FCC Chairman Caves, Economics of Lobbying Prevail (sort of)

The effort to impose new cable television regulations that renewed discussion of selling subscriptions to individual channels has apparently collapsed under strong pressure from cable companies.

However, potential changes in ownership restrictions and other regulations, not the sale of individual channels, were behind the collapse. Reports this morning say a Nov. 27 meeting of the Federal Communications Commission delayed a decision on the new rules because of a dispute over data showing how many people actually subscribe to cable.

If more than 70 percent of consumers have access to cable -- a number that is not in dispute -- and more than 70 percent of them subscribe, the FCC will have legal authority to limit ownership of cable companies. FCC Chairman Kevin J. Martin argues the 70 percent subscriber threshold has been met, but the industry and other members of the commission disagree. (Chloe Albanesius at PCMag.com does a good job explaining details of this argument about subscriber data.)

A Battle to Capture the FCC

The cable companies' effort to block new regulations at first appears to be a textbook example of why regulators often favor the interests of the industry they regulate. However, this is a case where the interests of three major media industries are at stake.

Clearly, if you own a cable company, you don't favor regulations that restrict which systems you can buy. Cable companies are also a relatively small group compared to millions of subscribers and advertisers also affected by ownership rules.

That means there are relatively low costs of organizing cable companies to talk to each other, negotiate a common position on the proposed regulations, and then hire people to contact government officials and argue their case. What I've just described, of course, is an industry association. Cable is represented by the National Cable & Telecommunications Association.
It costs far more for consumers or advertisers to create similar organizations. Advertisers tend to consider themselves part of an industry represented by an industry association, and not the larger group of all businesses that advertise on cable.

There are too many consumers to organize into a single group, even with instant communication. Some Washington groups, like the Consumers Union, do represent consumers and have been active on this issue. But these groups don't represent cable subscribers and their interests in the exclusive way that the industry association represents cable owners.

The difference means the industry probably has more focus, and resources, available to lobby the FCC. The effort to block new regulations included a meeting with top White House officials.

There are More Than Two Sides in This Fight

Groups representing another powerful industry are also in this fight. Chairman Martin says the new cable regulations will increase competition, lowering prices and increasing the range of voices on cable television.

However, Martin separately wants to change a long-standing regulation limiting newspaper company ownership of broadcast television stations. This rule prohibits a newspaper from owning a television station in the same market to ensure there are multiple media voices with diverse views.

Martin accepts newspaper industry arguments that the cross-ownership rule should be relaxed because of competition from new forms of media. The newspaper industry, of course, has its own association to lobby for its interests, the Newspaper Association of America.

Commissioners like Jonathan S. Adelstein, who might agree with Martin on cable, suspect he will use the cable changes to also push for a relaxation of the cross-ownership rule, decreasing competition in newspaper and broadcast markets.

Cross-ownership also evokes a strong response from the public. Consumer groups, such as the Media Education Foundation and Common Cause, are working to keep the cross-ownership rule. But consumer groups also support Martin's proposed changes for cable.

So, perhaps yesterday's collapse was inevitable. This is not a case where just one industry is trying to capture the FCC. Instead, multiple well-organized industries are competing against each other to capture the FCC. Meanwhile, less well-organized consumers are taking different sides depending on the issue in dispute.

Thinking About Buying Cable a la Carte

The Federal Communications Commission is making serious noises about new regulations for cable television, including allowing subscribers to buy channels one at a time. This idea is likely to have strong superficial appeal for anyone paying for channels that they never watch -- a group that may include most cable subscribers.

But, as Joe Nocera points out in his New York Times column, if a la Carte programming becomes a reality, subscribers are likely to regret it on the morning after. He writes artfully about the politics and likely effects of a la Carte, but leaves some larger questions untouched.

The proposal is supported by consumer groups, groups worried about sex and violence, and FCC Chairman Kevin J. Martin. This is one of several major regulatory changes being considered. The FCC is also revisiting rules on cable ownership, access to cable channels for producers of independent programs, and rules barring companies from owning newspapers and broadcast stations in the same market.

But the change in subscriptions would have the most immediate effect on consumers. Nocera does a nice job explaining why a la Carte programming would leave many subscribers paying more than they do now.

Fewer Subscribers Will Increase Cable Prices

Networks charge cable operators a fee based on the number of subscribers. Cable operators can spread the cost of, say, The History Channel across everyone who pays for the bundle that includes this channel, even if many don't watch programs about history. That keeps each subscriber's cost below the amount that would be charged if only those who watch The History Channel subscribed. This is true even for for channels with wide appeal, Nocera reports:

"Take, for instance, ESPN, which charges the highest amount of any cable network: $3 per subscriber per month. (I’m borrowing this example from a recent research note by Craig Moffett, the Sanford C. Bernstein cable analyst.) Suppose in an à la carte world, 25 percent of the nation’s cable subscribers take ESPN. If that were the case, the network would have to charge each subscriber not $3, but $12 a month to keep its revenue the same."

The proposal faces stiff opposition in congress. This is probably because legislators don't want to risk the wrath of voters if predictions like the one for ESPN prove correct.

Do Market Economics Favor a la Carte?

But what is good for cable subscribers and good for congress may not be good economics. A basic principle of market economics holds that people should only pay for things they want. If people have to pay for things they don't want, it creates distortions in the distribution of goods and the use of resources to produce those goods. Consumers end up getting more than they really want of some things, and not enough of others.

This argument suggests we may be getting too much programming about history, and too much programming about sports. (You decide which networks we don't get enough of.)

Sophisticated supporters of a la Carte are likely to make this argument, and it will carry some weight. That is because the argument holds true unless cable programs fall into the category of goods that are exceptions to some general rules of market economics.