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McCain, Powell Clash Over Rates

1/19/2003 7:00 PM Eastern

Washington— Facing one of cable's toughest critics on Capitol Hill, Federal Communications Commission chairman Michael Powell said last Tuesday that cable companies have raised rates. in part, to invest in new services attractive to consumers.

Appearing before the Senate Commerce Committee, Powell said cable companies have been forced to make improvements as a result of competition from direct-broadcast satellite providers.

"With its digital packages, [DBS] has driven greater investment and innovation in the cable network by forcing cable to upgrade systems to digital and interactive product, forced them to begin to look at cable modem service and invest in developing that," Powell said.

Powell's comments came in an exchange with Sen. John McCain (R-Ariz.), who has complained not only about rising cable rates, but also about the inability of cable subscribers to sign up for individual channels in lieu of big packages on a take-it-or-leave-it basis.

"A lot of consumers would like to see some of those positive effects [of DBS], chairman Powell, which they haven't seen yet," McCain replied. "In fact, cable rates have been rising rather than decreasing, despite all those marvelous technological breakthroughs you've been describing."

Last month, the FCC said nominal cable rates (which are not adjusted for inflation or program-quality improvements) rose 6.3 percent for the 12-month period ended June 30, 2002.

Telco factor

McCain is awaiting a cable rate analysis from the General Accounting Office before announcing any plans for legislation, an aide to the senator said.

In the past, Powell has refused to adopt the cable bashers' position, which states that rates have risen due to an absence of effective competition. Instead, Powell has argued that rates rise as new channels are added — a sign of the relationship between price and value.

Even though two out of three new pay-TV subscribers choose DBS, Powell suggested cable's most potent foe remains local phone companies that use fiber upgrades to introduce video-programming services.

"I think the greatest missing piece in competition to cable still is the phone-company infrastructure," Powell said. "I think it is probably the most significant potential out there that has yet to be invested in and deployed to be a competitive video alternative, but there have been minimal efforts at that."

Ameritech Corp., the Chicago-based Baby Bell acquired by SBC Communications Inc. a few years ago, was the most aggressive cable entrant among the Baby Bells. Yet, SBC sold the cable systems, with 310,000 subscribers, to WideOpenWest LLC in December 2001.

Powell specifically referred to phone company competition that Cox Communications Inc. faces in Phoenix, Ariz., in McCain's home state.

There, Qwest Communications International Inc. offers video programming to about 42,000 customers. Qwest Choice TV employs video digital subscriber line technology that offers a 190-channel platform, including 27 pay-per-view channels and 45 music offerings.

"I think the video-over-DSL experimentation out in the Qwest territory is the kind of the thing ultimately — not in the short term — that are going to be both necessary for those companies' survival and probably critical to continued competitive disciplining of cable," Powell predicted.

Dereg concerns

Joined by the other four FCC members, Powell also handled questions on pending rules and policies that that could expand the power of incumbent local phone companies and allow large media outfits to grow even larger.

Both Republicans and Democrats voiced concern that the agency is about to set in motion a process that will lead to more consolidation and less competition.

Powell said new local phone rules were necessary because courts refused to uphold the old ones.

Facing pointed questions from Sens. Fritz Hollings (D-S.C.) and Byron Dorgan (D-N.D.), Powell said federal law did not hand new entrants an unlimited and indefinite right of access to all parts of the Baby Bell phone networks at wholesale rates.

In February, the FCC is expected to phase out some network-sharing rules in some markets and limit state regulators from broadening the agency's decision.

The pending action has state regulators and new local phone players — who collectively serving 21.6 million out of 189 million phone access lines — decidedly nervous.

With regard to media-ownership limits, Powell said the FCC had lost four cases in which the agency tried to defend restrictions that predate the advent of cable television.

Nevertheless Sens. Kay Bailey Hutchison (R-Texas) and Ron Wyden (D-Ore.) were two lawmakers who cautioned Powell on media ownership, with Hutchison expressing support for current limits on TV-station ownership.

Wyden said he feared that Powell would open the gates to massive media consolidation.

"I think that's a straw man," Powell said. "I don't believe that anything coming out of the commission's decision is going to result in the ability of one person to own everything."

Sens. John Breaux (D-La.) and Sam Brownback (R-Kan.) expressed support for regulatory parity between cable and phone companies that provide high-speed data.

Powell does not have to worry about much political fallout in the Senate, because the committee appeared divided on the key issues, Precursor Group media and telecommunications analyst Scott Cleland said.

"There was no clear consensus out of this committee. The game is at the FCC," Cleland said.

Matthew J. Flanigan, president of the Telecommunications Industry Association — a group favoring broadband deregulation for the Baby Bell phone companies — agreed that Powell's efforts to cut back on data regulation would not be sidetracked by powerful senators.

"There are certain senators who have a strong feeling one way or another, but I think the FCC is set in its ways," Flanigan said after the hearing.

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