Cable revolution: Will rates rise?

It wasn't supposed to be this way. Cable rates were supposed to go down. Competition was supposed to flower. And consumers were supposed to have more control over what came out of picture tubes.

Instead, three years after a landmark law intended to usher in a golden era of telecommunications deregulation, cable prices have shot up - more than 20 percent. Service remains problematic. And the dizzying array of technologies that was supposed to offer consumers an alternative to cable - such as direct-broadcast satellite - have reached only a handful of homes.

"The Telecommunications Act was a mistake. It was a failure from that point of view," says Sen. Patrick Leahy (D) of Vermont.

The result is that one of the most sensitive issues for American consumers - cable TV rates - is now landing back in the lap of Congress.

In less than three weeks, as required under the 1996 law, almost all the remaining regulations designed to keep cable rates in check will be lifted - doing away with some of the last government price controls on a major industry in the United States.

But despite the soaring prices, lack of competition, and frustration from consumers, Congress isn't expected to reregulate the cable industry anytime soon. The free market remains the reigning philosophy on Capitol Hill. While several proposals in the House would delay the March 31 deregulation and create other consumer safeguards, they're given virtually no chance of passing.

Indeed, most of the Republicans and Democrats who voted to get the government out of the telecommunications business contend the answer is not better regulation, but more competition.

"The rates have skyrocketed under so-called regulation," says Sen. John McCain (R) of Arizona, chairman of the Senate Commerce Committee. "We've got to do everything we can to get competition to the cable industry."

But it will be years before technology and the marketplace will be ready to offer an alternative that can compete nationally with the cable industry, consumer advocates say. In the meantime, they want Congress to extend the current regulations and the Federal Communications Commission (FCC) to enforce them more aggressively to protect consumers.

"When regulation was pursued vigorously by the government, prices were first frozen and then declined," says Gene Kimmelman of the Washington office of Consumers Union. "It was only after the deregulatory-minded Congress told the regulators to get out of the business that we see the prices start skyrocketing again."

History of cable prices

Mr. Kimmelman contends he's got history on his side. After Congress deregulated the cable industry the first time in 1986, prices jumped and consumers rebelled. By 1992, Congress gave in to public pressure and re-regulated the cable companies.

Two years later, the FCC called for a 17 percent price cut across the board. It's estimated that has saved consumers some $3 billion. But that same year, Republicans won control of Congress, and the cable industry again lobbied to have regulations lifted.

This time, it argued that technology was changing so fast that telephone and satellite companies would soon provide enough competition to make FCC regulations unnecessary. The argument won bipartisan support.

But the technology to provide television over the phone wires turned out to be more expensive and problematic than the newly liberated phone companies had expected. Most ended up abandoning or delaying the few Video Dial Tone experiments they had under way.

The Direct Broadcast Satellite (DBS) industry fared better, but it also ran into a series of technological, regulatory, and legal hurdles that have kept it from offering any substantive competition to cable.

Installing a dish costs three to five times more than a cable installation. And most DBS services, like PrimeStar and DirecTV, can't offer local stations because the law currently forbids it and it's technologically difficult to do.

To ensure that their customers have access to the major networks, they offer network stations from cities often far away from their subscribers' homes. In addition to a competitive hurdle, that's created a legal one.

Under federal law, it's illegal for a satellite company to offer such a "distant network" signal, if the person receiving it can also get a local network affiliate by putting up an antenna.

The goal was to ensure that local broadcast stations would survive, despite the new satellite competition. And a federal court in Florida recently ordered Prime Time 24, an affiliate of DirecTV, to stop transmitting the CBS and Fox networks to 750,000 of its customers. By April 30, another 1.5 million customers could be cut off.

Senators McCain and Leahy believe the best way to help keep cable prices down and encourage competition in the short run would be to remove some of the hurdles facing DBS providers.

New legislation

They've each sponsored bills that, combined, would override the Florida court's decision and require the FCC to determine which satellite customers would be eligible for "distant network" signals. They also would allow satellite companies to carry a full range of local stations.

But both senators acknowledge that even with such changes it will take several years before the satellite industry is able to compete with the cable industry.

"Consumers ought to do whatever they can to get other choices and bitterly complain about it to the cable people and continue to support our efforts to get meaningful competition," McCain says.

The cable industry argues that its prices won't skyrocket under deregulation. In fact, it says the past three years of rate shock can be attributed to the $20 billion it has invested in upgrading cable systems so companies can offer more channels and better programming.

They believe DBS is already offering a competitive alternative. They note that cable's market share has dropped from 87 percent to 85 percent of the nation's video programming market since 1996. Satellite competition makes up most of the rest of the market.

But consumer activists and some legislators don't believe the cable industry will be able to restrain from "gouging" consumers by hiking prices well above the rate of inflation.

"If the rates keep going up much faster than inflation, I expect to see a similar consumer frustration leading again to congressional intervention," says Kimmelman. "The question is, why didn't they learn their first experience with deregulation."