Telephone landlines and traditional cable TV businesses have cost characteristics
similar to electric utilities. Once the wires have been put in place, the incremental
cost of extending TV or telephone service to another household is small. The extent
of the scale economies in such industries may warrant licensing only one cable
company or one local telephone service provider. In fact, municipalities have historically
issued an exclusive service contract to such public utilities. The rationale
was that one firm could service the whole market at much lower cost than several
firms dividing the market and failing therefore to realize all of the available scale
economies.
However, remember that the optimal scale of operation of any facility, even a
declining cost facility, is limited by the extent of the market. The expansion of
the cable TV market has always been limited by the availability of videocassette
recorders, DVD players, and services such as NetFlix because they are inexpensive,
convenient entertainment substitutes. As a result, the potential scale economies
suggested by industrial engineering studies of cable TV operations have never
been fully realized.
In addition, both telephone and cable TV companies are now facing new wireless
alternative technologies. Satellite-based digital television and cell phones have
cut deeply into the market once reserved exclusively for monopoly licensed communications
companies. As a result, the average unit cost in these cable-based
businesses increased from B to A as volume declined (see Figure 9.3). Consequently,
the price required to break even has necessarily risen. Of course, that
sets in motion a vicious circle; the higher the cost-covering price, the more customers
the cable TV and telephone companies lose to wireless alternatives.