Competition is Up—and So Are Cable Rates

One of the most cherished assumptions about a market economy is that competition drives down prices for goods and services. Widespread availability from numerous providers guarantees low prices, the conventional wisdom has it.

Satellite broadcasters have recently won the right to retransmit local signals. Video rentals are cheaper and more plentiful than ever. DirecTV, the most successful of the direct-broadcast satellite operators, had a record month in December, with 225,000 new customers signing on. So why are cable TV rates increasing almost twice as fast as the Consumer Price Index?

Part of the rate increase can be legitimately attributed to system upgrades necessary for cable providers to offer Internet services and other options. Cable executives claim that they are keeping a lid on runaway price increases. Mike Luftman of TimeWarner, with 13 million cable subscribers, says self-imposed rate restraint "reflects a sensitivity on our part to our customers' reaction to price increases."

Nonetheless, from June 1998 to June 1999, cable TV providers raised their rates faster than most American businesses, according to a new study released by the Federal Communications Commission: 3.8%, almost two times the 2% increase of prices overall. The year before that, rates went up by 7.3% during a time when the CPI rose only 1.7%.

After the implementation of the Telecommunications Act of 1996, which was intended to spur competition, the FCC stopped regulating the cable industry. "If history is any guide, rates will spike up again when policymakers are not watching as closely," said Gene Kimmelman, co-director of the Washington office of Consumers Union. In the US, 67 million households get their TV via cable, as compared to 14 million who subscribe to other services.