WASHINGTON -- On Monday, Free Press released Combating the Cable Cabal: How to Fix America’s Broken Video Market, a comprehensive analysis of the economics of the cable industry. The new report investigates why cable bills continue to increase annually at three times the rate of inflation and examines policies that could bring consumers more choice and lower prices.

The report comes in advance of a hearing on video competition scheduled for Tuesday in the U.S. Senate Subcommittee on Communications, Technology and the Internet.

Among the report’s findings:

• Despite flat and in some cases declining subscriber growth, multichannel video providers have raised the prices of their video services by more than 22 percent since 2007 — continuing this practice throughout the most recent recession. This trend has resulted in a 27 percent increase in video revenues.
• Despite these increasing revenues, the distributors’ video profit margins are declining since programmers are demanding higher fees to carry their channels. However, cable providers like Comcast are using their highly profitable broadband offerings to cross-subsidize their declining video profits.
• The owners of the cable channels have substantial pricing power. These programmers’ revenues have grown 36 percent since 2007. Over the past two decades, the programming industry’s cash-flow margins grew from 24 percent to 41 percent, even as many of these channels lost viewers.

Read the full report here: http://www.freepress.net/combating_cable_cabal

The report finds that these trends are driven by the market’s bloated bundled-channel business model, which hides prices and forces consumers to pay for dozens of channels they’ll never watch.

“Price increases on cable subscriptions are now as inevitable as death and taxes,” said Free Press Research Director and report author S. Derek Turner. “Competition is an illusion in this market. We have a comfortable cabal of cable programmers and distributors that work to ensure consumers have no power. This is why some channels can lose two-thirds of their audience but maintain profit margins nearly three times that earned by Exxon Mobil.”

The report examines how some consumers are now substituting online video for traditional television — and notes that the distributors’ control over the broadband platform and the programmers’ reliance on the bloated bundle model are preventing any substantive disruption of the video market.

The report suggests that policies that ensure consumers have access to robust, open broadband networks will heighten certainty among investors, who will be more likely to pour capital into new online video-distribution models. This increased investment will pull the programmers away from their reliance on the current multichannel model.

“The structural barriers to competition are significant,” Turner said. “This broken market is holding back competition and investment. The best hope for investors and consumers alike is to make sure we have big, open broadband pipes for everyone.”

Until new online competition develops, however, consumers will need protections. And programmers must have the right incentives to step outside the cabal model. The report recommends additional policy solutions, including a la carte pricing, wholesale unbundling and program access for online distributors.

Arizona Senator John McCain introduced legislation last week to bring consumers a la carte choices, noting that the industry’s current practice of forced bundling is “unfair and wrong — especially when you consider how the regulatory deck is stacked in favor of industry and against the American consumer.”

“We applaud Senator McCain’s efforts to protect consumers in this uncompetitive market,” Turner said. “American innovation can solve this seemingly intractable problem. New distribution models will emerge if policymakers ensure that the Internet remains a robust and open platform, and if programmers are no longer allowed to force feed consumers these bloated and expensive channel bundles.”

Read the full report here: http://www.freepress.net/combating_cable_cabal