News

Did Spin Doctors Stumble Over Rate Hikes?

2/25/2001 7:00 PM Eastern

WASHINGTON-Across the land, headlines were big and bold over stories which screamed that cable rates had outpaced inflation and that quoted consumer advocates who called for re-regulation to stop the gouging.

From The Washington Post
to USA Today
to the Associated Press to Time, the message from the national media was the same: Monthly cable rates rose 5.8 percent for the 12-month period ending July 1, 2000, while inflation remained a tame 3.7 percent. The result: Consumers are getting screwed.

The emphasis on that 5.8-percent increase was understandable because the Federal Communications Commission gave that figure the most prominence in its latest cable rate survey, released Feb. 14.

What the national press failed to notice was that the FCC's survey also disclosed-sometimes in footnotes printed in painfully small type-that instead of going up, cable rates actually declined in real terms.

Cable rates on a per-channel basis remained flat at 57 cents for those operators that face overbuild competition, according to the FCC. For those not subject to such competition they rose just one penny to 66 cents, or 1.5 percent.

These per-channel figures were nominal rates, which means they did not exclude inflation to produce the real cost to consumers. If inflation is factored out of both per-channel figures, cable rates on a per-channel basis declined-mainly because cable operators added channels faster than they are raised their rates.

CLEARING UP NUMBERS

The confusion surrounding this matter is rooted in the FCC's methodology for calculating year-to-year cable rate increases.

The FCC essentially asked operators to report basic, expanded basic and equipment rates in the aggregate for one year, then turned around and asked for the same rate data one year later. The nominal difference between the 1999 and 2000 rates was 5.8 percent, the figure that made all the headlines.

But the agency's approach doesn't account for inflation or the fact that operators added channels during the 12-month period. Unlike one gallon of gasoline or a dozen eggs, "cable service" is not a fixed quantity that can be compared from year to year without adjustments.

"Nominal prices unadjusted for quality are meaningless," said Tom Hazlett, a former FCC chief economist who is currently a senior fellow at the American Enterprise Instititute. "Nominal doesn't adjust for inflation and it doesn't adjust for quality."

Said Brookings Institution senior fellow Robert Crandall: "Clearly, one has to adjust any service for quality. You should certainly correct for inflation."

The FCC's decision to trumpet the 5.8-percent climb without any adjustment was explained in a footnote.

"Ideally, when calculating price changes, we would like to take into account changes in the quantity and quality of service provided," the FCC said. But the agency said cable service is changing so rapidly that non-inflation adjustments are too hard to make.

"Therefore, we report average monthly rates on a per-channel basis as a proxy for quality adjusted price changes," the FCC said, without pointing out that its "proxy" showed a real decline in cable rates.

By burying the importance of per-channel price changes in a footnote, the FCC effectively put the burden on the National Cable Television Association to remind the media of the per-channel data results.

But most of the stories either failed to report the per-channel data or chalked it up to industry spin.

"I wish [the FCC] had at least noted that on an inflation-adjusted, per-channel basis rates have actually dropped over the period," said NCTA spokesman David Beckwith. "The report, as written, allows cable critics to make misleading charges and get away with it in the consumer press."

Gene Kimmelman, Washington office co-director of the Consumers Union, used the 5.8 percent increase to declare that cable deregulation had been a failure.

In an interview last week, Kimmelman acknowledged that per-channel cable rates did not rise in the aggregate, adjusted for inflation. But he said the FCC's finding that channel capacity rose 4 percent for some operators and 5.4 percent for others was no reason to assume that consumers were better off.

"On the margin, a lot of the channels added are just knockoffs of others," said Kimmelman. "Not every channel is equal. We have known that forever."

But if cable operators raise rates to cover the cost of new networks their constituents don't want, Crandall noted, they risk losing subscribers and dissuading potential customers from signing up.

"The cable guys are spending a lot of money to increase their channel capacity," he said. "If all it does is bring people things they don't want, it wouldn't redound to their benefit in terms of their subscribers'being willing to pay more."

In 1996, Congress barred the FCC from regulating expanded basic rates as of March 31, 1999. Basic rates are still controlled by local governments unless the FCC determines that an operator in a franchise area is subject to effective competition.

As Republicans now control both Congress and the FCC, Kimmelman said his goal was not to re-regulate cable. He said he would support spurring greater competition, citing Northpoint Technology Ltd.'s proposal to share direct-broadcast satellite frequencies to provide video programming and Internet access.

HAVE TO BUY PACKAGE

Cable critics maintain that per-channel comparisons are inappropriate because cable service is mainly sold in packages.

"It's not an à la carte situation," said Consumers Union spokesman David Butler.

But cable proponents countered that consumers don't normally buy just one egg or tickets to see only the first three innings of a baseball game.

Hazlett called Butler's argument "absurd," and asserted that consumers make value assessments based on the cost of cable and the number and quality of the channels offered.

"They ask what the price is, and they say, 'What do I get for that price?'"

The FCC began to reregulate cable rates in 1993. During the next six years, cable rates grew faster in real terms than they did from March 1999 to December 2000, a period when the agency had no price-control authority, according to the Bureau of Labor Statistics.

"In those numbers, they tell you that the actual rate of increase has fallen since March 1999," Hazlett said. "So the Washington Post
story that quoted Gene Kimmelman saying deregulation is an utter failure is false on its face."

An FCC source, who acknowledged that per-channel cable rates remained flat, said the agency did not intend to give more weight to nominal cable rate increases than to per-channel rate increases.

"We put out the report and we put prices both ways," the FCC source said.

The Bureau of Labor Statistics, which collects inflation data both on the entire economy and on sectors like cable, found that cable rates rose 4.6 percent, unadjusted for inflation, during the same period covered by the FCC survey.

The BLS came in with a lower increase because, unlike the FCC, bureau analysts adjust their data to account for improvements in quantity and quality.

"We do adjust if there is a change in channels," said bureau cable analyst Heidi McGlone.

McGlone said the adjustment is made when channel additions are significant. The bureau is usually conservative in its adjustment because it's difficult to determine whether a channel was added for public access programming or for Home Box Office.

She said the fact that the BLS observed a 4.6-percent increase instead of no increase at all was the result of its conservative approach toward channel additions.

In recent weeks, the cable industry hasn't been alone in suffering media snipes over rates.

In January, EchoStar Communications Corp.-the No. 2 direct-broadcast satellite carrier, with 5 million subscribers-took some heat for raising rates 10 percent on its America's Top 40 package, which went from $19.99 to $21.99.

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