Like giant Gullivers, cable systems tied by FCC

Like giant Gullivers, cable systems tied by FCC

The `Going Forward` financial incentives offered by the FCC gave birth to a new round of complaints from cable companies.

Stephen Barlas

When Brian Roberts, president, Comcast Corp., announced record cable-TV subscriber gains on Feb. 24, it was just the front end of a "good news/bad news" joke that many other cable systems could glumly repeat--subscribers up, financial results either down or unappetizing. The bad news in this case was Comcast`s cash flow, which fell 4 percent in the fourth quarter of 1994, "due primarily to federal regulation of the cable industry," according to Roberts.

Cable systems today are like Gulliver, giants tied down by the Federal Communications Commission, with incipient competitors such as the telephone companies and direct broadcast satellite companies crawling like Lilliputians all over them. The cable industry hopes, though, that Congress, via a telecommunications deregulatory bill, will cut its regulatory restraints.

"Right now, we have no programming and pricing flexibility to allocate costs; there is no allowance for facilities upgrade. The fiber optics industry is one of many feeling the pinch," says David Krone, director of government affairs for industry giant Tele-Communications Inc.

The FCC had tried to give cable companies some additional flexibility with its "Going Forward" order issued in November 1994. It was supposed to usher in a new era for the cable industry, one in which they could increase their charge to customers by 20 cents for each new channel added--up to $1.40 per month over three years. In addition, the commission said cable companies could offer an unregulated new programming tier of programs, as long as they did not remove any program--CNN, the Cartoon channel, ESPN--from its cable programming services tier and put it exclusively in the new programming tier. CNN, for example, would have to be offered in the cable programming services tier if it was offered in the new programming tier. But new programs never carried before by the cable operator could be offered solely in the new programming tier.

It is fair to say the cable industry was underwhelmed by those incentives. Rich D`Amato, spokesman for the National Cable Television Association, says, "That is not a whole lot of incentive. It does not make it any easier for a cable system that needs a loan to build capacity to approach a bank."

The Going Forward order gave birth to a new round of complaints from cable companies, some of whom submitted petitions for reconsideration, asking for the FCC to modify the order. Cox Cable Communications Inc., which owns 23 cable systems in 18 states, argued in its petition, "The rules severely constrain the ability of cable operators to add more than a handful of new programming services to their systems."

But there is fighting--even within the cable industry--over FCC issues. Viacom and Lifetime, for example, oppose what Cox asks for in its petition. They`re afraid cable systems would break off the most popular shows and offer them individually at an attractive price. This would encourage customers to drop packages that incorporate numerous channels, including those owned by Viacom and Lifetime.

While various cable operators would like to see various revisions in the Going Forward order, there is probably a close to unanimous desire for a new "streamlined cost of service" order. The commission asked for industry ideas in February 1994. TCI, the leading proponent of this, which would allow cable operators to figure in the cost of laying fiber into requests for higher rates, sent in its comments in June 1994. But nothing has happened.

Paul D`Ari, the FCC official working on the form that would be used by companies requesting a streamlined rate, says there is no timetable for putting the process into action. Explains Krone, "The Commission decided in the video dialtone order to allow the telephony industry to upgrade its facilities with telephone ratepayer money. All we are asking for is reciprocity."

That particular foot-dragging aside, the FCC would say it is bending over backward to facilitate cable system development. Exhibit No. 1 was the first approval on Jan. 24 of an upgrade incentive plan. A small cable system in Horry County, SC, asked the commission for permission to pass along to its customers the $8 million cost of installing 200 miles of fiber-optic cable.

Under the UIP, the Horry County system will be able to increase its charges for new services above what the FCC would have otherwise permitted, allowing it to recoup its $8 million investment. The reason the FCC sanctions these higher charges is that the cable system and the county--which is the franchising agent--agreed to a "social contract" to benefit customers. An important part of that contract is the increasing of the bandwidths in the system from 220 to 550 MHz, allowing for improved signal quality and more programming. In return, the cable system, for a limited time, will be able to offer five non-regulated premium channels and two non-regulated pay-per-view channels.

As Krone points out, the FCC is, on the other hand, rolling out the red carpet for telephone system upgrades. The video dialtone order issued on Oct. 20, 1994, said the telephone companies could use existing networks or build new ones, which would serve as platforms for the provision of video services to the home.

The FCC had already approved a video dialtone system for Bell Atlantic in July 1994. Jim Carrigan, a Bell Atlantic spokesman, says a "fiber to-the-curb" system in Dover Township, NJ, will begin serving 38,000 households this summer. The first cable programmer to sign on in Dover Township was FutureVision of America Corp., which will offer a host of interactive video services, plus cable-TV offerings. FutureVision will compete with two other cable-TV systems already operating in the area.

On Jan. 27, Bell Atlantic filed with the FCC its tariff schedule for Dover Township. The commission was to approve or recommend changes to that schedule within 120 days. Then, on Feb. 7, the FCC approved a petition from New England Telephone and Telegraph Co. to build two commercial video dialtone systems in Massachusetts and Rhode Island. Both systems would be hybrid fiber and coaxial cable, offering advanced voice, data and video services, including interactive video entertainment. Don Evans, vice president for federal regulatory affairs for Nynex, says the company hopes to have both systems up and running at the end of 1995 or early in 1996, although he concedes those expectations "may be a little optimistic."

The Massachusetts video dialtone platform will be in an area where Time Warner currently provides cable-TV services. Evans agrees that at least initially, as cable operators use the Nynex platform, there will be a situation analogous to four gas stations on one corner. Cable systems will be competing head-to-head for the first time, and bidding down consumer prices. But Evans believes the quantity of available programming will explode over time, leaving enough channels so cable operators can differentiate themselves.

Stephen Barlas is a freelance writer from Arlington, VA.