How Elimination of ‘Junk’ Cable Fees Can Reduce Consumer Choice

Ryan Bourne and Sophia Bagley

The Biden administration’s crusade against “junk fees” continues. Federal Communications Commission (FCC) Chair Jessica Rosenworcel recently announced a proposal to eliminate early termination fees (ETFs), or “junk fee billing practices” as she describes them, for cable and satellite TV providers. The proposal is slated for a vote on December 13 and will likely pass given the Democrat majority at the FCC.

Eliminating ETFs would alter the way cable and satellite TV services are priced. At the moment, ETFs are levied if a consumer enters a long‐​term service contract for cable or satellite TV service and cancels their contract before it’s finished. The fees typically start at a high rate and are then reduced each month that a consumer stays in their contract.

The Biden administration (and many consumer groups) see ETFs as unfair charges simply designed to lock in consumers by deterring them from shifting to another service. As such, they deem their use inherently anti‐​competitive. As with other so‐​called “junk fees” the administration bemoans, however, characterizing ETFs as some sort of standalone exploitative charge, rather than a fee that forms a part of an overall pricing model, leads to sloppy economic thinking.

Early Termination Fees can serve several economic purposes for cable and satellite TV companies. There are one‐​off costs to acquiring new customers, as well as for setting up new accounts and providing and installing equipment. These must be recovered, whether the customer sticks around for the length of the contract or not.

The fees also help provide more revenue certainty for businesses, which grants the companies the confidence to make bigger long‐​term investments in service infrastructure, particularly in more remote regions or where expensive overhauls of technology are required.

Banning ETFs obviously has some theoretical economic benefits, such as removing financial barriers to customers changing services when a novel product better suits their needs or when they move residence to somewhere not covered by their current TV provider.

Yet enforcing a ban is no free lunch. These are profit‐​seeking businesses that will seek to protect their revenue base. So the primary effect of banning ETFs would mean some combination of higher up‐​front monthly prices for all customers to reflect greater turnover risk, fewer promotional rates, higher installation charges, or a shift to a more “pay‐​as‐​you‐​go” model for channels or shows. There’s no a priori reason to think these pricing structures are better for consumers overall.

In fact, given that the market for television is increasingly competitive, with multiple different streaming platforms already offering “no contract” subscriptions, it seems a bizarre time to ban a whole model of pricing. Customers can already opt for many platforms where they can sign up for a streaming service and cancel at their leisure. But these have incredibly high churn rates for subscribers, which alters the incentives for what type of TV programs are offered.

Cable and satellite services typically offer a more comprehensive package of channels, usually comprising live events, like sports, alongside entertainment, news, and weather channels. But if the companies have no lock‐​in mechanisms to ensure steady cross‐​subsidies are available to provide more niche channels, and they find they can’t charge higher monthly prices without losing customers to streaming services, then we’d expect cable companies to start prioritizing trendier output.

In other words, the packages and channels they offer will increasingly look more like streaming platforms, with fewer niche channels, more customizable packages, and maybe even an increased focus on on‐​demand services, which are less reliant on retaining long‐​term customers to provide cost‐​effectively. In that sense, eliminating these “junk fees” could reduce choice for consumers in how certain TV packages are bundled. It would incentivize less in the way of output consumers watch rarely but value being available.

This proposal is another example of what I call politicians’ “war on prices.” Behind most unusual pricing structures are important economic considerations that are sometimes not immediately clear to regulators or consumers. The fact that cable companies have adopted ETFs suggests that banning them will be costly to the current model of TV provision. It may be that competitive pressure from streaming platforms would have made the ETF pricing strategy unviable anyway, in time, but this should be decided by sovereign consumers, not regulators.