For Cable TV Viewers, Rate Cuts a Promise Undelivered

Dave Parke figured one of the benefits of federal telecommunications reform would be competition in the cable television business and lower rates at his Westchester home. But Parke is still waiting, as are millions of other cable customers across the country.

“My monthly bill went from $42 last year to $56 for the same package of channels,” said Parke, who subscribes to Continental Cablevision. “We went back to the basic service, for $29.”

Even as technological advances are changing the telecommunications landscape at a dizzying pace, the one constant seems to be that cable bills continue to rise.

The Telecommunications Act of 1996 was supposed to reduce prices and enhance service as phone and cable suppliers raced to consolidate Internet, digital television and telephone charges onto a single bill. But even proponents of the law admit their assumptions may have been misguided. “It is a great competition policy founded on two false premises: that cable would rebuild for telephony and that telephone companies would rebuild for cable,” said Reed Hundt, the chairman of the Federal Communications Commission, in a recent interview.

Hundt and others contend that competition will arrive, just not as soon as expected. In the meantime, cable companies are taking advantage of the delay to raise rates across the country.

Cable rates have jumped nearly 7% this year, according to the Bureau of Labor Statistics--more than double the increase during the same period last year and twice the growth of the consumer price index. And millions of consumers could see another large increase in January, when the nation’s three largest cable operators, Tele-Communications Inc., Time Warner and U.S. West’s Continental Cablevision, plan rate hikes of 7% or more.

Cable television customers have complained to their legislators, called their suppliers, or simply canceled their subscriptions over the last year.

“Consumers are getting a raw deal,” said Mark Cooper, director of research at Consumer Federation of America, a Washington public policy advocacy group. “Cable companies will push prices up to what the market will bear.”

Parke, the owner of a lawnmower store in Hawthorne, is considering a move that many frustrated cable customers are making: switching to digital satellite services. Prices have fallen in the last six months to about $500 for a dish and a year’s worth of programming. “If I’m going to pay close to $60 a month for television, I may as well buy a dish and get all those pay-per-view channels and not worry about my service going down in a rainstorm.”

How to keep customers like Parke from defecting will be a hot topic today in Anaheim, where more than 20,000 cable executives are gathering for an annual trade convention.

“Cable prices will come down eventually, but not before a few more years of increases,” said John Aronsohn, a telecommunications analyst at the Yankee Group, a market research organization in Boston. “Video is not a top priority for the phone companies and satellite has become their midterm strategy. Eventually, in three to five years, phone companies will have to replace their infrastructures--and will build out to provide cable at that time. “

That gives the cable industry more time to make good on promises made for so many years that few investors believe them any more. This was the year the cable industry finally was to deliver a host of services like telephone and high-speed modems for Internet use that would bring new revenues and lift stocks out of the doldrums.

But after years of trials and heavy investments to upgrade their networks, revenues from these services are still distant, leading cable companies to resort to rate hikes to fatten their coffers, even at the risk of losing customers to satellite.

Now cable companies are promising that many of those services will begin next year.

Years before deregulation became law, the phone and cable industries viewed their convergence as inevitable. Phone companies had deep pockets to take advantage of a technical revolution in telecommunications and the trust of customers that cable lacked. Cable companies had built networks capable of carrying far more data than phone lines, although they would need upgrading for two-way phone and Internet service.

But the phone companies shifted their priorities soon after the bill was signed into law in February. The long-distance carriers focused on local phone service, a $129-billion-a-year business five times larger than the cable market, which is worth an estimated $23 billion. The local phone companies became preoccupied with defending their territories against encroachment, leading to several mergers. SBC Corp. agreed to buy Pacific Telesis in the West, and Bell Atlantic and Nynex agreed to merge in the East.

“The forces of economic concentration are moving much more quickly than competition,” Cooper said. “As phone companies get bigger, they become harder for cable to attack.”

Amid the shifting alliances, the telephone company plan to enter the television business has taken a backseat. Nynex, Bell Atlantic and Pacific Telesis are now dissolving Tele-TV--a joint venture formed to move into TV--after delays, cost overruns and technical glitches.

While Pacific Telesis continues to pursue the wireless strategy championed by the joint venture, the two other partners are in heated talks with Rupert Murdoch’s News Corp. and other regional Bells to form a digital satellite service.

Digital satellite seems the most likely direction for many of the phone companies in the near term. In January, AT&T; bought a stake in the leading service, DirecTV, in a deal that valued the 2-year-old upstart at more than $4 billion.

Direct satellite offers more channels and better quality sound and pictures than cable, but is costlier and requires customers to keep basic cable or install an antenna to receive local broadcast channels.

While satellite systems won’t provide the kind of competition that will drive down cable rates, it has had a huge impact on the cable business.

“Cable stocks were moving up until AT&T; took an investment in digital satellite,” said Marc Nathanson, chairman and chief executive of Falcon Communications, a cable operator based in Los Angeles. “Until then, investors thought the phone companies would invest in cable.”

The Yankee Group says cable is losing its most valuable subscribers to satellite. This year, 71.1% of U.S. households with income of $75,000 or more subscribed to cable, down from 75.8% last year. “A large number of them are going to satellite,” Aronsohn said.

The cable rate hikes are only speeding the defection. Cable leader TCI lost 70,000 of its 14 million subscribers after it raised prices in June by 13%.

Cable operators say the rate increases are the first in three years and are needed to offset the heavy investments they are making to upgrade their networks to offer more channels and new services. Indeed, the cable companies are burdened with some of the highest debt levels in American industry. Last week, TCI, the largest cabler, announced it was laying off 6% of its work force to help bring its balance sheet back to health.

TCI Chairman and Chief Executive Officer John Malone, who once promised that cable companies would deliver interactive television, told analysts the company would scale back plans to offer Internet services, telephone, and digital television, and instead concentrate on rolling out set-top boxes that would provide customers more channels.

TCI, like most other cable operators, is concentrating these upgrade efforts on its urban systems, where expenditures can be spread across greater numbers.

Competition has emerged in a few pockets around the country and in those areas cable rates are stable or falling. In Thousand Oaks, for example, GTE is upgrading its phone network to provide cable services. Nathanson said that of Falcon’s more than 1 million customers, only its 4,000 subscribers in Thousand Oaks are getting rate relief. Falcon will soon cut prices for premium channels in half and customers will now be able to buy a package of 12 channels for 45 cents instead of 6 channels for $6.

But, Nathanson said, the market is not big enough to support both companies, and that he will probably be forced to sell to TCI, which owns contiguous systems.

Aronsohn, the Yankee Group analyst, said such economics have discouraged more phone companies from aggressively upgrading their networks to deliver cable. “Cable only serves 65% of the country and if you divide a territory in two, the economics just aren’t there.”

Ameritech, which has been the most aggressive of the regional Bell companies in rewiring for cable, says it is counting on expanding the market for video services to justify its investments. “There are already signs that the pie will grow for everyone and the services will improve with competition,” said David Onak, a spokesman for Ameritech, which provides phone service to five states in the Midwest and switched on its first cable customers, in Detroit, in June.

Ameritech has 27 cable franchises in the Chicago, Detroit, Cleveland and Columbus, Ohio, areas, representing 650,000 households, and has applications for an additional 30 franchises.

Onak said cable operators have dropped their prices in those markets and are upgrading their systems to offer more channels.

And three weeks ago, TCI sent out notices of a six-month price reduction of $5 to Troy, Mich., customers who are eligible to switch to Ameritech.

“Competition works where we are building but if you are in the next town over, your cable rates are going up,” Onak said. “That’s what we are seeing throughout the Midwest.”