As Satellite Dishes It Out, Cable TV Fights Back

Facing defections, cable plays with pricing, pushes broadband

Whenever cable rates go up, as they almost always do this time of year, TV watchers everywhere go slightly bonkers. This year will be no different: Nationwide, cable prices will rise by an average of 5.4% starting in January, figures Kagan Consulting Services analyst Robin Flynn.

Despite the hike--twice the inflation year--cable is in a serious bind. The industry needs price hikes to service more than $60 billion in debt and to help pay skyrocketing costs of sports and other programs. Yet even at current rates, cable prices are often higher than those of its small yet mightily growing foe, satellite. With newspaper and TV ads across the country shouting out satellite's great deals, the upstart technology siphoned off as many as 1 million cable customers last year. As a result, the number of households subscribing to cable service fell in 2002--the first drop since the industry began tracking data in 1980. That compares to a 13% increase in satellite subscriptions.

The combined squeeze of a nimbler, lower-cost rival and cable's own financial pressures has forced industry players into delicate balancing acts. They're fighting the encroaching dish by freezing rates in vulnerable markets, while raising rates sharply in other markets. And they're pushing higher-margin services--especially high-speed Internet access--that satellite can't yet offer. "We are in a game of capture the flag," says Charter Communications (CHTR ) President Carl Vogel, whose company lost more than 4% of its 6.9 million customers last year, many of them to satellite.

The two-pronged approach of freezing cable rates and pushing high-margin data services is already paying off for some operators. Cox Communications Inc. (COX ), the country's fourth-largest cable provider, froze rates last year in two of its larger markets, Phoenix and Northern Virginia, and this year will put a lid on rates in three or four other markets. Yet to generate more revenue from existing customers, Cox bundles its services, offering discounts of $10 a month for telephone or data service to customers who also subscribe to its TV service. That's limited satellite to only about 10% of the households in Cox's territories rather than the 18% for the rest of the cable industry. Says Joseph J. Rooney, Cox's marketing senior vice-president: "It's about not wanting to push people off the fence" and "toward satellite."

In markets where cable is entrenched, however, hikes are steep, such as Comcast's 7.8% rise in some New England cities and Cox's 7% increase in Baton Rouge, La. Others are trying a mixed approach: hiking cable-TV rates but giving deals on high-end services. AOL Time Warner Inc.'s (AOL ) cable unit raised its prices by 9% in New York City and 7% in Los Angeles for its "standard" lineup of 70 or so channels. But it has frozen its rates on its digital offerings with several hundred channels, including some free video-on-demand from CNN, NBC, and others.

Still, many consumers figure dish is a better deal. Charter officials admit they can't yet compete with EchoStar Communications Corp.'s Dish network (DISH ), which offers 50 channels plus local stations for $28.98 a month. Charter's best package has 82 channels for $45.85, the company says, although it says it is testing a slimmed-down package with fewer channels for about $30 a month.

Cable may soon get some relief. With their planned merger off, EchoStar and Hughes Electronics Corp.'s (GMH ) DirecTV services are contemplating rate hikes of their own to pay for increased program costs. But they're not foolish enough to give up their advantage entirely. "Whatever our price, we're always going to be less than cable," pledges DirecTV Chairman Eddie Hartenstein.

There's no doubt that war between satellite and cable is only going to heat up. When Comcast's AT&T Broadband unit and AOL Time Warner announced rate hikes for their San Francisco customers in early December, EchoStar blitzed the city with two weeks of radio and newspaper ads offering its lower-priced service. EchoStar says that prompted a flood of calls from potential new customers.

For all the couch potatoes who have endured big annual cable rate hikes over the years, the ongoing battle between cable and satellite is going to be one satisfying show to watch.

By Ronald Grover in Los Angeles, with Tom Lowry in New York

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