Two top cable operators significantly increased their efforts to seek regulatory freedom from rate and pricing restrictions last year, a trend that will continue to grow in coming months as operators try to gain back market share lost in 2001, according to FCC sources, records and cable operators themselves.
The trend could have a huge impact on cable's bottom line. Federal law mandates that cable companies, which gain what some call a monopoly through franchise agreements with local governments, comply with rate regulations for basic cable service. But cable companies can have such requirements waived if they can prove ?effective competition? in certain markets ? that is, that consumers have sufficient choice to make the rate regulations unnecessary.
Cable companies, which lost two percentage points of the multichannel market last year mostly due to direct broadcast satellite (DBS) providers, argue that the regulations put them at a disadvantage. (For more on cable's market-share decline, see story on page 8.) That's partly because some consumers end up carrying both cable and satellite service in their homes: low-priced basic cable service for the local broadcast stations, some of which are not carried by DBS, and satellite service for hundreds of other channels.
Charter Communications led all cable operators by filing 31 of the 47 total petitions seeking effective competition status last year, according to FCC records. The combined total represents a 161% increase of petitions filed by all cable operators combined last year compared with 2000 and a 95.8% increase compared with 1999.
?We have sort of stepped that up in the last six months to a year and probably will continue to file these petitions as we see a need to do so in order to compete more fairly,? Charter spokesman Andy Morgan said. Charter needs more flexibility for its pricing and packaging to compete with DBS providers and other television providers, he said.
Time Warner Cable also increased its filings last year, and Adelphia Communications plans to file more petitions this year, an FCC source said.
The law offers tests that a cable operator must meet to receive a declaration of effective competition.
The FCC may conclude effective competition exists, for instance, if a cable operator can prove there are two providers offering service to at least 50% of the market and then prove that the smaller provider actually provides service to at least 15% of the market ? known as the 50/15 criterion.
The petitions take anywhere from two months to nine months to review, according to the FCC.
Of the 33,000 cable community units nationwide, only 419, or approximately 1%, have been certified as having effective competition in the past nine years, according to the FCC's annual report ending June 2001. Many of those 419 granted were in 1994 and 1995, an FCC source said.
But more certifications could come this year.
DBS market growth rate more than doubled that of cable, bringing DBS market share to 18.2% of the multichannel video programming disctibution (MVPD) market for the 12 months ending in June 2001, the FCC announced in its report last week. And cable operators lost two percentage points in market share between June 2000 and June 2001, bringing cable subscribers down to 78% of the MVPD market.
?Cable television still is the dominant technology for delivery of video programming to consumers, although its market share continues to decline,? the FCC said in a statement.
Aware of this, Time Warner Cable nearly doubled the amount of petitions filed last year compared with 2000, FCC records show. And the operator has already filed at least one petition this year.
Time Warner spokesman Mike Luftman said the operator wants more freedom to market, promote and price its product. ?It frees us from local rate regulation,? he said. ?Local regulation has often led to artificially low prices for basic cable. It simply encourages people to downgrade and keep basic because DBS can't deliver local product as well as we can.?
Luftman explained that consumers tend to keep basic cable in order to get the local broadcast channels and public access channels provided by cable operators, which generally offer better local programming. DBS does not provide local broadcast channels in all markets to date and does not provide local public access channels. When it comes to seeking more robust programming, however, consumers have been switching to satellite, Luftman said.
While Luftman would not reveal the statistics behind how many consumers keep basic cable but upgrade to satellite, he explained that it's a prevalent enough pattern to prompt the operator to seek regulatory freedom when applicable.
The average basic cable rate rose 2.3% to $12.84 for cable operators in June 2000 compared with June 1999, according to the FCC's latest pricing report. While rates were lower in areas that were granted effective competition, the average rate increase in those areas was higher. The average basic rate increased by 6.1% to $12.03 in the effective-competition areas during the same time period, the report found. The pricing report for June 2001 is scheduled to be released in the next two months, an FCC spokeswoman said.
Larry Gerbrandt, chief content officer of Kagan World Media, the databook and newsletter publisher that, like Cable World, is a subsidiary of Media Central, said it wouldn't surprise him if 25% to 30%, or even more, of all urban DBS subscribers had basic cable hookups as well.
But Mark Cooper, director of research at Consumer Federation of America, said the number of crossover subscribers is relatively small, so any potential losses to cable operators is minimal. Out of the 16 million DBS subscriber total last year, 2 million had cable, according to his estimates, which means that only 2 million of the 67.7 million cable subscribers had DBS last year. ?That's not a big phenomenon,? he said.
Cooper hasn't focused on effective competition petitions much because there weren't many of them filed in the past. But the trend of increased filings makes sense from the operators' point of view, according to Cooper.
?It's in their economic interest to become unregulated,? he said. With DBS gaining more subscribers, it is easier for cable operators to meet the 50/15 criterion. But Cooper believes this 50/15 criterion fails to meet what ?effective competition? truly means. DBS and cable offer different products to a different set of consumers, he argues. ?We take the FCC to task for misusing the term effective competition,? he said.
Another reason for cable operators to increase their filings this year stems from a regulation that prohibits cable operators from requiring consumers to buy an expanded package, or a digital package, in order to access premium channels such as Home Box Office or Showtime Networks, an FCC source said.
A ten-year exemption on this prohibition, what is known as a ?tier buy through,? ends in October. So operators such as Charter and Adelphia Communications, which have required consumers to buy digital programming to get HBO's The Sopranos or Sex and the City, must get an effective-competition ruling in any market by the end of this year to continue this practice.
Charter said that this is not the main reason it files these petitions ? it is just an added benefit if the FCC certifies effective-competition status.
While an FCC source said that Adelphia has told the FCC that it seeks to file more petitions because of the end of ten-year exemption, Adelphia had not confirmed this by press time.
If Charter and Adelphia fail to get these rulings, they will have to drop channels and reconfigure the way they operate, Kagan's Gerbrandt said. ?It?undercuts their marketing strategy, their pricing strategy?their overall operating strategy,? he said.
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