The Telegraph
Since 1st March, 1999
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- CAS is destined to make the cable industry more transparent

The conditional access system has been shelved temporarily, but consumers in the four metros, where the new system was supposed to be introduced from mid-July, are not sure whether to feel relieved or disappointed. The truth is that most viewers are still in the dark as far as the details of the new system are concerned. The government, especially the information and broadcasting minister, Ravi Shankar Prasad, on the other hand, considers CAS as a definite means to please the consumers before the elections next year. So much so that the government has persuaded the provi- ders of cable services to conduct an awareness campaign before the new system is introduced.

How is CAS supposed to please the consumers' Would it please all consumers or only a section of them' More important, CAS entails the government to intervene into the cable television market and bargain on behalf of the consumers over the price to be paid by them to the service providers. So, is it not a departure from the announced policy of liberalization and non-intervention' Is the government tampering with market forces to woo the voters on the eve of an election' Or is the venture consistent with the government’s liberal policy stance' Indeed, one needs to answer these questions for an understanding of the full implications of CAS.

Let us start with the demerits of the present system which, presumably, has led the government to look for an alternative. Under the present system, cable service reaches the consumer only after it passes through a number of intermediate stages. At the one end of the spectrum there are the broadcasters who are basically the producers of television services. At the other end lies the consumer. In between various layers of middlemen, large, medium and small, weak and powerful, crowd the market. Producers sell their products to large distribution hubs called multi-system operators.

The MSOs, in turn, sell the services to local operators who finally sell the product to the consumers. Over the last ten years or so, big producers have managed to acquire stakes in MSOs indicating vertical integration and to some extent concentration. The present system, nevertheless, allows some market power to the small operator in the local market he is serving. The local operator takes full advantage of this. He is able to charge different prices in different localities, with price going up as the degree of affluence of the neighbourhood increases. Sometimes he would even charge, albeit surreptitiously, different prices to different households within the same neighbourhood. In other words, he has the power to price discriminate and indeed he uses this power to extract maximum rent from the consumers.

There are, of course, scores of markets where sellers enjoy market power. But surely we do not observe price discrimination in all of them. One wonders, what is so special about the market for cable services which enables the seller to charge different prices to different consumers' The secret lies in the word “services”. If for any tangible commodity, different prices are charged in different localities, it is natural for someone, looking for an easy buck, to buy some goods in the cheaper market and sell them for a profit in the market where price is higher.

Clearly, this cannot continue indefinitely, for the process of buying and selling would tend to increase demand in the cheaper market and supply in the dearer one. As a result, price will increase in the former and decrease in the latter eventually equalizing the two prices. But this process of arbitrage cannot work for services simply because services, once bought, are not resaleable. This explains why price discrimination is not so rare in the market for cable services.

What is wrong with price discrimination' One may argue that if local price increases with the degree of affluence of the neighbourhood, after all only consumers with a greater ability are paying a higher price. It is not a sound argument though. Not everyone in an affluent locality is affluent. Neither is a person residing in a less prosperous area necessarily poor. More important, price discrimination gives the seller a powerful weapon with which he can drain the consumer of his welfare. It is a raw deal for the consumer and someone, like the government, must do something about it.

The other problem with the existing system is that the consumer is compelled to buy an entire package irrespective of his actual consumption. A consumer has neither the talent nor the inclination to follow hundreds of channels in 15 different languages. He would like to watch programmes in two or three languages at the most. But the present system does not allow him to buy selectively. So a system should evolve where he has the option of not paying for the channels he will never view.

Finally, the present system deprives the government of its legitimate tax revenue. At present, neither the exact number of clients served by a local operator nor the price appropriated by him is transparent. Consequently, the government is in the dark as far as the tax base in cable markets is concerned.

Conditional access system is destined to bring about transparency in the cable industry. The government is sitting with the big players in the market, the broadcasters and the MSOs, to settle a price or to be more precise, an array of prices one for each package, which are to be uniformly paid by all consumers. Evidently, this will rob the local operator off his monopoly power and push him to the threshold of mere subsistence. He will now work just as an agent of a bigger player. One may expect an increase in the degree of concentration in the market. One may also expect the weeding out of price discrimination from the industry. Finally, one may expect a better collection of tax revenue.

All consumers will not gain uniformly from the deal, some may even lose. Those who were paying a lower than average price will face a price increase in the new regime. Those who were paying high prices before will definitely gain. Should we worry about the increase in the degree of monopoly in the market' Should we worry about the impoverishment of the local operators' Strictly speaking we should not. A decrease in the number of players in the market does not necessarily decrease the degree of competition, particularly if the existing players are engaged in fierce price competition. In the present situation, we do not know whether the players are openly competing or implicitly colluding. But we know for sure that the government is intervening in the market. Assuming that it is primarily concerned with the welfare of the consumers and not with the profits of the service providers, we should expect that this intervention will keep prices within limits. The marginalization of the small operators will in fact benefit the consumers.

As long as the small operators were enjoying some market power, consumers had to pay for their profits as well as the profits of the large players. With vertical integration and the small players becoming a part of the large, total profits reaped by the sellers taken together should fall and on this count consumers should benefit. Finally, is government intervention in the cable market justified' In markets for tangible commodities, if the government tries to reduce the price artificially, it acts like a disincentive to the producers who would typically respond by reducing supply. This, in turn, tends to reduce welfare. The cable television market, however, is different. Here the main production cost is in the nature of a fixed cost. Once this cost is incurred and the output is produced, very little additional expenditure is involved in supplying the product to an additional consumer.

Therefore, even if the government artificially reduces the price, the supplier has little incentive to reduce the number of clients to whom the service is to be provided. This definitely establishes a case for government intervention.

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