CableCARD Waiver Denial Means ‘Social’ Costs, Study Says

The study -- filed last week at the FCC to back Comcast’s waiver request -- was by Michael Katz, U. of Cal.- Berkeley economics prof. and onetime chief FCC economist. A waiver denial would harm consumers by stifling competition, boosting costs and limited adoption of new products and services. The study assumes 3-4.5 million low-cost, limited- capability boxes deployed per year. It uses the “low end” of NCTA’s estimated average cost increase for a set-top and CableCARD -- $72 -- to gauge the social cost.

The estimate assumes cable operators deploy the boxes at the rate they're planning, the study said: “One would expect cable operators to deploy fewer limited-capability, digital set-top boxes in response to the substantial price increases that denying the waiver would trigger.” Actual set-top outlays would be less than the report projects, it said.

But lower deployment of boxes would lead to “losses in consumer surplus as fewer consumers would enjoy the benefits of digital services,” it said. Other downsides: (1) Higher costs from dual distribution of analog and digital cable programming. (2) More govt. spending for DTV converter boxes via higher coupon subsidies. (3) Higher unit costs for the limited-capability, digital set-top boxes deployed, “to the extent that economies of scale were not fully realized.” As a matter of economic theory, “these harms to efficiency could be larger or smaller than the change in expenditures on set- top boxes due to the quantity decrease,” the study said: “The present analysis treats them as offsetting and thus uses the projected increase in expenditures holding the number of set-top boxes constant as a measure of the social costs of denying the waiver.”

As Comcast argued in its waiver application, Katz said granting the waiver won’t “harm competition in consumer electronics.” CE makers don’t “want to serve the low-cost, limited-capability segment of the market,” whether cable companies offer them or not, he said: “One could argue that if cable operators were not allowed to offer low-cost, limited-capability set-top boxes, then consumers would be forced to buy the high-end equipment that consumer electronics manufacturers wish to sell. To the extent that it had this effect, such a policy could raise the profits of some consumer electronics manufacturers and retailers. But even if this policy did raise manufacturer and retailer profits, it would be a costly and inefficient means of doing so. And it would harm consumers.”

Comcast and other cable operators have strong incentives to support CableCARD-ready set-tops “because they otherwise will not be able to roll out advanced new services that are vital to their revenue growth,” Katz said, repeating a cable argument CE repeatedly has pooh-poohed. “The requested waiver applies to boxes that cannot support advanced functions and services, such as DVR and high definition television. These advanced functions and services are a critical part of Comcast’s financial future.” Cable has strong reasons to back CableCARD “to avoid the costs of handling customer complaints, as well as the adverse effects on company reputation,” Katz said: “Regardless of where they obtained the equipment, subscribers tend to call their cable operator when a CableCARD device does not function properly. These service calls and visits are expensive, and a dissatisfied customer is also expensive.”