Some Cities Turning Their Backs on Cable

Tired of living with the monopolies enjoyed by cable television companies, a growing number of small-town mayors have begun wooing cable’s arch enemy--satellite TV.

Mayors in at least half a dozen small U.S. cities--including Tustin, Big Bear Lake and Simi Valley--have started negotiating cut rates for their residents with the nation’s two satellite TV companies.

In turning the tables on one of the last remaining monopolies, small-town America could end up playing a more influential role than Washington lawmakers in redrawing battle lines in the $50-billion-a-year competition to control one of the nation’s favorite pastimes--watching TV.

These mayors hope inflaming the rivalry at the local level could reverse a surge in cable prices. Rates have climbed 33%--more than any other telecommunications service--since Congress deregulated the cable and telephone industries to stoke competition under the Telecommunications Act of 1996.

“Cable companies think they have a captive audience and can set any price they want,” said Simi Valley Mayor Bill Davis, who late last month unveiled a plan with EchoStar Communications Corp. that reduces the cost of satellite television to the price that the local cable operator, Adelphia Communications Corp., charges for fewer channels.

“The only way to get a company like Adelphia to listen up is to hit them in the pocketbook. They told us they won’t lower their prices, so we did the deal with EchoStar,” Davis said.

Cable operators stand by their record and their service. They say they are investing about $45 billion nationwide to prepare for two-way digital service. And they say cities are using satellite operators as leverage in cable franchise renewal negotiations and to curry favor with constituents.

“We intend to be good guys in these communities, and over time, you’ll see that we are competitive,” said Bill Rosendahl, senior vice president of operations at Adelphia.

Cable operators say EchoStar has been shrewd in targeting specific communities where cable prices are high, channel capacity is limited and customer service is wanting.

Cities Opening Door for Satellite Firms

The satellite campaigns seem to be working.

The city of Tustin invited EchoStar to town in November when franchise renewal negotiations with AT&T; Broadband deteriorated amid a flood of customer complaints about prices and service.

“People are desperate for alternatives,” said Joe Meyers, administrative services manager for Tustin’s Public Works Department. “While deregulation was predicated on the promise of competition, nobody is going to overbuild [install a second cable network] because of the economics. We want to hold AT&T;’s feet to the fire.”

That’s what city officials in Big Bear Lake wanted to do to Charter Communications Corp., which charges residents one of the highest rates in cable--$35 a month for 35 channels. The mountain community is close to striking a deal with DirecTV under which the El Segundo-based satellite leader will provide free installation and equipment to local customers who buy one of its standard monthly packages, which start at $21.99 for 40 channels.

DirecTV says the strategy may have only limited potential nationwide because of cities’ demands for government-affairs channels that cable operators provide but that satellite hasn’t the space to accommodate. But DirecTV soon could become a more aggressive challenger, if, as expected, it is acquired by News Corp., which would in the process become the world’s largest satellite provider.

EchoStar says this is just the beginning of a guerrilla marketing campaign that could undercut cable. “We’ve made this a major focus of our company this year,” said Scott Landers, director of direct marketing at the Englewood, Colo.-based company. “This deflates the perception that satellite is expensive and cumbersome and lacks local channels.”

To accommodate city negotiators, EchoStar typically pares down its standard package, which costs $59 a month and includes free installation, a dish, two receivers with VCR functionality, and 171 channels, including local networks but not HBO.

Though all the relationships are slightly different, they boil down to a virtual endorsement of satellite service by City Hall. The cities don’t actively market the satellite service but rather invite these companies to make pitches at city council meetings that ironically are broadcast on government channels provided by cable operators. As part of their campaigns, the companies send direct-mail fliers in conjunction with the mayors’ offices to city residents and take out newspaper ads.

In Simi Valley, EchoStar dominated one City Council meeting, which was broadcast on Adelphia’s government affairs channel. “I’m surprised they didn’t black it out,” Davis said.

In Tustin, the city invited EchoStar to set up tents across the street from City Hall hours before a City Council meeting at which more than 200 people showed up to protest the renewal of AT&T;’s cable franchise. EchoStar pitched its special city plan at that meeting, which was broadcast on AT&T;’s cable system until a blackout knocked the program off the air. AT&T; said the interruption, which sent viewers flocking to City Hall, was caused by technical difficulties.

Tustin officials say the city has no ongoing relationship with EchoStar. “We’re putting our efforts into making our cable company more responsive,” Meyers said. “We don’t want to chase away cable fees. We don’t want to pick a fight or be sued by AT&T; for business interference. We just want to hold them accountable.”

In Big Bear Lake, DirecTV is setting up a toll-free number for residents. Company spokesman Bob Marsocci said DirecTV is prepared to install 600 dishes a day in the town. And in a further blurring of the lines between cable and satellite, DirecTV’s deal with Big Bear Lake provides for the unprecedented payment of $2 a month to the city for every subscriber recruited under the program--in much the same way cable operators pay franchise fees based on a percentage of their revenue. Similarly, the city will monitor satellite customer complaints, just as it does for cable.

Cable executives say they are prepared for the latest wrinkle in their war against satellite service.

Since deregulation, the industry has invested $45 billion to rebuild its networks for advanced two-way digital services such as high-speed Internet access and telephone services that satellite does not offer. New digital-cable packages, which offer more channels and better pictures than analog service, are being marketed by some operators as “satellite without the dish.”

Charter and Adelphia are on the verge of installing digital in Big Bear Lake and Simi Valley. Charter’s 35 channels will expand to 175, with high-speed Internet access available.

“This is a fight we’re looking forward to,” said Joe Camicia, vice president of government and public relations for the Los Angeles region of Charter Communications, which serves 500,000 customers locally, including 12,000 in Big Bear Lake. “We’ll see if we can undercut [DirecTV] in price.”

Yet the cable industry’s push into digital has been accompanied by a rise in customer complaints about everything from higher prices and long waits on help lines to bungled installations of converter boxes.

Cable Consolidation a Factor in Difficulties

Though Meyers praised Cox Communications for a digital roll-out in Tustin that was completed without a hitch, he said AT&T;’s prompted hundreds of complaints a week last year. He said complaints have since slowed to a trickle, quite possibly because of defections to satellite.

AT&T; says it has lost a small number of its 9,000 customers in Tustin. Spokeswoman Giselle Acevedo-Franco says the company regrets not having spent more time educating Tustin residents about the virtues of digital and the myriad new services that will be available with the set-top boxes.

Acevedo-Franco and other cable executives acknowledge that one of their biggest challenges is the pent-up consumer resentment from monopolistic practices and poor customer service of the past.

“We’re spending all this money to bring customers services they never dreamed of, yet they’re still mad,” Charter’s Camicia said. “We’re going through a major remodeling and are asking customers to please excuse our dust. But they don’t make the connection; they just view it as more bad service.”

Cable executives say a consolidation over the last three years in which nearly half of the nation’s 69 million cable customers changed hands has added to the chaos. Adelphia was not even operating in Southern California until late 1999, and Charter and AT&T; Broadband jumped into the cable business only within the last three years.

These operators say they inherited problems from previous owners.

“Southern California was a patch quilt of 30 to 40 operators that have consolidated down to five,” said Rosendahl of Adelphia, which entered the Los Angeles market through several acquisitions. “There’s been a whirlwind of consolidation.”

In the meantime, satellite is exploiting the opening. EchoStar says digital cable has narrowed the industry’s price advantage over satellite, giving consumers an incentive to comparison shop.

Simi Valley Mayor Davis says that, when Adelphia turns on digital within the next 60 days, its prices will jump $15 a month, catapulting them over EchoStar’s rates.

EchoStar’s Landers says municipal interest is mostly from small towns, where small populations make an investment in digital technology less economically attractive than in urban centers that have been cable’s top priority. But he said he is starting to get inquiries from larger cities such as Birmingham, Ala.

Encouraging cities to sign on is signature EchoStar, which has kept itself alive and goaded the more conservative DirecTV into action through underdog maneuvers. Undercapitalized and scrappy, EchoStar paid early bounties to distributors for bringing in cable defectors. It paid schoolkids to ride bikes through Denver in search of 3-foot dishes EchoStar could replace with its pizza-size alternative. Landers would not say how many customers the company has gained from working directly with cities. But Mayor Davis says he’s expecting to lose as much as $20,000 a year in cable franchise fees as hundreds of Simi Valley’s 115,000 residents convert to satellite.

But the battle isn’t over just yet.

Charter’s Camicia says his company is ready for the challenge.

“We’ve never had a city bring in satellite and put it to a side-by-side test,” Camicia said. “This is a great place for us to have a showdown because satellite doesn’t do well in the snow or where there are lots of trees. I can hardly wait for winter.”