August 28, 2009 11:45 AM

A Funny Thing Happened . . . Part 2

Meanwhile, . . . back at the ranch . . . given the potential for inter-governmental "enforcement competition", it is helpful to look at what the FCC's existing longitudinal data sets are showing regarding the performance of markets that, unlike the wireless applications market, are firmly under the jurisdiction of the Commission.  Does the FCC have information that could lead a "fact-driven" agency competitor (like the Antitrust Division or the FTC) to believe that the Commission has any "infra-marginal" markets that might look like good "acquisition targets?"

The following slide was presented by the Media Bureau to the FCC at the Commission's first open meeting at the beginning of this year.  This slide graphically illustrates the price performance of several different communications services from 1995 through 2008 vs. the Consumer Price Index ("CPI").  In the relevant time period, the CPI for all products and services (including food and energy) increased by about 38%.  During this period, the price of most major communications services--including mobile wireless service--declined in absolute terms, not just relative to the CPI.  Every service, that is, except cable television service--which increased by about three times the rate of inflation (122% vs. 38% for the CPI).   The Commission attributed this poor performance to a lack of competition in the market for subscription TV services.  Below is "Slide 5" of the Media Bureau's presentation on January 15th, and was based on data presented in the Commission's Report on Cable Industry Prices ("Cable Price Report"), which was released on the following day.
 So, could the FTC and/or the Antitrust Division sense an opportunity to expand their own jurisdiction?  Well, since the FCC's wireless focus seems to be on vertical integration between handset providers, wireless data applications providers (or at least one provider), and wireless service providers, does the Commission's cable data tell us anything about the effect that vertical integration (with set-top box providers and programmers) has had on the relative poor performance of cable prices?  As a matter of fact, the Commission's data does shed some light on the degree to which vertical integration is responsible for the poor performance of the cable market.

First, if equipment integration is taken into account (the fact that you can only "rent" set top boxes, and you can only rent them from the cable provider), cable's performance is much worse--in consumer welfare terms--than the monthly service price indicates.  The FCC actually factored in the costs of equipment rentals plus the cost of expanded basic cable (the service most consumers purchased) to come up with a measure called the "weighted average" cost of cable service.  This number, for the 1995-2008 time period, shows an increase in absolute terms of 163%.  Cable Price Report, paragraph 10.  See Chart 3 of the Cable Price Report below.

Weighted Average Cable Price and the CPI, 1995-2008.JPGSecond, since most cable MSOs also own programming, it is helpful to understand the impact of spiraling programming prices on cable price increases.  In Chart 7 in the Cable Price Report, the Commission attempted to measure the substantial effect of increased programming prices as a component of the overall increase in cable service prices over the past three years.

Even this chart, though, underestimates the effect of MSO ownership of programming on price performance in the cable TV market, because any historical measurement cannot accurately demonstrate the price effects of competition foreclosure on the markets in question.  Since integrated MSO incumbents choose to deal primarily, if not exclusively, with other MSO incumbents for the best programming--even when the MSO that owns the programming does not compete in the territory for which the competitor seeks the programming--competitive wireline providers of video service (plus high speed Internet and voice) are frequently at a competitive disadvantage relative to the incumbent cable operator.  So competitors, including telecom carriers (both ILEC (AT&T and Verizon) and CLEC (Grande Communications, Knology, RCN)) and satellite video providers, are frequently at a disadvantage for access to critical content--especially regional sports programming.  This issue was covered in a previous post, but bears repeating, as just this past Friday (August 13th), AT&T filed a Complaint with the FCC against Cablevision alleging that Cablevision was refusing to provide access to high definition programming for regional sports teams owned by Cablevision, or its MSG affiliate.  The AT&T Complaint is nearly identical to a Complaint also filed against Cablevision by Verizon in early July.

It's pure baseless speculation on my part, but given that no group of humans--government, not-for-profit, or commercial--is immune to the instinct to compete, it could be that the Commission's foray afield into the wide, wonderful world of mobile wireless smart phones could attract some friendly competitive interest from other government agencies.  It wouldn't be that surprising to see some ambitious public servants in these other agencies looking to acquire a little more jurisdiction of their own.  And what could be more tempting than to "poach" jurisdiction over the promotion of competition in an industry that the FCC has been tasked with promoting, but has--so far--tended tended to ignore.  


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