Comcast Stakes a Counterclaim - Multichannel

Comcast Stakes a Counterclaim

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A career cable-basher got a dose of his own medicine last week when an MSO actually bashed back.

For eons, the cycle went like this: A consumer group slams the cable industry, prompting a quickie defensive statement from the National Cable & Telecommunications Association that serves to shield all MSOs from having to take reporters' calls. Three months or so later, the pattern is repeated.

But a new, proactive era might be upon us, inaugurated by Comcast Corp. The nation's largest MSO has hired a distinguished economist to examine some claims of longtime industry critic Dr. Mark Cooper, research director of the Consumer Federation of America.

'Distorted view'

The results were not exactly favorable to Cooper. The economist concluded that Cooper's cable research took "a distorted view of the facts," employed "economically unsound theories," and was the last thing Congress or the Federal Communications Commission should consult in making policy judgments about the industry.

Dr. Michael Katz, an economics professor at the University of California at Berkeley, took on Cooper. A highly regarded academic, Katz has been tapped by Democrats and Republicans in Washington before.

In 1994, Katz was chief economist for then-FCC chairman Reed Hundt when the agency was aggressively regulating cable prices. From 2001 to 2003, he headed the Bush Justice Department's division of economic analysis, which helped sink EchoStar Communications Corp.'s proposed merger with Hughes Electronics Corp., parent of DirecTV Inc.

Jeff Chester, a Cooper ally who is executive director of the Center for Digital Democracy, criticized Katz for selling his services to a cable company.

"Katz has provided them with the mantle of academic respectability, something that Comcast and the cable industry do not deserve," Chester said. "It's a reflection of the fact that the academic community too often is for sale. I think Katz should return his check to Comcast."

In a 22-page paper completed in late July and obtained by Multichannel News
last week, Katz analyzed claims about the cable industry made by Cooper in a January 2003 paper titled, "Cable Mergers, Monopoly Powell and Price Increases."

Katz found that Cooper misapplied basic economic theories and drew erroneous conclusions, portraying operators as entities milking a monopoly when the evidence showed large capital investment coupled with the rollout of new services in response to the rapidly growing direct-broadcast satellite industry.

Cooper, a Ph.D sociologist from Yale University, said after reviewing Katz's paper that Katz used simplistic examples (comparing the sale of vegetables to the sale of cable channels) to belittle his work and paint a rosier picture of cable's market power than was justified.

"I can't say he is wrong, but I can say that his analysis has nothing to do with the industry he is supposed to be talking about," Cooper said.

Following are some highlights from the Katz paper:

  • He concluded that the most "meaningful measure" used to evaluate rates is the per-channel price. Unlike Cooper's view that cable rates have been soaring, Katz, relying on the same FCC data as Cooper, found that from 1997 to 2002 real per-channel rates declined.
  • He concluded that Cooper's theory that cable rates go up due to excessive MSO acquisition costs was incorrect, because it ignored the fact that system prices fell from $5,755 per subscriber in 2000 to $2,196 in January 2002.
  • He disputed Cooper's claim that when a cable company raises rates, it is merely shifting revenue from the cable division to the programming division because cable operators own "40% of the top channels." In fact, Katz found that ops own 30% of cable networks, a figure that would drop to 21% if Liberty Media Corp. — which doesn't own a cable system in the U.S. — was not included by the FCC.

Katz said the revenue-shifting argument was faulty by just looking at Cable News Network, owned by AOL Time Warner, the second-largest operator with 10.9 million subscribers. Katz said that because CNN is one the most widely carried cable networks, the vast majority of its carriage is obtained from distributors unaffiliated with AOL Time Warner.

Dr. Cooper treats all sales of CNN as integrated sales. For at least 80% of CNN sales, Dr. Cooper's approach is misleading, Katz said.

Katz ended his paper by noting that based on his experience at the FCC in early 1990s, regulating the price of cable was difficult when operators needed to add channels and pay higher program license fees to assure quality. He noted that even when the FCC was regulating cable rates, rates went up.

"I am proud of the work that the [FCC] staff did. Inevitably, however, difficulties arose in regulating the supply of a product as complex as cable-television services," Katz said.

Cooper complained that in the pricing portion of his paper, Katz assumed that cable operators created value by adding channels to tiers that are offered to subscribers on a take-it-or-leave-it basis. The only way to test that theory is to make every channel in a package available à la carte, he said.

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