Clipping Cable's Power
Norma Madison has had it with her cable-TV company. The 64-year-old retired deli clerk lives on less than $500 a month in rural Springfield, Ore. Yet she forks over $43.62 for basic television reception--more than double the $18.80 she paid in 1990. "They're pricing people right out of TV," she says. And what's she getting for her money? "The John Wayne and Clint Eastwood films have been rerun at least 30 times each," she says.
Madison is ready for a shoot-'em-up--and she's not alone. Consumers are livid about cable rates, which rose 8.5% on average last year, four times the inflation rate. So with elections looming, pols and policymakers are coming out with guns blazing. They have an opening: The Federal Communications Commission's authority to regulate cable rates expires in March, 1999. "We shouldn't expose consumers to an unregulated monopoly," says FCC Chairman William E. Kennard, who wants Congress to consider renewing the FCC's powers.
The cable crisis is another sign that the 1996 Telecommunications Act hasn't lived up to its promise. When the Act passed, lawmakers had expected cable competition to spring up from local phone companies and from satellite. Instead, phone companies have been plowing money into new capacity and better data-communications services. And high costs have kept operators of direct broadcast satellite (DBS) systems from grabbing big chunks of the market from cable. "Waiting for competition has been like waiting for Godot," says Larry Irving, assistant secretary at the Commerce Dept.
LEG UP. Congress isn't considering reopening the telecom act--yet. But if cable rate rises don't subside, House Republicans want to introduce "video competition" legislation by 2000 to help cable's rivals. Other proposals range from reregulating rates to giving rivals such as DBS operators a leg up. Representative Peter A. DeFazio (D-Ore.) has even proposed freezing cable rates.
First, though, Congress must decide whether to extend the FCC's authority to regulate the industry. While Representative Edward J. Markey (D-Mass.) has already introduced a bill to do that, Republicans are balking.
The GOP has its own preferred route: Aid satellite TV rivals by lowering the copyright fees they pay to carry network broadcasts, allowing them to transmit local broadcasts and giving them better access to cable programming. "If competition hasn't emerged, we've got to do more than let cable companies continue," says House Telecommunications Subcommittee Chairman W.J. "Billy" Tauzin (R-La.).
The cable industry insists there's no need for new regulations and point to continuing subscriber growth as a sign that consumers aren't unhappy. Tele-communications Inc., in Englewood, Colo., gained 155,000 new subscribers in the last quarter despite rates that are 6.5% higher than a year ago. And on Mar. 24, TCI reported a 28% jump in operating cash flow for its latest quarter. Englewood (Colo.)-based Media One saw a 2% rise in subscribers after raising rates 8% in January. Consumers "feel they are getting service for the money," says Executive Vice-President Ron Cooper.
They can expect to pay even more. Under current rules, cable operators can pass along most cost increases to ratepayers. The biggest variable now is the soaring price of programming. "If the Knicks want to sign Michael Jordan for $50 million a year, guess who gets to pay for it?" asks John Malone, chairman of TCI, which says its programming accounts for 70% of costs. "The poor suffering cable subscriber and their poor suffering cable operator."
Cable companies also are asking customers to help pay for network upgrades. Operators spent $7.5 billion to build and improve systems and services, roughly the same proportion of revenues as the telcos spent, says Bank America Robertson Stephens analyst Timothy Horan. By 2000, with high-capacity wiring, new switching equipment, digital set-top boxes, and cable modems, the cable systems may offer competition to local telcos. "The FCC has got to look at this from a more holistic point of view," says Bob Fox, vice-president at Mercer Management Consulting.
Holistic, schmolistic, counters the FCC, which doesn't believe the industry has to charge consumers for future improvements. Cable operators enjoyed cash flow estimated at $12 billion last year, up from $9.7 billion in 1992, according to Paul Kagan Associates. Ad revenues jumped 12%, to an estimated $1.9 billion over the last year, says Kagan.
In contrast, cable's DBS rivals still lag badly. DBS operators have just 6.9% of the pay-TV market, compared with cable's 87%. Potential customers have been turning down DBS, largely because it doesn't carry local channels. Senate Commerce Committee Chairman John McCain (R-Ariz.) plans to introduce a bill changing that in April.
Satellite operators also want Congress to strengthen rules requiring cable companies to provide programming to rivals on fair terms. DBS companies say they often are forced to pay a premium. "We shouldn't have to pay more," says Charles W. Ergen, CEO of Echostar Communications Corp.
Direct broadcasters also complain about programming access. Cable companies that own programmers and transmit via satellite are required to sell programs to all comers on an equal basis. But cable companies try to work around that rule. In September, DirecTV filed a complaint at the FCC against Comcast Corp. for refusing to let it carry Comcast SportsNet. Comcast is delivering the programming via a fiber-optic network and says it does not have to follow the satellite program-access rules.
NO SWEAT. Cable competitors want the Justice Dept. and the FCC to block a merger between American Sky Broadcasting Co., which is News Corp.'s U.S. satellite property, and Primestar, a satellite broadcaster owned by a cable consortium. The combination would concentrate "a disproportionate share of the precious spectrum" that is supposed to compete with cable, says DirecTV President Eddy W. Hartenstein.
For now, the cable industry isn't sweating. "I am very optimistic," says Leo J. Hindery Jr., president of TCI. Still, the cable guys can't be too complacent. "The cable companies claim they don't act like monopolists," says Gene Kimmelman, co-director of Consumers Union. "But all the while, they're charging prices like monopolists." As autumn draws nearer, both Democrats and Republicans in Washington could be outdoing themselves to find votes by taking on the local cable companies.