Cable Television
CABLE TELEVISION
The cable television industry provides multichannel video services to approximately two-thirds of all television households in the United States. In addition to offering different tiers of programming, many cable systems offer ancillary services, such as high-speed Internet access and local telephone services. There are approximately 10,700 cable systems in operation in the United States. Many companies own more than one system, and are known in the cable industry as multiple system operators (MSOs).
Major Players in the Cable Industry
Ownership of cable television systems has changed considerably since 1980, resulting in a rapidly consolidated industry. Five companies dominate the cable industry. AT&T, Time Warner, Comcast, Cox Communications, and Adelphia are the leading MSOs. These companies account for 70 percent of all cable television customers. There are a number of smaller companies that serve the remainder of the cable audience. Several companies also hold ownership interests in cable television service in foreign markets.
While large media companies dominate cable ownership at the national level, cable is in reality a local service. Cable operators are awarded a franchise to serve a specific community or geographical area. The local governing board (e.g., city council) actually awards a franchise for cable service, usually for a ten-to fifteen-year period. In exchange for the right to provide service to the community, the operator normally pays a franchise fee equal to a maximum of 5 percent of the revenues derived from operating the system. In many cases, the operator also agrees to provide a number of public, educational, or governmental access channels (also known as PEG channels) as part of the franchise agreement. The operator, often in consultation and negotiation with the franchising body, sets rates for cable service.
In September 1999, the Federal Communications Commission (FCC) revised its limit on the number of households a single cable operator could serve at the national level. The FCC had previously established 30 percent of all television households as the benchmark, but the commission revised its definition to include households also served by various satellite carriers. The new ruling thus increased the ownership limit to 38 percent, allowing industry operators to engage in further consolidation.
Industry Organization
The cable operator offers packages of broadcast (i.e., over-the-air) channels and satellite-delivered channels—such as the Cable News Network (CNN), Music Television (MTV), ESPN, and the USA Network—to customers in the franchise area. Services range from basic cable (usually broadcast signals in the market, along with PEG channels) to expanded basic (the basic package plus an offering of satellite-delivered channels). Additionally, operators provide a number of subscription or pay channels, such as Home Box Office, Showtime, Cinemax, and Encore, for an additional monthly fee. Finally, the operator offers unedited movies and special events (e.g., concerts, sporting events, and other types of entertainment) through a number of pay-per-view channels. The customer pays for each of these items on a per-event basis, in addition to the payment for basic and expanded service.
In building different packages of services to attract customers, the cable operator negotiates carriage fees with local broadcast stations and other program suppliers. The FCC's "must carry" provision requires that cable systems carry local, over-the-air television broadcast signals, but operators must still obtain the rights to carry these local signals. Broadcasters usually negotiate for another cable channel on the system as part of granting retransmission consent; in rare cases, the station may ask for cash compensation. Among the broadcast networks, Fox, NBC, and Disney (ABC) have successfully launched several cable channels (FX, MSNBC, ESPN2) through retransmission consent negotiations using their owned and operated broadcast stations.
National program suppliers such as CNN, ESPN, MTV, and Nickelodeon charge local cable operators fees based on the number of subscribers to the system. The operator pays these fees to the program supplier in exchange for permission to carry their programming. Consolidation helps negotiations with program suppliers, as it limits the number of potential agreements in which an MSO must be involved. By owning large numbers of cable systems, an MSO can realize greater efficiency in program negotiations and, ultimately, economies of scale. Programming is the greatest expense of any cable system operator. According to the National Cable Television Association (NCTA), program expenses in 1998 totaled $7.46 billion.
Cable systems also draw revenues from the sale of national and local advertising, and Internet and telephone services. Local advertising varies from market to market, but overall local advertising accounts for about 24 percent of cable television advertising revenues, according to data compiled by the Cable Advertising Bureau. Internet connection services, available through the rental of high-speed cable modems, is a growing revenue stream for cable operators. Many systems are planning to offer local telephone service in hopes of bundling voice, video, and data services in a single package to consumers.
Ultimately, all of the expenses charged for programming are eventually passed on to consumers in the way of monthly subscriber fees. Subscriber fees represent the primary source of revenue for cable operators. The cable industry is unique in that it derives revenues from a number of sources, whereas broadcast stations depend primarily on advertising revenues.
Industry Evolution
The cable television industry has experienced considerable change over the years. Originally, cable television service was initiated as a retransmission service for broadcast television signals in the 1940s and 1950s in areas where television signals were difficult to receive due to complications related to surrounding terrain. In fact, in its infancy, cable was known as CATV (community antenna television), reflecting the fact that it brought television signals to households in a specific geographical area.
Broadcasters, fearing the loss of audience, fought the introduction of cable television in urban markets. The broadcast industry was able to delay the diffusion of cable for several years, arguing that the presence of cable would cause economic harm to over-the-air broadcasting. The industry was most concerned with the possible importation of signals from outside the local market, which would provide competing programming that might siphon off some of the television audience available for local stations.
Following a series of court decisions, the industry was finally able to offer cable service in urban areas. In the 1970s, a number of different program services began to emerge. Home Box Office (HBO), originally conceived as a regional pay service in 1973, went national in 1975, becoming the first channel to offer unedited movies to television audiences. The introduction of HBO became a bellwether of change for the industry, providing qualitatively different content from regular television channels.
Other channels that debuted during the late 1970s and early 1980s further promoted interest in cable television among consumers. The USA Network became the first national advertising-supported cable channel in 1977. A year later, ESPN began operation. In 1980, CNN was launched by Turner Broadcasting to become the first all-news channel on cable. On August 1, 1981, MTV appeared.
In 1984, Congress passed the Cable Television Act, which deregulated many industry policies, especially in regard to rate regulation. Rates for services mushroomed between 1986 and 1990, prompting outrage from consumer groups and policymakers. The 1984 act also prohibited cable ownership by the broadcast networks and limited telephone companies to ownership of cable services that were outside of their regions of telephone service.
Despite the controversy over rate deregulation, cable systems and subscribers grew at an unprecedented rate. Not only did the audience enjoy a growing number of programming services, cable service also provided a higher quality picture than most television antennas. The evolution of cable television had drastic effects on broadcast television audiences, especially during the lucrative evening or prime-time hours when audience levels are the highest. Network television programming prior to the advent of cable would routinely draw 80 percent to 90 percent of the available television audience. As cable matured, audience shares for the networks would fall into the 45 percent to 50 percent range by the 1990s.
Rate regulation has not been the only subject of customer complaints. Customer service has been an ongoing complaint, especially with regard to service technicians missing or being late for appointments. Customers have also had concerns over the quality of service and unannounced "switchouts" of one channel for another. In a switchout, one channel is replaced by another at the discretion of the operator. During the 1990s, the industry worked hard to improve customer service and become more responsive to complaints.
In 1992, Congress reestablished rate regulation in the cable industry with the passage of the Cable Television Consumer Protection and Competition Act. The legislation required a rollback of rates for basic service in an effort to limit the monopoly power of cable operators. The results were short-lived; the Telecommunications Act of 1996 wiped out rate regulation at the federal level and opened the industry to competition from other industries.
The cable industry began to experience competition from the emerging DBS (direct broadcast satellite) industry during the 1980s. Satellite services primarily attracted rural customers who could not receive cable television. The early home satellites required large dish-type receiving antennas, which were bulky and considered by many to be eyesores. By the 1990s, technology enabled the diffusion of smaller home dishes, which could receive digital transmissions. Companies such as DSS, Echo Star, and the Dish Network were able to lure away cable customers, and together they accounted for approximately fifteen million subscribers by the end of the 1990s.
The 1996 act stimulated interest in cable system ownership among the various telephone companies ("telcos"). Freed from restrictions barring ownership of cable services within regions of telephone service, the telcos were interested in acquiring cable systems as a way to expand their base of telephone customers and to achieve the goal of providing multiple services (e.g., voice, data, video, broadband) to businesses and consumers. Several acquisitions happened within a few months. Southwestern Bell (now SBC) became one of the first telcos to acquire cable systems. Bell Atlantic and Tele-Communications Inc. (at the time the largest cable operator in the country) announced plans to merge, but the deal never happened. U.S. West acquired all the holdings of Continental Cablevision and renamed its cable unit Media One.
Following the 1996 act, the cable industry began a heavy period of consolidation. AT&T shocked the cable industry with its acquisition of TCI in 1998, followed just a few months later by another key acquisition, Media One. In less than a year, AT&T had moved from its position as the number one long-distance telephone company in the United States to also being the leading cable operator. Other competitors to cable include wireless telephone services, "wireless cable" services such as multi-channel multipoint distribution services (MMDS) and satellite master antenna television (SMATV), and utility companies (power companies).
Issues Facing the Cable Industry
The cable industry faces a number of challenges. One key issue of concern among operators is the continual upgrading of the system's physical plant. With the conversion to digital transmission, many systems are investing millions of dollars in converting their analog transmission systems to a hybrid coaxial-fiber optic system. Fiber optic cable provides a much larger carrying capacity than coaxial cable, enabling the bundling of different types of services (e.g., voice, data, broadband). Furthermore, fiber is easier to maintain and provides greater reliability of service.
Upgrading of systems will result in faster deployment of cable modems that can provide high-speed Internet access to homes. However, competition for Internet service is extremely intense, with America Online, Earthlink, and Microsoft's MSN service already holding dominant shares of the ISP (Internet service provider) market. The cable industry will have to market cable modems aggressively as an alternative to traditional types of Internet service.
Controlling costs is another key issue for the cable industry. The costs to maintain and upgrade the physical plant pale in comparison to the rising cost of program services. Every year, new programming services continue to be introduced in the marketplace. As consumers learn of new services, they expect their cable operator to carry those services they deem most important. Every new program service added results in increasing program costs. In time, the industry may be forced to move to providing services on an a la carte basis, allowing subscribers to choose the specific services that they want and pay only for those services.
Competition will continue to be a concern in the cable industry. DBS services have already shown they are capable of luring existing cable subscribers. DBS services can now offer local broadcast signals as part of their program packages, placing further competitive pressure on the cable industry. No one is certain how the Internet will affect competition for multichannel services. Clearly, the Internet is capable of delivering video, but watching streaming video on a computer display is not the same experience as watching television programming on a large screen.
In addition to competition for services, competition for advertising remains intense. As an industry, cable television has done very well at attracting national advertising on the most popular cable channels (e.g., CNN, MTV, ESPN). Locally, competition for advertising is typically very strong, in that cable competes with newspapers, local radio and television, outdoor (e.g., billboards and transit media), and other advertising vehicles for revenues. Local revenues are important, and the industry recognizes more growth is needed at the local level.
Ancillary revenue streams in the form of Internet services (cable modems) and telephone service are also needed for the industry to maintain a strong competitive position. The latter will be much more difficult to obtain, especially with regard to local exchange or local telephone service. Most customers are not used to competition for local phone service, and they may be apprehensive about switching service to a provider that has a limited history. There are also questions concerning how responsive customers will be in accepting the bundling of voice, data, and broadband services from a single operator.
See also:Broadcasting, Government Regulation of; Cable Television, History of; Cable Television, Programming of; Cable Television, Regulation of; Cable Television, System Technology of; Federal Communications Commission; Satellites, History of; Satellites, Technology of; Telecommunications, Wireless; Telecommunications Act of 1996; Television Broadcasting; Television Broadcasting, History of.
Bibliography
Albarran, Alan B. (1996). Media Economics: Understanding Markets, Industries and Concepts. Ames: Iowa State University Press.
Albarran, Alan B. (1997). Management of Electronic Media. Belmont, CA: Wadsworth Publishing Company.
Baldwin, Thomas F., and McVoy, D. Stevens. (1991). Cable Communications, 2nd edition. Englewood Cliffs, NJ: Prentice-Hall.
Cable Advertising Bureau. (1999). Cable TV Facts. New York: Cable Advertising Bureau.
Carroll, Sidney L., and Howard, Herbert H. (1998). "The Economics of the Cable Industry." In Media Economics: Theory and Practice, 2nd edition, eds. Alison Alexander, James Owers, and Rod Carveth. Mahwah, NJ: Lawrence Erlbaum.
Chan-Olmsted, Sylvia, and Litman, Barry. (1988). "Antitrust and Horizontal Mergers in the Cable Industry." Journal of Media Economics 1:63-74.
National Cable Television Association. (1999). Cable Television Developments. Washington, DC: National Cable Television Association.
Owen, Bruce M., and Wildman, Steven. (1992). Video Economics. Boston: Harvard University Press.
Veronis Suhler & Associates. (1999). Communications Industry Forecast. New York: Veronis Suhler & Associates.
Alan B. Albarran
Cable Television
CABLE TELEVISION
The cable TV industry exploded from modest beginnings in the 1950s into a service that by 2003 reached 69 percent of all U.S. households that had television. Cable was initially a response to a need for improved transmission in areas where signals were weak or nonexistent. By the 1960s, consumers began to demand not only better reception but also more signals. This demand fueled the exponential growth of the industry. In 2003, almost ten thousand cable systems provided services to 73 million household subscribers in the United States. The industry has faced many legal issues, including programming and rate regulation, lack of competition, and customer service complaints. In addition, deregulation of the industry in the late 1990s has led to the consolidation of major cable companies.
The most contentious issue in cable television arises from federal communications commission (FCC) regulations that require cable operators to allot up to one-third of their channels to local broadcast stations. Known as must-carry rules, these were first enacted in the 1960s in an effort to protect the interests of local broadcasters. In 1985 and 1987, the Court of Appeals for the District of Columbia Circuit held that must-carry rules, as promulgated at the time, violated the first amendment (see Quincy Cable TV v. FCC, 768 F.2d 1434 [1985], cert. denied, 476 U.S. 1169, 106 S. Ct. 2889, 90 L. Ed. 2d 977 [1986]; Century Communications Corp. v. FCC, 835 F.2d 292 [1987], cert. denied sub nom. Office of Communication of the United Church of Christ v. FCC, 486 U.S. 1032, 108 S. Ct. 2014, 129 L. Ed. 2d 497 [1988]).
Congress addressed the must-carry issue in the Cable Television consumer protection and Competition Act of 1992 (47 U.S.C.A. § 325 et seq.). The 1992 Cable Act, passed over President george h.w. bush's veto, required cable systems to carry most local broadcast channels and prohibited cable operators from charging
local broadcasters to carry their signal. These requirements were challenged on First Amendment grounds in Turner Broadcasting System v. FCC, 512 U.S. 622, 114 S. Ct. 2445, 129 L. Ed. 2d 497 (1994). Turner Broadcasting asked the Supreme Court to apply a strict scrutiny test, similar to the one used to evaluate the constitutionality of restrictions on printed material, to determine whether the FCC's regulations infringed the industry's freedom of speech. The FCC urged the Court to apply the same relaxed standard it had applied to broadcast media in Red Lion Broadcasting v. FCC, 395 U.S. 367, 89 S. Ct. 1794, 23 L. Ed. 2d 371 (1969).
The Court took a middle ground on cable communications. Noting that cable television is neither strictly a broadcast medium nor a print medium, the Court held that the relaxed scrutiny test adopted in Red Lion was inappropriate, but declined to adopt the strict scrutiny protection given to print publications. The Court held that any regulations that are content neutral—in other words, that do not dictate the content of programming and that have an incidental burden on free speech—will be judged by an "intermediate level of scrutiny." Any regulations found to be content based—in other words, that attempt to restrict programming based on its content—will receive the strict scrutiny applied to print media. It returned the case to the district court for a full hearing under this ruling.
The case returned to the Supreme Court in 1997. In Turner Broadcasting System v. Federal Communications Commission, 520 U.S. 180, 117 S.Ct. 1174, 137 L.Ed.2d 369 (1997), the Court upheld the statute and rejected the cable operators' First Amendment claims. The court found that the law served an important and legitimate legislative purpose because it protected noncable households from losing regular local broadcasting service due to competition from cable companies. In addition, there was a legitimate governmental purpose in seeking to ensure public access to a variety of information sources. Finally, the government had an interest in eliminating restraints on fair competition even when the regulated parties were engaged in protective expressive activity.
The regulation of the rates charged by cable companies is another area of contention between the industry and the government. Before 1984, local franchising authorities regulated the rates charged by franchisees. The 1984 Cable Communications Policy Act (46 U.S.C.A. §§ 484-487, 47 U.S.C.A. § 35, 152 et seq.), which was designed to promote competition and allow competitive market forces to determine rates, deregulated rates for almost all franchisees. Although industry representatives had argued that competition would keep rates reasonable, after deregulation, average monthly cable rates increased far faster than the rate of inflation, in some cases as much as three times faster. During the same period, the average cable subscriber received only six additional channels, and competition from other operators was almost non-existent. In 1991, only 53 of the more than 9,600 cable systems in the United States had a direct competitor in their service area.
The 1992 Cable Act provided a regulatory structure for basic and expanded programming, but exempted individually sold premium channels, such as HBO and the Disney Channel, and pay-per-view programming. The 1992 act authorized local governments to regulate programming, equipment, and service rates charged by companies in areas where there is no competition. Basic rates could be regulated but only under prescribed circumstances that indicate a lack of competition in the area. According to figures gathered in 1994, the new regulations led to average rate reductions of more than eight percent.
When Congress deregulated the cable industry with the 1984 Cable Act, its primary intent was to promote competition. The 1984 act sought to balance the government's dual goals of providing cable access to all areas and deregulating rates. The industry had argued that competitive market forces would produce competition and stabilize rates. However, competition did not occur in the ensuing years, and cable operators continued to enjoy a monopoly in virtually all service areas. Before 1992, exclusive cable franchises were granted to the bidders who promised the widest access and most balanced programming. The government felt that this was the best way to ensure that cable's new and expensive technology was available to people in poor and rural areas as well as more affluent areas. As a result, bidders who promised more than they delivered were protected from competition. The 1992 Cable Act eliminated many of the barriers to competition that existed before. Most important, it abolished the exclusive franchise agreement, which had been a powerful monopolistic tool.
Although the 1992 act did much to encourage competition, it did not address the 1984 act's ban on ownership of cable companies by local telephone utilities. This ban was challenged in Chesapeake & Potomac Telephone Co. v. United States, 42 F.3d 181 (1994), in which the Fourth Circuit Court of Appeals held that it violated the telephone companies' First Amendment right to free speech. The ban was removed by the Telecommunications Act of 1996 (110 Stat. 56), which President bill clinton signed in February 1996.
The 1996 act signaled a return to the pre-1992 act philosophy, as the FCC was again directed to deregulate the cable television industry. The industry, which lobbied hard for the changes, contended that deregulation would produce more competition and lower prices. In addition, cable operators believed they could move into the areas of broadband internet service and local phone service. Critics raised concerns that deregulation would produce less competition, high prices, and the consolidation of cable services into the hands of a few powerful companies.
By 2002, the cable landscape had changed, with four companies controlling 80 percent of the national cable market. In addition, cable subscriber costs rose steadily. The FCC continued to advocate for a deregulated cable market and has permitted companies to pass on external costs (those unrelated to the delivery of programming and maintenance of infrastructure) to their subscribers. Competition from satellite television providers also grew, but not enough to pose a serious threat to the cable industry.
The growth of cable television led to other issues, including litigation over the distribution of sexually explicit content on cable systems. For example, United States v. Playboy Entertainment Group Inc., 529 U.S. 803, 120 S.Ct. 1878, 146 L.Ed.2d 865 (2000), involved a provision in the 1996 Cable Act that required cable TV systems to restrict sexually-oriented channels to overnight hours if they did not fully scramble their signal to nonsubscribers.
Even before the enactment of the 1996 provision, cable TV operators scrambled the signals of their programming so nonsubscribers could not view the channels. In addition, "premium" channels are scrambled so only those cable subscribers who pay an additional fee will gain access to the programming. However, scrambling technology is imperfect. A phenomenon known as "signal bleed" allows audio and video portions of scrambled programs to be heard and seen for brief periods. The federal law sought to prevent children from hearing or seeing sexually explicit content because of signal bleed. If a cable operator could not completely scramble the signal, it could only transmit sexually explicit programming between 10 p.m. and 6 a.m.
Playboy Entertainment Group, which owns and prepares programming for adult television networks, filed a lawsuit alleging the law was unconstitutional. The Supreme Court, although it acknowledged that many adults would find the material offensive, ruled that the law did violate the First Amendment because it sought to ban indecent rather than obscene material. Adults had a right to view such material. Moreover, the law only restricted signal bleed to sexually explicit content. This meant that the law was not content neutral and had to be judged using the strict scrutiny test. Although Congress had a compelling interest in preventing children from viewing sexually explicit cable programming, the method it had prescribed was too restrictive to the rights of adult subscribers. Therefore, the government had failed to justify a nationwide daytime speech ban. In so ruling, the Court found that another provision of the act, which permits cable customers to request complete channel blocking, was a better and legal alternative.
further readings
Arnesen, David W., and Marlin Blizinsky. "Cable Television: Will Federal Regulation Protect the Public Interest?" American Business Law Journal 32.
Gustafson, Madie D. "Transfers of Cable Television Systems: Regulatory Concerns at Federal, State, and Local Levels." Practising Law Institute/Patents, Copyrights, Trademarks, and Literary Property Course Handbook Series 380.
Lay, Tillman L., and J. Darrell Peterson. "Federal, State, and Local Regulation of Cable Television Franchise Transfers." Practising Law Institute/Patents, Copyrights, Trademarks, and Literary Property Course Handbook Series 405.
Markey, Edward J. "Cable Television Regulation: Promoting Competition in a Rapidly Changing World." Federal Communications Law Journal 46.
National Cable and Telecommunications Association. Available online at <www.ncta.com> (accessed June 4, 2003).
Parsons, Patrick, and Robert Frieden. 1997. The Cable and Satellite Television Industries. Boston: Allyn and Bacon.
Peritz, Marc. "Turner Broadcasting v. FCC: A First Amendment Challenge to Cable Television Must-Carry Rules." William and Mary Bill of Rights Journal 3.
Robichaux, Mark. 2002. Cable Cowboy: John Malone and the Rise of the Modern Cable Business. New York: John Wiley.
Sanders, Edmund. 2002. "FCC May Ease Cap on Cable Ownership." Los Angeles Times (December 12).