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The Cable Industry: Do Not Pass Go, Do Not Collect $200.

The cable industry is approaching an inflection point that will determine the future of both television networking as well as cable provision; both of which are main sources of revenue for companies like Time Warner Cable.

Cable providers offer services with high fixed costs. Additionally, they function in a business capacity with networks like ESPN and Disney, both of which can be seen as relative monopolies with high pricing power. These networks are in high demand by pay-tv consumers and as such are able to charge cable providers exorbitant rates. As a result, cable providers have resorted to a few strategic behaviors at the peril of the consumer, passing on increased fixed costs in the form of bundling. How this works is simple; while some networks are very expensive for cable to provide, others are cheap. In order to offset the costs of the staple television networks (ESPN and Disney), cable providers offer consumers more channels (that are inexpensive to provide) than they could possibly want in exchange for a high bundled rate. As a result, the average cost per channel decreases.

Further, cable companies have incentive to mitigate further average fixed costs by installing cable in every home in every neighborhood. With the relevant infrastructure already housed throughout given areas, cable companies have minimal marginal cost for installing additional cable boxes on existing lines. With parallel reasoning, cable companies also offer internet connection for homes, once again bundling products together. With bundled products twice over, cable companies offer two products in high demand by consumers with relatively inelastic demand. But with more consumers on the same lines, during times of high use the quality of service is severely impacted. Internet slows and cable streaming of on demand services crawls.

Consequently, cable companies function more generally as monopolies; qualifying the industry as an oligopoly would be a generous categorization at best. As proof of their industry strength and pricing power, the price of expanded cable bundles has grown at a rate more than twice inflation every year for nearly two decades. Further, consumers have begun to take notice. Analysts predict that either cable operations will have to discontinue certain programmers in order to lower costs, or people might start disconnecting. More than half of American households would prefer to pay individually for channels they watch. Cable cutting households increased 150% in 2007. Needham & Company estimated that if all TV content were unbundled, the TV industry would take a $70 billion hit, and just 15-20 channels would remain.

While the FCC proposed rules last month to limit networks’ ability to leverage high prices from distributors, other private companies have taken notice and work to provide more wallet friendly viewing options for consumers. Companies like Amazon and Netflix offer cheaper viewing options. While they compete in movies and TV series and not channels more generally, the two services could be viewed as substitutes for the budget conscious consumer.

However, as these services run on broadband internet provided by cable companies, they too suffer the consequences of monopolistic strangle hold, once again passing prices off to consumers. Cable providers have hit both companies with steep impositions, saying, “If you steal our business from network provision, we’re going to slow bandwidth spent on your sites.” With staggered streaming speeds, Netflix, etc. had no choice but to pay up.

Herein enters another fairly unrelated competitor; responding to cable’s over stretched infrastructure and bandwidth manipulation that both slow internet speeds, companies like Verizon FiOS and Google Fiber have begun providing blazing fast internet with the most recent technology: often for free. Google Fiber specifically doesn’t care about making money from internet provision, as one author put it, “They have enough money already.” Rather, they care about the state of the internet. With slow internet, ultimately, Google products will be less responsive.

Cable companies reacted by taking in extra overhead costs; they’re building greater infrastructure to support faster internet. As a result, cities like Kansas City have benefitted most from increased competition. Their internet is currently the fastest in the country.

So, what is to come? Cable is continuing the fight to maintain their monopoly. Rest assured, they have interest groups badgering the FCC to restrict networking leverage. Further, we may see continued impositions on the Neflixes of the world. In addition, cable companies continue to merge, with recent speculations of Comcast (who owns network NBC Universal) purchasing the #2 cable provider, Time warner Cable.

As for my story, it culminates with President Obama. He has called into question the potential for internet provision to be classified as a utility, which would surely regulate what they can charge, passing benefits to consumers.

In the mean-time, Time Warner Cable and companies like it are competing within the monopolistic industry through local network provision, providing local news and sports to more rural areas with smaller profit margins across the country. Further, they’ve increased employment in an attempt to provide greater service while appealing to the American who believes his peers need greater employment. Regardless, I think the way Americans consume pay-tv and internet is about to change at the expense of cable companies, finally terminating a long and overplayed game on monopoly. Stay tuned.

One Comment

  1. strauss strauss

    In my post on the unraveling of the cable bundle due to the success of web-based streaming services I also speculated on the inevitable changes to the cable bundle as more and more consumers choose not to purchase cable, but I did not consider the role of internet suppliers in my forecasts. I too hope that the future will bring larger consumer surplus, but it seems that recent developments with the FCC are ominous, despite what Obama has said. Ultimately he has little say in what they determine, and unfortunately he appointed the former head of Comcast to head the FCC. Ideally internet will be treated as utility (in some ways it could be viewed as a modern-day interstate system) and invested in as such by the federal government, but unfortunately the average consumer does not have as much say as ISPs pressing for fast lanes and the end of net neutrality.

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