$6 and $15 per household per month in public support for television. The US, despite
being the largest television market in the world, provides only $0.40 per household per
month in government support for PSBs.
7.2.1.2 Pay Television
Pay television is just that: television supported at least in part by payments from sub-
scribers (households). The production of pay-television programming occurs as part
of a vertical supply chain. Television channels contract with (often small) program pro-
ducers for individual programs and form (often 24-h) television schedules. They then
license the right to perform these programs with cable, satellite, and telecommunications
companies in what is called the programming market. In turn, these distributors aggregate
channels into bundles and sell access to these bundles to households in what is called the
distribution market. The right panel of
Figure 7.1 shows the vertical structure and pay-
ment flows associated with pay-television providers. Revenues in the pay-television
industry arise from a mix of subscriber and advertiser payments. Content providers
(non-broadcast television channels) differ considerably in their revenue mix, but roughly
Figure 7.3 Public funding for television, 2011. Notes: Reported is the amount of public (government)
funding for television in a range of countries in the year 2011. The top panel reports aggregate funding
(in $ billion) and per-household funding (in $ per household per month). Amounts have been
converted to USD using World Bank average 2011 exchange rates.
Ofcom (2012), figure 3.1, author
calculations.
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The Economics of Television and Online Video Markets
50% of upstream industry revenue comes from each source (SNL Kagan, 2014a). Distrib-
utors (cable, satellite, and Internet Protocol television (IPTV) providers) rely predomi-
nantly (90+%) on payments from subscribers.
7.2.1.2.1 Pay TV Distribution
In the US, pay television arose in the form of “cable television.”
14
Cable TV began in the
1950s to transmit broadcast signals to areas that could not receive them due to interfer-
ence from natural features of the local terrain (e.g., mountains). Cable systems needed
access to public infrastructure and so typically reached exclusive franchise agreements
with local governments granting this access in return for price, quality, and/or service
guarantees. FCC regulations initially limited the provision of additional, non-broadcast,
programming, but these were relaxed in the late 1970s and, with the simultaneous devel-
opment and regulatory liberalization of satellite technologies, numerous programming
networks were launched, including some of the most recognizable TV brands in the
world (e.g., CNN and ESPN). Between 1980 and 2000, the pay (cable) TV industry
experienced phases of price regulation and deregulation, and grew considerably.
15
Entry into the pay-television distribution market is a risky and expensive undertaking.
Many thought cable distribution was a natural monopoly in the early years of the industry
and cable operators consequently negotiated exclusive arrangements with franchise
authorities.
16
The 1992 Cable Act reversed this policy, outlawing exclusive franchises,
but there was limited entry concentrated in big cities from so-called cable overbuilders.
The year 2000 was a watershed in the development of the US pay-television industry.
Previous to that year, satellite companies were not permitted to distribute local broadcast
signals by satellite, putting them at a competitive disadvantage relative to cable operators.
The 1999 Satellite Home Viewer Improvement Act relaxed this restriction, permitting
the so-called local into local carriage of local broadcast signals into local television mar-
kets. Cable subscribers peaked in 2000, despite continued annual industry subscriber
growth, and are now 10% below that peak. Subscriptions to the two major national
satellite providers have absorbed the majority of industry growth since that date.
The gradual convergence of television and communications (i.e., telephone) technol-
ogies in the last 20 years has given rise to entry by former telephone companies (telcos)
into video markets. Most such entrants provide service using Internet Protocol (IP) tech-
nologies rather than conventional dedicated coaxial cable or satellite broadcast technol-
ogies, and are therefore called IPTV providers. In the US, telco entry was permitted by
14
The material discussed in this subsection is discussed in more detail in Crawford (2013).
15
See Hazlett and Spitzer (1997) and Crawford (2013) for discussions of this period in the industry’s
regulatory history.
16
The auctioning of cable franchises was thought to be one way of controlling cable system market power
and was first suggested by
Williamson (1976). Zupan (1989a,b) evaluates the success of this strategy for
initial franchise awards (renewals).
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Handbook of Media Economics
the 1996 Telecommunications Act, but did not happen on a large scale until the mid-
2000s with major infrastructure investments by two of the three major telcos. Since then,
these two operators have grown to serve 10% of the national market despite being avail-
able to less than two-thirds of US households.
Figure 7.4 shows the pattern of subscribers
to US pay-television platforms from 1985 to 2013.
Using data from
FCC (2012a), Figure 7.5 reports an estimate of the distribution of US
cable television prices across markets in 2011, measured as the average expenditure on
Basic, Expanded Basic, and Digital Basic cable services.
17
There is significant heteroge-
neity across cable systems in the price of Basic Services, with an average of $67.64.
18
0
20
40
60
80
100
Subscribers (millions)
1985 1990 1995 2000 2005 2010
Year
Total MVPD subscribers Cable subscribers
Satellite subscribers Telco subscribers
Figure 7.4 US pay-television distributor subscribers, 1985–2013. Notes: Depicted is the number of US
pay-television subscribers (in millions) by distribution platform between 1985 and 2013 (
SNL Kagan,
2014a
). MVPD stands for Multi-Program Video Distributor, the FCC definition of a pay-television
distributor.
17
These data were obtained from the FCC using a Freedom of Information request. They included infor-
mation about the price for Basic, Expanded Basic, and the most popular Digital Basic service for a stratified
random sample of cable systems in the US. See
FCC (2012a, para. 8) for details of the sampling plan. The
sample averages in the Price Survey are weighted by subscriber. Because the data provided were stripped
of system and geographic identifying information, I could not weight by subscribers. Following
FCC
(2012a)
, I calculate average expenditure as the price of the Expanded Basic service plus a weighted average
of the price of the Digital Basic service, with the weight given by the share of Expanded Basic subscribers
that took Digital Basic in 2011. From
SNL Kagan (2014a) , this figure was 79.4%.
18
See also Table 7.4.
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The Economics of Television and Online Video Markets
Much of the heterogeneity in prices is likely driven by heterogeneity in the number of
channels available to subscribers depicted in
Figure 7.7.
A recurring concern in US pay-television markets is the persistent increase in pay-
television prices over time.
Figure 7.6 reports price indices from the Consumer Price
Index (CPI) from December 1983 until December 2013. Reported are series for
Multi-Program Video Distributor (MVPD) (i.e., cable + satellite) services and consumer
non-durables. Pay-television prices have grown by 5.1% annually, almost 2% per year
faster than non-durable prices.
19
This price growth has prompted recurring concerns
about market power in the industry, a topic I revisit in
Section 7.4.3.
7.2.1.2.2 Pay TV Program Production (Channels, Networks)
There are broadly three types of pay-television channels. Cable programming networks are
fee- and advertising-supported general and special-interest networks distributed
0
0.02
0.04
0.06
0.08
40 60 80 100
Density Mean
Figure 7.5 Distribution of cable prices, 2011. Notes: Depicted is the distribution of cable television
prices as measured by average household expenditure on Basic, Expanded Basic, and Digital Basic
cable services. The mean of $67.64 is indicated by the vertical line in the figure. Source: Author
calculations from
FCC (2012a).
19
A significant challenge when interpreting pay-television price changes is accounting for differences in the
quality of cable service.
Crawford et al. (2008) describe how the FCC, in FCC (2009), proposed using
price-per-viewer-hour as a measure of quality-adjusted cable prices. They show that between July 1997
and January 2008, price-per-viewing-hour of cable services increased by a CAGR of 5.8%, 2.8% more
than the 3.1% CAGR in the non-durable CPI over the same period. Thus, cable prices have also been
rising on a quality-adjusted basis.
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Handbook of Media Economics
nationally to distributors via satellite. Examples from the US include some of the most
recognizable networks associated with pay television, including MTV, CNN, and
ESPN.
20
An important subset of cable networks from a policy perspective are Regional
Sports Networks (RSNs). As per their definition, these are regional networks that carry live
broadcasts of performances of sports teams that play in and belong to the areas served by
the networks. Examples include Yankees Entertainment and Sports Network (YES),
Comcast SportsNet Chicago, and the Big Ten Network. While the sports carried vary
somewhat across networks, a typical RSN will show those games that are not being car-
ried on a national network from the US professional basketball (NBA), baseball (MLB),
1985 1990 1995 2000 2005 2010
0
50
100
150
200
250
300
350
400
450
500
12/86 4/93 11/94 1/06
MVPD (cable + satellite) CPI Non-durables CPI
Figure 7.6 MVPD (cable + satellite) prices, 1983 –2012. Notes: Reported are price indices from the
Consumer Price Index (CPI) from December 1983 to December 2013 for MVPD (Multi-Program
Video Distributor, i.e., cable + satellite) services as well as consumer non-durables. Source: Bureau of
Labor Statistics.
20
So-called cable networks earned their name by having originally been available only on cable.
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The Economics of Television and Online Video Markets
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