What Cable Customers Want: Choice
By Jane Black
The masses are ripe for revolt. That's one conclusion you can draw from the reaction to my Nov. 6 story on BusinessWeek Online alerting readers to a new federal rule that allows them to selectively order pay-per-view events and premium channels such as HBO, Starz, and Showtime instead of having to buy fat -- and expensive -- packages of programs to get those features (see BW Online, 11/6/02, "Big Cable's Package-Pricing Ploy").
The rule change meant that, suddenly, New York City fans of HBO's Sex and the City who don't watch much other TV could slash their cable bills from $56 to $31. For the lower price, they'd get only "basic" cable -- the networks, C-SPAN, plus a few others -- and HBO. No more Discovery, ESPN, or MTV.
The truth, I discovered, is that most people do want their MTV. But the overwhelming response to the story -- I received e-mail from more than 200 readers, and numerous news organizations followed the story -- also revealed that cable subscribers want something that they don't have much of now: choice.
After years of rate hikes and spotty service, customers also want respect. Philip Mahru, an employee of software company American Arium in Tustin, Calif., spoke for many when he wrote: "Even when asked, cable companies seem to not know about this [new] rule -- or they say something to the effect that this is the way they do business; take it or leave it." Most couch potatoes, including Mahru, aren't quite ready to shut off their service in protest. But one thing is clear: They're not in any mood to take it much longer.
It's no wonder. Between 1996, when Congress voted to deregulate the cable-TV industry, and last October, rates rose 45%, according to the Bureau of Labor Statistics, nearly triple the 17% rate of inflation over the same period. The cable figure doesn't include the holiday present that many operators are giving their subscribers this year: As of Jan. 1, Cablevision (CVC ) will hike charges 9% for customers in Long Island, N.Y. AT&T Broadband (a unit of Comcast [CMSCA ]) will boost bills for its Boston customers by 7.8%. Time Warner Cable (a unit of AOL Time Warner [AOL ]) will start charging 8% more in Binghamton, N.Y., and 7.2% more in Orlando, Fla.
Such increases are pushing cable out of reach for some subscribers. One reader in Hickory, N.C., who asked that her name not be used, wrote that she pays $13 a month to Charter Communications (CHTR ) for basic cable. She said she would like to add ESPN and ESPN2, but that would mean buying the entire middle-tier programming package -- and increasing her bill by $31, or 238%, well beyond her means.
SELLING LIKE MACY'S?
When she called her cable company to ask about a more modest option, she was informed by what she characterizes as a "laughing customer-service representative" that the she would have to pay up or do without. "The reality is we are a virtual department store of home entertainment," says Dave Andersen, senior vice-president for communications at Charter. "We buy products and put them on the shelf, just like Macy's does, and sell them to our customers. Contracts we have don't allow us to put them on an à la carte basis."
Still, many BusinessWeek Online readers are getting fed up. "I'm disgusted with the cable companies' tactics," wrote Peter Glenn of Wharton, N.J. "In order to get one additional channel (Animal Planet) I have to pay an additional $10 [a month], which includes another block of programming, mostly sports. My company [Cablevision] should offer a sports package separately for sports fans who are serious about it, and leave the rest of us alone."
Others complained that, with the rules now officially changed, cable companies are finding other ways to push them into higher-priced services. For example, according to trade magazine Multichannel News, some cable executives are now trying to classify HBO as a tier, not a premium service, by offering it only as part of a digital bundle of HBO programming. The theory: If HBO is considered a tier instead of a channel, then the new rule would not apply.
Moreover, operators have little incentive to keep prices low or offer customers more choice because cable is a monopoly in most areas of the country, says David Butler, media director for Consumer's Union in Washington, D.C. True, there's satellite service, but that's often more expensive than cable. Moreover, if you don't have a direct-line view of the southern horizon, you won't get a crystal-clear picture via satellite.
To make cable companies consumer-friendly, Butler says, more than one provider per area is needed. Statistics support his assertion: According to a 2002 survey by the U.S. General Accounting Office, 95% of cable households have only one local company. Cable households with choice paid rates 17% lower than the national average.
Cable operators argue that the rate hikes and lack of choice are somewhat beyond their control. To some extent, they're right. The creators of programming for cable channels don't want their product to be sold separately, since they would then be paid only for the audience they attract -- a less lucrative option than getting a cut from every member of the much bigger audiences cable companies sign up for multichannel service. Most programmers also fear that ad rates would plummet if advertisers knew how many people were actually watching their itsy-bitsy channel.
The programming companies wouldn't have much leverage, however, if they weren't in league with cable operators who know a good business model when they see it. For them, it just makes sense to bundle desirable channels with less popular ones, because they've found that most viewers will relent -- and sign up for pricey programming packages. According to the industry's trade group, the National Cable & Telecommunications Assn., 97% of cable subscribers choose to buy expanded programming -- though the association doesn't say how many of these viewers are offered the choice of going à la carte. "The value of cable programming stands on its own," declares Marc Smith, the NCTA's director of public affairs.
What if, however, customers could make their own choices? Based on the flood of response to my story, they want that option -- and perhaps would even pay a little extra for the privilege. Cable companies that don't like regulation should probably pay attention.
Jeff Chester, executive director of the Center for Digital Democracy, a nonprofit that advocates openness and choice for digital media, says he was overwhelmed by calls from consumers after BusinessWeek Online highlighted the little-known pay-by-the-channel cable rule. He has since launched a consumer campaign to lower cable rates. Senator John McCain (R-Ariz.), who will take the reins of the Senate Commerce Committee in January, seems to support the idea. In November, he announced that igniting competition in the cable biz will be at the top of his legislative agenda. So the revolution may be coming -- sooner than you think.
Black covers technology for BW Online in New York