Why cable costs too much; how local politicians and cable companies conspire to make cable TV overpriced.

• Author: Barnes, John A.

Why Cable Costs Too Much

In 1982, Sacramento, California became one of the last major metropolitan areas to decide to wire its residents for cable television. Assuming that cable was a "natural monopoly," similar to a public utility, Sacramento saw little reason not to copy the 5,000 other cities and counties across America and announce that it was accepting bids for a cable television "franchise." The lucky winner would have the right to provide cable service within the city and county of Sacramento in exchange for paying a "franchise fee" (which, as in most places, ran about 5 percent of revenues). Such franchise rights, in turn, would leave the company in control of a market that would generate revenues of about $60 million a year. That, at least, was the plan until a revolutionary new idea in cable economics--competition--rudely forced its way onto the Sacramento stage. This intrusion has left the nation's cable monopolists ill at ease and lent a bit of hope to the nation's cable consumers, who have been courted, then fleeced, from coast to coast. That's right, consumers--remember them?

Until the early 1960s, cable was little more than what it had been at its inception in the late 1940s: a way of bringing clear signals to poor reception areas, such as those in Pennsylvania's coal country. As cable operators began to add signals from distant viewing areas, however, broadcasters started to worry that their "exclusive" television licenses were being infringed upon. The Federal Communications Commission (FCC), which up to this point had pretty much ignored cable television, suddenly spewed forth regulations. Cable companies could carry only two stations in addition to local broadcasting stations. If a network affiliate in a top 50 market bought the rights to, say, "Hogan's Heroes," the cable company could not import a signal from another station that also showed "Hogan's Heroes." Cable stations could not show movies that were less than three years old or more than 10. They could not produce their own programming. And on and on.

The federal barriers to cable operation began to erode with a series of court and FCC decisions in the 1970s, and by the early eighties most of these regulatory inanities had been removed. Once the feds were out of the way, however, and cable was ready to show what it could do, another gatekeeper appeared: local government.

When the average American politician spies the chance to regulate a public franchise, his soul begins to sing, because life's experience has shown that such power easily leads to enrichment, either through new campaign contributions from those anxious for his favor or from the more direct solicitations known as graft. This has been the case with everything from liquor licenses to race tracks, and so it was with cable. The local politicians quickly set out to rationalize their role.

The normal law of economics, that competition between suppliers keeps prices low and the level of service high, simply did not apply to cable television, they argued. Powerful economies of scale made cable a "natural monopoly." Cable companies had to dig up city streets and make their way into people's homes; flat-out competition for something this large and intrusive was simply uneconomical. Moreover, the politicians argued, left to their own devices the cable operators would bypass poorer neighborhoods. It was therefore incumbent upon local politicians to choose one supplier that would offer the best deal for consumers.

While cities could offer licenses to operate, there's one thing they couldn't do: regulate prices. A 1984 federal deregulation act stripped them of that right. This left consumers with the worst of both worlds. Having set up effective monopolies in what is now a $14.5 billion industry, city governments were powerless to control the resulting prices. For the cable companies it became a situation of gouge-as-gouge-can. Nationally, the price for cable service rose about 32 percent from 1984 to 1988. In Washington, D.C., families with young children now have to pay $33 a month for full...