Why Your Cable Bill Is Soaring

Scant competition has prices climbing and viewers up in arms. Here are 10 industry secrets to help you decode your bill -- and shrink it

By Amey Stone

Remember when your cable bill was just $22 a month? Now, it's more like $45. Add on digital service, high-speed Internet access, and a set-top box that records your favorite shows, and your bill could easily climb above $130 a month (mine has). That's $1,500 a year -- enough to make any family think good and hard about the value they're getting for their money. Sticker shock is leading to growing customer dissatisfaction with cable service and higher rates of churn, say industry analysts.

Yet the largely unregulated cable industry -- which is busy promoting spiffy new digital services -- isn't exactly rushing to explain the reasons behind all the price hikes. Little wonder politicians are lately jumping into the fray. After all, they watch cable, too. Congress' investigative arm, the U.S. General Accounting Office (GAO), recently released a report that shows why consumers don't have the choice they want, why prices are rising so quickly, and why the forces of competition haven't kicked in, despite cable deregulation in 1996.

UNSPOKEN TRUTHS.

  With that report, plus the help of consumer activists, industry analysts, and, in some cases, cable providers themselves, BusinessWeek Online has uncovered some unspoken truths about the cable business. Here are 10 industry secrets to keep in mind as you look for ways to get more out of the cable service for which you're paying so dearly:

1. Higher programming costs and spending on infrastructure to provide digital service are bulking up bills. You aren't really paying more because there are so many channels. The main problem is programming costs have gone up -- by 34% in the past six years, the GAO report found. Much of that is because of the high salaries commanded by sports celebrities and the actors who star in top-rated shows. Those higher costs are passed onto the cable operators, who pass them onto customers, explains Gary Arlen, a media analyst with Arlen Communications in Bethesda, Md. Says Arlen: "Someone has to pay."

Cable operators have also spent a lot to upgrade their systems -- more than $75 billion from 1996 to 2002, according to the GAO report. Those upgrades were mainly to allow them to offer high-speed Internet and digital service, and the extra fees they charge for those services will more than cover those costs over time. What makes consumer activists mad is that providers are also charging nondigital (or analog) customers more for cable as well. "The upgrade was paid for twice," says Mark Cooper, director of research at the Consumer Federation of America.

2. If cable concerns faced more competition, bills would be lower. This was a major finding by the GAO, which reported that rates are about 15% lower in areas where two cable companies compete. Unfortunately such competition exists in only about 2% of markets nationwide. The report also concluded that cable providers give better service when a satellite competitor exists, although they don't necessarily offer lower prices.

Fortunately, Arlen believes the cable industry will face more competition, especially for packages of digital services that include phone, video, and high-speed Internet access. He says broadcasters are even talking about sending cable channels over the airwaves, which could be a major source of competition for cable. For now, he advises consumers to shop around and compare service offerings and deals. Surprisingly, he notes, "there are sometimes better options in smaller towns."

3. If you want all the bells and whistles, buy as many services as you can from one company. For example, most cable providers will give you a $10-a-month discount on high-speed Internet access if you also buy cable from them. Add phone service, which, when available, is typically about 10% cheaper than the telco offers anyway, and you may be able to get an additional $5 or $10 bucks off that bill. Cox (COX ) and Time Warner (TWX ) are the leaders in offering phone service so far, but others are jumping in.

Voice service is new, but "customers tend to stick with it," says Josh Bernoff, a cable analyst with Forrester Research. Cox finds that subscribers who have all three services -- video, phone, and Internet -- are 50% less likely to leave. "Getting a better value is not always defined as a lower price," says Michael Goodman, senior analyst at the Yankee Group in Boston. "Sometimes it's increased service."

4. Cable operators know you watch only about 15 of the hundreds of channels you receive. But if they let you pick and choose the channels you want, it would mess up their whole business model. The way the business works, network operators (like ESPN) negotiate with cable outfits to provide a package of channels for a set fee per subscriber. (ESPN is the most expensive, charging $2.63 per subscriber per month, says Goodman.) Most cable networks bundle less popular offerings with their flagship channels, hoping that a show will take off. Also, by having more channels on the air it creates venues for selling and airing more advertising.

"It amounts to a sort of social welfare program for programmers," says Cooper. "They're picking and choosing what people get to see and taxing everyone to pay for that." This dynamic gets more complicated since many cable outfits also own cable networks (for instance, Time Warner owns HBO and CNN). The GAO report found that companies are much more likely to carry their own networks.

5. If people could pick and choose only the channels they want, all those less popular channels likely would go out of business. For shows that the masses watch, it might not matter much. But the result would be less niche programming (you might lose your favorite channel) and a smaller number of homogenous networks, says Goodman.

Plus, without those additional revenue sources, cable networks would charge even more, says Bernoff. "People would end up paying more money for less content," he says. "It sounds like a good idea, but in the end it's not likely to be." For now, cable operators say they're trying to meet consumer demand for more choice by carving up digital offerings into premium tiers, such as for extra sports or Spanish language programming.

6. You can get just a premium channel without paying for dozens of other channels. For most people, the option is impractical. Still, the Federal Communication Commission requires cable providers to allow customers who purchase the most basic level of service (only the local broadcast channels, plus some government channels, for about $11), to add premium channels or pay-per-view events à la carte. The big problem is that to gain this right, you must forgo Lifetime, MTV, ESPN, CNN, and all the other channels that come as part of the next level of service.

Very few customers find that a good deal (fewer than 5% at Cox Communications, for example). But consumer advocates argue it's partly because cable concerns don't advertise that option. Says Cooper: "They don't want people to be aware of that option."

7. If you don't go digital, you can save a lot of money. About 60% of cable customers haven't made the jump to digital service and may want to keep it that way. With analog, you probably don't need the set-top box and remote at all, since most TVs come configured for cable. That will shave a few bucks off your bill. Also, a lot of customers aren't satisfied with digital service, since its main benefit is adding more channels, which most consumers don't want. One in four customers who sign up drop off, says Arlen.

8. To make digital cable worth the extra money, you may want to get a digital video recorder (DVR). Whether you buy the device from TiVo (TIVO ) or another provider, or upgrade to a new set-top box (about $10 more a month), DVR service will enable you get more out of the programming you pay for.

You can zip through commercials and make sure the programs you want are there when you're ready to watch them. You may even be able to drop premium channels since you will be able to choose from so many more movies and programs shown throughout the day and record them for later viewing, says Bernoff. All the top cable operators are planning on delivering DVR from set-top boxes in 2004, but it may not be available in all locations for some time.

9. To really save money, skip cable, and buy your favorite shows at retail on DVD. A new trend in DVD sales is to package complete seasons of popular shows on a DVD. You may have to wait, but it's a far cheaper option than paying for cable if all you really want to do is keep track of the shenanigans of Tony Soprano.

10. Want to complain? Contact your "local franchising authority," or LFA. This is the governmental body that negotiates with the cable outfit to provide local service. Each month you pay a fee to this agency, which shows up as a line on your bill, so feel free to contact them if you're unhappy with service. The phone number should be on the back of your bill. You may also want to contact a congressional representative. With consumers increasingly feeling gouged by high cable bills, you might find a willing ear from local politicians.

Stone is senior writer for BusinessWeek Online in New York

Edited by Beth Belton

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