Follow-up National Survey of Cable Television Rates and Services

Published by the Government Accountability Office on 1990-06-14.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                       United    States General       Accounting       Office

GAO                    Testimony

For Release              'f'cllss~--p     xL;aticy,al     s;1rl.-e)'    of      2zb;e    Tal2v;SiCE
on Delivery              Rates      and   SerT:ic?s
Expected    at
2:00 p.m.
June 14, 1990

                         Briefing  Statement   of
                         John PI. Ols,   Jr,, Director
                         Housing  and Community      Development                        Issues

                         Before    the
                         Subcommittee     on Telecommunications
                         and Finance
                         Committee     on Energy   and Commerce
                         House of Represencativss

GAO/T-RCED-90-89                                                                           GAO Fnr    r6nfl~   (17‘)
Mr . Chairman                and         ?lembers           of         the         Su’bcommittee:

We are        pieased              to     be here                to        discuss               tne        resuits             of     1;AaG’s just
released            “Tallow-up                   National                  Survey              =f      Zabie           Te?svisiJn                  3atas              37’3
Services”.                  Last         August,            1 testified                         on      the        results             of         olur        first
study--       covering                changes              ;n     cable              rates             and      services               ‘between
December            1986       and        Cctober                1388.               That           study          showed             a 23-Feroent
average           increase               in      cable           subscriber’s                          monthly               rates          for      the          lowest
priced        basic          service.

As you        may      recall,                 a number                of      questions                    and        issues          were          raised              at
last       year’s           hearing,               which          we have                     attempted                to      deal         with          in      our
follow-up            work.                 As requested,                           we’ve            updated              our         study          through
1389,       and       have         collected                data             from             1984      and        !385--in                an effort                    to
further           study           the      effects               of         the      Cable             Act.            In      addition,                 we sought
to     determine             whether               cable          rate             increases                   represented                   one-time
adjustments                 following                 deregulation,                            and      whether                changes              in        cable
system        ownership--which,                             as         you         know,            have        been           frequent--have
affected            cable          rates.                 We also                 analyzed               various               proposals                  for
amending            the       Cable            Act        as well                 as major              options                for     dealing                  witn
cable        industry              market             power.


Let      me briefly                summarize                    the         results              of      our         study.             As I
mentioned,              a key            concern            last             year             was      whether               cable          rates             would
show       further            moderation                   in         1989.              We found                 that         basic         rates              have
continued             to      increase                at    a rather                     significant                        rate.           During              1989,
cable        subscriber’s                      monthly                rates             for      both          the          lowest          priced              and
most       popular            basic            services                    increased,                  on average,                    by      10 percent,
higher        than          the         rate         of    inflation                     for          the      year,           which         was          4 to          5
percent.              I should                 point        out             here         that          since           some          cable          systems
offer        more         than          one      “tier”               of      basic            service,                we again               collected
information                 not         only         on    the         lowest                 priced           tier,           but      also             on      the
level        of      service              that        affected                    the         greatest               number           of      subscribers,
which          we refer                 to       as      the     most            popular              service.                      These             rate
increases                 were          accompanied                       by     small             increases--cne                             and        two
cnannels,                 respectively--in                                tne     average                 njmoer              3f         basic           channels
offered.                  In        addition,               overall                revenue                t3    cable               operatars                  ;er
subscriber,                      which           represents                     the      subscriber’s                         total               monthly            ‘bill
for      all      cable               services                 increased,                    on average,                      by         5 percent,                  rrcm
$25.00          to        $26.36.

Regarding                 systems                changing                 ownership                 between                 1985             and      1989        we did
not      find         any           statistically                         significant                     pattern                 of         higher          basic           rate
increases                 than          those            imposed               by cable               systems                 that            remained               under
the      same ownership.

Looking           at        it       more           broadly--              in         the      3 years               since               deregulation,                       .de
found          average                 increases                of        39 and             43 percent,                      respectively,                          for      the
most       popular                  and         lowest          priced             basic            services,                     and         a 21 percent
increase               in        revenue              per       subscriber.                         During                 this          period,             cable
subscriptions                          increased                by        22 percent,                     and        system                  penetration
(total          number                of        subscribers                     divided             by        the          number             of      homes
accessible                     to      cable)            increased                    from         56 to            58 percent.                          The      lack        of
-lose          substitutes                       to      which            consumers                 can        switch                  is     often          cited           as a
reason          that             the         subscriber                   base         has         not        decreased                      despite
substantial                      rate           increases,                 although                  there           are           other            potential
explanations,                          such         as      improved                  cable          programming.

The      continued                     increases                in        cable             rates            we are           reporting                    are,         of
course,           likely                   to    fuel          even        more             debate            over          regulating                     the       cable
industry.                      For      many,            promoting                    more         competition                          is    a preferred
policy          option                 to       regulation.                      Views             differ,                 however,                 on     the       extent
to     which           potential                    sources               of     competition                        will           be available                      on a
significant                      enough             scale            to     provide                much        competition                          in     the       near
future.                In        our         report            we discuss                    some of                the       major                legislative                and
regulatory                     proposals                 being            considered,                        as well               as various                    policy
options              to     deal             with        cable            industry                 ‘market            power--however                             we have
not       taken           a position                     on what                the         best         solution                  is        at     this         time.             We

                                                                                       2                 ’
believe           that       this        is    a polizy               decision              for        the       Congrass.                ? a n v_
other       hearings              you      have        held,          ,Clr. Cha.:rman,                  haive        explored             these
various           policy          options.

Before          going        into        more        detail,            I want           to       briefly            talk        about        the
methodology                we used            in     conducting                our       study.


We d,eveloped                a questionnaire                         similar           to     the       one       we used           in      our
first          study.         ilowever,              recognizing                 that         FCC had             a legislative
mandate           for      a policy-related                          study       requiring                   similar          information,
with      the      Chairman’s                 concurrence,                   we worked                 closely          with        FCC in
developing               a questionnaire                       that        would         satisfy              both      our        data       needs,
thus      avoiding            duplication                    and      an       undue        reporting                burden         on the
cable          industry.               We have             furnished              the       resulting                questionnaire                      data
to      FCC,      but      they        haven’t             seen       or       had     any        input          into       our     report.

Our      questionnaire                   asked         for      a wide           range            of     rate        and      subscription
data,          including            data       on

          --      basic        cable          service,               which        includes                the      re-transmission                        of
                  local        television                  channels,             but        may also               include           such         cable
                  channels             as C-Span,                 CNN,         ESPN,        and        the       “superstations,”
                  offered           either           as a single                 level            of      service           or     as     two        or
                  more       “tiers”           of      service,

          --      optional              services,              which           inciude            such          features           as remote
                  control           units          and       cable         outlets            for        additional                television
                  sets,       and

          --      premium           service,               which        includes              entertainment                       channels,
                  such       as     Home Box               Office            (HBO)       and        Cinemax,            available                 for      an
                  extra        monthly              fee.
As in       our         first              study,              we obtained                  cable            system                names          and
addresses               from           a data             base       maintained                      by      the         publisher                     of
Television                and          Cable           Factbook,                 a well-known                          i,?dustry                 reference
book.         We sent                  questionnaires                       out            to     a random                   sample              of         1,971            cable
systems           nationwide,                        and        received               responses                      from         1,530          systems,                     a
response            rate             of      almost             78 percent--higher                                    than         last          year's                 74
percent           response                   rate.              An analysis                     of        these          nonrespondents
indicates               several                reasons             for       their              not        responding,                         including                     the
fact       that         3 percent                    of        our questionnaires                             mailed                were undeliverable
by the           Postal              Service.                   Thus,  we believe                            a more                accurate  count     of
systems           unwilling                    to      respond             is         19    percent.                     A further                     analysis                    of
nonrespondents                            indicates               that       the           smaller                systems                were          less             likely
to     respond,               and          that        those         cable             systems               that            did         respond                  contained
86 percent                of         the       total            subscribers                     represented                         in     our         sample                of
1,971       systems.


I would           like           to        now discuss                    more         details               on         the         results                 of         our
study.            During                  1989,           cable      subscriber's                           monthly                 rates             for         the
lowest           priced               basic          service              increased,                      on average,                      by         10 percent,
from       $14.50               to        $15.95.               Rates           for        the        most            popular              basic             service
also       showed               a lo-percent                      increase.                      Between                November                 30,             1986,            and
December               31,           1989,        monthly             rates               for        the         lowest             priced             basic
service            increased                   by         43     percent,                 from        an average                     of        $11.14                  to
$15.95           per         subscriber.                         By comparison,                            the        monthly               rates                for         the
most       popular               basic              service              increased                   by     39        percent.                    I should                    add
that       about             20 percent                    of     the       subscribers                          to     either              the        most
popular            or        lowest            price             service              experienced                       price             increases                     in
these        3 years                  greater              than          60 percent.                        Also,             if         one      looked                at         the
 '84-'89           period,                  on average,                   monthly                rates            for         lowest              and            most
popular            service                  increased               over          65 percent                          (see         attachment).

Cable        subscribers                       received                  additional                   basic             channels                  to        accompany
 the      rate          increases.                        During           1989,            the       number                 of     channels                     available

to      subscribers                   increased                  modestly,                  ‘by one         and         two      cnannels,
respectively,                        for         the         lowest          priced             and    most            popular         ;er-i;;es.
Jverall,                 since        deregulation,                          ‘basi:         channels              a~;a:l~icla             to
subscribers                     to    the         lowest              priced             basic        service             increased,                 on
average,                 from        24 to             31 channels.                        Channels           availa’ble               for
subscribers                     to    the         most          popular               basic        service              3150       inzrease,d,                  on
average,                 from        27     to         34.

Interestingly,                        we found                  that         cable          systems              that      were        regulated                     :n
November                 1986        had     greater                  rate          increases              through             December               1983           than
those          systems               that         were          not        regulated.                 (Twenty-four                    percent             of
cable          systems               were         already                deregulated                  at     that         time.)              Rates            for
the      regulated                   systems                 increased                by    47 percent                  compared              with        a 32-
percent              increase               for         the         nonregulated                   systems.                This        difference                     nay
be explained                     by        the         fact         that          the      average          basic          rate         for      systems
not      regulated                   on November                      30,         1986,         was over               $1.00       higher             than           the
rate          for        regulated                systems.                   By       December             31,         1989,       however,               basiz
rates          for        systems                formerly                regulated                had caught                  up with           the       r2 tes
of      those            systems            previously                      not         regulated.

;ge found                that        53 percent                     of      <able          systems          had         changed          ownershi?
since          1985.             As you                know,          critics              have       charged             that        “trafficking,”
or      the         frequent               buying             and        selling            of     systems,               has      resulted               in
increased                 cable            system             costs            that        must       be     recouped              from        subscribers
through              higher           rates.                  Our        study,            however,              did      not      confirm             this
charge.                  Comparing                rate          increases                  occurring               immediately                 after
systems              changed               ownership                  with          rate         increases              during          the      same
period              in    systems                that         did        not        change         hands,              we found           no
statistically                        significant                      pattern              of     higher           increases              in     the
systems              changing               ownership.

We also              collected                   data         on other                  cable      operations--options,                                premium
services,                 revenue                per         subscriber,                   subscriptions,                       and    cable           system
penetration,                     and        here’s              what           we found:
            --      The          availability                        of        ,options            and        charges           for       FremiJm
                     services                 showed             little             cnange              c,ompared              witn       the     1338         data
                     in        our       prtvious                report.

            --      Average                 revenue              to        cable          operators                 per        subscriber               (covering
                    revenue                  from         all        subscriber                    services)               increased              21 percent
                    over             the      past          3 years,                   from        521.78           to     $26.36.                                         #

            --      During                 1989,          revenue                per         subscriber               increased                 5 percent,
                     from            $25.00          to         $26.36.

            --      Total              cable         subscriptions                            continued               to       grow,         increasing               by
                     22 percent                     since            deregulation.

            --      Also,              the        number             of         homes         accessible                  to      cable         grew      by    14
                     percent.                     Cable          system                penetration                  (total            subscribers               as a
                     percentage                     of      homes               accessible                 to    cable)            increased
                     slightly,                     from         56 to            58 percent.

POLICY             I!ll?LICATIONS

What        are           the        policy              implications                        of    our        study        results?             Because
the      nature                of      basic         cable                service             was altered                  after          deregulation,
it     is        difficult                   to     assess                how much                of      the    rate          increases               that
followed                  is     due         to     the         market             power           of      cable          operators.              However,
many        agree               that         the     cable                industry                has      structural                 characteristics
which            permit              the      exercise                    of     market             power.         Views              on the prospects
for      competition                         in     the         near            future            vary,         and thus              lead  to different
policy             opt ions.                  Chapter                3 of          our        report            discusses              the       major
legislative                      and         regulatory                        proposals               currently               being         considered.
Chapter              4 discusses                         the     pros            and         cons        of     several            policy          options            to
deal        with           cable             industry                market              power,            including

            --       redefining                     “effective                     competition,”                          that        is,   broadening
                     the            definition                  of        which          cable            systems           are       subject     to

                  regulation.                         FCC is                currently                raassesaing                         its         tnree-signal
                  definition,                        and     the            key     questicn                   :s        .&nether              the         definition
                   should          be broadened                             to     include               the         ;rasence                  of     alternative
                  multichannel                        video               providers                 (YPlCS,              33S,           or     second             caole
                   systems).                    If     so,            the        majority                of         cable             systems              would
                  become              subject              to         regulation.

           --     assigning                   FCC a larger                         regulatory                       role.               Instead             of
                   returning                  rate         approval                     authority                   to      thousands                 of
                   localities,                       one     option                would            be        for        FCC to              set      some
                   national              criteria                     for        allowable                    rate          increases.

           --      returning                  control                 to        local          communities.                             In     this          regard,
                   both        FTC and                Justice                   support             greater                 local            control              over
                   cable         rates.                They               questioned                  the           need          for        a uniform
                   national              cable             policy,                 given            different                     regulatory                    needs             of
                   the      localities.

In   summary,               we have                  not      taken              a position                    on        these           various                 policy
options,            nor        have           we made any                        recommendations                                 in     this         report.                  I
might           note,       that             while         competitive                         options                would             seem         the         ideal
solution,                these         tend           to     stress                the         emergence                    of        new,         alternative
technologies.                         However,                  it         is     not        certainwhen                          these             new
technologies                   will           enter             the         market             or     how successful                                they        will          be.
Therefore,                even          if      policymakers                            wish        to        rely          primarily                 on market
competition                 and        removal               of           legal             restrictions                         to     entry,             some          form
of   interim              rate         regulation                         may be desirable.                                  tir.        Chairman,                     this
concludes                my statement.                               We would                be pleased                     to        respond              to     any
questions                you     or          Members                 of     the         Subcommittee                        may have.

ATTACHMENT                                                                                                   ATTACEIMENT

                            Average     Monthly         i3asic         Service        Charce         per     Stibscrlber

                                                  Average             basic      service          charge
                                                        per           subscriber           for:

Date                             Most    popular            service                Lowest         priced      service

12/31/84                                    $9.84                                                  $9.50
                                            (+y- 10)                                               (+.09)
                                          N=j033                                                  N=?f968
                                           (+196                                                   (+I951

12/31/85                                    10.60                                                   10.19
                                            (+. 10                                                  (+. 10)
                                          N='5385                                                 N=T335
                                           (2207                                                    (+206)

11/30/86                                    11.71                                                   11.14
                                            (+.       10)                                          (+.lll
                                           N=T002                                                 N=7995
                                             (+218)                                                 (+218)

12/31/87                                    13.47                                                   13.01
                                             (+.lo)                                                 (+. 10)
                                           N=z706                                                 N=T701
                                            (+227)                                                  (+227)

12/31/88                                     14.91                                                  14.50
                                             (+.ll)                                                 (+.ll)
                                           N=5405                                                 N=5380
                                             (2227                                                  (2227)

12/31/89                                     16.33                                                 15.95
                                             (+.lo                                                  t+. 10)
                                           N=K289                                                 N=??284
                                             (2215                                                  t+2w
Percent          increase
       1988-89                                 9.5                                                  10.0
                                           (+1.4j                                                 (y.5)

       1986-89                              39.4                                                     43.2
                                           (_t1.9)                                                 (+2.1)

       1984-89                               66.0                                                   68.0
                                           (+2.01                                                 (+2.2)

Note:      The table   above contains                   sampling  errors    for the values
presented,     as well    as estimates                  of the number of cable      systems                                (N)
that    would  have responded      had                we surveyed   all  systems.