As Netflix traffic continues to grow, analysts are pondering whether Netflix is a primary driver behind consumers cord-cutting their pay television packages in favor of watching video content online.

A recent article in The New York Times claims that Netflix may be behind the recent decrease in cable television households, citing a report from the Diffusion Group, a media analyst.  The group’s study claims 32% of satellite, telephone, or cable-delivered pay television customers were planning to downgrade or cancel their packages in 2011, a giant increase from the 16% measured in 2010.

[trefis_forecast ticker=”NFLX” driver=”0532″]

Trefis, another research firm, is challenging those assertions, noting an in-depth review of the study finds only around 7% of those planning to pull the plug cited Netflix as the chief reason.

What is causing a rush to downgrade or cancel service?  Rate increases, particularly for add-on services like premium channels or extra tiers including sports and movies.  Time Warner Cable recently boosted prices for HBO to as high as $15 a month for many subscribers.  Netflix may have an impact on these consumers, deciding to drop premium services like HBO, Showtime, and Starz!  For several dollars less than what these premium channels charge, Netflix customers have unlimited access to the company’s streaming video library.

Relentless annual rate hikes have often triggered subscribers to review their packages and delete services to keep the bill stable.  Economic distress is also a widely cited factor among those completely canceling pay television.  The report does not measure how many consumers, especially younger ones, don’t ever start a pay television subscription.  These subscribers never had a cord to cut.

Billboards sprinkled across Ft. Wayne, Ind., telling residents, “Frontier is pulling the plug on FiOS — Switch to Xfinity,” has infuriated Frontier Communications, who says it will continue to provide FiOS service in the area, at least for broadband, indefinitely.  Now the independent phone company has sent a “cease and desist” letter to Comcast officials demanding the billboards come down.

Frontier spokesman Matt Kelley accused Comcast of spreading false rumors in an effort to drum up business.

“Frontier is not planning on pulling the plug,” Kelly told WANE-TV. “We are going to continue providing FiOS service in Allen County and we have no plans to remove it.”

[flv width=”480″ height=”380″]http://www.phillipdampier.com/video/WANE Ft Wayne FiOS Not Going Away 6-9-11.mp4[/flv]

WANE-TV in Ft. Wayne led its newscast with the dispute between Frontier Communications and Comcast over fiber optic television.  Is the plug really being pulled? (Loud Volume Alert!) (3 minutes)

But Comcast officials note Frontier has been pushing existing customers hard to switch to satellite television service, and Frontier earlier announced dramatic rate increases for its fiber cable television service — rates much higher than other competitors.

Comcast issued a statement about the dispute:

“Comcast continues to invest in these markets, while Frontier has taken a number of steps to discourage new customers from signing up for its service and encourage current customers to seek alternative services from satellite. We are using these ads to make consumers aware of our Xfinity TV service as a better choice for consumers.”

HissyFitWatch: Oooh... Comcast!

From our own Stop the Cap! investigation, both companies are partly correct.

We called Frontier this afternoon posing as a new FiOS customer in Ft. Wayne trying to sign up for television service.  The only option available, we were told, was satellite television service.  While Frontier was happy to sign us up for telephone and fiber broadband, the company representative told us she could not take our order for FiOS TV because, “it’s not available in your area.”

But Comcast’s claims about FiOS lack the very important detail that FiOS broadband and phone service will be offered by Frontier without any interruption — only television service appears to be at issue, and remains available to current customers.

We heard from several Ft. Wayne customers who are unhappy with Frontier’s handling of FiOS.

“While Comcast is being clever, the fact is Frontier wants TV customers to switch to satellite, which is simply a stupid idea,” says our reader Kevin.  “Why would I want a satellite dish when I have fiber.”

Lee, another Frontier customer, believes the company broke its promise of no rate increases after buying out Verizon’s local operations.

“They promptly raised the TV rate by around $30, and if you are a new FiOS customer, expect to pay hundreds and hundreds of dollars for installation,” he says.

Last week, Frontier’s deadline for Comcast to pull down the billboards passed, but as of today those billboards are still on full display.  Comcast’s response to Frontier?

“We received their letter.”

[flv width=”480″ height=”380″]http://www.phillipdampier.com/video/WANE Ft Wayne Deadline day for billboard back-and-forth 6-17-11.mp4[/flv]

WANE-TV in Ft. Wayne updates viewers.  Frontier’s unilateral deadline for Comcast to pull down their billboards came and went.  The billboards are still there.  Now what? (2 minutes)

[flv width=”360″ height=”290″]http://www.phillipdampier.com/video/Bloomberg Swinburne Sees Most TV Revenue from Subs by 2015 6-2-11.mp4[/flv]

With the advent of high speed broadband and streamed online video, an analyst at Morgan Stanley is predicting that by 2015, more than half of all television revenue will come from subscription fees charged to access it.  Ben Swinburne says the entire television model is being turned on its head by broadband video, with cable, phone and satellite companies scrambling to protect the average $85 Americans spend every month for broadband Internet and television service.

Among Swinburne’s predictions:

• Cable and telephone broadband will increasingly be the delivery platform for television programming with at least 50% of all televisions connected directly to the Internet by 2015;
• Advertising revenue will continue to lose prominence, with networks and programmers seeking direct payments from consumers in the form of monthly subscriptions or pay-per-view to access even traditional over-the-air programming;
• Satellite television is at a distinct disadvantage not offering broadband Internet access, something satellite companies are trying to change;
• Cable companies will face the potential of “online cable” competitors delivering multichannel video packages over broadband connections;
• Content producers, networks, and the cable industry will continue to maintain a united front against a-la-carte television, which could dramatically reduce the revenue the entertainment industry earns from selling multi-hundred channel cable and satellite video packages.

Swinburne speaks with Carol Massar and Matt Miller on Bloomberg Television’s “Street Smart.”  (4 minutes)

The thin horizontal line found in this chart represents the rate of inflation. The individual bars show just how high Tennessee cable operators raised their rates from 1986-1989, when deregulation allowed them to charge "sky is the limit" prices. (click to enlarge)

On this Memorial Day, we thought it might be a good time to look back to years past when legislators were forced to deal with a deregulated cable industry that immediately went on a rate hike spree that was unprecedented even for oil companies.

In 1984, cable television companies won the right of complete rate deregulation, arguing government involvement in the cable business was retarding investment, harming innovation, and killing jobs.  By keeping the cable industry free of government regulation, the industry promised improved service, more innovation, and even the potential for more competition.  The importance of this drive to deregulation was underlined with a flood of campaign contributions from some of the biggest players in the industry.

In the mid-1980s, that lineup included the National Cable Television Association (NCTA), the cable industry lobbying group led by James Mooney.  Tele-Communications, Inc. (TCI)’s John Malone — dubbed Darth Vadar of a Cable Cosa Nostra by then Sen. Albert Gore, Jr., and an assortment of cable industry executives from companies like Warner-Amex, Sammons Cable, Cablevision, and a variety of other operators large and small.

TCI would later become AT&T Cable and then eventually evolve into today’s Comcast.  Warner-Amex is today Time Warner Cable.  Sammons joined dozens of other medium-sized multiple cable system operators in selling out to larger players — in this case TCI.  Cablevision sold off most of its systems outside of the metropolitan New York City region to companies like Time Warner Cable.

After winning near-complete deregulation, Americans saw the start of a relentless series of rate increases Tony Soprano would not have attempted.  Called “price adjustments” or a benign “pricing reset” by cable lobbyists, what used to be an average rate for basic cable amounting to just over $11 per month rapidly increased to $16, $19, $25, $29, $35, $45, $50, $55, and now today’s frequently seen $60 threshold for a basic cable package.

What used to be an exciting new product in the late 1970s and early 1980s was now rapidly becoming a highly consolidated handful of corporate empires that promised to be money machines for shareholders.  At one point, adding up the number of corporate entities that were parented under TCI, including local and regional cable systems, programming distributors, cable networks, and other entities generated a printout more than six feet in length.

The mid-to-late 1980s were the cable industry’s glory years, with unfettered rate increases sometimes resulting in more than doubling customer bills.  Members of Congress got an earful from irate consumers who noticed even with the higher prices, the quality of service received deteriorated markedly.  Many cable systems simply left an answering machine on their service and support line.  Others left local cable offices locked and closed for business.

There were many reasons for the deterioration:

• Investors saw the best possible returns buying and selling existing cable systems, not investing -in- them;
• Some cable systems changed hands 3-4 times in just a few years, leading to staffing shortages, billing chaos, and confusion;
• Some small operators saw no need to invest in aging cable systems when their value was skyrocketing during the consolidation era.  They waited for a buyout offer and cashed out of the business;
• There was no enforcement agency capable of stopping the abusive business practices;
• There was almost no competition.

Before becoming part of the Comcast empire, Tele-Communications, Inc. (TCI) was the nation's largest cable operator. Later known as AT&T Cable, the company was eventually sold to Comcast.

Competition in the cable industry was a rarity in the 1980s, but a handful of communities did have more than one cable operator, with lower rates and better service the result.  But pressure from investors forced most of these competitive anomalies to either divide into respective monopoly service territories, or forced one company to sell their business to the other.  Competition and rate wars were bad for business.

The satellite dish industry was the only national competitor to cable television at this time.  Before DirecTV and DISH, rural and suburban homeowners erected often enormous backyard satellite dishes of up to 12 feet in diameter.  Capable of receiving hundreds of channels with better picture quality, home satellite offered an experience somewhat familiar to those with large rooftop antennas.  Rotate the dish slightly and enjoy two dozen or more channels on each respective satellite.  More than three million Americans eventually installed satellite dishes, even with the entry cost of installation and assembly, which could run several thousand dollars.  For rural Americans, it often meant the difference between some television and none at all.

Never tolerant of competition, the satellite industry came under a withering attack on all fronts:

• Cable programming was scrambled and either unavailable to satellite dishowners at any price, or sold at prices similar to what cable subscribers would pay, even though home dishowners owned and maintained their own equipment;
• Most cable networks at that time were either owned outright or tacitly subject to cable industry pressure not to sell programming at steep discounts;
• Premium cable channels often sold programming to satellite dishowners at prices higher than those paid by cable subscribers;
• Home dishowners were required to purchase their own decoder box outright, at a cost exceeding $300 — an enormous price at a time when most people paid less than $20 a month for basic cable service;
• Cable companies encouraged or defended town zoning laws which required would-be dishowners to purchase expensive permits, hide their dishes from view (and sometimes viewable signals in the process), or ban their use outright;
• In the case of networks owned by TCI, consumers with satellite dishes often had to buy the programming from their nearest TCI cable system and be billed by them.  So much for avoiding the cable company.

Then-Sen. Albert Gore, Jr. (D-Tenn.) got into the fight against unregulated cable when cable rates in his home state of Tennessee more than doubled.

The worst abuses, and corresponding distortions from the cable industry, occurred from 1987-1992.  More than a dozen pieces of legislation attempted to correct the over-deregulation of the industry, but campaign contributions to both parties meant years of failed attempts.  Some of the worst anti-consumer officials included Sen. Tim Wirth (D-Colorado) who happened to represent the state where the vast majority of large cable companies were headquartered at that time, Sen. Daniel Inouye (D-Hawaii), who read industry talking points and was skeptical about stories of cable abuse, and Sens. Bob Packwood (R-Washington) and Bob Dole (R-Kansas) who didn’t like government regulation and thought the abuses would be self-correcting if consumers cancelled service.

Many of the heroes of the cable fight of the last generation remain familiar names.  Sen. Albert Gore, Jr. (D-Tennessee) was perhaps the industry’s greatest foe.  He began the fight as a congressman in the mid-1980s and carried the battle all the way through 1993, when he became vice president under the Clinton Administration.  Other notables included Sen. Wendell Ford (D-Kentucky), who is a far cry from today’s two senators in Kentucky.  Ford heard complaints about Kentucky cable companies almost daily.  Sen. Howard Metzenbaum (D-Ohio), who wasted no time calling the cable industry an outrageous unregulated monopoly. Sen. John Danforth (R-Missouri) railed against the cable industry and was instrumental in helping pass legislation in 1992 that finally ended the worst abuses.

What the cable industry promoted and defended in 1987 for cable television will haunt you when you consider they are appealing for the same types of “hands-off” policies for broadband today.  Only now they are joined by the nation’s largest phone companies.  In the early 1990s, the telephone companies were threatening to compete with the cable industry and the two were considered foes.  But once an industry player becomes well-established, they defend their right to raise rates, restrict service, and retard any additional competition.

To give you a taste of what the abuses were like, and the industry’s efforts to excuse them, we present coverage of a Senate hearing held in November, 1989 pitting cable industry titans against would-be competitors and government officials from towns and cities trying to deal with a cable “bad actor” in their midst.  Some of the most interesting parallels come in the very last video as you watch Chuck Dawson, representing consumers and independent satellite dealers, detailing the schemes by the cable industry to kill off any threats.  Pay particular attention as he discusses the lies the industry will tell to predict the imminent failure of its then-newest competitor — the home satellite dish industry.  It’s a game plan they’ve used again fighting off community broadband.

Menino

Boston Mayor Thomas Menino has problems with Comcast.  The cable operator, long a dominant player in the city of Boston, has been raising basic cable prices for the last several years, and the mayor’s office has had enough.  This week Menino filed a petition asking the Federal Communications Commission to give the city “emergency control” over the price of basic cable service in Boston — the only control permitted in the largely deregulated cable television marketplace.

Menino waved a study done at the behest of the city showing residents were paying substantially higher prices for the lowest level of service from Comcast.  Basic Service, which includes 37 local over the air stations and a handful of shopping and public access channels costs $15.80 inside city limits — up from $9.05 in 2009.  In nearby Cambridge, the same service costs $7.30 a month.  What’s the difference?  Cable rates are completely deregulated in the city, but smaller communities around Boston lack sufficient meaningful competition, so they are permitted by law to continue regulating rates for the lowest tier: Basic Service.

Now Menino wants those rates brought back under control for the benefit of seniors and low income residents, among the 10,000-15,000 local homes that subscribe to the economy service.

It’s just the latest challenge for Boston, which is among a few cities along the coast of the northeastern United States not benefiting from aggressive broadband and video competition between the phone and cable company.  Just over 200 miles away, metropolitan New York and the bedroom communities in that state, as well as New Jersey and Connecticut, have access to super fast broadband from Verizon FiOS, Time Warner Cable, Cablevision, and Comcast — the latter predominately serving greater Philadelphia.

Boston has been bypassed for Verizon FiOS, is ignored by other potential cable competitors, and is stuck with poor-performing cable overbuilder – RCN, which has focused most of its efforts on multi-dwelling apartment and condo units in the city.  The rest of Boston gets ‘take it or leave it’ service from Comcast or DSL from Verizon.

Comcast was quick to respond to Menino’s call for reregulation, noting they provide $5 senior discounts for their cable customers and offer cheaper service than the alternatives — $17.50 a month from RCN or between $30-35 for promotions from DirecTV and DISH Satellite.

Menino’s dealings with telecommunications companies in Boston have run hot and cold for years.  In February, Menino appeared with Comcast senior vice president Steve Hackley to celebrate the opening of a Digital Connectors program for up to 2,800 low income households, paid for by federal stimulus grant money.  Under the program, students who complete computer training courses receive discounted Comcast Internet service for $10.95 a month for the first year and $15.95 for the second year.

Boston

Menino’s office has often been a watchdog when it comes to Comcast fulfilling its franchise obligations, and the city had high hopes competition from RCN would extend a choice of cable providers to most city residents.  That has not happened.

The city’s other telecommunications provider, Verizon, has been in contention with the city for several years.  The trouble began in 2007 when Menino declared war on property tax exemptions for utility poles dating back to 1915, granted to telecom companies like Verizon.  Four years later, that battle has culminated in Verizon literally wiring its fiber optic FiOS service around the city of Boston, refusing to deliver service inside it.

The promise of Verizon fiber has often gone unfulfilled or delayed in many larger cities, subject to bureaucratic delays not experienced in smaller communities.  Some towns and villages in Massachusetts signed franchise agreements just a few months after the company came knocking.

One local official, not authorized to speak publicly on the matter, told Stop the Cap! many communities welcomed Verizon’s fiber optic initiative with open arms.

“You have to understand there is a different mentality among government officials in smaller towns than there is among larger cities,” the official tells us. “In our town of 35,000 when Verizon offered to wire competitive service in our area, we wanted to know where to sign and when they could get started.”

The official says the local government was concerned about making sure Verizon repaired any damage to local infrastructure, abided by local zoning rules, and guaranteed they would not bypass parts of the town.  Negotiators also fought for funding to upgrade equipment for the community’s public access channels, but never went into the negotiations thinking about how much they could extract from the phone company.

“In larger cities in this state, there is a definite mentality that Verizon represents a golden goose ready and willing to lay golden eggs in return for franchise agreements,” the official told us.  “Maybe that is true, but when you are in a smaller town, you recognize the degree of willingness to invest capital to tear out old wires and replace them with fiber is far less here than a city like Boston, which has the potential of many more customers.”

Boston, like other large cities, prepared for protracted negotiations with the phone company over the new fiber service.  At the same time, Mayor Menino infuriated Verizon when he won his property tax lawsuit against the company, collecting $5 million in tax payments that one city official rubbed in.

Ronald W. Rakow, Boston’s commissioner of assessing, told the Boston Globe at the time: “We will actually be sending a bill to them for that later today,’’ Rakow said. “Don’t want to let the ink dry.’’

No Verizon FiOS for Boston

The argument over property taxes may have been the final straw for Verizon FiOS in Boston.  Menino suspected as much, telling the Globe “they insinuated that we weren’t going to get it because of my position on telecommunications.’’

Even then-Verizon CEO Ivan Seidenberg warned the city during a speech at the Boston College Chief Executives’ Club of Boston “to be careful when considering new taxes or regulations.”

Verizon has since stopped expanding its FiOS service to new cities.

“We knew as the financial crisis grew we were smart to sign up earlier rather than later, because if we didn’t, we would never have the service today,” the local official tells us.  “I have sympathy with local officials in every city trying to do what is best for their residents, but anyone who understands wired telecommunications should know these kinds of projects are exceedingly rare — grab them when you have the chance.”

Just a few years later, the impact of earlier decisions not to hurry competition into the city of Boston and the city’s tax policies have become clear:

• Comcast may be forced to reduce their Basic Service rate, but nothing prevents them from increasing Digital Service cable rates to make up the difference;
• RCN’s network has languished, providing competitive choice to just 15,000 local residents.  Comcast serves at least 170,000;
• Verizon has no plans to offer FiOS in the city indefinitely;
• Menino’s victory claim that Verizon should pay its fair share in property taxes seems less victorious today as the phone company began passing on the new taxes to ratepayers as a “Massachusetts Property Tax Recovery Surcharge” in March, 2010.
• No other competitor has appeared on the horizon willing to take on Comcast in the city of Boston.