Rising Rates Prompt McCain's Rhetorical Frenzy

7/13/2003 8:00 PM Eastern

These days, it doesn't take much for the cable industry to set off John McCain.

Last week, the Federal Communications Commission released a report showing cable rates jumped 8.2% last year.

Within hours, the Arizona Republican , chairman of the powerful Senate Commerce Committee, issued one of his harshest assessments yet of his understanding of how the cable industry operates.

McCain called the cable rate increases "astounding" given that inflation in the overall economy was 1.5% and that markets were starting to come out of recession.

"This means that cable rates increased an unbelievable 5½ times faster than inflation. The cable industry has risen to new heights in their apparent willingness and ability to gouge the American consumer," McCain said in a statement.

McCain has been watching the cable industry closely for several years, his views largely shaped by his respect for Gene Kimmelman, the Consumers Union official who seldom has a nice word about the industry.

The FCC report covered the 12-month period ending July 1, 2002, with the 8.2% rise the highest seen in at least five years.

The commission said the combined average monthly rate for basic, expanded basic and equipment increased from $37.06 to $40.11. Digital tiers were not included.

The National Cable & Telecommunications Association released a statement prior to McCain's boasting that cable represented good value for the money on either a relative or a stand-alone basis.

"Although cable prices have increased, cable consumers are also enjoying increased value for their entertainment dollar. Compared with taking a family of four to a single movie, concert or professional sports event, a month of basic cable remains a superior entertainment value," said Rob Stoddard, the NCTA's senior vice president of communications and public affairs.

NCTA president Robert Sachs declined to comment on McCain's reaction.

Consumers Union, in response to the FCC study, called on Congress to reregulate cable rates or at least allow subscribers "to pay for only the channels they want to watch."

In a statement, Kimmelman claimed cable rates keep rising because the direct-broadcast satellite carriers, DirecTV Inc. and EchoStar Communications Corp.'s Dish Network, fail to supply the same competitive check that a second cable company would.

"Competition from satellite is not holding cable rates down. The satellite industry does not yet provide a viable alternative to cable for a significant number of consumers," Kimmelman said.

The 20 million-subscriber satellite industry used the FCC report to bash cable, even though both DirecTV and EchoStar have raised their rates within the last year. In a statement, the Satellite Broadcasting & Communications Association offered an analysis that appeared to clash with Kimmelman's.

"Today's annual report illustrates why consumers continue to unplug their cable boxes and switch to satellite-television service, and one reason why the number of DBS subscribers grew by more than 10% from April 2002 to March 2003," SBCA president Andrew Wright said in statement.

McCain, a supporter of Kimmelman's à la carte approach, has asked the General Accounting Office to take a close look at the factors causing higher cable rates. The report is expected to be released in the fall.

"These increases defy logic — the Committee on Commerce, Science, and Transportation will continue to focus on this issue in the months to come," McCain said.

Waiting for GAO

About twice a year, the FCC induces an attack on cable, first with the release of its formal price survey in the second or third quarter, and later with the release of its annual competition report in the fourth quarter that contains updated cable-rate data.

This year could be different, because McCain has ordered the General Accounting Office, Congress's investigative arm, to pore over cable records to verify whether, as cable operators claim, programming costs are largely responsible for driving up rates. As a result, McCain is not expected to introduce legislation or hold more hearings until the GAO report surfaces in October.

"He is not actively writing legislation because he wants to wait for the GAO report to come in October," McCain spokesman Rebecca Hanks said. "At this point, we have no hearings scheduled. Looking at this issue, he will want to hold hearings in the future. We just don't have any yet."

Bad headlines about rates have dogged cable for more than a decade, crowding out favorable news about the industry's $75 billion in capital spending since 1996. That outlay has generated 20 million digital-cable subscriptions, 12 million high-speed data users and 2.5 million local phone customers — not to mention the explosive drive into HDTV, with that high-end service now available in 112 markets containing 50% of TV households.

No re-reg fervor

With Republicans in control of Congress and the White House, there do not appear to be a sufficient number of McCains on Capitol Hill right now to enact a reregulation law.

"There is near zero stomach in Washington to reregulate cable rates," said Scott Cleland, a cable analyst with Precursor Group.

Cablevision Systems Corp. and Cox Communications Inc. have dropped strong hints that they would not stand in the way of legislation that barred programmers from denying à la carte treatment of their services.

Paul Glenchur, a cable analyst with Schwab Washington Research Group, said it was worth watching to see whether the traditional debate over cable rates morphs into a serious examination of à la carte.

"There is definitely interest in the cable pricing issue and you are seeing a lot more discussion about tiering as opposed to traditional rate regulation," Glenchur said. "Whether there is real moment behind that remains to be seen. It seems unlikely at this point."

Nominal hike

The FCC's report expressed cable rates in nominal terms, which means the 8.2% figure was not adjusted for inflation or for quality improvements made by cable companies.

On a per-channel basis, however, the FCC found that cable rates dropped two-tenths of one percent after adjusting for inflation. A per-channel decline in rates suggests that consumers received more channels to go along with the increased prices.

In the past, the NCTA has pointed to per-channel data, but it didn't this year — a lapse which might be explained by the ongoing MSO-programmer dispute over à la carte carriage. The operators can cite the 8.2% figure to reinforce their point about rising programming costs, while programmers can point to declining per-channel costs as evidence that consumers are gaining more for less.

Thomas Hazlett, an economist at the Manhattan Institute for Policy Research, has long believed that examining cable rates on a per-channel basis made the most sense.

"If you're really interested in what the customer is getting in terms of price and quality, you can't ignore either one," Hazlett said.

With regard to McCain's notion that cable is gouging customers, Hazlett argued that operators mainly interested in price-gouging wouldn't bother to add channels when raising rates.

"The fact [operators] are raising prices as they give them the all these channels and that they are not losing customers because of it, all of that adds up to, 'This is a higher quality package in the eye of the customer,' " Hazlett said.

Probably the only winner last week was Rupert Murdoch, the News Corp. chairman who has his heart set on taking control of DirecTV. In comments to lawmakers and regulators as part of his effort to gain merger approval, Murdoch has said he would use DirecTV to sharpen competition with cable.

"I think this [FCC] report only brings a smile to Murdoch's face, because he knows the facts are on his side on getting his merger approved," Cleland said.

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