AN EMPIRICAL STUDY OF THE SUBSCRIPTION TELEVISION SERVICES MARKET WITH COMPETITIVE PROVIDERS*



by


John Agyei Karikari **
Stephen M. Brown
Amy D. Abramowitz

US General Accounting Office
441 G. St. NW, rm 6K17R
Washington, DC 20548-0001


First Draft: August 2000


Abstract

This study investigates empirically the nature and degree of competition in the subscription television (STVS) services market, in the presence of competition from direct broadcast satellite (DBS), local exchange telephone carriers (LECs) and cable overbuilders. We estimate jointly a four-equation structural model of cable rates, cable demand, cable channels and DBS penetration, using data for 1998. Our results show that DBS penetration did not result in lower cable rates, particularly in metropolitan areas. The system upgrades enabled cable providers to offer more channels and to meet the competition from DBS-non-price competition. Cable subscribers were willing to pay high rates for the high quality services (more channels and digital) made possible by the upgrades. Cable rates were, however, lowered by about 10 percent in response to head-to-head competition from LECs and cable overbuilders. The high cable rates encouraged migration from cable to DBS, especially in !
!
competitive franchises. We also considered the impacts of various market forces and regulatory factors on cable rates, subscriptions, channels, and DBS penetration.

Keywords: Subscription television services market, cable TV, direct broadcast satellite (DBS),
pricing behavior, non-price competition
JEL Classification: L96, L13, C30



* Paper will be presented at the 28th Annual Telecommunications Policy Research Conference, Alexandria, VA, September 23-25, 2000.

The opinions expressed in this paper do not necessarily reflect the opinion of GAO or its staff. We thank John Mayo, Jay Cherlow, Faye Morrison, and Kiran Duwadi for their helpful insights and comments. Any remaining errors are our sole responsibility.

** Corresponding author: Tel: (202) 512-6908; e-mail: karikarij.rced@gao.gov.