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GAO Punts on Cable Fees

You know it's a good day for cable operators when a government agency spends months and months analyzing rising basic rates and the only criticism that emerges is that the FCC doesn't collect pricing data properly.

That was pretty much the result of the Government Accounting Office's new study on basic-cable rates, which had been commissioned by Senate Commerce Committee Chairman and cable critic Sen. John McCain (R-Ariz.). Some expected a bombshell; the report, issued Friday, landed with a harmless thud.

The study and an expected Senate hearing on cable rates highlight why the current fight between MSOs and programmers, particularly sports networks, is so nasty. Cable operators know that their above-inflation rate hikes could draw regulation. But they blame rising programming costs.

The heat is evident in Cox Communications' fight with ESPN, whose executives went to Washington last week to attack the MSO.

Cable-industry executives were pretty happy. "After more than a year's worth of work, the GAO has concluded that there is competition in the cable video market and there is no need for additional governmental involvement," said Comcast Executive Vice President David Cohen.

NCTA President Robert Sachs was almost ebullient discussing the report's overarching conclusion that rising cable rates are caused by climbing costs of programming and an expensive infrastructure buildout. "If there's a headline here," he said, "it's 'Increases in cable prices reflect increases in cable costs.'"

Industry executives feared that the report would offer a much harsher assessment, particularly on whether cable operators and networks should be forced to sell channels à la carte, just as they offer movie networks like HBO and Showtime. That was part of what McCain, who likes the "consumer control" à la carte sales create. If you don't want to watch MTV or ESPN, you're not forced to pay for it.

But the GAO emphasizes the downside of à la carte sales: the need for subscribers to get addressable converters, marketing costs, networks' loss of ad revenue and their subsequent need to jack up license fees.

Cable critics will find some ammunition. The GAO reaffirmed the contention that cable operators tend to charge less in areas where they face competition from a wired overbuilder (as opposed to direct-broadcast satellite, which takes on cable systems everywhere). But that's the situation in just 2% of U.S. homes.

The "recommendations for executive action" center on the FCC and then only on its collection of data (clearer instructions to cable operators on reporting their costs, better monitoring of markets where there are overbuilders, better sourcing of DBS subscriber counts).

Dramatic increases in sports-network licensing fees are a particular sore spot for cable's critics, who point to the GAO's finding that licenses for ESPN and other sports channels climbed 59% during the three years ended 2002. Fees for non-sports nets climbed only 26% during the period.

The dedication of sports fans has given programmers leverage to demand the higher prices, which led GAO to conclude that sports may be the one area where consumer groups' demand for à la carte pricing might be economically viable. GAO cautioned, however, that creating sports mini-tiers may lead to negligible declines in basic rates. In New York, for instance, sports mini-tiers on some Cablevision and Time Warner systems cut expanded-basic rates by only 50¢ to a dollar.

Consumers "continue to be fleeced by their cable operators," McCain said in responding to the report. "Consumers benefit from more choices: the choice of video distributors, the choice of cable networks, and the choice not to pay for multiple channels that they do not watch."

Consumer groups derided the report. "Cable rates keep spiraling up, three times faster than the rate of inflation," said Gene Kimmelman, head of public policy for Consumers Union. The group estimated that as many as 40% of subscribers could see their monthly bills decline because they watch a small portion of the channel in their programming packages.