- Email: [email protected]
The economics of cable television
Book reviews
possible readership’. High praise from a fellow journalist. In the ‘The threat to privacy’, large addresses himself to the use of IT for surveillance and social control by various government bodies. Full-text retrieval is ideally suited for surveillance. Coupled to further advances in hardware and software such as CAD, digital plotting of street maps, video discs, and remote sensing satellites, we would have to reply entirely on the administrative efficiency, honesty, sensitivity, and humanity of all those who handle the wealth of information accumulating on each individual. Large quotes Sir Norman Lindup who headed the UK’s Data Protection Committee: ‘We did not fear that Orwell’s 1984 was just around the
corner, but we did feel that some pretty frightening developments could come about quite quickly . . .’ The book provides not only a good technical overview written for the intelligent layman, but also raises the problems and issues that all of us, working in the information technology field, should be thinking about. In summary, a readable book written by a thoughtful reporter to help us live with the information explosion. Tom Stonier
The author is Professor of Science and Society at the University of Bradford. His book The Wealth of information was published in 1983 by Thames-Methuen, London, UK.
Cable economics THE ECONOMICS TELEVISION
OF CABLE
Lexington Books, Lexington, 1983, 197pp, f22.00
MA,
by G. Kent Webb
In The Economics of Cable Television, Kent Webb presents a comprehensive study of the economic issues involved in the cable industry. Although there are occasional factual errors in the early chapters of the book, it includes a substantial amount of valuable empirical results and -fresh economic analysis in areas that have not been discussed carefully anyway elsewhere. He presents his analysis and conclusions clearly and crisply in the text of the chapters and the detailed econometric equations that support his results are discussed neatly in appendices following the chapters. In his requisite review of cable’s history, Webb begins many decades before the operation of the first CATV system, and even before the first television station began broadcasting. He quite properly introduces cable with a short history of telephony and his discussion of competition in local telephone service in the early 1900s gives insight into the issue of whether cable is a natural monopoly.
340
Two interesting points that he might have added are that, despite claims that telephone service was a ‘natural’ monopoly, it took vigorous (unnatural) lobbying by AT&T’s president, Theodore Vail, to convince most states to create telephone monopolies by granting exclusive licences.’ Also, in 1952, it was the judgement of the FCC staff that cable was a communications common carrier, like telephone, rather than a broadcasting service.’ Webb’s detailed descriptions of the elements of equipment in a cable system and the cost of each will be very useful to anyone eager to evaluate how cable will fare if faced with price competition from other video media. In addition, he also provides estimated operating costs including costs of labour and equity capital. His technical explanations should be illuminating to all nomengineers and his empirical measurements of cable’s economies of scale are a welcome addition to a debate too often lacking in data. Yet the size of the elasticities that he finds are substantially larger than those found by other economists using more sophisticated regressions.3 After stumbling over scattered errors in Webb’s legal history, I am not confident that Webb’s results are correct here.
The most interesting parts of the book, however, are the chapters on the demand and pricing of cable services. In the demand chapter he measures the elasticity of demand with respect to various geographic and socioeconomic variables, as well as the interdependence of demand for basic and pay services. He points out that ‘low income families spent more dollars on basic cable than did middleincome families’. and thus ‘operators may have undervalued a potentially important part of the market’. He also found that demand was not affected significantly by the number of motion picture theatres in the area, the number of pay services carried, nor the provision of two way capability. Webb believes that there may be significant potential for this latter service, but recently the cable industry has been retreating, claiming that interactive services are not economically practical. Webb provides a very detailed discussion of cable pricing and the elasticity of demand. He explains the intricacies of ‘Ramsey’ prices and how they are the optimal prices for maximizing social welfare from cable, short of subsidizing cable service. He notes, however, that a number of practices undermine the use of such pricing strategy. First, jurisdiction over rate regulation has been divided between local governments (who generally regulate basic) and the FCC (which has forbidden the regulation of pay TV rates). Second, competitors in other media are not regulated.
Confused He also claims that the contract terms offered by pay networks undermine efficiency, but he appears to be a bit confused on this issue. Webb quite correctly draws the analogy to the network-affiliate relationship in broadcasting, but then confuses the way that advertising revenues are distributed in those arrangements. In addition he claims that ‘pay-television networks purchase or produce most of their own programming for a fixed price that does not vary on the basis of the number of viewers’, and that pricing would be more efficient if the
TELECOMMUNICATIONS
POLICY
December
1984
Book reviews
networks charged operators a lump sum rather than a fee per subscriber. Yet, he is mistaken on both counts. Both film owners and pay networks set their fees based on their assessments of the potential revenues that cable operators can earn and the share of those revenues that they feel they can secure. If their projections are accurate then it shouldn’t make any difference whether that fee is calculated as a lump sum or on a persubscriber basis, and to improve the accuracy of their projections most pay networks use a schedule of prices. They prevent an operator from underpricing pay cable in order to shift its profits from pay to basic service fees, and yet do not appear to distort Ramsey pricing. It is likely that most of the inefficiency in cable pricing arose from the inadequacy of local political rate regulation, which is rarely conducted by those with Webb’s economic expertise. In fact, with the passage of the 1984 Cable Communications Policy Act,4 the issue of Ramsey pricing is one for academics rather than practitioners.
Handsome profits While cable advertisement sales have been small in the past (Webb writes that, ‘[i]n a few cases, the cable operator may profit by selling local ads to fill spots in satellite network programs’,) even he admits that it is, ‘[a] relationship that will become increasingly important as the industry matures’. It is unclear why he never explores the possibility that operators may earn handsome profits by utiliz-
ing economies of scope when selling local advertisements as a representative for multiple channels. Using Philadelphia as a case study, he provides a cost-benefit evaluation of alternative system designs. He argues that a system built to meet the dynamic demand - present and near future - maximizes consumer surplus, but warns against excessive capacity demands, which serve to raise prices to subscribers. Anticipatory construction may be unwise for two reasons. First, simultaneous installation is not very much less expensive than the sequential process (except for underground construction), and second it creates a risk that the installed technology may become obsolete before it is ever used. Still, he realizes that excessive numbers of channels and institutional networks are bound to arise because they provide prestige to incumbent politicians and their cost is a disguised tax which subscribers are likely to blame on the cable operator. Although he recognizes that prohibitions against media concentration pressure against it, Webb calculates that, ‘[f]rom a cost perspective . . . it would be wise to have all the systems in an urban area operated by a single firm’, and that subscriber rates in Philadelphia could be decreased by several dollars a month if all four territories were served by the same operator. , Readers should be aware that some of his text is a bit out of date due to post publication developments. For example, the 1984 Cable Act has become law, the Spotlight pay TV service was disbanded, Satellite News
Channels was absorbed by Cable News Network, and Showtime and The Movie Channel have merged. Also a number of DBS applicants have decided to drop out, teletext seems to be premature, and STV has been eulogized, while multichannel MDS has been approved and video and VCR sales have cassettes exploded.5 Even so, Kent Webb has assembled a wealth of data and analysis of cable economics which, despite some minor errors, should be required reading for any serious student of cable economics. Benjamin
Mark S. Nadel N. Cardozo School of Law New York, USA
‘See, Gable, ‘The early competitive era in telephone communications, 1893-1920’, Law and Contemporary Problems, Vol 34, 1969, p 340. ‘See the 25 March 1952 memorandum to the Commission from the General Counsel, the Chiefs of the Broadcast and Common Carrier Bureaus, and the Chief Engineer, reproduced in Television Inquiry, Review of Allocations Problems, Special Problems of TV Service to Small Communities: Hearings on S 376 Before the Senate Committee on Interstate and Foreign Commerce, 85th Congress, 2d Sess 3490,4142, 1958. %ee, Eli Noam, Economies of Scale in Cable Television: A Multi-Product Analysis, Columbia University Research Program in Telecommunications and Information Policy, 1983; Bruce Chven and Peter Greenhalgh, Competitive Policy Consid-
erations in Cable Television Franchising, Economists, Inc. Washington, DC, 1982. ‘Section 623 of the 1984 Cable Communication Policy Act will deregulate basic cable rates in two years. ‘See, eg, ‘The video revolution’, Newsweek, 6 August 1984, p 50.
Contributions The editor invites the submission of major articles and items for inclusion in the Comment, Book reviews, and Conference report sections. Contributions should be sent to Cohn Blackman, Editor, Telecommunications Policy, Butterworth Scientific Limited, PO Box 63, Westbury House, Bury Street, Guildford GU2 5BH, UK. Tel: 0483 31261
TELECOMMUNICATIONS
POLICY
December 1984
341
possible readership’. High praise from a fellow journalist. In the ‘The threat to privacy’, large addresses himself to the use of IT for surveillance and social control by various government bodies. Full-text retrieval is ideally suited for surveillance. Coupled to further advances in hardware and software such as CAD, digital plotting of street maps, video discs, and remote sensing satellites, we would have to reply entirely on the administrative efficiency, honesty, sensitivity, and humanity of all those who handle the wealth of information accumulating on each individual. Large quotes Sir Norman Lindup who headed the UK’s Data Protection Committee: ‘We did not fear that Orwell’s 1984 was just around the
corner, but we did feel that some pretty frightening developments could come about quite quickly . . .’ The book provides not only a good technical overview written for the intelligent layman, but also raises the problems and issues that all of us, working in the information technology field, should be thinking about. In summary, a readable book written by a thoughtful reporter to help us live with the information explosion. Tom Stonier
The author is Professor of Science and Society at the University of Bradford. His book The Wealth of information was published in 1983 by Thames-Methuen, London, UK.
Cable economics THE ECONOMICS TELEVISION
OF CABLE
Lexington Books, Lexington, 1983, 197pp, f22.00
MA,
by G. Kent Webb
In The Economics of Cable Television, Kent Webb presents a comprehensive study of the economic issues involved in the cable industry. Although there are occasional factual errors in the early chapters of the book, it includes a substantial amount of valuable empirical results and -fresh economic analysis in areas that have not been discussed carefully anyway elsewhere. He presents his analysis and conclusions clearly and crisply in the text of the chapters and the detailed econometric equations that support his results are discussed neatly in appendices following the chapters. In his requisite review of cable’s history, Webb begins many decades before the operation of the first CATV system, and even before the first television station began broadcasting. He quite properly introduces cable with a short history of telephony and his discussion of competition in local telephone service in the early 1900s gives insight into the issue of whether cable is a natural monopoly.
340
Two interesting points that he might have added are that, despite claims that telephone service was a ‘natural’ monopoly, it took vigorous (unnatural) lobbying by AT&T’s president, Theodore Vail, to convince most states to create telephone monopolies by granting exclusive licences.’ Also, in 1952, it was the judgement of the FCC staff that cable was a communications common carrier, like telephone, rather than a broadcasting service.’ Webb’s detailed descriptions of the elements of equipment in a cable system and the cost of each will be very useful to anyone eager to evaluate how cable will fare if faced with price competition from other video media. In addition, he also provides estimated operating costs including costs of labour and equity capital. His technical explanations should be illuminating to all nomengineers and his empirical measurements of cable’s economies of scale are a welcome addition to a debate too often lacking in data. Yet the size of the elasticities that he finds are substantially larger than those found by other economists using more sophisticated regressions.3 After stumbling over scattered errors in Webb’s legal history, I am not confident that Webb’s results are correct here.
The most interesting parts of the book, however, are the chapters on the demand and pricing of cable services. In the demand chapter he measures the elasticity of demand with respect to various geographic and socioeconomic variables, as well as the interdependence of demand for basic and pay services. He points out that ‘low income families spent more dollars on basic cable than did middleincome families’. and thus ‘operators may have undervalued a potentially important part of the market’. He also found that demand was not affected significantly by the number of motion picture theatres in the area, the number of pay services carried, nor the provision of two way capability. Webb believes that there may be significant potential for this latter service, but recently the cable industry has been retreating, claiming that interactive services are not economically practical. Webb provides a very detailed discussion of cable pricing and the elasticity of demand. He explains the intricacies of ‘Ramsey’ prices and how they are the optimal prices for maximizing social welfare from cable, short of subsidizing cable service. He notes, however, that a number of practices undermine the use of such pricing strategy. First, jurisdiction over rate regulation has been divided between local governments (who generally regulate basic) and the FCC (which has forbidden the regulation of pay TV rates). Second, competitors in other media are not regulated.
Confused He also claims that the contract terms offered by pay networks undermine efficiency, but he appears to be a bit confused on this issue. Webb quite correctly draws the analogy to the network-affiliate relationship in broadcasting, but then confuses the way that advertising revenues are distributed in those arrangements. In addition he claims that ‘pay-television networks purchase or produce most of their own programming for a fixed price that does not vary on the basis of the number of viewers’, and that pricing would be more efficient if the
TELECOMMUNICATIONS
POLICY
December
1984
Book reviews
networks charged operators a lump sum rather than a fee per subscriber. Yet, he is mistaken on both counts. Both film owners and pay networks set their fees based on their assessments of the potential revenues that cable operators can earn and the share of those revenues that they feel they can secure. If their projections are accurate then it shouldn’t make any difference whether that fee is calculated as a lump sum or on a persubscriber basis, and to improve the accuracy of their projections most pay networks use a schedule of prices. They prevent an operator from underpricing pay cable in order to shift its profits from pay to basic service fees, and yet do not appear to distort Ramsey pricing. It is likely that most of the inefficiency in cable pricing arose from the inadequacy of local political rate regulation, which is rarely conducted by those with Webb’s economic expertise. In fact, with the passage of the 1984 Cable Communications Policy Act,4 the issue of Ramsey pricing is one for academics rather than practitioners.
Handsome profits While cable advertisement sales have been small in the past (Webb writes that, ‘[i]n a few cases, the cable operator may profit by selling local ads to fill spots in satellite network programs’,) even he admits that it is, ‘[a] relationship that will become increasingly important as the industry matures’. It is unclear why he never explores the possibility that operators may earn handsome profits by utiliz-
ing economies of scope when selling local advertisements as a representative for multiple channels. Using Philadelphia as a case study, he provides a cost-benefit evaluation of alternative system designs. He argues that a system built to meet the dynamic demand - present and near future - maximizes consumer surplus, but warns against excessive capacity demands, which serve to raise prices to subscribers. Anticipatory construction may be unwise for two reasons. First, simultaneous installation is not very much less expensive than the sequential process (except for underground construction), and second it creates a risk that the installed technology may become obsolete before it is ever used. Still, he realizes that excessive numbers of channels and institutional networks are bound to arise because they provide prestige to incumbent politicians and their cost is a disguised tax which subscribers are likely to blame on the cable operator. Although he recognizes that prohibitions against media concentration pressure against it, Webb calculates that, ‘[f]rom a cost perspective . . . it would be wise to have all the systems in an urban area operated by a single firm’, and that subscriber rates in Philadelphia could be decreased by several dollars a month if all four territories were served by the same operator. , Readers should be aware that some of his text is a bit out of date due to post publication developments. For example, the 1984 Cable Act has become law, the Spotlight pay TV service was disbanded, Satellite News
Channels was absorbed by Cable News Network, and Showtime and The Movie Channel have merged. Also a number of DBS applicants have decided to drop out, teletext seems to be premature, and STV has been eulogized, while multichannel MDS has been approved and video and VCR sales have cassettes exploded.5 Even so, Kent Webb has assembled a wealth of data and analysis of cable economics which, despite some minor errors, should be required reading for any serious student of cable economics. Benjamin
Mark S. Nadel N. Cardozo School of Law New York, USA
‘See, Gable, ‘The early competitive era in telephone communications, 1893-1920’, Law and Contemporary Problems, Vol 34, 1969, p 340. ‘See the 25 March 1952 memorandum to the Commission from the General Counsel, the Chiefs of the Broadcast and Common Carrier Bureaus, and the Chief Engineer, reproduced in Television Inquiry, Review of Allocations Problems, Special Problems of TV Service to Small Communities: Hearings on S 376 Before the Senate Committee on Interstate and Foreign Commerce, 85th Congress, 2d Sess 3490,4142, 1958. %ee, Eli Noam, Economies of Scale in Cable Television: A Multi-Product Analysis, Columbia University Research Program in Telecommunications and Information Policy, 1983; Bruce Chven and Peter Greenhalgh, Competitive Policy Consid-
erations in Cable Television Franchising, Economists, Inc. Washington, DC, 1982. ‘Section 623 of the 1984 Cable Communication Policy Act will deregulate basic cable rates in two years. ‘See, eg, ‘The video revolution’, Newsweek, 6 August 1984, p 50.
Contributions The editor invites the submission of major articles and items for inclusion in the Comment, Book reviews, and Conference report sections. Contributions should be sent to Cohn Blackman, Editor, Telecommunications Policy, Butterworth Scientific Limited, PO Box 63, Westbury House, Bury Street, Guildford GU2 5BH, UK. Tel: 0483 31261
TELECOMMUNICATIONS
POLICY
December 1984
341