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GAO Report Lands Few Blows

10/26/2003 7:00 PM Eastern

Exhale, cable industry. The General Accounting Office did not endorse a-la-carte mandates on cable operators.

In a long-awaited report released last Friday, the GAO concluded that retail cable rates have risen in recent years due to a number of factors, not just programming costs, and that the sale of programming on an a la carte basis would not be a uniformly positive development.

That's all the cable industry needed to hear.

"Forcing cable operators to package programming á-la-carte would produce a net loss for many cable customers, who would end up paying higher prices for fewer channels," National Cable & Telecommunications Association president Robert Sachs said in a prepared statement.

ESPN and ABC Sports president George Bodenheimer — who's embroiled in a programming-cost controversy with Cox Communications Inc. — praised the GAO for acknowledging that cable operator costs go beyond programming license fees and that á la carte has its downside.

"We are heartened to see the GAO confirm that [Federal Communications Commission] data blaming program costs may be flawed, that a-la-carte is not a panacea and that competition is better than regulation," Bodenheimer said.

GAO's á-la-carte reluctance, coming from an organization not on any industry's payroll, likely gives the cable industry the necessary armor to deflect á la carte legislation.

"While the report will likely lead to a louder public discussion of the issue, we do not believe Congress or the FCC is likely to respond by regulating cable rates or programming options," said Legg Mason media analyst Blair Levin. "The primary impact of the report, in our view, is to give cable operators and programmers new ammunition in their public campaigns to 'pin the tail on the bad guy.' "

Wireline Impact

The most damaging news in the study released Friday was a finding that cable rates are 15% lower in the 2% of markets where two wireline cable companies compete. Other government reports and consumer groups have documented that trend in the past.

Senate Commerce Committee chairman John McCain (R-Ariz.), who requested the GAO report early last year, seized on the 15% price differential to suggest cable-industry pricing abuse.

"According to the report, consumers in the few markets with a choice of a second cable company pay 15% less for cable. The apparent implication for all other consumers is that they continue to be fleeced by their cable operators," McCain said in a statement.

Sachs told reporters in a conference that it was incorrect to assume, without knowing more about the characteristics of the overbuild markets, that because rates are 15% lower in markets with two cable systems, they should be 15% lower in every market in the country.

Some in the cable industry were clearly worried that the GAO might lay the foundation for the reregulation of the industry. In the late 1980s, a GAO report that examined cable rates was cited at the time by Capitol Hill lawmakers who pushed for passage of the 1992 Cable Act, which reregulated cable prices and packaging.

Competition Praised

McCain, who has condemned cable price hikes, said the GAO study touched on numerous issues "ripe for examination" by his committee.

In looking at a range of cable-industry issues, the GAO observed that "reregulation of cable rates stands as a possible option" but then added that the goals of regulation — lower cable rates — could be achieved by government stimulation of competition in the pay-TV market.

House Majority Leader Tom DeLay (R-Texas) issued a statement praising GAO's nod to competition.

"Consumers have benefited from deregulation in the cable industry," DeLay said. "The market is working. I'm glad to see that the GAO recognizes that competition is the answer, not regulation."

In the 94-page report, the GAO said nominal cable rates rose 40% from 1997 to 2002, according to FCC data. FCC data have also shown that on a per-channel basis, adjusted for inflation, cable rates have declined.

But GAO was not sympathetic to breaking out cable rates on a per-channel basis.

"It is not clear to us how meaningful cable rates reported on a per-channel basis are since subscribers cannot purchase cable service on a per-channel basis," the GAO report said.

In looking at the causes of higher cable rates, GAO attributed the rise to higher programming and customer service cost, as well as $75 billion in MSO capital investments to provide consumers with digital services, including high-speed data.

Sports: Up 59%

On programming costs, GAO said cable companies on average have paid 34% more over the last three years, with sports programming spiking 59% over that time.

News Corp. and the Walt Disney Co., both major sports programmers, told GAO officials that they viewed the 59% figure as too high.

Á-la-carte supporters, hoping GAO would deliver an air-tight endorsement, were disappointed.

Requiring cable operators to break up programming tiers would have mixed results, GAO said, causing some cable networks to lose ad revenue from a reduced subscriber base and causing some subscribers to see their bills rise.

"An á la-carte approach would facilitate more subscriber choice but require additional technology and customer service. Additionally, cable networks could lose advertising revenue. As a result, some subscribers' bills might decline but others might increase," GAO said.

In an á-la-carte environment, sports networks would probably do the best, GAO noted, "because this genre of programming has a loyal base of subscribers."

But GAO said selling sports a la carte might cause problems with sports leagues "because the programming would not be widely available."

On another programming issue, GAO said cable programmers affiliated with cable operators and broadcasters are more likely to gain cable carriage than unaffiliated cable networks. But the GAO found cable- and network-affiliated programmers do not receive higher license fees than unaffiliated networks.

Who Was Interviewed

The GAO took about a year to prepare its report, which was based on interviews with 11 top cable companies, 15 cable networks (including CNN and ESPN), one DBS operator and five financial-analysis firms.

GAO devoted a portion of the report to criticize the FCC's annual rate survey sent to cable operators.

"FCC's cable-rate report does not appear to provide a reliable source of information on the cost factors underlying cable-rate increases or on the effects of competition," GAO said.

GAO said cable operators hadn't filled out the surveys "in a consistent manner, primarily because the survey lacked clear guidance."

The FCC said it had redesigned the survey.

 

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