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Rising Costs of Cable, Satellite Service May Bolster Video

17 Feb, 2003 By: Holly J. Wagner

Just as DVD players are hitting 50 percent household penetration in the United States, consumers are facing higher prices to pipe video entertainment into their homes.

A number of cable companies raised their basic subscription rates Jan. 1, with hikes averaging 7 percent to 10 percent. That's a chunk of change, considering the Federal Communications Commission (FCC) puts the number of cable and satellite subscribers in the country at 89.9 million households. That compares to the agency's assessment that “about 90 percent of all U.S. households have at least one VCR.”

Though the cablers blame increased programming costs, a recent report from watchdog groups Consumers' Union (publisher of Consumer Reports) and the Consumer Federation of America contends the cablers are hiking rates to block competition and fund mergers that ultimately reduce consumer choice.

“While the cable industry has certainly increased capital expenditures to upgrade its plants, it has actually sunk a lot more capital into another activity -- mergers and acquisitions,” the report contends. “It is the outrageous prices that have been paid to buy each other out and consolidate the industry that is helping to drive the rate increases.”

The National Cable & Telecommunications Association (NCTA), a cable industry trade group, attacked the consumer groups' complaints as “misleading and factually inaccurate.”

“The consumer group lobbyists have failed to take full account of the enormous investment cable operators have made in upgrading their networks to provide consumers with advanced broadband services,” said Rob Stoddard, SVP of communications and public affairs for NCTA. “Since 1996, cable operators have invested more than $70 billion -- or $1,000 per cable customer -- in network improvements. … The consumer lobbyists also minimize the fact that cable operators have experienced double-digit programming cost increases and greater-than-inflationary labor increases in order to provide consumers with new services and improved customer care.”

Far from ignoring those claims, the watchdogs say they are false or mis-state the case.

“Approximately 40 percent of the top channels (measured by subscription or prime-time ratings), which command the highest prices, are owned in whole or in part by cable operators or companies that have large ownership stakes in cable companies,” their report states. “For a substantial part of the industry, rising programming prices are just a transfer from one subdivision of the cable company to another, which comes out of the consumer's pocket.”

Furthermore, they report, service upgrades like DSL (Internet digital subscriber lines) are paying for themselves with new fees.

“Cable operators dominate the residential high-speed Internet service [market], with a 65 percent market share of all residential customers and a 79 percent share in advanced services,” the report states. “The digital upgrades are intended to make a new range of services available. By selling these services, the upgrades pay for themselves.”

Meanwhile, the nation's top two satellite providers -- Hughes' DirecTV and EchoStar's DISH Network -- are slugging it out for market share following a scuttled merger effort that has other companies reviewing DirecTV's books.

Ironically, the watchdogs blame the FCC's denial of permission for the satellite merger for increasing the cable companies' leverage.

“Ignoring the market presence of direct broadcast satellite (DBS) TV, whose competitive potential was recently weakened by the FCC's denial of the DirecTV/EchoStar merger, the cable industry is doing exactly what should be expected from a monopolist that has just had its hand strengthened,” the report contends.

Even TiVo, the personal video recorder (PVR) service that pipes programming to subscribers and lets them pause, rewind, fast-forward and share live programming, has raised the price of its “lifetime” subscriptions from $249 to $299 just a year after a $50 hike that brought the price up from $199.

While that hike will not affect DirecTV subscribers who have TiVo, others who use the service will have to pay. Analysts have speculated the service is trying to transition to a monthly subscription fee rather than the lifetime payment as its set-top boxes remain in use for longer periods of time. The company based the lifetime fee on a projected four-year lifespan for its PVRs, but stands to lose money if the boxes outlast that time.

TiVo claims 500,000 subscribers, about evenly split between lifetime and monthly subscriptions. Executives hope to double that number of subscribers by this time next year. But that's not the whole picture, since the satellite providers place TiVo boxes in more homes than TiVo itself. About 40 percent of EchoStar (DISH Network) subscribers opt for the combination receiver and PVR.

And what about home video?

Both sides of the cable rate debate drew from the FCC's ninth annual report on video competition (available online at FCC.gov). That report pays scant attention to packaged video because it's outside the scope of FCC regulation, and video dealers seldom comment in the FCC process.

Cable companies don't hesitate to cite packaged video as a competitive force in their comments to the FCC, but the packaged industry does little to push back.

Comcast, for example, submitted news stories quoting consumers who switched from pay-per-view to Netflix to keep their entertainment costs down.

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