Stiff competition with DBS providers, high capital cost make cable overbuilds precarious undertaking

February 17, 2004

The head of the national cable trade association told members of the Senate antitrust subcommittee last week that virtually all of the 9,000 cable systems nationwide already face stiff competition from two direct broadcast satellite companies and that the economics of the cable TV business cannot sustain multiple cable systems in the same service area.

Addressing the Senate Subcommittee on Antitrust, Competition Policy and Consumer Rights, National Cable & Telecommunications Association president and CEO Robert Sachs said that cable overbuilders result from “anomalous circumstances in nearly all cases” and that frequently they exist in “financial distress or as the aftermath of financial distress – unless they are tied to a utility or not-for-profit cooperative.”

Speaking Feb. 11 before the subcommittee, Sachs said that although a recent study by the General Accounting Office (GAO) of cable overbuilders relied on a “tiny” sample –specifically, six communities with a second cable system and six without- it identified the problems with overbuilding cable systems.

“A major reason was that overbuilders simply underestimated the extent to which the marketplace they chose to enter was already fiercely competitive,” Sachs told the subcommittee. “Overbuilders may have assumed that they could easily and profitably capture customers from incumbent providers with lower prices.”

However, DBS offerings had already caused existing cable systems to offer service at competitive prices “so, overbuilders were caught in an economic bind,” he said.

“To entice customers away from the incumbent, they might have to charge lower prices than the incumbent. But those lower prices were insufficient to cover their costs and investment risk and were economically unsustainable for more than an introductory period,” he said.

The NCTA conducted its own study and found that about 400 of the 33,485 communities served by cable companies nationwide have two competing franchised wireline providers. “Many of these franchised overbuilders, however, have either never deployed and launched their services, launched and failed, or are in danger of bankruptcy,” he said.

For more information, please visit www.ncta.com/pdf_files/Testimony/SachsTestimony0211.pdf

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