Rates on Rise

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It's that time of year again, as cable operators brace for subscribers' reaction to notice of higher rates for standard cable service.

But although times have been tough — and programming rates continue to reach to the sky — most MSOs said they're generally sticking to an informal industry limit on rate hikes.

Not all operators have released their rate increase plans, including Charter Communications Inc., Mediacom Communications Corp. and Insight Communications Co., all of which said they have not yet set rates for 2003. But anecdotally, rate increases look to be in a range of 5 percent to 8 percent next year, according to National Cable & Telecommunications Association spokesman Rob Stoddard.

That's higher on the top end than last year's benchmark of 5 percent to 7 percent, mostly due to increased costs from such new services as video-on-demand and high-definition television, as well as the usual suspect: rising programming costs.

"Cable prices are reflecting a steady escalation in costs, including content, the hiring, recruiting and training of personnel — the usual costs of running the business and continued investment in upgrading the plant," Stoddard said.

Consumers Union, an independent consumer watchdog group, doesn't buy that argument. In a press release, the CU said upgrade and programming costs are more than covered by the increase in cable revenues from advertising, pay-per-view services and cable-modem service.

The CU's two-page release asserted that cable's ability to raise rates with seeming impunity was the result of insufficient competition from the direct-broadcast satellite industry, and the Federal Communications Commission's refusal to grant free-of-charge nationwide licenses to would-be cable competitor Northpoint Technology Ltd.

Per-channel debate

Although FCC data over the years have shown a steady rise in nominal cable rates, the agency has also documented that on a per-channel basis, when adjusted for inflation, fees have actually declined.

But the CU claimed that the per-channel analysis was flawed because it "raises the question of how many cable companies actually let consumers purchase only the cable channels they want on a per-channel basis. The answer is none."

In response, the NCTA said the CU's contention that the DBS industry — after amassing 18 million subscribers over the course of the past decade — exerts little competitive pressure on cable is "ludicrous."

Although rumblings of new cable rate regulation have swirled around Washington — especially since Sen. John McCain (R-Ariz.), who becomes chairman of the Senate Commerce Committee next year, has made cable rates a priority issue — most analysts don't believe regulation is imminent.

In April, McCain asked the nonpartisan General Accounting Office to investigate cable-rate increases and to assess the reliability of industry-supplied financial data reported by the FCC. The GAO is Congress's investigative arm.

With the White House and both houses of Congress in Republican control, passage of legislation that would punish cable operators for high rates is considered unlikely, even if Democrats try to use Republican ties to big business as a political weapon in the 2004 elections.

The FCC, also controlled by the GOP, has broad powers to oversee cable, but lost the authority to price regulate cable programming tiers on March 31, 1999. FCC chairman Michael Powell has said on occasion that although cable rates have increased, cable operators continue to add channels and make other quality improvements that benefit customers.

"I personally think there has to be some political sensitivity, but I would be surprised if operators were so undisciplined as to provoke reregulation," Harrigan said. "But there is certainly going to be some saber-rattling."

In some areas, that rattling has already started.

Comcast Corp., which just completed a $54 billion merger with AT&T Broadband, has been taking some heat lately over a nearly 8 percent rate increase in 200 communities in Massachusetts, including Boston.

But Comcast executive vice president of marketing and customer service Dave Watson said that on the whole, the Philadelphia-based MSO's rate increases will average about 5.7 percent in 2003. Watson called that increase comparable with 2002's.

In Boston, a former Broadband system, rates are set to rise by 7.8 percent beginning in January, largely due to increased programming costs.

In Washington, D.C., Comcast will implement a 3.5 percent increase in December, on top of a 5 percent increase levied in January 2002.

In Nashville, Tenn., a pre-merger Comcast market, customers weathered a 7 percent rate rise in October.

In Western Washington, the former AT&T Broadband system there will raise standard cable rates by about 7 percent, or $2.59 per month, beginning Jan. 1. But the average rate increase in Washington will be about 4.5 percent (1.95 per month) across all cable packages.

Watson said Comcast evaluates rates in each market on an individual basis, and each system will differ. While some may see increases in excess of 5.7 percent, others, including Atlanta and Jacksonville, Fla., will have no rate increase next year.

"Our approach is to go on a market-by-market basis," Watson said. "We evaluate operational stability, we evaluate the competitive situation and the state of the plant. There's not one set number."

In Massachusetts and other former AT&T Broadband markets, Watson said, decisions on rates were made long before the merger was completed.

Cablevision Systems Corp. on Nov. 22 announced an average rate increase of about 5.26 percent across its 3-million-subscriber footprint in metropolitan New York City. For consumers, that will mean an additional $2.69 per month for standard cable.

The Bethpage, N.Y.-based MSO said that the average monthly rate for its customers before the increase was about $51 per month.

Cablevision's 2003 increase is slightly lower than the 5.5 percent increase last year and way down from the 7 percent rate hike in 2001.

The company blamed rising programming costs and increased costs for improving customer service, network reliability and channel realignment. The increase will take effect in January or February.

For customers in certain areas of the Hudson Valley region in New York State, the rate increase will take effect in June. Cablevision also said it is standardizing its basic channel lineup.

"We are confident that new and existing Cablevision customers will recognize the benefits of receiving our service, especially when compared to our competitors," MSO president of cable and communications Tom Rutledge said in a statement.

Cox Communications Inc., which reports that programming costs have risen about 15 percent so far this year, will likely increase its rates somewhere within the 5 percent range, spokeswoman Laura Oberhelman said.

While rate increases vary by system, Oberhelman said, Cox has been relatively consistent at keeping its fee hikes steady.

"Programming costs have continued to go up," Oberhelman said. "But there is only a certain amount that you can pass on to the customers. We have to eat the rest."

But some markets eat more than others.

According to reports, in September, Cox raised rates by 5.9 percent in Oklahoma City and by 8 percent in Baton Rouge, La.

At Time Warner Cable, the second largest MSO with 10.8 million subscribers, spokesman Mark Harrad said 2003 rate increases have yet to be been determined.

But according to published reports, at least one market — Raleigh-Durham, N.C. –—will see monthly rates for standard cable climb 8.4 percent to $41.50 from $38.30 on Jan. 1.

There is still the question of the competitive impact. DBS service providers EchoStar Communications Corp. and DirecTV Inc. have been extremely aggressive in pricing, and have consistently eroded cable's basic video base. It seems that any increase in prices above 5 percent would give customers another reason to switch to DBS.

Watson said that was not necessarily the case. Although basic DBS service is priced less, cable presents the better value for the money overall.

"We stack up our overall rates, fully loaded," Watson said. "And you have to separate things like [DBS] charging for local channels, charging for different tiers. When you do an apples-to-apples comparison, we're certainly very competitive."

Harrigan agreed, adding that DBS may have to raise its rates as well. EchoStar chairman Charlie Ergen has already hinted about rate increases, the analyst said.

"When you look at DBS, they're really a one-trick pony," Harrigan said. "In a certain sense, if you get dead in the water on the subscriber-growth front, the DBS companies are more dependent on rate increases for video than the cable companies are, simply because they don't have the growth factors of data and voice.

"If you get relatively static subscriber growth, you certainly have to ask how are they going to get growth without having price increases," Harrigan added.

Cable, on the other hand, continues to roll out new services. For example, Watson said Comcast is offering HDTV in Washington and is making preparations to do the same in Boston.

VOD is available in parts of the Washington area —currently Alexandria and Arlington, Va. — and Comcast hopes to have that entire region covered in the next 12 to 18 months.

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