News

As DBS Rises, Ops Ask FCC: Set Us Free!

12/05/2004 7:00 PM Eastern

Washington— Cable’s urban moat remains under assault.

The latest sign that satellite TV is more than a rural powerhouse was Comcast Corp.’s recent request for total deregulation in Dallas, the country’s No. 7 television market, on account of robust competition from DirecTV Group Inc. and EchoStar Communications Corp.

Other cable operators, such as Charter Communications Inc. and Adelphia Communications Corp., have sought similar relief in Los Angeles and Miami suburbs chockablock with single-family homes.

Cox — already deregulated in Phoenix due to video competition from a local phone company — now wants Tucson, Ariz., included.

Cablevision Systems Corp. has already won relief in dozens of New Jersey and New York commuter towns ringing Manhattan, based on satellite competition.

Deregulation petitions must go through the Federal Communications Commission, which is under no formal deadline to act.

Under federal law, Comcast needs to show that pay TV competitors in Dallas serve at least 15% of area households. Comcast told the FCC that 17.6% subscribe to the competition in that market, justifying relief.

“Indeed, with more than 20 million subscribers nationwide, and the substantial penetration figures reported in Dallas, it cannot be credibly argued that Dallas consumers are not generally aware of the availability of DBS competitors,” Comcast told the FCC in a Nov. 15 filing.

“We believe that in a competitive environment, marketplace forces and consumer choice are the most effective regulatory measures to ensure that rates are reasonable and that service offerings are competitive,” Comcast spokesman Tim Fitzpatrick said in a statement. “Comcast is delivering high-value, quality services at a competitive price.

“By lifting this regulatory burden, Comcast will be better positioned to serve our customers, attract new ones and meet competition from other video providers.”

Congress eliminated expanded-basic price regulation effective March 31, 1999. But it retained basic regulation until the 15% penetration test was met in each cable franchise area. The basic tier includes local TV stations, public-access channels, and cable networks placed there by the cable operator.

WHAT THEY’D GAIN

If the FCC agrees with Comcast in Dallas, local regulators would lose power to set basic cable rates. Equipment rates would also be deregulated.

Two other restrictions would also be eliminated. Comcast would no longer be bound by the uniform-rate rule, which requires a cable company to ensure that all local subscribers receive the same rate card, excluding the occasional short-term promotion.

Comcast would also be allowed to require basic subscribers to purchase another programming tier in order to receive a premium channel like HBO or purchase a pay-per-view event.

Across-the-board deregulation in large urban markets could be controversial, given that many cable companies have just announced 2005 rate increases that have not played well in the national media.

Mark Cooper, research director of the Consumer Federation of America, argues that because satellite-TV does not restrain cable rates, the penetration test used to deregulate cable systems is flawed.

“I think the empirical evidence supports our view, and has [done] so forever,” Cooper said. “The fact that Congress wrote a competition standard that does not protect consumers proves not that the market is working, but that Congress got the standard wrong.”

Cooper said basic rates would, if deregulated, rise because cable subscribers are required by law to buy the basic tier in order to gain access to all other cable programming. He said demand for basic cable is “inelastic” — an economics term that means demand does not change whether rates go up or down.

“One would expect them to have greater increases for basic cable,” he said. “That’s where you would put your price increases.”

Opposition from local communities to cable deregulation petitions varies.

Although New Jersey regulators fought the deregulation of Cablevision, many communities decide not to invest the resources in a fight with cable operators when the decision rests with the FCC.

DALLAS WILL FIGHT

Dallas is ready to fight. Nick Fehrenbach, manager of regulatory affairs and utility franchising for the city of Dallas, said he plans to challenge Comcast’s petition.

“We will be filing an opposition to the effective competition filing. One of the things we are going to be contesting is the DBS numbers,” Fehrenbach said.

Cable operators in small cities and rural communities have long been vulnerable to DBS, mainly because they have been slow to upgrade to digital technology to fend off satellite’s more robust programming options.

Measured on a statewide basis, DBS subscriber growth has been impressive, with 41states now recording DBS penetration of at least 15% of households, according to the National Cable & Telecommunications Association.

Although no state has more DBS than cable subscribers, in a few years those lines might cross in states like Idaho and Utah, where satellite providers (including C-band) today serve 41% of all pay-TV subscribers.

That doesn’t meant there aren’t a few cable strongholds. In Hawaii, for example, cable has 96% of the pay TV subscriber base.

In recent years, satellite has become more aggressive in poaching customers from cable operators in large markets.

CABLE SUB 'THEFT’

“These days, DBS looks as much to urban and suburban markets as it does to rural markets to gain more subscribers,” said Jimmy Schaeffler, a DBS analyst with the Carmel Group. “In fact, one could argue that based on subscriber acquisition success by both EchoStar and DirecTV, the majority of their subscribers now are coming from suburban and, to lesser extent, urban cable footprints. That’s what’s happening.”

Cable, which has been losing subscribers in recent quarters, still has some weapons at its disposal: the ability to offer many local TV stations in HDTV — something DBS is years away from matching — and true video on demand, something cable operators say is infeasible for satellites hovering 22,300 miles above the equator.

EchoStar and DirecTV do not offer high-speed Internet access in the same class with cable and they do not offer local phone service on their own.

Comcast has about 500,000 subscribers in the Dallas area, with about with about 136,000 residing within city limits. Fehrenbach said he has seen records that show Comcast wants FCC deregulation for nearly all its Dallas-area subscribers.

LOW PENETRATION

Craig Moffett, a cable analyst at Sanford C. Bernstein & Co., said he didn’t think that Comcast’s Dallas petition could be viewed as the onset of many cable-deregulation petitions in large urban areas. Dallas, he said, had some unique characteristics.

“I don’t think it’s necessarily a sign of any material change. For whatever reason, Dallas has the lowest cable penetration of any major city in the U.S., and DBS penetration is pretty high,” Moffett said in an e-mail message.

Cable penetration in Dallas is less that 40%, compared with 64% nationally. The likely reason, Fehrenbach said, is the availability of about 20 TV stations in the Dallas-Ft. Worth market. The region’s flat terrain contributes to improved over-the-air signal reception.

Schaeffler said he viewed Dallas as the start of a trend, claiming cable has failed to stop satellite from taking video customers.

“This is an ongoing trend that will intensify, and there will be more and more of these requests to be released from the requirements of the 15% rule in urban and suburban [areas],” Schaeffler said. “I would project that in maybe three to five years down the line, more than 50% of the [TV markets] will be subject to this 15% threshold.”

For cable, seeking deregulation from the FCC is time-consuming and not inexpensive. A cable company has to file for each franchise area and has to pay the FCC about $1,000 for each application.

Comcast and the NCTA have proposed that the FCC streamline the process. Under their proposal, a cable company in one of the 41 states with at least 15% satellite penetration should be presumed subject to effective competition and deregulated.

The proposal would put the burden on local franchise authorities to prove that the 15% test had not been met in their communities.