Under Chairman Tom Wheeler, the Federal Communications Commission has been fairly serious about encouraging competition.
The federal agency made it clear that it would not support a merger between Sprint and T-Mobile because it would have reduced the number of major wireless carriers from four to three. It also forced the dissolution of the proposed deal between Comcast (NASDAQ:CMCSA) and Time Warner Cable (UNKNOWN:TWC.DL) at least partly because it would lessen competition.
Despite that clear commitment to making sure the industries it regulates remain competitive, the FCC is considering changing a rule that allows local government to impose rate regulation on cable companies. Under the current system, cities and towns can control what cable providers charge unless the company proves it faces effective competition.
A new proposal being considered by the agency would shift the burden of proof from the cable provider to the town or city. Basically, if the new rules are adopted, the default assumption would be that cable companies have enough competition and are therefore not subject to rate regulation.
It's a not-very-subtle change that could have a direct impact on your cable bill, especially in a climate where the precise definition of what constitutes competition for traditional pay-TV has become more than a little murky.
What is the FCC considering?
The FCC released a Notice of Proposed Rulemaking recently. That's exactly what it sounds like -- an incredibly detailed, hard-to-read document meant to tell the public about a potential change in the law. The document explained why the agency was considering the change:
In 1993, when the Commission adopted its presumption that cable systems are not subject to effective competition, incumbent cable operators had approximately a 95% market share of MVPD subscribers. Only a single cable operator served the local franchise area in all but "a few scattered areas of the country" and those operators had "substantial market power at the local distribution level." DBS [satellite] service had yet to enter the market, and local exchange carriers ("LECs"), such as Verizon and AT&T, had yet to enter the MVPD business in any significant way.
That, of course, has changed with the growth of satellite and phone-company providers and the FCC is acknowledging that the market is no longer the same. Whereas there used to be only one cable provider in a community, now many people have more options including satellite companies and phone company-provided pay-TV. The proposal does not even address whether streaming live-television services like Dish Network's (NASDAQ:DISH) Sling TV count as competition.
The FCC provides some numbers to back up its claims, noting that traditional cable companies have lost subscribers "from year-end 2012 to year-end 2013 (from 101.0 million to 100.9 million)." The document also notes that the telephone company pay-TV services have grown from 9.9 million homes nationally to 11.3 million and that Dish along with satellite rival DirecTV (NYSE:DTV.DL) serve nearly the entire population of the United States.
Does the FCC have a point?
On the surface, it seems like cable has ample competition and that it makes sense for the companies to no longer have to establish that fact on a local level to avoid rate regulation. But the Intergovernmental Advisory Committee -- a board of local officials that serves in an advisory capacity to the FCC -- disagrees and explained why in a document filed with the agency:
With respect to the substance of the NPRM, the IAC submits that adoption of a rebuttable presumption of effective competition for the entire country is contrary to the public interest.
There can be no doubt that cable services as a practical matter are not subject to effective competition, despite the language of the statute and tests established pursuant to federal law. Cable rates have risen at rates substantially higher than inflation and consumer satisfaction with cable services has consistently been a significant issue, even in areas found by the Commission to be subject to effective competition. If there were truly effective competition in the true sense of the term, rates would decrease and consumer satisfaction would increase.
The IAC is essentially contending that while it looks like traditional cable companies have competition, the alternative options have not been attractive enough to consumers for the traditional providers to lower prices or treat people well. That's a nontraditional definition of competition, but the IAC has a point.
The FCC should leave this alone
Under Wheeler, the FCC has been more conscious of what the public wants and it's hard to imagine the public wants its cities and towns to lose the ability to regulate cable rates. To be sure, it's a different world and people do have more options for pay-TV. It's reasonable to think that the cable companies can use that to argue against regulation in truly competitive markets.
But, on a broad level, cable still dominates. The FCC -- while seemingly well-intentioned in examining this issue -- should leave the status quo in place.
Daniel Kline owns shares of Apple. He is generally against government rate regulation but might make an exception for cable companies. The Motley Fool recommends Apple, Google (A shares), Google (C shares), Netflix, and Verizon Communications. The Motley Fool owns shares of Apple, Google (A shares), Google (C shares), and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.