CABLE TELEVISION: THE FRAMEWORK OF

REGULATION

(By BRUCE M. OWEN, School of Business and School of Law,
Duke University)

Between 1955 and 1975 the number of cable television subscribers grew at an average annual percentage rate of 23%. The cable phenomenon has resulted in the creation of a major controversy, in which the broadcast industry and its allies see cable as a destructive force threatening both their own and the public's interest in free over-the-air broadcasting, while cable television companies and their allies see a vast increase in consumer service and freedom of viewer choice.

Television is a major, perhaps the major, entertainment industry in America. The A. C. Nielsen Company estimates that the average American family watches more than six hours of television per day. Television advertising revenues in 1976 were $5.2 billion, with profits of $1.3 billion before tax. There are approximately 70 million homes with TV in the United States (98 percent of all homes), and 112 million TV sets in use. Advertising prices range from $5 for 30-second commercials in small towns to $225,000 for a minute of network time during the superbowl.2 The average network prime time program costs about $250,000 per hour to produce. Table 1 provides an overview of the growth of TV and cable TV households. Existing television service is worth billions of dollars per year to viewers, and viewers place substantial value on additional TV options.

Cable television, despite its rapid rate of growth, is still very small compared to broadcasting. There are now (late 1977) about 12.8 million cable subscribers who pay about $8 per month for servicegiving the cable industry annual revenues of about $1.3 billion.

Figure 1 shows the physical design of a cable system. The typical system has twelve channels, mainly devoted to rebroadcasting local TV signals in order to improve the quality of reception. Some systems carry a local origination channel, mostly programmed with time and weather forecasts. Most systems also carry, to the extent permitted by FCC rules, TV signals from distant cities that cannot be received in the area with rooftop antennas. A growing number carry one or

1 The author is grateful to Mike Klass, Roger Noll, Joe Peck, and Len Weiss for reading the manuscript and offering a number of useful suggestions. In addition, I have benefitted from conversations with Stan Besen, Bridger Mitchell, Ed Park and Jim Rosse. This paper was written in 1976; minor revisions were made in early 1978.

2 The preceding statistics are from Broadcasting Yearbook (1975), and Broadcasting magazine (August 29, 1977).

3 Estimating the economic value of television to viewers is difficult because consumers do not pay directly. However, observations of viewers' willingness to pay for cable TV service suggest that, nationwide, viewers would be willing to pay as much as $30 billion per year rather than do without the existing level of service. Noll, Peck & McGowan (1973), p. 23.

more special channels with new movies, for which a separate charge is made. These are "pay-TV" channels, whose operation was closely regulated by the FCC until recently. An estimated 1.2 million households subscribed to such pay-TV channels at the end of 1977. The largest cable system in the country is in San Diego, with about 100,000 subscribers. The top fifty cable companies (multiple system operators) have more than 70 percent of all cable subscribers. The largest such company is TelePrompter Corporation, with more than one million subscribers.

Cable systems tend to have the characteristics of natural monopolies in their local areas. Costs decline as the number of subscribers increases within a given area. The higher the ratio of subscribers to homes "passed" by the cable, the lower the cost per subscriber. This does not preclude the existence of two or more cable systems in a city, provided that they serve different areas. The financial viability of a cable system depends on population density, income levels, quality of overthe-air reception, number of over-the-air signals, and the like, all of which may vary considerably within a television market. Hence, cable may be viable in some parts of a market and not in other parts.

The TV rating services list over 200 TV "markets" in the United States, defined roughly by the coverage areas of TV stations assigned to a city or adjacent cities. Table 2 lists the top 100 of these markets and Table 3 shows the FCC broadcast financial data for stations in these markets. Most TV revenues and profits go to VHF network affiliates in the top 100 markets. This is not surprising, given the distribution of population: one-third of all TV households are in the top ten markets, 68 percent in the top fifty, and 87 percent in the top 100. TV stations are in the business of selling audiences to advertisers. The larger the audience, the more advertisers are willing to pay. Therebefore TV revenues are greater in larger cities than in smaller ones.

Source: TV Factbook, services vol., 1974-75, No. 44, p. 65a; TV Digest, vol. 15, No. 48, Dec. 1, 1975, p. 2. 1978 data from Broadcasting, May 1, 1978, at 32.

17

6

11

85 Sioux Falls-Mitchell, S. Dak.

86 Evansville, Ind..

87 Baton Rouge, La.

88 Beaumont-Port Arthur, Tex..

89 Duluth, Minn.-Superior, Wis..

90 Wheeling, W. Va.-Steubenville, Ohio. 91 Lincoln-Hastings-Kearney, Nebr....

92 Lansing-Onondaga, Mich.

93 Madison, Wis.

94 Columbus, Ga..

95 Amarillo, Tex.

96 Huntsville-Decatur, Ala.

97 Rockford-Freeport, III.

98 Fargo-Valley City, N. Dak.

99 Monroe, La.-El Dorado, Ark.

100 Columbia, S.C.

33202~33~moomoo

UHF

Cable penetration (percent)

00000000001042002

331233~3~1~30-321

10

11

10

8

11

55

3 4

9

7

3

3

14

40

12

11

2

18

35

42

14

10

16

3

1The table shows the largest 100 TV markets as defined by the FCC in its 1972 rules. Most markets cover a dozen or more counties, and sometimes several States. The number of commercial TV stations in each market is from "Broadcasting Yearbook" (1975) pp. B-1 ff. The percent of TV households subscribing to cable is from a November 1973 survey appearing in "TV Factbook" (1974/75) pp. 95-a ff. 2 Not available.

TABLE 3.-PROFITABILITY OF TELEVISION STATIONS, 1974

Source: Subcommittee on Communications, Committee on Interstate and Foreign Commerce, U.S. House of Representatives, "Cable Television: Promise versus Regulatory Performance" (January 1976) p. 36, table 10 (from FCC data).

The FCC cable television rules are also organized by market, with different treatment accorded to cable systems in larger than in smaller markets. These differences are discussed below. Although the FCC's rules and much of the research on cable and its effects involves distinctions among these television markets by size (e.g., "top 50," or "largest 100 markets") it must be emphasized that there are important distinctions not captured by these classifications. Thus, while "top 50 markets" is a short-hand way of referring to large metropolitan areas with generally abundant over-the-air TV service, there are some markets in the top 50 with special characteristics which make them more or less conducive to cable growth. Thus, Table 4 lists 19 of the largest 100 "standard metropolitan statistical areas" as defined by the Department of Commerce, in which there is no local commercial VHF station, as defined by the FCC and the broadcast industry. Many of these SMSA's have UHF service, and others are served by VHF stations in nearby cities. Statements about the impact of or prospects for cable in the "top 50" or any other such market grouping must be regarded as broad generalizations with important exceptions.

Source: Carl Pilnick and Walter S. Baer, Cable Television: A Guide to the Technology, The Rand Corporation, R-1141-NSF, June 1973, p. 4.

FIGURE 1

HISTORICAL BACKGROUND

The historical development of federal regulation of cable television can only be understood in the broader context of radio and television regulation. The Congress in 1927 nationalized the radio spectrum and in 1934 granted regulatory authority over wire and radio communications to the Federal Communieations Commission. As demand for television programs grew in the post-war years, the FCC was faced with the problem of allocating spectrum to this new service.

For more extensive histories of broadcast regulation, see Noll, Peck and McGowan' (1973), Jones (1970), Owen, Beebe and Manning (1974). Radio Act of 1927; Communications Act of 1934. See Title 47, United States Code.