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Hudson Institute
William E. Kennard
Chairman
FCC Commissioners Office
1919 M Street N.W.
Room 814
Washington, D.C.
20554
June 3, 1998
Dear Chairman Kennard,
The Hudson Institute released a study on May 18, 1998 called the Role of Competition and Regulation in Today’s Cable TV Market. This study has been given wide, yet brief mention in the cable industry trade publications. On May 26, the authors of the study hosted a round table discussion at the Hudson Institute. About a dozen people attended that meeting which included the general managers of the Indianapolis Comcast and Time Warner operations, representatives from the Indiana Cable Television Association, three members of the Marion County Cable Franchise Board, the Cable Communications Agency and its legal counsel.
This document intends to respond to aspects of the report plus highlight a few things that were discussed at the round table meeting. The authors said that the study was widely distributed to the FCC Commissioners and elected officials in Washington.
For those who have read the study, be advised that it was funded by the National Cable Television Association (NCTA) and that the document’s tone and recommendations reflect the views of the NCTA.
The essence of the study is that cable television has enough competition currently to remove rate regulation and that to extend rate regulation would be devastating to the industry and consequently, the consumer.
The study points out that current cable TV market share is at 85.6% and conjectures that by the year 2002 that will fall to 75%. Therefore, one should draw the conclusion that in the multi-channel arena, cable TV has effective competition from Direct Broadcast Satellite (DBS) because it is DBS that is primarily eroding cable’s dominant market share. What the study does not present is that cable TV is not losing its subscriber base but is actually making modest gains every year. Even Leo Hindery, President of TCI, the nation’s largest cable TV company pointed out in March of 1998 that the erosion of cable subscribers to DBS has ended (Warren’s Cable Monitor/3/30/98 pg1). While cable may be losing market share to DBS (yet gaining in customers/ 2-3% on average annually-CableWorld 7/21/97 pg1) the biggest DBS benefactor to take away cable TV market share is DBS’ Prime Star (MultiChannel News 1/19/98 pg 37). Prime Star is owned by a partnership of cable operators (TCI, Comcast, Time Warner). To a large extent, the money is changing hands from cable operators to cable operator subsidiaries. A fact that the study does not include.
The study leaves out information relating to launch fees (monies that cable networks like Animal Planet must pay to a cable operator in order to receive carriage) and other important issues that should factor into the actual programming costs of the cable operators and consequently, what they pass along to their subscribers.
Another issue is proprietary programming that the cable company owns and that when the cost of their own programming goes up, they pass this along to the subscriber.....essentially double dipping. As an example, Time Warner may implement a larger annual increase to their expanded basic tier of service than TCI or Comcast. The justification being that their programming costs are increasing and that they are simply following the various rate orders and criteria at the FCC in order to do this. Yet, Time Warner owns some of the most popular and expensive programming seen on cable TV (and satellite): TNT, TBS, CNN, Turner Classic Movies, Cartoon Network, Headline News, etc. Again, a lot of the money is simply changing hands within the same company but it is passed along to the subscriber as a big increased cost in programming. The study does not include this information.
The study does not talk about cable rates increasing 3-5 times annually beyond what the rise is in the Consumer Price Index (CPI) or how that differs from every other sector of the economy.
The study pushes the premise that home VCRs and over the air broadcast stations are the cause of great competition to the cable industry. It is the opinion of the Cable Agency that the emphasis that the study has placed on this, including the cost of over the air antennas and amortizing their costs compared with the cost of cable TV, is a stretch.
We believe that people subscribe to cable TV to enhance their viewing pleasure and don’t look at VCRs and over the air broadcast stations as an either/or proposition to subscribing to cable TV. The argument is clear that renting new movies is competitive to watching a pay-per-view movie, but owning the VCR or receiving broadcast stations is not going to diminish your appetite to watch ESPN, 24 hour news, a weather channel or any other niche programming that a VCR or an over the air broadcast station can’t offer.
The study represents that SMATVs "provide the full range of programming available on cable" (pg. 11). The SMATVs that we are aware of in the Indianapolis area do anything but. Full range of programming is usually limited to 18 to 20 channels with questionable reception. Service calls to SMATV customers take an inordinate amount of time to complete as SMATVs do not employ adequate technicians. The full range of programming for a SMATV resembles a model that is far less than traditional expanded basic service offered by a cable operator, much less upgraded services for a rebuilt area. This has been the case in the Indianapolis area as we held ascertainment hearings for a SMATV interested in becoming a franchised cable operator. They later withdrew their franchise application.
In our view, the best part of this study dealt with cable overbuilds as competition and the possibility of profit by Ameritech in such a venture. What the study does not include, (and we raised at the round table discussion) was why more emphasis was not placed on cable overbuilds by incumbent cable TV operators. And to take it a big step further is that this study or any study has ever looked at the overbuild model from the perspective of simply extending cable plant into an area where operators buffer one another. The Cable Communications Agency feels very strongly that the biggest impediment to competition in cable TV is from that of the cable industry itself. Ameritech’s representations of profits in their cable division of New Media exposes a possible complicity of non-aggression by the cable industry. Only one traditional cable operator that we are aware of has dared to overbuild an incumbent’s territory.....21st Century on Chicago’s North Shore.
The Cable Agency is taking the premise that if Ameritech can show a profit with its cable overbuild venture, and that there is a significantly higher intensive capital investment to be made by Ameritech in which to engage in the cable services business, then buffering cable systems should compete with one another in terms of merely extending cable plant. This would be far less capital intensive than Ameritech’s overbuilds and the economies of scale are in place by the cable industry to make this profitable. This would benefit millions of people.
It is widely known that the most competitive model being implemented in cable services are Ameritech’s overbuilds. Prices have come down or have stabilized. The competition has allowed subscribers to receive free service for a short period of time and free premium services.
The argument that Ameritech is subsidizing its cable platform with its telephony platform in order to turn a profit on cable services is a poor one. How is that different than the argument that the cable industry is using its cable services platform to subsidize its telephony platform?
A further argument could be made that cable overbuilds are much more lucrative with all of the new services that are being introduced now or planned in the future. The cable industry puts a dollar amount on the head of each subscriber. How much more will that amount go up as a cable subscriber adds to his traditional services by subscribing to cable modem service, video on demand, interactive services, digital services, etc.? Cable television is the vehicle of choice to house all of these services and as the revenue pot gets bigger, the argument gets stronger that cable overbuilds are profitable.
If Capital Hill and the FCC is serious about competition (rather than making it its overused buzzword) to cable television and its pricing, it needs to take a serious look at what is the biggest impediment to that competition:
the non-aggression pact that cable TV has within its own industry. Somehow the lawmakers need to compel the cable industry to compete by overbuilding, the same way the lawmakers broke up AT&T.
The Cable Agency visited the Strategis Group that had previously published the only known study on cable overbuilds. However, they had not studied the premise of just deploying cable plant extensions and their potential profitability. The Strategis Group gave a ballpark figure of 30,000 to perform such a study. Since Capitol Hill is looking into the competition issue now, it may serve prudent to see such a study performed.
The view of cable overbuilds as the competitive model of choice is further hampered by the allowance of mergers and clustering in the cable and telecommunications industry for the sake of ‘economies of scale’. Lawmakers walk around speaking about the theory of competition but their actions speak to the opposite. The clustering and mergers remove the possibility of competition by removing competitors from the same market. It removes the overbuild premise: the largest and most effective building block to competition in the cable TV marketplace.
All of this is further demonstrated with the pending merger of SBC and Ameritech. SBC has been selling off their cable properties and refuses to assure the Justice Department that they won’t divest themselves of Ameritech’s cable TV division of New Media: the definitive model thus far to competition of an incumbent cable operator.
The study ignores all of the above premises but does, to its credit, raise the fact that the Federal Trade Commission is not convinced of the impracticality of cable overbuilds given its opposition to several proposed mergers (pg 23).
Not from the study but from our discussion, the point was raised by cable industry representatives about that lack of profit taking by their business. The Cable Agency countered that the cable divisions have been reporting very healthy profits over the last several quarters. The industry countered that they measure their profits in terms of overall cash flow, ( Time Warner’s 1997 cable division cash flow rose 44% (over 96 totals) and Comcast 10% for cash flow and revenues in the cable division for 97. Our argument continued that the success of cable television should not be measured by the offset losses of Time Warner’s Music Division (Cable World 2/16/98 pg 39) or Comcast’s losses in the sports teams it owns. If those are the representations that the industry is making to Capitol Hill then they are seriously skewed.
Why should unrelated non-cable services be part of whether a cable TV operation is successful or not? Cable subscribers should not be held responsible by less than desirable results incurred by the cable operators in non-cable services.
The Cable Agency’s response to the overall intent and recommendations of this study is that cable rate regulation for expanded basic services be continued indefinitely until such time that there is effective competition in any particular area. Furthermore, that the rate orders and criteria before the FCC on how it ‘regulates’ expanded basic service need serious retooling so that there is some substance to them.
We hope that you look favorably at our comments. Keep in mind that our office serves a constituency and is not driven by profit making. In that spirit, we would appreciate your kind consideration on these relevant issues that are seldom discussed.
Best regards,
Rick Maultra
Director
Cable Communications Agency
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