Cable TV Faces New Threat of Rate Controls

In response to a groundswell of consumer complaints, the federal government is threatening a new clampdown on cable television prices.

From Capitol Hill to the Federal Communications Commission, the $30-billion industry is under fresh attack for raising prices at more than four times the rate of inflation, and legislation to restrain rates was introduced in Congress this week.

The specter of prolonged regulation comes during boom times in the cable industry, when more money than ever is flooding in from major investors--including AT&T; and Microsoft--in the belief that cable wires are the high-tech information pipeline of the future. On Thursday, in one of the highest-priced deals yet, Microsoft billionaire Paul Allen announced the $4.5-billion acquisition of Charter Communications, which will make him the nation’s seventh-largest operator and the third-ranked in Los Angeles.

But even as cable companies race to upgrade their systems for the high-tech future, the continuing outcry over rising rates raises troubling questions about the public’s willingness to pay more, even for such low-tech services as a wider array of cable channels. In the end, many cable experts believe, the industry will be forced to absorb more of the costs of upgrading their systems themselves rather than passing them along to consumers.

Part of the public’s frustration with cable companies stems from the industry’s well-earned reputation for poor service, and in some cases the roll-out of new services has only exacerbated the situation. In Los Angeles, efforts by the second-largest local cable company, MediaOne, to upgrade to digital set-top boxes has infuriated customers, who have complained that the new boxes are not compatible with some TV sets and require them to press as many as five buttons just to turn on their cable service.

“We are this close to getting a satellite dish,” fumed Rick Mitchell, a Los Angeles real estate broker at John Aaroe & Associates. “I’m looking to simplify stuff, not make things more complicated. The price [of cable service] keeps going up but the service doesn’t get any better.”

Complaints about cable operators in Los Angeles have been rising sharply again after several years of decline, said Mary Kay Kotzman, assistant general manger of the city’s Information Technology Agency. The agency has received almost as many complaints in the first five months of 1998 (1,802) as it received in all of 1997 (2,314).

Some, like Tony Donna, a Culver City graphic artist, are responding to poor service and price increases by ditching cable.

“I just told my cable company to drop dead and that they were fired,” Donna said. “I went out and got a satellite dish” about two months ago and “have never regretted it.”

A bill, announced Wednesday by Reps. W.J. “Billy” Tauzin (R-La.) and Edward J. Markey (D-Mass.), aims to give Mitchell and the rest of the nation’s 67 million cable customers protection from escalating cable rates when federal price controls expire next March.

Meanwhile, the FCC staff is wrapping up a seven-month investigation of cable prices and expects to deliver a report to FCC commissioners “by the end of summer,” said Michael Perko, director of government outreach for the agency’s cable services bureau.

The FCC and Capitol Hill initiatives are the latest response to cable rates that rose 7.3% in the year that ended June 30. Inflation was just 1.7% in the period.

“If we go through a series of situations where these rates continue to go up by double-digit percentages, people are not going to stand for it and neither are we,” Senate Majority Leader Trent Lott (R-Miss.) warned the cable industry Tuesday in a Senate Commerce Committee hearing on the issue.

But many cable operators say they are showing great restraint in raising rates and are sensitive to public resistance. For instance, the nation’s largest operator, Tele-Communications Inc., raised rates less than 4% on average last year.

Industry officials are both bewildered and terrified about the renewed anti-cable sentiment. For one thing, they contend that even higher rate increases are allowable under the deal they struck with Congress and the FCC that led to the Telecommunications Act of 1996. “They wanted systems to be upgraded and they wanted the superhighway, not for us to just repair the potholes in the road,” said Marc Nathanson, chairman of Falcon Communications, a Los Angeles-based cable operator.

Under the 1996 deal, cable operators are allowed to pass along to consumers their costs of upgrading their plants to provide new services, as well as their costs for licensing channels. “Given the capital we are putting in, we could justify rate increases of 8% or more,” said Nathanson. “Many cable operators are showing restraint. We are living up to our end of the deal, but a few congressmen are reneging on the deal.”

Some operators said a move to re-regulate cable rates could discourage further investment in the industry and slow improvements sought under the 1996 act. Cable operators are plowing investment into their systems to enable them to offer a variety of new services, including digital video, high-speed Internet connections and phone service.

In the long run, regulators believed that such upgrades would lead both to greater choices for customers as well as spurring competition in the telephone business.

“It is definitely not going to help deployment of new service,” Marwan Fawaz, vice president of engineering for MediaOne’s western region, said of the Tauzin/Markey bill. “We are in a business that is very capital-intensive . . . all of these new technologies could be slowed” or stopped altogether if rates are controlled.

“The industry would go back into a funk,” said Jeffrey Marcus, chairman of Dallas-based Marcus Cable. “The upgrades would not have been possible if we were under the strict regimen of control of the early ‘90s.”

The controversy exploded in 1992 when Congress overrode a presidential veto and passed a sweeping law reforming regulations of the cable industry. But the sharpest pain for the industry came in 1994, when Congress ordered a 7% rollback in cable rates, sending stocks into a tailspin that lasted until last year, when the promise of long-awaited new services finally came into view and investors such as Bill Gates of Microsoft endorsed them.

Tom W. Bell, director, of technology studies at the libertarian-leaning Cato Institute think tank in Washington, said, “No one should underestimate the eagerness of Congress to mess up cable and regulate it again. They’ve done it before . . . it’s a great election-year issue that could really hit the industry.”

“Concerns about cable rates and service produce a consistent level of letters and calls for every member of Congress,” said Markey. Congressional support for continuing some kind of price controls over the industry is “bipartisan. I think there’s a real momentum on this issue,” he said.

The outcry against cable comes as AT&T; Corp. tries to complete a $46.5-billion acquisition of cable giant Tele-Communications Inc. AT&T; officials hope the purchase will position the long-distance giant to deliver local phone service, high-speed Internet access and other communications services in competition with local phone carriers.

Other deep-pocket investors, including Gates and Allen, have made huge financial bets on cable with a particular eye on the Internet and other high-speed computer data networks.