Climate Makes Ops Uneasy on Rates

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Early this month, Cox Communications Inc. notified its
565,000 Phoenix-area customers that basic and expanded-basic cable rates were going up by
about 7 percent Sept. 1.

Now, Cox officials say the regulated rates will only go up
by around 5.5 percent. The difference -- about 89 cents per month -- will be shifted onto
the unregulated new-product tier instead.

The turnabout is a nod to competition in Phoenix, including
plans by U S West to offer video over copper phone lines, local spokeswoman Bruce Smith
said last week. "We identified an opportunity to position the regulated tiers more
competitively," she added.

But it also comes as operators' arms are feeling the
twist to ease up on rate hikes while Congress considers steps like extending rate
regulation beyond its scheduled March 31, 1999, sunset.

There are signs that the message is sinking in.

"I think that we're all very aware that this
year, it's time to be sensitive to that in terms of the political atmosphere,"
Cox corporate spokeswoman Ellen East said. "So I think that we are being
cautious."

East added that Cox is in the process of formulating
upcoming rate increases.

But several operators said there's no way that they
can adhere to Tele-Communications Inc. president and chief operating officer Leo J.
Hindery Jr.'s recommended benchmark of 5 percent hikes. This year's increases
appear to be averaging about 6 percent to 7 percent, with MediaOne once again pushing the
envelope, posting 8 percent to 9 percent increases.

One senior executive at a major MSO, who asked not to be
identified, said National Cable Television Association chairman Hindery's admonition
against large rate increases next year may play well politically, but it isn't likely
to jibe with "reality."

"Politically, it sounds great. But the reality is that
it's not going to happen," the executive said. "How the hell am I supposed
to hold down rates when I'm getting hammered with double-digit increases in
programming? I'm also spending hundreds of millions of dollars on upgrading plant.
There's no way that I'm going to hold rates at 5 percent."

The executive added, "I applaud Leo for being
conscious of the political reality. I would also encourage him to work on ESPN about those
exorbitant rate increases."

Many large operators are in the middle of planning next
year's rate "adjustments." On Aug. 14, Hindery bluntly advised his peers to
keep those upward adjustments below last year's average of 8.5 percent.

TCI opted to raise its rates by an average of 3.9 percent
this year, he said -- down from its original plan of 5 percent, and way below the 6.2
percent that it could have justified under Federal Communications Commission regulations.
His advice to other operators was to keep increases around 5 percent next year.

"I would hope for the industry as a whole that there
would be more restraint in this area than was shown this year," Hindery said at the
time.

NCTA president Decker Anstrom is cheering Hindery on.

"I think that Leo gave the industry good advice --
that we have to be very, very careful here over the next six to 12 months on
retail-pricing behavior," Anstrom said last week. "My impression is that
everybody is looking at it real seriously."

Hindery and Anstrom are addressing rises that would take
effect between this fall and next fall. Hikes already pushed through this year
wouldn't meet their goals, although on average, they appear to be below last
year's level. Federal statistics show cable rates rising at about a 7 percent clip,
or about four times overall consumer-price inflation. But the July figure was down to 6.7
percent on a running-rate basis, compared with a 7.3 percent annual rate for the 12 months
that ended in June.

Time Warner Cable spokesman Michael Luftman said he
wouldn't address Hindery's comments directly, but "we are certainly well
aware that cable rates are an issue in Washington," and that will be a factor in
determining the rate structure for the coming year. "We're in the middle of that
now," he added.

In addition to citing sharp rises in programming expenses,
Cox, MediaOne and Comcast Corp. have pointed to their extensive capital costs for
expanding channel capacity and adding services like telephony and high-speed data as
factors in setting their rate increases.

MediaOne spokesman David Wood, for example, said
"significantly" higher programming costs were augmented by a nationwide rebuild
program that's running about $1 billion per year, and that isn't likely to get
any cheaper in 1999.

"We can't offer high-speed data, telephony,
advanced analog or digital without doing these upgrades," Wood said. "At the
same time, we're cognizant that this is a huge issue with customers and
regulators."

Ultimately, most MSOs will likely consider Hindery's
warning against double-digit rate hikes when formulating business plans for next year,
Wood said.

"I think that it will definitely be part and parcel of
the many considerations that go into it," he added.

Comcast treasurer John Alchin said his company, like TCI,
chose to raise its rates by less than it could have under FCC regulations this year.
Comcast's rate hikes averaged 5 percent to 6 percent, and they could have been 6.5
percent.

Asked if Comcast felt more pressure now to minimize rate
increases, Alchin said, "I don't know that it's any more or less than last
year." Comcast always frets about the "delicate balancing act" needed to
increase rates while adding subscribers, he added.

But by the end of this year, Comcast will have invested
$1.5 billion on its cable plant over the past three years, adding channels in the process,
"and with all of that comes, in our mind, a justification for modest rate
increases."

Hindery made his plea for restraint during an Aug. 14
conference call to discuss TCI's second-quarter results.

Two days later, Hindery felt compelled to fax analysts a
two-page statement clarifying the financial impact of TCI's decision to keep rates
down. Instead of meeting the 1998 double-digit cash-flow-growth goal articulated in March,
TCI's pro forma cash-flow rise will probably only hit "mid-single-digits,"
Hindery wrote.

TCI still projects a 10 percent-plus cash-flow increase in
1999, and it thinks that other operators can do the same by adding subscribers,
introducing new revenue-generating services and applying "thoughtful pricing
practices," Hindery wrote.

What's more, while Hindery emphasized rate increases,
he was "suspiciously quiet on equipment rates," said Susan Littlefield, cable
coordinator for the city of St. Louis. TCI's rate increases in that city were meager:
Expanded basic went from $14.77 per month to $15.02, while basic rose just three cents,
from $10.21 to $10.24. But the charge to add a premium channel or to otherwise upgrade
service rose to about $33 from $11, she said.

TCI spokeswoman LaRae Marsik said that in most cases, any
equipment-charge increases this year were "not a significant impact by any stretch of
the imagination."

Jim O'Brien, president of Jones Intercable Inc., said
operators would be "prudent" to heed Hindery's warning against
indiscriminately raising rates. However, heading into the season when most MSOs begin
looking at next year's rates, O'Brien is worried about the high-wire act that
operators are being forced into as they juggle Washington's concerns over raising
costs against their own business interests and those of shareholders and customers.

"The industry is doing a good job of being sensitive
to Washington's concerns," he said. "But at the same time, you need to
realize that you need to run a business at the end of the day."

Jones' rate hikes have generally run between 5 percent
and 6 percent in recent years. Meanwhile, the company's programming costs continue to
climb by between 10 percent and 15 percent per year, he said.

At Bresnan Communications, where 1998 rate increases
averaged 4.2 percent, plans next year call for remaining within the 5 percent range
suggested by Hindery. Bresnan figures to raise its cash flow with new services, and it
fears that a double-digit spike in basic rates would drive away customers, said Mike
Bresnan, senior vice president of the MSO's domestic division.

"It's important not only from a political
standpoint, but from the standpoint of maximizing cash flow," Bresnan said.
"Outrageous increases only cause people to defect to DBS [direct-broadcast
satellite]. And when they switch, you lose the ability to sell them these new
services."

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