases in debt costs, whereas Comcast
    provides no similar calculation. ESPN/s reporting of debt service
    misses the point, however, since part of the debt was incurred to
    fund acquisitions, not capital expenditures.

[^67]: Only a consent decree forced Time Warner to allow modest access,
    and intense scrutiny forced AT&T to make some minor concessions, but
    the recent AOL/AT&T carriage agreement is thoroughly
    anticompetitive. "A New Model for AOL May Influence Cable's Future,"
    *New York Times,* August 26, 2002, p. C1; Gilmore, Dan, "AOL
    Capitulates, Gives Up Struggle for 'Open Access'," *San Jose Mercury
    News,* September 1, 2002.

[^68]: Cooper, Mark, "Open Access to the Broadband Internet: Technical
    and Economic Discrimination in Closed, Proprietary Networks," 71
    *University of Colorado Law Review*, 71: 2000;

[^69]: Federal Communications Commission, *High-Sped Service for
    Internet Access: Status as of June 30, 2003,* December 2003, Table
    4.

[^70]: "A New Model for AOL May Influence Cable's Future," *New York
    Times,* August 26, 2002, p. C.1; Gilmore, Dan, "AOL Capitulates,
    Gives Up Struggle for 'Open Access'," *San Jose Mercury News,*
    September 1, 2002.

[^71]: Hu, Jim, "AOL's Unrequited Cable Love," *CNET News.com,* January
    26, 2004.

[^72]: Latour, Almar and Peter Grant, "Verizon May Set Off Price War,"
    *Wall Street Journal,* May 5, 2003.

[^73]: *U.S. Department of Justice v. AT&T Corp and MediaOne Group,
    Inc.,* May 26, 2000.

[^74]: Conquering the high-speed Internet access as a neighbor market of
    video has additional advantages in preserving market power in the
    primary market (see for example, Carlton, Dennis W. and Michael
    Waldman, "The Strategic Use of Tying to Preserve and Create Market
    Power in Evolving Industry," *Rand Journal of Economics*, Summer,
    2002; Rubinfield, Daniel L. and Hal J. Singer, *Open Access to
    Broadband Networks: A Case Study of the AOL/Time Warner Merger*, 16
    Berkeley Tech[. L.J.]{.smallcaps} 631, 2001; Ordover, Lansuz A. and
    Robert D. Willig, "Access and Bundling in High Technology Markets,"
    in Jeffrey A. Eisenach and Thomas M. Lenard (eds.), *Competition,
    Innovation And The Microsoft Monopoly: Antitrust And The Digital
    Marketplace* (Washington, D.C.: Progress and Freedom Foundation,
    1999); Salop, Steven C., "Using Leverage to Preserve Monopoly," in
    Jeffrey A. Eisenach and Thomas M. Lenard (eds.), *Competition,
    Innovation And The Microsoft Monopoly: Antitrust And The Digital
    Marketplace* (Washington, D.C.: Progress and Freedom Foundation,
    1999). Bundling basic video with Internet access has the effect of
    undermining competition for video services (by driving basic into
    households and reducing the value of satellite). Bundling video
    content with Internet access reduces competition for video services,
    (See, e.g., Comments of the Competitive Broadband Coalition,
    *Implementation of the Cable Television Consumer Protection and
    Competition Act of 1992*, Cable Services Bureau Dkt. No. 01-290, at
    10-11 \[Dec. 3, 2001\]). Bundling also raises barriers to entry by
    forcing competitors to build larger packages to compete: "AT&T is
    refusing to sell HITS to any company using DSL technology to deliver
    video services over existing phone lines because such companies
    would directly compete with AT&T\'s entry into the local telephone
    market using both its own cable systems and the cable plant of
    unaffiliated cable operators. AT&T simply does not want any
    terrestrial based competition by other broadband networks capable of
    providing bundled video, voice and data ser­vices." (Comments of the
    American Cable Association In the Matter of: Implementation of the
    Cable Television Consumer Protection and Competition Act of 1992,
    Development of Competition in Video Programming Distribution:
    Section 628(c)(5) of the Communications Act: Sunset of Exclusive
    Contract Prohibition, CS Docket No. 01-290 \[filed Dec. 3, 2001\]).

[^75]: "Initial Comments of the California ISP Association, Inc.,"
    *Further Notice of Proposed Rulemaking in the Matter of the Computer
    III Remand Proceedings: Bell Operating Company Provision of Enhanced
    Services; 1998 Biennial Regulatory Review -- Review of Computer II
    and ONA Safeguards and Requirements*, Federal Communications
    Commission, CC Docket No. 95-20, 98-10, DA 01-620, April 16, 2001
    (hereafter CISPA, 2001a), p. 7; "Comments of DirecTV Broadband,
    Inc," *In the Matter of Appropriate Framework for Broadband Access
    to the Internet Over Wireline Facilities, Universal Service
    Obligations of Broadband Providers, Computer III Remand Proceedings:
    Bell Operating Company Provision of Enhanced Services; 1998 Biennial
    Regulatory Review -- Review of Computer II and ONA Safeguards and
    Requirements*, Federal Communications Commission, CC Docket No.
    02-33, 95-20, 98-10, May 3, 2002, p. 5; "Comments of Cbeyond, et
    al.," *In the Matter of Appropriate Framework for Broadband Access
    to the Internet Over Wireline Facilities, Universal Service
    Obligations of Broadband Providers, Computer III Remand Proceedings:
    Bell Operating Company Provision of Enhanced Services; 1998 Biennial
    Regulatory Review -- Review of Computer II and ONA Safeguards and
    Requirements*, Federal Communications Commission, CC Docket No.
    02-33, 95-20, 98-10, May 3, 2002 (Hereafter Cbeyond, et al., 2002),
    pp. 27-28.

[^76]: National Research Council report entitled *Broadband: Bringing
    Home the Bits*, (Washington, D.C.: National Academy Press, 2002),
    pp. 21, 152-154.

[^77]: Federal Communications Commission, High-Speed Services for
    Internet Access, June 2003, Tables 1, 2; Local Telephone
    Competition: Status as of December 31, 2002, June 2003, Tables 1,
    13; NCTA, Overview 2003: Mid-Year, p. 1.

[^78]: Young, Shawn and Peter Grant, "How Phone Firms Lost to Cable in
    Consumer Broadband Battle," *Wall Street Journal,* March 13, 2003.

[^79]: "Comments of Ad Hoc Telecommunications Users Committee," *In the
    Matter of Review of Regulatory Requirements for Incumbent LEC
    Broadband Telecommunications Services*, Federal Communications
    Commission, CC Docket No. 01-337, March 1, 2002, pp. 18-19.

    > Cable modem service presents serious security and reliability
    > issues that, while present for residential users, are of far
    > greater concern when used to support business applications... In
    > addition, service quality for cable modem service not equivalent
    > to ILEC standards... Additionally cable modem transmission speeds
    > are not consistent, due to the "shared platform" architecture...
    > Finally, cable modem platforms do not offer business customers a
    > sufficient level of security

[^80]: Cable modem service presents serious security and reliability
    issues that, while present for residential users, are of far greater
    concern when used to support business applications... In addition,
    service quality for cable modem service is not equivalent to ILEC
    standards... Additionally cable modem transmission speeds are not
    consistent, due to the "shared platform" architecture... Finally,
    cable modem platforms do not offer business customers a sufficient
    level of security.

[^81]: Kuhl, Craig, "Writing the Business Case for VDSL," *CED,* April
    2000. Extensive documentation of the technology difference is
    provided in Cooper, Mark, *Transforming the Information Superhighway
    into a Private Toll Road* (Washington, DC: Consumer Federation of
    America, October 1999).

[^82]: Hazlett, Thomas W. and George Bittlingmayer. *The Political
    Economy of Cable "Open Access."* Joint Center, Working Paper 01-06,
    May, argue that there is a strategic under allocation of capacity to
    high-speed Internet.

[^83]: Cox, Comcast and ESPN also focus on a short time frame.

[^84]: Federal Communications Commission, *Report on Cable Prices*, In
    the Matter of Implementation of Section 3 of the Cable Television
    Consumer Protection Act of 1992, Statistical Report on Average Rates
    for Basic Service, Cable Programming and Equipment, MM Docket No.
    92-226, January 2, 1997, p. 7.

[^85]: Id., p. 7.

[^86]: U.S. GAO, 2003, p. 26.

[^87]: Federal Communications Commission, *In the Matter of Annual
    Assessment of the Status of Competition in Markets for the Delivery
    of Video Programming*, Fifth Annual Report, December 23, 1998, Table
    B-7; Ninth Annual Report, December 2002, Table 4.

[^88]: I report both revenue per subscriber and the total revenue
    because some costs are not incurred on a per subscriber basis.

[^89]: Cox II, p. 8.

[^90]: The GAO cautions that it is difficult to apportion capital costs
    between the traditional video business and the new lines of
    business. The same is true with operating expenses. The expert for
    Cox, recognizes the problem, but conveniently punts. Cox II, p. 8,

    In particular, it seems likely that a relatively large share of
    increased capital costs and perhaps also operating costs may have
    been incurred in order to permit firms to offer more advanced
    products than expanded basic service, such as digital tiers of
    service (including pay per view and video on demand), broadband
    internet connections and telephony.

    > In my opinion, any attempt to allocate a portion of those costs
    > increases to basic analog service (in order to determine if prices
    > for expanded basic service have risen by more than would have been
    > sufficient to cover all cost increases of expanded basic service)
    > would require a long list of assumptions which would be open to
    > question and controversy.

[^91]: Federal Communications Commission, *Annual Assessment of the
    Status of Competition in the Market for the Delivery of Video
    Programming,* Ninth Annual Report, p. 15; Seventh Annual Report;
    NCTA, *Cable Pricing: Value and Cost*, May 2003.

[^92]: Federal Communications Commission, *In the Matter of Annual
    Assessment of the Status of Competition in Markets for the Delivery
    of Video Programming*, Fifth Annual Report, December 23, 1998, Table
    C-1; Ninth Annual Report, December 2002, Table B-1.

[^93]: NCTA, Overview 2003: Mid-Year, p. 12.

[^94]: ESPN, p. 12.

[^95]: Hazlett.

[^96]: Thinking about the cost of viewing to the public leads to another
    conceptual problem in the NCTA and Comcast analyses, one that has
    been recently highlighted by the ESPN analysis. ESPN points out they
    improve quality and increase audiences to increase their ability to
    sell advertising, as well as get more subscription revenues. Cox II,
    p. 6, nets advertising out from the cost of programming cable
    operators incur. That may make sense from the cable operator point
    of view, but not necessarily from the consumer point of view.
    Consumers have to watch the commercials and, ultimately, the cost
    turns up in the goods and services they buy. From a total social
    welfare analysis, the cost of advertising needs to be attributed to
    the cost of the total viewing time. The advertising revenue can be
    handled in a variety of ways, but it cannot be ignored.

[^97]: Unfortunately, in 1996 the FCC shifted from a January cable price
    to a June cable price in its annual reports on cable prices.
    However, we can use the CPI to interpolate from June to January and
    only slightly underestimate the actual price increase (since quality
    adjustments over any short six month period are relatively minor).
    To the extent the industry was adding channels, this approach
    underestimates the price increase.

[^98]: Cox, Appendix.

[^99]: Cox, p. 13

[^100]: Cox, p. 13,

    > since regulation is costly and can create other distortions, the
    > fact that this type of bundling cannot be shown to be
    > systematically harmful to consumers is sufficient reason for most
    > economists to conclude that there is no reason to regulate this
    > type of bundling

[^101]: The example offered by Cox assumes that all fruits and
    vegetables are equally valuable to consumers in exactly the same
    quantities.

[^102]: Levy, Jonathan, Marcelino Ford-Levine and Anne Levine,
    *Broadcast Television: Survivor in a Sea of Competition* (Federal
    Communications Commission, OPP Working Paper, September 2002), p.
    62; Albararan, Alan and Angel Arrese, "Time and Media Markets: An
    Introduction," in Albararan and Arrese (Eds.), *Time and Media
    Markets* (Mahwah, NJ: Lawrence Earlbaum Associates, 2003), p. 2.

[^103]: Veronis Suchler Stevenson, *Communications Industry Report*:
    *Forecast Summary, 2003*, p. 48.

[^104]: The explanations that cable industry executives gave the GAO for
    the social welfare superiority of bundling assume that advertisers
    irrationally pay for homes passed, rather than eyeballs watching,
    and that consumers maximize their welfare by subsidizing their
    neighbor's viewing habits. Those claims are inconsistent with the
    data in this paper (U.S. GAO, 2003, pp. 34-37).

[^105]: Deutsche Bank, *Walt Disney Company*, October 27, 2003.

[^106]: This assumes that the non-avid sports fans would pay nothing for
    it, given the choice.

[^107]: Cooper, 2002, pp. 26-32.

[^108]: USPIRG, *The Failure of Cable Deregulation: A Blueprint for
    Creating a Competitive, Pro-consumer Cable Television Marketplace*
    (August 2003), pp. 18-19.

[^109]: Carlton and Waldman.