Originally published June 2014

I bought a bourgeois house in the Hollywood hills

With a trunkload of hundred thousand dollar bills

Man came by to hook up my cable TV

We settled in for the night my baby and me

We switched ‘round and ‘round ‘til half-past dawn

There was fifty-seven channels and nothin’ on

— “57 Channels (And Nothin’ On)” by Bruce Springsteen

 

There’s no question that we want our MTV. And, as the cost of MTV and the rest of the universe of channels has increased over the years, consumers of cable television have made it clear that, at least until recently, they would be willing to shoulder the costs of having the big game or the latest episode of “Mad Men” available at the push of a button. But change is on the horizon, and moves by the country’s largest cable companies may prove that consumers are growing weary of the status quo.

In February of this year, Comcast, the nation’s largest cable company, announced its intent to purchase Time-Warner, the nation’s second-largest cable company. Said Comcast CEO Brian L. Roberts on Feb. 13, 2014:

“The combination of Time Warner Cable and Comcast creates an exciting opportunity for our company, for our customers, and for our shareholders…. We are looking forward to working with [Time Warner CEO Rob Marcus’s] team as we bring our companies together to deliver the most innovative products and services and a superior customer experience within the highly competitive and dynamic marketplace in which we operate.”

Immediately a flurry of protests began, suggesting that a merger would stifle innovation, that cable prices already are rising beyond the rate of inflation, and that the separate-but-very-much-related issue of net neutrality — the idea that the Internet should have the same standards of delivery for any type of use — would disappear, especially given that Federal Communications Commission chair Tom Wheeler has signaled the FCC may allow an end to open Internet rules. That revelation followed a decision by the Washington, D.C. Court of Appeals this past February, in Verizon v. FCC, that struck down net neutrality rules that had been reaffirmed by the FCC in 2010.

Given the size and scope of the Comcast-Time Warner purchase merger and the antitrust concerns associated with such a large market share, the Department of Justice and the FCC will scrutinize whether the sale should go through, a decision expected to come later this year.

So what about the cost of cable?

Given that one of the major concerns about such a merger is the continual rising costs of service, it begged the question: What has happened to the cost of cable in previous mergers? History should tell us that when consolidation has occurred, cable prices have gone way up, and a merger is therefore not in the consumer’s best interest. In addition to addressing other concerns about this merger, I will use this platform to answer the question of cost increases post-merger and the factors driving up cable TV bills.

Plenty of factors have caused the growth of cable TV itself to plateau and even begin to shrink, but two in particular have caused the acceleration: The widespread adoption of services such as Netflix, Hulu, and even the television networks themselves to offer viewers’ favorite programs on-demand, when they want them, “The number of cord cutters – those dropping cable in favor of streaming video – is still a very tiny fraction of pay TV subscribers,” according to Forbes Magazine. Much more worrisome for the cable industry is the loss of its customers to direct-satellite services, such as the Dish Network. While cable still can boast the majority of paying customers, the share of cable TV customers dropped from 63 percent to 55 percent in the country’s 10 largest markets, according to analysts at SNL Kagan.[1]

A history of cable TV

Cable TV got its start in the same way so many other technological breakthroughs have gotten their start: Some guy had an itch that needed a scratch.

One man often said to have built the first CATV system is L. E. (“Ed”) Parsons of Astoria, Oregon…. By the late 1940s, after several other jobs, Parsons was working as a radio broadcaster having acquired a nearly defunct station in Astoria and brought it back to life. It was in this capacity that he and his wife Grace (formerly a journalist) traveled to a broadcasting convention in Chicago. While there, they were able to watch broadcast television for the first time. As the story goes, Grace was fascinated and pleaded with her husband to bring television to Astoria.

He had his opportunity in summer 1948, when KRSC, Channel 5-Seattle, went on the air. After some experimentation, Parsons found that KRSC’s signal filtered through the mountains surrounding Astoria in bands or “fingers” of varying strengths. In fact one of the fingers was accessible from the roof of the two-story apartment building where he lived so he erected an antenna there…. No clear signal was received, however, until he relocated the antenna to the top of the nearby eight-story Astor Hotel, and then connected it to his own building.

It did not take long before the public became curious about Parsons’s work, and so both his home and the Astor Hotel became local attractions.[2]

Parsons made a career of building cable systems throughout the Pacific Northwest while other similar ventures launched around the country. By 1950, 70 cable systems had launched across the U.S., with about 14,000 subscribers. By 1960, that number had increased to 640 cable systems with 650,000 subscribers.[3]

But 1960 and the subsequent eight years put the brakes on cable’s growth.

For even while those in the industry were well aware of ways to expand their businesses — for example, by moving into larger markets, merging with pay-television systems, and selecting from among the most desirable broadcast stations to retransmit — these opportunities were kept on hold by fickle and uncertain policy-making efforts.[4]

The FCC throughout the 1960s increased its regulatory role regarding cable TV, including a rule in 1966 that restricted its growth in the nation’s largest 100 markets.[5]

1968 marked the beginning of a turnaround, however. Called the “Blue Sky” era by cable pioneers, the start of this era, like so much else in America at the time, was defined by upheaval.

Basically, three sets of FCC rules enacted between 1968 and 1972 would enable the rather rough transformation of CATV into cable television as we know it today: the 1969 Report and Order on Cable Television, the 1972 Report and order on Cable Television, and the 1968 Report and Order on Pay-Television. The cumulative effect of these rule-making efforts was at first to tighten the FCC’s grip on cable television’s growth and then subsequently to loosen that grip quite a bit (though not completely). As a federal agency and part of the executive branch of the US government, the FCC’s composition and regulatory temperament echoed the shift between the Johnson and Nixon administrations — the latter leaning heavily toward deregulatory policies in various spheres.[6]

These reports brought requirements to produce local programming, which “ended up imposing a strikingly heavy logistical and financial burden on the industry”[7] (the 1969 report); “opening the cable business to free-market competition”[8] (the 1972 report); and the entry into pay television, with the creation of the Green Channel, which later changed its name to Home Box Office. HBO was actually banned from cable systems outside of New York due to the 1968 report, and remained so until 1977, when the Supreme Court reversed those rules[9].

At the same time, the courts were also dealing with what cable systems charged their customers.

In one important case, the State of New York was prohibited from regulating rates for pay-cable. In 1974, the FCC had reiterated its position that pay-cable prices were not to be controlled by any level of government.

Nonetheless, in March 1976, the New York State Commission on Cable Television declared its authority over pay-cable fees. A lawsuit quickly followed. A federal district court, in 1977, enjoined the state’s action, finding that the FCC had preempted the field.

An appeals court agreed and the Supreme Court declined review. The FCC’s authority in this area trumped state and local rules.[10]

Cable bills have been a cause of stress (for consumers) and profit (for cable owners) ever since. Two subsequent acts of Congress, one in 1984 and the other in 1992, sought to clarify cable companies’ responsibility to consumers, particularly in light of the growing number of acquisitions of mostly smaller, often family-run outfits by larger systems, creating centralized companies known as multiple-system operators, or MSOs. As such, “MSOs were growing wealthier and more powerful almost by the minute.”[11] With the 1984 Cable Act:

Cities gained some control, at least in theory if not in practice, over programming “decency” standards — an issue on the public’s mind since some cable networks already were showing some mildly “adult” material. But the Act ultimately did much more for the increasingly powerful cable industry. It freed operators from most types of control at the municipal level and protected their existing operations from prosecution for all but the most egregious forms of negligence or business misconduct. And it gave them the go-ahead to increase rates — which they did, extensively, over the coming years….

Ultimately, consumers would be hurt the most by the 1984 Act — something that federal legislators would start trying to address almost immediately following its passage and culminating in the 1992 Cable Act.[12]

The 1992 Cable Act, led by then-Sen. Al Gore, created a set of rules that used rates in competitive markets as benchmarks for cable pricing, roughly 10 percent lower than prevailing rates, and “primarily sought to control rates for basic tier service,”[13] but exempted pay channels and pay-per-view programming. Digital cable, which at that time was still in its infancy, also escaped regulation.

The FCC also washed its hands of regulating cable prices:

Your local franchising authority (LFA) legally may (but is not required to) regulate the rate your cable TV provider can charge for basic cable service. The rates you pay for other cable programming and services, such as expanded cable channel packages, premium movie channels and pay-per-view sports events, are set by your cable TV provider.

Mayhem ensued when the rules took effect.

The actual cutbacks produced an industry-wide grimace. Operators called them unreasonable, even draconian. Worse still, as operators began adjusting their prices in response to the new law, consumers and regulators watched in shock and bewilderment as rates, instead of coming down, began to climb. An FCC survey of rates between April 5, 1993, and September 1, 1993, showed an average decrease in regulated rates of 6 percent, most of which came from reductions in equipment rentals.

But, for the top fourteen MSOs, 31 percent of subscribers experienced rate increases following adoption of the new rules. [14]

Congress has not approached the regulation of cable pricing since.

 

How the little fish have grown bigger. And bigger.

While the big four (likely soon to be big three) serve roughly 45 percent of the U.S. population, the coverage areas, particularly in large metropolitan areas, show that Comcast and Time-Warner hold monopolies in large swaths of Los Angeles, New York, San Francisco, Houston, Phoenix, Chicago and Atlanta, as well as many other mid-sized cities, including Seattle and Portland.

Will cost be a factor in this merger?

Which brings us to today. In its first hearing before the Senate Judiciary Committee, Comcasts’s vice president David Cohen told members that consumers would not see an uptick in their cable bills.

“I can make you and members of this committee that one absolute commitment, which is there is nothing in this transaction [emphasis mine] that will cause anyone’s cable prices to go up,” Cohen said. “Between the synergies in this deal and whatever marginal additional leverage we might have, certainly in the equipment supply and purchasing, whatever economic benefits generated will ultimately inure to the consumer.”

Cable bills were the primary concerns senators put before Cohen at that hearing, and with good reason. “Everything else in consumer technology is getting more affordable every year — everything except communications services,” said Glenn Derene, electronics editor of the Consumers’ Union, publisher of Consumer Reports magazine.

But does history back Cohen up? Let’s take a look at the numbers:

 

The methodology I used compared basic, non-digital expanded cable services from 26 markets across the United States where mergers and/or acquisitions had taken place since 1995 by one of the four largest cable companies: Comcast, Time-Warner, Charter Communications and Cox. Because digital delivery had not yet been introduced in most of these markets early on, in the interest of comparing apples to apples I chose not to include that service in my assessment, though it is now in the majority of subscribers’ homes, and the method of delivery for broadband and voice services.

Using the Television and Cable Factbook (Warren Publishing), an annual trade publication that collects details such as coverage area, channels offered, pricing tiers, and ownership information, I looked at cable prices on the year a merger took place, then looked at cable prices for the two years previous and the two years following to see which direction, if at all, prices had gone.

Did the results bear out my hypothesis? Sometimes, but not often. As a quick breakdown, of the 26 markets I surveyed, 13 — fully half — saw no change in their rates. Eight of those markets increased, some markedly, and three actually saw price decreases. However, in nearly all cases, it costs more to have cable in your home today, wherever you live, than it did when most of these mergers took place. This data also does not take into account the hundreds of smaller cable companies that mostly exist outside of the major metropolitan areas served by the big four.

Keep in mind also that because digital cable subscriptions are now the norm, the prices shown on the chart are not necessarily what a consumer will pay today for pure cable. Depending upon the market, digital adds as little as $7.95 to a monthly bill in a place like Brunswick, Maine, and as much as $31 in Chicago[15]. Yes, the gap is that big.

I also looked at the price of cable in three countries outside of the U.S., for the sake of comparison. Here’s a snapshot of three countries not so far from us either geographically or on the media landscape:

• Alberta, Canada: $57/month for digital cable.
• London, England: ~$36/month for digital cable.
• Mexico City, Mexico: ~$40/month for digital cable, voice and 12 Mbps broadband, with negligible increases for higher speeds. Comcast currently offers speeds between 15 and 20 Mbps.

Anatomy of a cable bill

So what’s making cable bills go up? Let me count the ways. Since, as I stated earlier, the FCC will only allow basic cable to be regulated, that price is often static from year to year, or increases very slowly. But there’s much more:

• Digital cable: Starting in the 1990s, cable systems began moving from the traditional coaxial cables, or analog streams, to a digital stream using fiber optics. Fiber optics are faster, hold far more data, and display at higher resolutions. And, of course, it costs money to build the infrastructure.
• The “Triple Play”: A big benefit of using digital cable is that high-speed Internet and phone calls using Voice Over Internet Protocol (VOIP) share the fiber’s bandwidth. Signing up broadband customers is the holy grail of customer acquisition today, and a big reason why Comcast is willing to spend $45 billion on Time Warner.
• Lack of competition: Most larger markets today — Philadelphia being a notable exception — either do not allow or do not have the infrastructure for more than one cable company. In Seattle, for example, some neighborhoods can use a service other than Comcast, but Comcast does not serve those areas. “Still, broadband and wireless services have become so important to our business and personal lives that most people are willing to pay up, even in the face of high prices driven in part by a lack of competition in the broadband and wireless markets,” according to Time Magazine. Many cities and states have also outlawed a competitive cable market, in part due to legislation written by cable industry lobbyists.
• Equipment rentals: Cable and other utility companies will lease the equipment such as modems and set-top boxes that are necessary to bring their services into their customers’ homes. This is no different from what phone companies did for decades, but I can recall stories of people who had the same rotary phone for decades — and it cost them thousands of dollars over the course of a lifetime.
• Licensing fees: ESPN is free, right? Well, no. Sports networks charge cable providers a premium to be allowed on their systems, from $1.24 per subscriber for TNT to nearly $6 for ESPN[16]. In fact, it’s not just consumers complaining about the cost of ESPN’s per-household fees. In 2011, Liberty Media CEO Greg Maffei, which owns such entertainment channels as the Starz network, told the Wall Street Journal that because of the constant uptick in cost of sports networks, his network “could suffer if the basic-tier programming becomes too expensive.”
• Retransmission fees: The 1992 Cable Act allowed local TV stations to charge cable companies to retransmit their broadcasts. The fees have turned into a multi-billion dollar windfall for these stations and their owners (often multi-market entities themselves). According to Forbes Magazine, “SNL Kagan estimates revenue of roughly $3 billion in retransmission fees this year and predicts that will surpass the $6 billion mark by 2018.”

The ramifications of the merger of these two behemoths

While cost on the viewership side of this merger is certainly a factor, it’s not the only factor, or even the biggest. What cable companies charge for high-speed Internet can also be a barrier to equal access, says telecommunications expert Susan Crawford. She believes that broadband access today is the engine for innovation:

Truly high-speed wired Internet access is as basic to innovation, economic growth, social communication, and the country’s competitiveness as electricity was a century ago, but a limited number of Americans have access to it, many can’t afford it, and the country has handed control of it over to Comcast and a few other companies.[17]

Crawford told Time Magazine that broadband access is slower and more expensive in this country, with far inferior service.

“In Seoul, when you move into an apartment, you have a choice of three or four providers selling you symmetric fiber access for $30 per month, and installation happens in one day,” she said. “That’s unthinkable in the United States.”

Crawford holds a special contempt for Comcast in particular. “Even as the Internet was becoming the world’s general-purpose network, the merger would put Comcast in a prime position to be the unchallenged provider of everything — all data, all information, all entertainment — flowing over the wires in its market areas,” she wrote of the company’s purchase of NBC/Universal in 2011, a deal that went through despite heavy regulator scrutiny.

Then there’s the issue of customer service. According to Consumer Reports, “Comcast came in 15th out of 17 pay-TV providers for customer satisfaction with TV service, with an overall score of 59 out of 100. The company had low scores for value and customer support. Its proposed merger partner, Time Warner, did no better, ranking 16th overall for TV service with an overall score of 58.”

Further, the conflict of interest in the approval process can’t be overlooked. Comcast spent $18.8 million on lobbying in 2013, and $3.2 million thus far in 2014. Its 2013 expenditures are only slightly lower than what the company spent in 2011, the year it bought NBC/Universal: $19.6 million. And, as Politico’s Tony Romm reported, “even before announcing its plans for Time Warner Cable, Comcast had donated to almost every member of Congress who has a hand in regulating it. In fact, money from Comcast’s political action committee has flowed to all but three members of the Senate Judiciary Committee.”

When the Senate panel heard Comcast and Time-Warner executives on April 9 about the proposed merger, its members touched on issues of net neutrality and networks’ access in the channel lineup, but most of the three-hour discussion centered around pricing. Clearly it’s an issue. Consumers feel stuck with what is, in most cases, a local monopoly on their cable TV and broadband.

Should the merger be allowed to proceed, the Internet pipeline in most of our major metropolitan areas will be in the hands of one company. Given the much more serious issue of net neutrality, which Reuven Carlyle (D–36th), a representative in Washington State’s legislature who was named in April as one of the 13 tech-savviest legislators in the U.S., believes should be the single issue that deserves scrutiny, a few bucks more on a cable bill seems like small potatoes.

But people notice when their bills go up year after year without any noticeable change in quality of service. And when it comes to content, they have more options — and more control over those options — than their 570 channels and nothin’ on. Yet as I noted above, when Comcast’s David Cohen told the Senate panel, “There is nothing in this transaction that will cause anyone’s cable bills to go up,” he may be right. The data suggests there’s a 50 percent chance he’s telling the truth. And in his defense, per-subscriber cost increases from networks or local broadcasters may be out of Comcast’s control. Yet with so much at stake in this $45 billion transaction, it makes me wonder if our lawmakers are not asking the right questions.

[1] “U.S. Multichannel Subscriber Update and Programming Cost Analysis,” Robin Flynn, SNL Kagan, June 2013.

[2] Television in the Multichannel Age: A Brief History of Cable Television. Megan Mullen, Blackwell Publishing, 2007, pp. 33-34.

[3] Ibid., p. 41.

[4] Ibid., p. 60.

[5] Ibid., p. 67.

[6] Television in the Multichannel Age, pp. 93-94.

[7] Ibid., p. 95.

[8] Ibid., p. 100.

[9] Ibied., p. 107.

[10] Blue Skies: A History of Cable Television, Patrick R. Parsons, Temple University Press, 2008, p. 361.

[11] TV in the Multichannel Age, p. 144.

[12] Ibid., pp. 148-9.

[13]Blue Skies, p. 594-595.

[14] Blue Skies, pp. 594-595.

[15] Television and Cable Factbook, Warren Publishing, 2014

[16] “U.S. Multichannel Subscriber Update and Programming Cost Analysis,” p. 3.

[17] Captive Audience: The Telecom Industry and Monopoly in the New Gilded Age, Susan Crawford, Yale University Press, 2013, p. 2 (Kindle edition).