Economics at the FCC 1/??
Economics at the FCC
Gregory S. Crawford
Chief Economist
Federal Communications Commission
International Industrial Organization Conference
Arlington, VA
May 18, 2008
Disclaimer
Disclaimer
 Disclaimer
Outline
FCC Overview
Merger Review at the FCC
Recent Issues of Interest to
Economists
Quality-Adjusted Cable
Prices
Resources
Economics at the FCC 2/??
The views presented here are my own and do not necessarily
represent the views of the Federal Communications
Commission or its staff.
Outline
Disclaimer
Outline
 Outline
FCC Overview
Merger Review at the FCC
Recent Issues of Interest to
Economists
Quality-Adjusted Cable
Prices
Resources
Economics at the FCC 3/??
I’m going to briefly discuss three topics in my talk today:
1. Overview of the FCC
2. Merger Review at the FCC
3. Recent Issues of Interest to Economists
• Quality-Adjusted Cable Prices
Organization
Disclaimer
Outline
FCC Overview
 Organization
 Responsibilities
 Economists at the FCC
Merger Review at the FCC
Recent Issues of Interest to
Economists
Quality-Adjusted Cable
Prices
Resources
Economics at the FCC 4/??
• The Federal Communications Commission (FCC) is an independent
federal regulatory agency.
• Its governing statute is the Communications Act of 1934, as amended
numerous times.
• The FCC is charged with regulating a number of media and
communications industries:
? Local and long-distance telephone industries,
? Wireless telephone industry,
? Broadcast radio and television industries,
? Cable television industry
Responsibilities
Disclaimer
Outline
FCC Overview
 Organization
 Responsibilities
 Economists at the FCC
Merger Review at the FCC
Recent Issues of Interest to
Economists
Quality-Adjusted Cable
Prices
Resources
Economics at the FCC 5/??
The FCC engages in two types of Proceedings:
1. General Rulemaking Proceedings,
• Typically involve developing and/or implementing regulatory
policies.
2. Adjudications,
• Including the review of mergers that involve the transfer of
? Spectrum licenses, or
? ”Interstate 214” authorizations to provide interstate
telecommunications services.
Economists at the FCC
Disclaimer
Outline
FCC Overview
 Organization
 Responsibilities
 Economists at the FCC
Merger Review at the FCC
Recent Issues of Interest to
Economists
Quality-Adjusted Cable
Prices
Resources
Economics at the FCC 6/??
• The FCC has 1,795 employees
? Including 510 attorneys, 273 engineers, and 56 economists.
• Unlike at the DOJ or FTC, economists at the FCC are located
throughout the organization.
? The Chief Economist sits in the Office of Strategic Planning and
Policy.
? Each bureau has its own Bureau Chief Economist.
? There are staff economists in each of the bureaus and some of the
offices (esp. OSP).
Merger Review at the FCC: Analytical Framework
Disclaimer
Outline
FCC Overview
Merger Review at the FCC
 Analytical Framework
Recent Issues of Interest to
Economists
Quality-Adjusted Cable
Prices
Resources
Economics at the FCC 7/??
Given the other members on the panel, it might be useful to compare
merger review at the FCC with that undertaken at the DOJ or FTC.
• Analytical Framework
? In general, the burden of proof is on the applicants to demonstrate
that the transfer serves the ”public interest.”
? The steps:
1. The FCC considers whether the proposed merger complies with
the Communications Act, other statutes, and the Commission’s
Rules.
2. The FCC considers potential public interest harms from the
transaction.
• Including any potential competitive effects.
3. The FCC considers the claimed benefits of the transaction and
balances them against potential harms.
• Where appropriate, the FCC may impose conditions on its
approval to address specific harms.
Recent Issues of Interest to Economists
Disclaimer
Outline
FCC Overview
Merger Review at the FCC
Recent Issues of Interest to
Economists
 Recent Issues
Quality-Adjusted Cable
Prices
Resources
Economics at the FCC 8/??
The FCC is (always) a busy place. What follows is a short list of recently
completed and ongoing proceedings that might be of interest to
economists.
• Mergers
? Liberty Media/DirecTV
? XM/Sirius
• 700 MHz Auction
? Combinatorial Auction
? Anonymous Bidding
• Regulatory Reform in Wireline
? Intercarrier Compensation
? Universal Service Reform
• Using reverse auctions?
Recent Issues of Interest to Economists
Disclaimer
Outline
FCC Overview
Merger Review at the FCC
Recent Issues of Interest to
Economists
 Recent Issues
Quality-Adjusted Cable
Prices
Resources
Economics at the FCC 9/??
• Network Neutrality
• Media Ownership
• Regulatory Issues in Cable Television
? Leased Access
? Program Access/Wholesale Tying
?
`
A La Carte
Rising Cable Prices
Disclaimer
Outline
FCC Overview
Merger Review at the FCC
Recent Issues of Interest to
Economists
Quality-Adjusted Cable
Prices
 Rising Cable Prices
 Quality?
 Viewing Hours
 PPVH
 Other Measures
 Conclusion
 What can be done?
Resources
Economics at the FCC 10 / ??
• Unlike prices for most of the services under the purview of the FCC,
prices for cable services continue to rise.
Weighted Average Price of Cable Service
Disclaimer
Outline
FCC Overview
Merger Review at the FCC
Recent Issues of Interest to
Economists
Quality-Adjusted Cable
Prices
 Rising Cable Prices
 Quality?
 Viewing Hours
 PPVH
 Other Measures
 Conclusion
 What can be done?
Resources
Economics at the FCC 11 / ??
• Indeed, the previous figure likely underestimates cable price increases
for most households.
? Over 40% of cable subscribers (in 2005) purchased a digital tier.
? Including the average price of digital service (weighted by the share
of subscribers that take digital) yields the weighted average price
of cable service (the blue line).
22.35
.
.
.
.
.
.
.
.
.
43.04
38.58 .
.
.
.
.
.
56.03
.
.
.
.
.
.
48.44
20
30
40
50
60
Monthly Price
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Year
Average B+EB Price Average B+EB+D Price
Weighted Average B+EB+D Price
Sources: FCC Cable Price Reports.
What of Cable Service Quality?
Disclaimer
Outline
FCC Overview
Merger Review at the FCC
Recent Issues of Interest to
Economists
Quality-Adjusted Cable
Prices
 Rising Cable Prices
 Quality?
 Viewing Hours
 PPVH
 Other Measures
 Conclusion
 What can be done?
Resources
Economics at the FCC 12 / ??
• While prices have risen, the cable industry has argued that so too has
the quality of cable service.
? Both the number of channels purchased by households and the
amount those channels spend on programming have increased over
the same period.
• We would ideally measure the increase in (e.g.) mean consumers
surplus from having access to higher quality cable services (as in
Crawford (2000)).
? But this poses a difficult measurement problem.
• Failing that, the best measure of cable service quality (as perceived by
households) is likely to be viewing hours.
? The number and quality of networks matter to households to the
extent that having access to them translates into watching more
television.
Viewing Hours
Disclaimer
Outline
FCC Overview
Merger Review at the FCC
Recent Issues of Interest to
Economists
Quality-Adjusted Cable
Prices
 Rising Cable Prices
 Quality?
 Viewing Hours
 PPVH
 Other Measures
 Conclusion
 What can be done?
Resources
Economics at the FCC 13 / ??
24.4
.
.
.
.
.
.
.
37.7
27.9
.
.
.
.
.
.
24.7
52.3
.
.
.
.
.
.
.
62.4
20
25
30
35
40
45
50
55
60
65
Average Viewing Hours/Week
1997 1998 1999 2000 2001 2002 2003 2004 2005
Year
Ad?Supported Cable Broadcast
Total
Sources: Cable: Cable Advertising Bureau (CAB) (2002-2006); Wildman (2003) (1997-2001). B/C: CAB;
Author calculations.
Price per Viewing Hour (PPVH)
Disclaimer
Outline
FCC Overview
Merger Review at the FCC
Recent Issues of Interest to
Economists
Quality-Adjusted Cable
Prices
 Rising Cable Prices
 Quality?
 Viewing Hours
 PPVH
 Other Measures
 Conclusion
 What can be done?
Resources
Economics at the FCC 14 / ??
• There are at least two possible ways to calculate Price Per Viewing
Hour:
1. PPVH based on Total price and viewing, or
2. PPVH based on Incremental Cable price and viewing.
• Both yield similar results; I use the Incremental Cable measure here
due to complications obtaining the necessary (broadcast viewing) data
for the Total measure.
PPVH
Cable
=
Weighted Average Price of EB+D Service
Ad-Supported Cable Hours
(1)
Weighted Average Expanded Basic + Digital Price
Disclaimer
Outline
FCC Overview
Merger Review at the FCC
Recent Issues of Interest to
Economists
Quality-Adjusted Cable
Prices
 Rising Cable Prices
 Quality?
 Viewing Hours
 PPVH
 Other Measures
 Conclusion
 What can be done?
Resources
Economics at the FCC 15 / ??
• The Cable Price Survey provides the information necessary to calculate
the (weighted) average price of Expanded Basic plus Digital service.
11.63
.
.
. .
.
.
.
14.30
14.68
.
.
.
.
.
.
.
34.14
22.35
24.28
26.31
.
.
.
.
.
.
.
48.44
10
20
30
40
50
Monthly Price
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Year
Average B Price Weighted Average EB+D Price
Weighted Average B+EB+D Price
Sources: FCC Cable Price Reports.
Average Price per Viewing Hour
Disclaimer
Outline
FCC Overview
Merger Review at the FCC
Recent Issues of Interest to
Economists
Quality-Adjusted Cable
Prices
 Rising Cable Prices
 Quality?
 Viewing Hours
 PPVH
 Other Measures
 Conclusion
 What can be done?
Resources
Economics at the FCC 16 / ??
0.139
.
.
.
.
.
.
.
0.209
0.10
0.12
0.14
0.16
0.18
0.20
0.22
Average Price Per Viewing Hour
1997 1998 1999 2000 2001 2002 2003 2004 2005
Year
.
.
.
.
.
.
.
.
50.4
.
.
.
.
.
.
.
18.8
0
10
20
30
40
50
Percent Increase
1997 1998 1999 2000 2001 2002 2003 2004 2005
Year
PPVH_{Cable} (EB+D Expn/Cable Min)
CPI (All Goods)
• Average price per viewing hour has increased from 13.9 cents/hour in
1997 to 20.9 cents/hour in 2005,
? An increase of 50.4% (5.2% per year).
? Compared to an increase of 18.8% for the CPI (2.2% per year).
Sources: PPVH: Data on slides 14, 16; formula on Slide 15. CPI: BLS.
Other Measures of Quality-Adjusted Cable Prices: NCTA
Disclaimer
Outline
FCC Overview
Merger Review at the FCC
Recent Issues of Interest to
Economists
Quality-Adjusted Cable
Prices
 Rising Cable Prices
 Quality?
 Viewing Hours
 PPVH
 Other Measures
 Conclusion
 What can be done?
Resources
Economics at the FCC 17 / ??
The National Cable Television Association (NCTA) claim PPVH has fallen in
real terms since 2002.
• But they err twice in their calculations:
1. They fail to include the (weighted) price of digital service in their
numerator (the channels on which are included in Cable Viewing
Hours in their denominator).
2. They include the price of Basic Service in their numerator (the
channels on which - Broadcast Channels - are excluded from their
denominator).
Other Measures of Quality-Adjusted Cable Prices: CPI
Disclaimer
Outline
FCC Overview
Merger Review at the FCC
Recent Issues of Interest to
Economists
Quality-Adjusted Cable
Prices
 Rising Cable Prices
 Quality?
 Viewing Hours
 PPVH
 Other Measures
 Conclusion
 What can be done?
Resources
Economics at the FCC 18 / ??
The Consumer Price Index (CPI) from the Bureau of Labor Statistics (BLS)
• Uses independent data and methods to measure quality-adjusted
MVPD (cable and satellite) prices.
• How?
? Measures expenditure on cable and satellite services using data
from the Consumer Expenditure Survey.
? Adjusts for quality on a per-channel basis, e.g.
• Month 1: 71 channels for $40.00, or $0.563/channel.
• Month 2: 80 channels for $47.00.
? Implies a Month 1 price had they offered 80 channels:
80*$0.563 = $45.07.
• Effective price change is $47.00 - $45.07 = $1.93, or 4.3%.
Other Measures of Quality-Adjusted Cable Prices: Results
Disclaimer
Outline
FCC Overview
Merger Review at the FCC
Recent Issues of Interest to
Economists
Quality-Adjusted Cable
Prices
 Rising Cable Prices
 Quality?
 Viewing Hours
 PPVH
 Other Measures
 Conclusion
 What can be done?
Resources
Economics at the FCC 19 / ??
.
.
.
.
.
.
.
.
50.4
.
.
.
.
.
.
.
41.8
.
.
.
.
. .
.
5.8
0
10
20
30
40
50
Percent Increase
1997 1998 1999 2000 2001 2002 2003 2004 2005
Year
PPVH_{Cable} (EB+D Expn/Cable Min)
CPI Cable
NCTA PPVH (Wrong Formula)
• The NCTA under-estimates the growth in PPVH over time.
• CPI Cable is quite similar to PPVH (correctly measured).
? Growing 41.8% (4.5% per year) between 1997 and 2005.
Sources: NCTA PPVH: Data on slides 12, 14; Formula inferred from figure in 1/4/07 NCTA Letter, ”NCTA
Asks FCC to Correct 2005 Cable Price Report. CPI: BLS.
Conclusion
Disclaimer
Outline
FCC Overview
Merger Review at the FCC
Recent Issues of Interest to
Economists
Quality-Adjusted Cable
Prices
 Rising Cable Prices
 Quality?
 Viewing Hours
 PPVH
 Other Measures
 Conclusion
 What can be done?
Resources
Economics at the FCC 20 / ??
.
.
.
.
.
.
.
.
84.1
.
.
.
.
.
.
.
50.4
.
.
.
.
.
.
41.8
.
.
.
.
.
.
.
18.8
0
20
40
60
80
Percent Increase
1997 1998 1999 2000 2001 2002 2003 2004 2005
Year
Weighted Average B+EB+D Price
PPVH_{Cable} (EB+D Expn/Cable Min)
CPI Cable
CPI (All Goods)
• Conclusion:
? Cable prices have grown much faster than inflation, on either a raw
or quality-adjusted basis.
Sources: As in slides 2, 17, and 20.
What can be done?
Disclaimer
Outline
FCC Overview
Merger Review at the FCC
Recent Issues of Interest to
Economists
Quality-Adjusted Cable
Prices
 Rising Cable Prices
 Quality?
 Viewing Hours
 PPVH
 Other Measures
 Conclusion
 What can be done?
Resources
Economics at the FCC 21 / ??
• All this is a precursor to the important policy questions:
1. Why do cable prices continue to rise?
2. What can be done...
? To promote competition?
? To ensure the delivery of diverse video programming at a
reasonable cost to consumers?
References
Disclaimer
Outline
FCC Overview
Merger Review at the FCC
Recent Issues of Interest to
Economists
Quality-Adjusted Cable
Prices
Resources
 References
Economics at the FCC 22 / ??
CRAWFORD, G. (2000): “The Impact of the 1992 Cable Act on Household
Demand and Welfare,” RAND Journal of Economics, 31(3), 422–449.
WILDMAN, S. (2003): “Assessing Quality-Adjusted Changes in the Real
Price of Basic Cable Service,” Discussion paper, Michigan State
University.