Industry poised for last leg of deregulation; Consumers, critics fear companies will react by boosting rates; 'A done deal'; FCC supervision of expanded service to cease Wednesday; Cable TV

THE BALTIMORE SUN

This week, regulations on the most popular tier of cable offerings will disappear, and many consumer advocates, government officials and analysts predict the cable industry will respond by jacking up monthly bills.

"By the end of the year, it will be surprising if they haven't raised rates substantially," said Scott C. Cleland, an analyst with Legg Mason Precursor Group in Washington. "Cable expended an enormous amount of political capital to get these rates deregulated. You don't do that to keep rates stable -- why bother?"

However, industry officials insist that increased competition will suppress rate increases. The National Cable Television Association, a trade group based in Washington, expects increases this year to average about 5 percent, less than what cable companies have been getting recently.

"Cable companies will not change the way they price their services after the sunset of regulation," said NCTA spokesman Scott Broyles. "There's increased pressure on cable companies to restrain rates."

Cable's new era begins Wednesday when the cost of service popularly known as "basic expanded" or "basic plus" will cease to be supervised by the Federal Communications Commission. That will enable cable companies to charge whatever they wish for this category of channels, which typically includes such cable mainstays as CNN, ESPN and MTV in addition to national and local broadcast networks.

Cable's critics fear that the past will be prologue. An FCC study released in December showed that cable rates nationally rose 7.3 percent between June 1997 and June 1998 -- four times more than the Consumer Price Index, a standard benchmark for inflation, which increased only 1.7 percent.

That wasn't an aberration. From July 1996 to July 1997, monthly cable bills went up at almost four times the rate of inflation, and in the twelve months before that, they nearly tripled the growth of the CPI.

Since 1995, cable rates have risen about 25 percent nationally, an increase that has been reflected in most Baltimore-area cable systems. One large local cable company, TCI Communications of Baltimore, said it plans to raise rates for its Baltimore City customers by June 1, though it has not said how big the increase will be.

"I think it's too dang expensive," Colleen Brown of Edgewater said of her cable service. "All I have is the basic-plus, and it's just shy of 50 [dollars per month]. We just don't have much choice."

Thomas McClelland, who watches cable at home as well as in the kitchen he manages at Souris' Saloon in Towson, blames rising rates on the fact that cable firms have traditionally had little or no competition. "There's nowhere else to go, and they know it," he said.

Cable companies respond that they are paying more than ever for programming, and that customers are getting more channels and better service for their money.

"Where cable price increases take place, they reflect costs incurred by cable companies who have invested in new technologies and new services," said the NCTA's Broyles.

With the deregulation of the only cable service still under federal control, Congress is betting that the market will force cable companies to curb rate increases.

Congress and the FCC have had similar expectations before. In 1994, after the election of a Republican congressional majority that favored the relaxation of cable regulations, the FCC loosened cable pricing rules, making it easier for companies to pass the costs of capital investments and additional channels on to consumers.

Two years later, Congress passed legislation to end regulation, boost competition and reduce prices throughout the telecommunications industry, including cable television. The 1996 Telecommunications Act provided that FCC regulation of the basic-expanded tier would end March 31, 1999.

As part of the complex agreement, cable providers and local telephone companies indicated that they would enter each other's markets, thus giving customers new choices -- and, it was assumed, lower bills -- in those two areas of communications that had formerly been dominated by monopolies.

"The feeling at that time was that there would be a lot more competition in video programming," said FCC spokesman Morgan Broman. "The level of competition is not near anything that was foreseen three years ago."

Since the 1996 act, the Bell phone companies have largely abandoned plans to poach customers from the cable operators.

Chicago-based Ameritech Corp. has had some success establishing itself as an alternative cable company in the Midwest, but Bell Atlantic Corp. and other regional phone companies have been slow to follow.

Frustrated by this turn of events, consumer advocates and some members of Congress have hinted that deregulation should be scrapped or postponed.

Experts say there is little or no chance that will happen, given the deregulatory instincts of Congress. John Mansell, a senior analyst with the Carmel, Calif., cable industry research firm Paul Kagan Associates, called the change Wednesday "a done deal."

"There is no sentiment at this moment to re-regulate cable," said Ken Johnson, an aide to House telecommunications, trade and consumer protection subcommittee chairman W. J. "Billy" Tauzin of Louisiana and one of Capitol Hill's leading experts on cable issues. "We don't believe over the long haul regulation is the answer. Competition is the answer. It's proven that regulations aren't necessarily going to hold down costs."

But will deregulation do any better? Consumer groups and many industry analysts are skeptical.

"I expect to see more of the same," said Gene Kimmelman, co-director of the Consumers Union's Washington office. "Cable companies have tempered a little bit their most recent rate increases, and they may continue to do that for a little while, but you should expect to see rates go up three or four times faster than inflation."

Mark Cooper, research director of the Consumer Federation of America, said: "Neither economics nor regulation has been holding back their prices. Only politics has. And that's not going to change. They will get their 5, 6, 7 percent increase when inflation is zero to 1 percent. They will take what they can get."

Cable analyst Mansell isn't certain about that. "I don't think there's going to be any immediate effect at all, because cable operators are coming under increasing competitive pressure, especially from direct broadcast."

Direct broadcast satellite television, known as DBS, is a relatively new technology that uses pizza-size dishes to bring signals to the consumer. Fueled in part by customers fed up with cable service, DBS has grown explosively -- from 70,000 customers in June 1994 to more than 7 million today, with 30 million forecast by 2008.

"You only feel as free as your competition allows you to feel. We are in a market where we feel strong competition from satellite TV providers," said Jaye Gamble, regional vice president of Comcast Corp., the Baltimore area's largest cable provider. "I don't believe you will see dramatic increases in [cable] rates or a reckless approach to setting rates."

While DBS has made some inroads into cable's market -- two out of every three new pay-TV subscribers in 1998 opted for DBS -- many experts say it does not constitute a genuine competitive threat to cable.

As of June, there were 65.4 million cable households in the United States, two-thirds of all TV households and 10 times the number of DBS subscribers. The up-front costs of setting up a DBS system remain prohibitive for many, and it is impossible to get local broadcast networks on a DBS system without a rabbit-ears antenna or other equipment.

Still, DBS represents the core of Congress' strategy for bringing down cable costs. Both the House and the Senate are considering legislation that would allow DBS to carry local stations.

Even if DBS can't keep cable rates down, though, something else might -- the changing financial realities of the Communications Age.

From Internet connections to long-distance phone calls, the speed of communications is going up and the cost is going down.

Increasingly, cable is being pulled into partnerships with other communications companies. The reason is simple: Cable has the best wires.

Cable lines can carry communications traffic at great speed -- much faster than typical copper phone networks. This velocity is a prized asset in modern communications. And, unlike DBS, cable can be used for two-way communications like phone calls and Internet transmissions.

In addition, cable is virtually everywhere. In the United States, 98 million households have at least one television, and cable TV wires run within reach of 97 percent of them.

That is why long-distance king AT&T; Corp., looking to expand into local phone and other services, bought Tele-Communications Inc., the nation's second-largest cable company. It also explains why Comcast has jumped into the Internet business, using its lines in Harford, Howard and Baltimore counties to carry super-fast Internet traffic.

What does all this have to do with the future of cable rates? Plenty, say some experts.

Tom Rhinelander, an analyst with Forrester Research Inc. in Cambridge, Mass., said while there is still only "minimal" competition to cable, "I don't think customers will see a substantial jump in their cable bills."

"It's a very different climate this year," he added. "Different people are steering the cable industry now, with different aims."

Before, he said, heavily indebted, slow-growing cable companies would raise rates out of perceived financial necessity. By contrast, today's communications empires are likely to see cable as just one of many streams of revenue, making cable rate increases less necessary -- in theory, anyway.

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