Courtesy: vgm8383

Bay area residents are fuming over Comcast’s latest round of rate increases.  The din grew so loud, Drew Voros, the Oakland Tribune Business Editor, noted “the annual outcry over Comcast rates is louder than any rate increase for electricity or water I have come across. A possible exception being California’s energy crisis earlier this decade.”

Voros then casually dismisses consumer outrage by telling his readers “cable TV is not a utility. It is not a vital service with transparency, public input and debate. There is no recourse for poor service through regulatory bodies or the ballot box.”

We know where this is going.

Voros doesn’t suggest that the rate increases are unjustified and unwarranted, nor does he have a bad word to say to Comcast, although he does fixate on one aspect of the regulatory framework (the wrong one) that he believes is at the core of the problem of unchecked rate increases.

His suggestion is to watch free over the air television or try DirecTV, Dish Network or AT&T’s U-verse.

Let’s explore those alternatives.

For some, assuming they get reasonable reception, and many Bay Area residents do not, getting local over the air signals might be good enough, but won’t help with those pesky rate increases on broadband service, or for those channels like C-SPAN or cable news outlets residents access to get coverage of events local broadcasters ignore.

DirecTV and Dish Network are also fine alternatives, assuming you have permission from a landlord to install the reception equipment, and/or your view to the satellite isn’t obstructed by trees or buildings.  AT&T U-verse is an even better potential choice, assuming it’s actually available in your area.

For everyone else, it’s Comzilla or go without.

Voros then goes too far into the weeds and gets lost in what suspiciously looks like “blame the government” rhetoric:

What many TV viewers do not realize is that the franchise agreements are loaded with fees and payments to the cities, funded through annual rate increases. There’s give and take between cable companies and the cities they serve. It’s a business deal with you in the middle.

But consumers are not bound by any franchise agreements, and the options for television services have grown immensely since the first cable TV line was connected in the 1970s. That is why the franchise agreements are out of date. Technology has overtaken that legal document. There’s no monopoly on television content delivery.

Comzilla attacks San Francisco with rate hikes.

Ask any city official if they’d rather enjoy the incremental increase in franchise payments (which amounts to a fixed percentage, usually 3-5% of gross revenue) made possible by the annual rate hike, or the peace and quiet from constituents not upset over an industry that routinely increases rates well in excess of inflation.

Doing away with the franchise system to resolve cable rate hikes would be like using a ShamWow to deal with the after-effects of Hurricane Katrina.

Most cable companies used to include the “franchise fee” as part of the cost of the monthly service, but now routinely break that charge out onto its own line on your bill (and many never lowered the price for the original service, pocketing that as a hidden rate increase as well).  A rate increase may add a few pennies to the franchise fee on a customer’s bill, but then there is the other $3-5 dollars to consider.

Franchise agreements are negotiated for wired providers.  AT&T had to obtain one to provide U-verse.  That’s because local communities demand that a business tearing up their streets provide something in return for the community.  That usually includes: a small percentage of gross revenue, an agreement to provide free service in community centers, government offices, and public schools, and that they set aside several channels for Public, Educational, and Government access, known collectively as “PEG channels.”  It’s a very small price to pay for an industry that earns billions in profits.

Those agreements typically are renegotiated every ten years, so if consumers object to the franchise fee arrangement, they can appeal to local government to reduce or eliminate it.

Voros also suggests consumers try to obtain television programming online.  That is also sometimes possible, but as Stop the Cap! readers know, that also takes a broadband connection, and Comcast just raised the price for many of their customers for that as well.  With the industry’s new TV Everywhere project, dropping your cable subscription, as Voros suggests, will also likely cut you off from many of your favorite cable shows online — TV Everywhere is for paid television subscribers only.

The industry has every angle covered, right down to suing to remove the exclusivity ban on cable networks and programming.  Should the DC Court of Appeals agree, Voros’ contention that there’s no monopoly on television content delivery will also be thrown into doubt.

The solution is not to blame “outdated” franchise agreements.  The cable package business model is the larger problem.  Customers are expected to pay for ever-growing and more costly basic and digital cable packages filled with channels they don’t want.  Of course competition should be encouraged, but allowing consumers to choose and pay for only the channels they wish is a far better solution to runaway cable pricing.

Motorola SB6120 SURFboard DOCSIS 3.0 eXtreme Broadband Cable Modem

Another year, another rate hike for millions of Comcast customers.  The cable company is notifying cable subscribers of rate increases for programming and equipment.  While Comcast says the rate increases are among the lowest the company has implemented, the sting will be felt differently based on the types of services a customer receives.  One particularly nasty increase is for the cable modem rental fee.  In most areas, that used to be $3 a month, but is now increasing a whopping 66% to $5 a month.  Comcast blames the increased equipment expenses incurred upgrading their broadband network.

Consumers can avoid the monthly rental fee by purchasing their own cable modem, retailing for $60-100 depending on the model.  A Motorola SB6120 SURFboard DOCSIS 3.0 eXtreme Broadband Cable Modem is available from Amazon.com for less than $90 and works with Comcast.

Although not every Comcast customer rents a cable modem from the company, the company will earn hundreds of millions of dollars in new revenue from the rate increase for cable modems, according to Multichannel News.

The Marin Independent Journal crunched the numbers:

In the San Francisco area, where Comcast has 2.2 million customers, the average rate increase will be 1.6 percent, down from a 4.9 percent spike in 2008-09 and a 6.9 percent jump in 2005-06.This year’s rate increase is the lowest in the past six years in what has become an annual rate hike for Comcast customers. The company has raised rates on its average Marin customer by a cumulative 29.5 percent over the past six years, based on the company’s annual notices of price changes.

The San Jose Mercury News observes that the rate increases will hit some harder than others:

Ironically, the customers who will see their rates increase are those who subscribe to the company’s lowest-end — and least-enhanced — packages. Subscribers to Comcast’s more expensive packages generally will see no rate increase.

Mindy Spat, communications director of The Utility Reform Network, a San Francisco-based consumer advocacy organization, said Comcast appears to be taking advantage of its lower-end customers.

She noted that many Bay Area consumers who were unable to tune in the new digital broadcast signals signed up for limited basic cable to continue to get the local channels after the old analog ones were switched off earlier this year. With the increases, Comcast also appears to be trying to push customers into higher-tier packages, she charged.

“If consumers had choices, they certainly would not choose Comcast,” Spat said. “But they don’t, and Comcast is taking advantage of the fact.”

Of course, the only thing not increasing this year is Comcast’s 250GB usage cap.  It remains locked firmly in place at 2008 levels.  How much Comcast will recoup from a perpetual modem rental fee providing up to $300+ million a year in new revenue is an open question.  But clearly some cable operators intend to pay for upgrades to their networks by means other than forcing consumers into consumption billing schemes.

Bazinet

Citigroup media analyst Jason Bazinet is among the first Wall Street investment analysts to call for the mother of all cable mergers – Comcast snapping up control of Time Warner Cable, respectively the nation’s largest and second largest cable operators.  Comcast reported having nearly 23.9 million customers at the end of June; Time Warner Cable said it had about 13 million customers.

In a research note issued today, Bazinet argued that a merger would result in major cost savings for both operators, including $1.6 billion dollars in savings possible from volume discounts for cable network programming to $1.1 billion in savings from employee layoffs, reduced marketing expenses, technical and customer service support, billing, and combining equipment purchases, among other things.  The total net present value of the synergies would come to around $11 billion to $12 billion. That’s not far from Time Warner Cable’s current market value of about $14 billion, according to The New York Times.

A super-sized Comcast would also be able to leverage lower prices when competitively necessary to keep a price advantage over satellite television and telephone company TV, according to Bazinet.

Both Time Warner Cable and Comcast have not publicly indicated any interest in combining forces.  Aside from the regulatory headaches probable from a more skeptical Obama Administration that might aggressively counter such a merger, Comcast Chief Operating Officer Stephen Burke questioned whether the cost savings were anywhere near as high as Bazinet speculated.

Multichannel News quoted Burke:

“We would like to get bigger if the economics were right,” Burke said. “Its pretty hard for me to see how there would be synergies on the programming side or on the hardware side when you go from 24 million subscribers to 27 [million] or 30 [million].”

Time Warner CEO Glenn Britt refused comment.

Still, Wall Street investors were interested.  Time Warner Cable stock shot up 3.5% this afternoon, while Comcast’s rose just a few cents during afternoon trading.

“Comcast isn’t looking to make a $50 billion purchase.”

Stephen Burke, Comcast Chief Operating Officer

Now that Comcast has been freed from that pesky provision of the 1992 Cable Act, authorizing the Federal Communications Commission to set a maximum size for large corporate cable operators, the nation’s largest cable operator is now considering breaking out the checkbook and going on a shopping spree.  That is likely to spark a merger and acquisition frenzy among several players in the industry which could dramatically reduce America’s choices for telecommunications services.

Bloomberg News this evening quotes Stephen Burke, Comcast’s Chief Operating Officer, that it will consider buying other cable operators at a “good price.”

“If there is a way to acquire cable systems for what we consider a good price, ones that are well managed, we would certainly look at whatever is out three,” Burke, 51, said today at a Bank of America Corp. conference in Marina del Rey, California. Still, the company “isn’t waking up every morning” evaluating how it can become bigger, he said.

The Wall Street Journal calls the decision by the U.S. Court of Appeals in Washington, freeing Comcast from its limits, the start of “the coming cable consolidation.”

Martin Peers, writing for the Journal, said that when the dust settles, phone companies might own satellite TV providers and cable companies might end up consolidating into one or two super-sized providers blanketing the entire country with service.

Consumers would be left with a handful of providers for all of their communications needs, from telephone to broadband to television, if the courts open the door with more decisions favorable to the industry and antitrust reviews aren’t aggressively undertaken.

Starting with Comcast, Burke thinks Comcast’s first priority might be to buy up more programmers.  Comcast already has ownership interests in several cable networks, and Burke feels “content channels are good businesses, and we wouldn’t be doing out job if we didn’t try to figure out a way to get bigger in those businesses.”

With Comcast and Cablevision joining forces to sue their way out of the cable network exclusivity ban, owning and controlling those networks, and what competitors get access to their programming, could be an important asset in an ever-consolidating marketplace.  Imagine if U-verse or FiOS was denied access to ESPN, The Weather Channel, CNN, and other popular cable channels.  Would subscribers be compelled to switch providers if they could no longer get the channels they want to watch?

The Journal ponders the coming consolidation frenzy:

Comcast and other cable companies will probably need to consider more consolidation — if not now, in the next couple of years. They are still losing market share to satellite and phone rivals. Comcast lost nearly 700,000 basic subscribers in the year to June. Time Warner Cable has fallen to No. 4 among TV providers, behind satellite firms DirecTV Group and Dish Network.

Cable operators are more than offsetting video losses by selling phone and Internet-access. Eventually, though, those opportunities will peter out. And phone companies’ competitive threat in video could be enhanced by a combination with satellite TV.

The newspaper speculates about this kind of marketplace in the near future:

Today's pay television marketplace

AT&T DirecTV: The Journal ponders an AT&T buyout of DirecTV resulting in a reduction in AT&T’s investment in U-verse, pushing consumers to its newly-acquired satellite service and redirecting investment into the overburdened AT&T mobile phone network.

VerizonDISH: A Verizon buyout of DISH would allow the phone company to push more rural customers to DISH satellite service, and reduce the expense of wiring all but the nation’s largest cities with fiber optics.

Comcast (formerly Comcast & Time Warner Cable, if not others): A supersized Comcast absorbs Time Warner Cable and becomes an even more dominant cable operator, leveraging its investment in Clearwire to offer a  wireless data option to stay competitive with the mobile phone companies like AT&T and Verizon Wireless.

That would leave most Americans with just three choices for telecommunications services capable of bundling multiple products together.  Wouldn’t such a merger-mania trigger antitrust implications and government review?

The Journal doesn’t think so:

Would such a deal pass antitrust scrutiny, even absent the ownership cap? There is a good chance, say several antitrust lawyers. A major focus of antitrust law is whether a merger reduces competition in a way that could raise prices or otherwise hurt consumers. As cable operators generally don’t compete with one another, merging wouldn’t cut competition.

But what kind of benefits would be found for consumers?  If one resides in a city too small to be judged worthy of fiber optic deployment, consumers could be told to get the satellite television service and live with the copper wiring the phone companies provide today.

Cable operators would be in a fine position to compete, as they traditionally have, against satellite television because of the technical limitations of satellite service, ranging from consumer objections to having a dish on their home, to a limit on the number of sets that can be wired, to the inability to get a clear view of the satellite because of nearby trees or other obstructions.

Who pays for the debt likely incurred from a bidding war during a merger frenzy?  Guess.

Back in the mid-1980s, I first got involved in the fight against the cable television industry’s consumer abuses.  Cable had gotten cocky, and began to use their monopoly position to extract ever-increasing amounts of money from consumers, providing lousy service and engaged in anti-competitive abuse all over the marketplace.  Back then, competition for the overwhelming majority of consumers came from just one place – giant 10-12 foot satellite dishes.  These were the days before Direct Broadcast Satellite providers like Echostar/DISH and DirecTV (and PrimeStar, the cable industry’s own satellite provider that claimed to ‘compete’ with cable) provided competition to cable.

In the mid and late 1980s, your choice was a giant TVRO (TV-Receive-Only) satellite dish in the backyard or you hooked up to cable.  A tiny handful of communities had wireless cable, a service that was supposed to compete with cable but was seriously limited in channel capacity (in many communities, wireless cable ended up providing access to ‘adult’ content that cable wouldn’t carry as their biggest selling point) and quickly faded from view by the mid 1990s.

The abusive practices were all over the place back then:

• Cozy arrangements between cable companies and local governments resulting in outright bans of satellite dishes for aesthetic reasons, using zoning laws either prohibiting their installation or requiring landscaping to hide them from view (to the neighbors and to the satellites they were trying to receive, making them useless), or requiring expensive permit fees;
• A rush to scramble/encode satellite signals and then require consumers to purchase, outright, a costly descrambler from General Instruments called the VideoCipher II for $399 (or have it incorporated within a satellite receiver that typically cost $800-1000 and was available only for purchase), only to be replaced a few years later by the VideoCipher II+ (which consumers were also forced to purchase).
• Cable companies, which had ownership interests in most cable networks (which was nearly a pre-condition for getting your network on cable systems), often had exclusive rights to sell that programming, and frequently provided it “only on cable” or to satellite customers who could not subscribe to cable.  Some networks refused to sell to competitors, including dish owners, at any price.
• Anti competitive pricing was by far the biggest problem.  Prices for programming packages encrypted on satellite were sold to consumer dish owners in small or large bundles at pricing comparable or above what cable subscribers paid, despite the fact all of the costs to provide, install, and service reception equipment were borne by consumers.  No cable TV company overhead, no infrastructure or staffing and support costs, yet satellite dish owners were expected to pay the same high costs that cable subscribers paid, and also purchase their own equipment.  That was quite an investment: a 12 foot dish, satellite reception equipment, decoder, and installation routinely ran well over a thousand dollars, depending on the equipment and installation complexity, and that was before programming costs were factored in.

Rural consumers really got the short end of the cable stick, not able to buy cable even if they wanted to, and forced to spend big money, upfront, just to get satellite TV.

That inspired the consumer groundswell of support for legislation to stop the abuses, which overrode a White House veto by President George H.W. Bush.  Among other things, the Cable Act of 1992 put a stop to exclusive programming contracts which denied competitor access to cable networks.

Without that legislation, there would be no DirecTV or DISH today.

Now the cable industry is back, high-fiving over their victory to have the 30% ownership cap dispensed with, and are now taking on the next provision of the 1992 Cable Act they don’t like — the ban on exclusive programming contracts.

That’s right, it’s Back to the Future as Comcast and Cablevision take their legal business to the same friendly DC Court of Appeals that savaged the 30% cap, now seeking an immediate repeal of the exclusivity ban as well.

Oral arguments start September 22nd.

Most amusing of all is the argument made by Comcast and Cablevision, who claim despite the time and attention they are spending on overturning the law, not to mention the legal expense, the practical effect of an end to exclusivity bans would be… absolutely nothing.

“Widespread withholding is now implausible,” said the attorneys in the filing. “[T]here are proportionally fewer services to withhold. The limited withholding that may still occur will not threaten competition: most vertically integrated services have closely similar substitutes, and, when competitive MVPDs [multichannel video programming distributors] have sunk massive investments, withholding can no longer cause market exit.”

That’s right.  Big cable companies throw money away on attorneys who will presumably fight this case and the inevitable appeals for the next few years for no practical change whatsoever in the current competitive landscape.  The believe people will accept that an industry that had to be forced by regulation to compete on a level playing field will continue to respect that playing field once they plow it up.

Just trust us.  We’re your cable company.  You love us.

So it could be “nothing” as they suggest, or it could be a defensive response to challenges of their business plans from telephone company TV and online video competition.  Would you subscribe to a competitor that didn’t offer the networks you wanted to see because they were “exclusively” available only from the cable company?

Be it usage caps, consumption billing, exclusive contracts, “price protection agreements” that hold customers in place for 12-24 months (or longer), the war to keep consumers from choosing when, where, and how they access content is becoming fully engaged.

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Satellite television in the mid-1980s was highlighted by Granada Television