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The rebels: Cable firms

 

It was the kind of thing that can give programmers ulcers and cost producers their jobs.

UC Berkeley's Bears were playing Washington State in one of the big Pac-10 games last season, and although they trailing by five points, they still had a shot at winning. Then, at exactly 11 p.m., with less than two minutes left in the game, San Francisco's Channel 35 switched to a local news talk show--its regularly scheduled programming.

Hundreds of calls flooded the cable station, which had been taken over by Tele-Communications Incorporated just two months earlier. But it was too late: The Bears had lost in the closing seconds after fumbling on the one-yard line.

And as angry as the Cal fans were, there wasn't much else they could do. Given that TCI controlled 90 percent of the market in the Bay Area, they could hardly threaten to move to another cable operator. As with most other parts of the country, the local cable franchise holds a virtual monopoly at the regional level, unchallenged largely because of the high cost of laying coaxial and other types of industrial-strength lines that can carry video.


Common carrier
A company that agrees to provide service to anyone until its network has reached capacity--
that is, the firm doesn't hold out for more profitable customers.
 
"Nobody has a choice, anywhere. There are only a handful of cities around the country where there is real competition, with more than one cable purveyor," said Sylvia Siegel, founder of Cable Cops, a statewide non-profit consumer advocacy based in Mill Valley, California. "Deregulation has just not been good for consumers. All in all, they are getting shafted."

TCI's dominance in that market underscores one of the strongest criticisms of the Telecommunications Act of 1996: Instead of encouraging more competition through deregulation, critics say, the law is accomplishing just the opposite, creating unprecedented mergers and consolidation in the last year alone.

Industry executives and government officials stress that it is far too soon to declare the legislation a failure. As they point out, history shows that deregulation typically takes years, if not decades, before true competition emerges and consumers begin to benefit from it.

"It's very easy to get caught up in the notion that we should be providing competition in everything to everyone," TCI senior vice president Bob Thomson said from corporate headquarters in Denver. "If you think all these big capital-intensive companies know which way to go, you're dreaming." For the cable companies, however, deregulation has made at least one dream come true: higher rates. According to the federal Bureau of Labor Statistics, cable bills rose an average of seven percent last year, and the Yankee Group consultancy projects increases of about eight percent between now and the end of the century.

Beyond the obvious, these increases are important barometers of the post-deregulation environment. For one thing, it shows that phone companies have done little to offer competition that would prevent cable operators from imposing such additional costs on its subscribers. While federal antitrust statutes prevent any one company from holding more than 40 percent of the nation's cable franchises, they do not address de facto monopolies at the state, county, or city levels.


OVS
Open Video Service is a video delivery platform that makes available the majority of the system's channels to other cable and TV distributors. It was designed as an alternative to cable franchises to facilitate phone companies' entry into the video market.
 
At the same time, cable companies are using the increases to raise as much money as possible to fend off potential threats from huge conglomerates produced by the current trend toward mega-mergers. Even market leaders like TCI, the largest operator in the $28 billion cable industry, are mere upstarts in comparison to their established counterparts in the $170 billion telephone arena.

"My opinion is that the people on Capitol Hill were being disingenuous in saying that the bill would lead to lower prices, at least in the first year," said Jeffrey Hops, director of government relations for Alliance for Community Media, a Washington non-profit. "The big problem in competition is a technological one."

The solution to that problem is money, and lots of it.

To undertake ventures as ambitious as brand-new cable service, companies must become larger and have more resources. Translation: mergers and consolidation. The costs associated with coaxial infrastructure are enormous, even for companies as large as AT&T.

"The key thing is on the terrestrial side: With the eventual carriage of multiple services on cable systems, digital media, the Internet, telephony, it changes the rules a little bit on who would want to compete with you," said Jerry Bennington, senior vice president of CableLabs, an industry research group based in Louisville, Colorado.

But the effects of those high costs cut both ways. While they keep intruders out of their market, they leave the cable companies themselves with enormous bills to maintain their stronghold and build new networks for such services as Internet access. Those expenses, as well as a number of other obstacles, have repeatedly delayed cable-modem services by @Home, the much-publicized Internet venture of TCI, Comcast, and Cox Communications. And in a recent move that did not bode well for the rest of the cable industry, TCI significantly scaled back its plans to enter new businesses for the time being. Seeking to avoid such problems, the long distance carrier and other companies are looking toward different technologies to deliver Internet, video, and other services, such as satellites. Merrill Lynch

The single

largest challenge

will be to stay

ahead of the

competition.

Not just in

programming

promotion and

service, but

to get into

the phone

business and

computers.

-- Ted Turner,
chairman of
Turner Broadcasting System

estimates that, even if cable penetration doubles to more than 85 percent of U.S. households by the year 2005, telephone companies will continue to hold a marketshare of about one percent.

"Meanwhile, Time Warner has said it won't be doing much telephony in the near future," FCC chairman Reed Hundt said in a recent speech, offering further indication that companies are doing a lot of looking before leaping far from home. "TCI is shifting resources from battling telephone rivals to battling satellite video competition."

Yet such technologies are years away from maturation, analysts say, and cable companies can be expected to make the most of their mini-monopolies with price increases until the competition poses any real threat.

"Although direct broadcast satellite continues, its reach is fairly small and appeals to a specialized group of customers. And telephone companies have, for the most part, backed off in aggressive plans for moving into cable, going more into long distance," said John Aronsohn, an analyst with the Yankee Group. "The cable part of the telecom bill has had the opposite effect of deregulation. Instead of creating more competition, it has actually solidified the current position."

How long that will remain the case, however, is anyone's guess.

"The bill clearly told us to let people compete with one another, to get out of the way. However, companies couldn't fully get off the ground right away--phone companies are getting into video slower than the commission would like," said Morgan Broman of the Cable Services Bureau of the Federal Communications Commission. "But Rome wasn't built in a day." 

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