Cable Tv: For A Better Picture, Try Competition

Bob Friedhoffer, a professional magician, has nothing on Manhattan Cable TV when it comes to making things disappear. Static obscures the broadcast channels that he gets via cable, especially the lower numbers. Channel 2, the CBS Inc. affiliate in New York, is "painful to look at," he says. "I get better picture reception on my radio." His prescription for cable television: "First, a big sledgehammer."

That's a bit overheated. Most subscribers to Manhattan Cable TV and other systems around the country have decent service. A recent Consumer Reports readers survey found that three-quarters were very or fairly satisfied. Still, plenty of people are squawking about high prices and poor service. And that has caught the ear of lawmakers, who know that Americans take few things more seriously than television.

So far, though, the debate over cable TV has produced a picture as fuzzy as the one on Friedhoffer's screen. Every couch potato has an opinion on cable TV. And so does every lobbyist for a phone company, TV network, movie studio, or newspaper, because the cable TV fight is pivotal to a bigger battle over who owns and transmits information and entertainment into America's homes.

What's the answer? In a nutshell, more competition. Monopolies made sense when communications networks were specialized in function and too expensive to duplicate. No more. The technologies that underlie telephones and cable TV are converging. And it's becoming cheaper to open new channels to the home via fiber-optic lines, satellites, and wireless systems that resemble cellular-phone networks. So bust the cable monopolies, and the telephone monopolies as well. With all obstacles removed, homeowners early in the next decade could receive TV on a foot-square satellite dish. Or plug their TV into an upgraded telephone line. Or hook up to the cable operator. Or even get TV the old-fashioned way, by broadcast. Meanwhile, phone calls could arrive via the phone company, cable TV company, or wireless network provider.

Healthy competition isn't an automatic result of deregulation, as recent history richly demonstrates. Since Congress deregulated rates for most operators at the end of 1986, cable companies have had the field virtually to themselves. From then until October, 1991, the government's cable TV price index rose 53.4%, more than twice the 24.3% overall rise in consumer prices. Consequently, the House is solidly behind reregulation, and Senate sponsors are seeking enough votes for reregulation to override a Presidential veto.

But rate regulation is at best an interim solution. It conjures up a cumbersome bureaucracy and leads monopolists to do just enough to placate regulators. In contrast, if cable operators were disciplined by competition, they would have to do their best job or risk losing the business. "Your gravy train would be gone," says Bruce L. Egan, an economist at Columbia business school.

The issue, then, is how to foster that kind of competition. Here's one way, a plan that lowers fences around markets while protecting consumers during the transition to an open market for home delivery of information and entertainment. This plan applies to all competitors but focuses on phone companies, whose rivers of cash flow and wires to nearly every home in America make them naturals to enter the TV business.

--Allow phone companies to carry TV programming over their networks. The Federal Communications Commission proposes to let phone companies provide a "video dial tone," by which they could relay to customers a menu of TV programs from other sources. The FCC plan would give viewers more choices: Cable operators now often refuse to carry any program that might steal viewers from another program that they own or control. Phone companies, in contrast, would be "common carriers," obligated to transmit for a standard fee any program that someone wants to send.

But providing a video dial tone would require billions of dollars in new optical fibers and electronics, and some phone companies say they're not willing to do it if all they can do is transmit programs. The real money, they say, is in owning those programs. So:

--Let phone companies own their own programs. Phone companies might turn out to be flops at creating or buying shows, but they should be allowed to try as long as captive phone customers don't have to foot the bill. Such subsidies would be easy to detect as long as the Norman Lear wannabes are sealed off in subsidiaries. To make sure that phone companies have plenty of channels available for outside programmers, there should be limits on how many channels they can fill with their own shows.

--Lessen government's role in phone companies' investment decisions. Under traditional rate-of-return regulation, governments have an incentive to discourage phone companies from spending heavily on wires that can carry television. Why? Because phone companies are allowed to earn a certain profit percentage on their investments in plant and equipment, and every dollar spent on infrastructure inflates the rate base used in the profit calculation. Given a fixed rate of return, more investment means higher rates.

Wisely, many states and the federal government are moving toward capping prices rather than profits. In a pure price-cap regime, regulators don't care how much phone companies invest or earn in profits as long as they meet benchmarks for price and service. Economists agree that price caps aren't ideal, but during the transition to full competition they're the best way to protect consumers while modernizing networks.

--Open the way for cable companies to offer telephone services. Delivering phone calls would be relatively easy for advanced cable systems that have lots of fiber capacity and two-way communications. Others will take longer. Letting cable companies into the phone business would partially compensate them for the loss of their monopolies. It would give consumers another choice in telephones. And it would put the phone companies on notice that they can't overcharge their customers with impunity.

--Ease municipal franchise requirementsfor providing video service. Municipal franchises have become unholy alliances: Cities get lucrative fees, and officials who award franchises may get fat campaign contributions. In return, cable operators get impenetrable monopolies. Congress should require cities to justify any rejection of applicants for additional franchises. If cities still balk, abolish franchise requirements and let cities make up some of the lost revenue with a small tax on video transmission.

--Investigate whether cable operators are violating antitrust laws by withholding popular programs. Cable operators have a huge advantage over new entrants, because they can withhold access to such mainstays as CNN, HBO, Showtime, and MTV that they own or control. Requiring cable companies to sell programs to competitors could violate their First Amendment rights. Still, it seems fair to examine whether the cable industry is engaging in illegal monopolistic behavior. This is mainly a short-term issue, since rivals should eventually be able to create their own CNNs and MTVs.

It may take a decade or more before all barriers are breached, but in time these measures will give competition a real chance to produce lower prices, better service, and a good picture on Channel 2 for Bob Friedhoffer.

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