Opinion Editorials

The Telecommunications Act of 1996 was hailed as landmark legislation that would increase competition among telecommunications service providers, lower prices, spur the development of new services, and achieve the deregulation of the telecommunications industry.

That was then; this is now. It's now been three years since the Act was signed into law, and its failure has become appallingly obvious to all but its diehard loyalists.

The first thing the Act's critics point to is the Act's failure to stimulate multichannel competition as a check on cable rate increases. Monthly rates for cable TV have increased a whopping 21 percent since the passage of the Act, with last years' rates increasing four times as much as the increase in the overall Consumer Price Index. At the same time telephone companies, discouraged by Telecom Act-generated rules that crippled them from offering competing multichannel video service, exited the cable TV market to compete in the long-distance telephone market (from which they have been shut out by another crippling set of Telecom Act-generated rules).

With telco-cable competition all but history and with deregulation of most remaining cable rates set to occur next month, Congress faces a urgent choice: should we try to control cable rate increases by making multichannel competition more effective, or would we be better off imposing new rate regulations on cable instead?

Thankfully, the answers to these questions are easy. Due to the federal government's checkered on-and-off approach to regulating the cable industry, we can look to evidence of how cable performs with, and without, rate regulation and the effect multichannel competition has on cable rates and service. What we learn from this evidence is that multichannel competition effectively constrains cable rates without affecting service. Rate regulation, on the other hand, has precisely the opposite effects: it's largely ineffective in constraining rates, and it substantially hurts cable's ability to offer improved service.

To see why this is so, let's take a closer look at the multichannel video market.

Currently, the most potent marketplace challenge to cable TV is posed by Direct Broadcast Satellite service, or DBS. DBS systems are the fastest-growing consumer electronics product in history: the number of DBS subscribers jumped an astonishing 97 percent in 1996 and another 30 percent the following year. These increases were driven by the advent of small dish antennas and by improved digital technology, which enables DBS to offer better picture quality, expanded channels capacity, a sophisticated navigation device, CD-quality sound, and an augmented array of pay-per-view offerings.

On the downside, DBS's inability to offer local TV stations as part of an integrated service package is cited as its chief competitive disadvantage vis-a-vis cable TV. Nevertheless, DBS remains cable's principal competitive nemesis, with subscribership estimated to more than quadruple by the year 2000.

The effectiveness of competition as an antidote to cable rate increases was demonstrated to the Senate Commerce Committee last year. Testimony before the Committee last year showed that head-to-head cable TV competition between TCI and Ameritech in one community caused TCI to increase the number of channels its system offered while cutting the monthly price almost in half. Nor was this an isolated incident. TCI's rates also went down in other communities where Ameritech offered a competing cable service, as did rates charged by Comcast, Cablevision, MediaOne, and Jones Intercable when Ameritech began competing with their incumbent cable TV systems.

I'll acknowledge that those rate reductions were brought about by competing cable systems, not competing DBS systems, which have service and technical limitations that cable systems don't. So it's legitimate to ask whether we can be sure that competing DBS systems will constrain rates as effectively as competing cable TV systems do.

The honest answer is that we can't be absolutely sure --but we don't have much choice except to try. Thanks again to the perversity of the 1996 Telecom Act which caused the telephone companies to leave the video market, like it or not DBS has become the fastest pony in the multichannel video horse race. Fact is, we have little choice but to place our bets accordingly.

Why not just take what seems to be the sure road by reregulating cable TV rates instead? Because rate regulation doesn't work. Here again, we can speak from experience, which clearly shows rate regulation's ineffectiveness in either controlling rates or in insuring consumer satisfaction with cable service.

Want proof? Well, look no farther than the FCC's fifteen (that's right, fifteen) rate regulation orders. Although collectively they make a fine doorstop, they aren't nearly as effective in controlling cable rates, which have soared 21 percent since the passage of the 1996 Act. Even worse, the effect of rate regulation was to make many of these rate increases regressive, because rates for optional channels of cable programming went down while rates for the lowest-price basic tier of service went up. So, thanks to rate regulation we've actually managed to increase the rates of the least-affluent cable subscribers who purchase only a "lifeline," basic-tier service.

Experience also shows that rate regulation produces similar unintended results on cable's ability to upgrade service. In 1992 the FCC reduced cable rates 17 percent and imposed arbitrary limits on subsequent rate increases. Investment in programming and facilities upgrades was immediately and sharply curtailed: total capital investment plunged from $8.17 billion in 1989 to $1.9 billion in 1993. Growth in cable subscribership slowed, and customer service tanked. In contrast, with the prospect of most cable rate regulation sunsetting this March, capital flow from debt, equity and other sources has increased 25 percent each year since 1996.

Nor is this something we would want to endanger right now. The cable industry is aggressively increasing digital channel capacity and rolling out new high-speed Internet service through cable modems. Capital is the lifeblood of this investment. With only two percent of all homes in America having access to these services and with the FCC holding back incumbent local telephone companies' efforts to offer them, ill-conceived cable rate regulation must not be allowed to block cable the way ill-conceived FCC policies are currently blocking telcos.

So, experience gives us clear answers to the two critical questions about cable TV policy: Does multichannel competition restrain cable rates? Yes, it does. Is regulation a good substitute for competition? No, it isn't.

I hope we remember this as Congress begins to deal with satellite and cable TV issues in this session. I hope just as fervently that we will also remember it when Congress decides it's time to clear the wreckage of the 1996 Telecom Act off the Information Superhighway.