Cable Fights Back

Cable took a few hits this year. Subscriber rates are generally flat, stock prices are low and the FCC has made a series of moves the industry has opposed. There’s competition, especially in the HDTV realm, and the FCC is plotting still new ways to regulate the industry.
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WASHINGTON
Cable took a few hits this year. Subscriber rates are generally flat, stock prices are low and the FCC has made a series of moves the industry has opposed. There’s competition, especially in the HDTV realm, and the FCC is plotting still new ways to regulate the industry.

The head of the National Cable and Telecommunications Association pronounced the commission “broken.” And when Comcast made a minor adjustment to its financial outlook in December, one analyst called the announcement “the worst of all possible worlds.”

But as Democratic Commissioner Michael Copps recently said, every industry tells the FCC a story of tough times and growing competition, and then tells Wall Street that it’s well positioned for growth despite all the regulations.

CUTTING CABLE

Big cable aggressively resisted several measures this year. First, led by Comcast, the industry fought against the July ban on integrated set-top boxes, ushering in the era of CableCard security systems. The commission allowed those systems with a plan to go all-digital by February 2009 an exemption from the rule and allowed smaller systems to seek a waiver.

But Comcast, with nearly half its customers still in analog, faces the prospect of deploying millions of the more expensive CableCard-ready boxes as its viewers transition—slowly—to digital.

In September, in a compromise with big cable, the commission ordered, starting in February 2009, carriage of local HDTV stations, plus three more years of analog carriage for those who have it. Comcast told investors its analog tiers would start shedding channels to make room for the required HDTV.

Then came rulings reducing leased-access cable rates and ending cable’s exclusive deals with apartment buildings. Both of those are heading to court.

When FCC Chairman Kevin Martin threatened to invoke new regulatory powers with the declaration that cable passed 70 percent of the homes in the country and was subscribed to by 70 percent of those (the “70/70” finding), cable fought back harder, bringing what Media Access Project President and CEO Andrew Jay Schwarzman, who favors more cable regulation, called a “full-court press” by the industry.

“Every one of the FCC commissioners got lots of visitors,” from industry leaders and lobbyists, Schwarzman said. Congress got involved, and Martin didn’t get the votes on the commission he needed to invoke the 70/70 finding.

“Part of what happened the past couple of weeks is the recognition that the commission can’t engage in unfair proceedings, and we got Congress and others stepping in and saying, ‘Why?’” said Dan Brenner, the NCTA’s top lawyer.

The cable industry will provide data on its penetration rate to the FCC in January. But even if the commission goes through with 70/70, NCTA is ready to challenge both the law on which Martin claims authority as well any moves he makes with it to force a la carte programming.

Meanwhile, Martin scheduled a Dec. 18 vote on a 30 percent nationwide ownership cap on the industry. That would mainly affect Comcast, and still allow it to acquire a small operator or two if it wanted.

ROOM TO GROW

Cap or no cap, cable still sees opportunity ahead.

“The outlook is for slower growth going forward, but it’s still significant growth,” said SNL Kagan Senior Analyst Robin Flynn. “They still have a lot of room to grow in terms of the penetration [of] advanced services.”

Indeed, although the industry lost some subscribers, in part to aggressive offers by Verizon and DirecTV, Comcast, the nation’s top multichannel provider, is still experiencing strong revenue and cash flow growth.

Verizon is giving away HDTVs—19-inchers, to be sure, but still HDTVs—to people entering a contract. Cable executives have said they’ll concede some customers to short-term efforts.

Meantime, cable is signing up tens of thousands of phone customers (as well as high-speed Internet customers) every week and Comcast is soon to be the nation’s fourth-largest telephone provider, Brenner said. And the fact that the industry is at least treading water in video in the face of massive marketing efforts by its competitors speaks to the strength of the industry, he said.

But then there’s the war for actual video customers, especially those with high monthly HD-DVR bills and slow churn rates.

WHO’S NO. 1 IN HD?

The cable companies are bristling at DirecTV’s attempt to usurp the HDTV throne among carriers, with its high-profile rollout of, supposedly almost 100 HD channels by the end of 2007, (and, according to its recent announcement, local HD in 76 markets, covering 75 percent of U.S. television homes by mid-2008).

“We’ve allowed a competitor to take a higher ground in the marketing work on high-def and I don’t think their product justifies that, so we need to a better job around that,” Michael Angelakis, Comcast executive vice president and co-CEO, said at the UBS Global Media and Telecommunications Conference in New York in December. Among the moves: investing more in advanced STBs, especially HD-DVRs. “And by the way, we get a really good return on that deployment,” he said.

Cable is bullish on video-on-demand, which has enjoyed massive growth in 2007. VOD also enables the cable industry to tout slippery numbers in its fight with satellite over HD leadership.

While DirecTV’s supposed 100 HD channels stretches the data to include every optional and regional channel available, some cable companies are conflating HD on-demand streams with actual linear channels to create a single large number of HD “options” in their materials for consumers and investors. When it rolls out switched digital video technology more extensively in 2008, cable executives have said they’ll be able to bring “unlimited” HD choices to cable.

BEYOND SUBSCRIPTIONS

There are still other ways for cable to grow. In the last year, Comcast acquired movie ticket site Fandango.com, and regional sports networks in New England and the San Francisco Bay Area. “Sports is a highly sought-after programming aspect and I look at that as really an offensive and defensive move for us,” Angelakis said.

Comcast and others also say they need to work harder to keep customers happy.

“I think we’ve made a meaningful investment this year in customer service,” said Angelakis. “I think that is an area where we need to improve upon and probably make more investment. I’m not a guy who going to sugarcoat things and I think our customer service needs to improve, and that’s an area where I think you’ll see us invest.”

Time Warner Cable CEO Glenn Britt echoed that sentiment, noting at the same conference that it needs to repair the industry’s reputation where it bought systems in Los Angeles and Dallas. And Neil Smit, president and CEO of Charter, agreed that the eight-hour window it had been offering to customers seeking “service” were too long, and that the company had narrowed that down to just two or four hours.