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Homes Passed Rate Needs Some Recalculating

I grew up in rural Pennsylvania, but I have been living in Washington, D.C., for the last 25 years or so. Last year I went back to Pennsylvania for the first time in quite a while.

While driving through the sparsely populated countryside, I started thinking about a question that has been raised in the context of the proposed merger of EchoStar Communications Corp. and DirecTV Inc.: exactly how much of the country has access to (i.e., is "passed by") cable? Or, on the flip side, how many people do not have access to cable and will have to take multichannel-programming service from the new merged entity ("New EchoStar")?

You would think, at this point, that there would be a clear answer to this question. After all, wouldn't satellite and cable companies, programmers, advertisers, manufacturers, policy makers and anyone else interested in media want to nail down the correct number of "homes passed" by cable? In many respects, it is an important number, but it has never generated a whole lot of interest over the years.

For the last seven or eight years, the Federal Communications Commission has purported to answer the question in its annual Cable Competition Report. Each year, based on cable industry numbers submitted to the FCC, the Commission has duly reported a homes-passed rate of 97 percent. Of course, the FCC never independently verified the homes passed number. Instead, the agency simply accepted whatever the cable industry told them, and it never really mattered too much ... until EchoStar and DirecTV decided to merge. Now it matters a lot.

EchoStar and DirecTV argue that their proposed merger will not be anticompetitive, because almost all of the people in the country (hey, 97 percent!) can switch to cable if they are dissatisfied with the programming, pricing or services of the new EchoStar.

Based on what I saw last year in Pennsylvania, it seems quite clear that there are plenty of homes still awaiting cable. Common sense tells us that many more than three out of every 100 homes in the country cannot receive cable, and a comparison of readily available statistics bears this out.

But to get to the bottom of the fuzzy math, we need to understand three basic terms used by the Census Bureau and the television industry:

  • Housing Units: Houses, apartments, mobile homes, groups of rooms or single rooms that are occupied (or, if vacant, are intended for occupancy) as separate living quarters.
  • Households: occupied Housing Units.
  • TV Households: Households with at least one television set.

The cable industry calculates the Homes Passed percentage by dividing the total number of TV households supposedly passed by cable into the total number of TV households in the country. But even a cursory comparison of Census Bureau and cable industry statistics shows that the distinctions between housing units, households and TV households were lost long ago in an apparent rush by the cable industry to demonstrate a comprehensive nationwide build-out.

In 2000, the cable industry in half a dozen states reported more TV households passed than the total number of households reported by the Census Bureau. For example, in New Jersey the cable industry supposedly passed 662,167 more TV households than the Census Bureau reported households. In the District of Columbia, the cable industry even said it passed more TV households (44,000) than the Census Bureau reported housing units.

Nielsen Media Research's estimate of TV households for June 2001 (107.1 million) — used by the cable industry and the FCC for computing homes passed — actually exceeds the Census Bureau's national estimate of households for the same period (106.7 million).

Now we really have a problem. Almost half a million television sets across the country are desperately in need of a home. Perhaps the FCC will initiate a rulemaking proceeding to address the growing problem of homeless television sets.

The 97 percent homes passed rate, in fact, has nothing to do with the number of homes actually passed by cable. Rather, it defines (get ready for this mouthful) the number of housing units passed by cable relative to the number of occupied homes throughout the country that contain a television set.

Why? Because when a cable operator "passes" a house, it has no way of determining whether that house is occupied or unoccupied, or whether it has a television set or does not have a television set. The only thing that the cable operator knows for sure is that it is passing a housing unit. When a cable operator reports the total number of homes it has passed, in reality it is reporting the total number of housing units it has passed.

In arriving at a national homes passed rate, the cable industry takes the total number of housing units passed (i.e., whether occupied or unoccupied, with or without a television set) and divides that number into the total number of TV households (i.e., occupied homes with a television set). That's a classic case of dividing apples (housing units) into oranges (TV households).

The resulting calculation does not show that cable passes 97 percent of TV households, as is claimed. Instead, it shows that cable passes 97 percent as many housing units as there are TV households, a statistic that does not tell us much of anything.

Simply by comparing apples to apples (i.e., dividing the number of housing units passed into the total number of housing units), the so-called national homes passed rate drops from 97 percent to 81 percent. Using 2000 Census statistics, this methodology demonstrates that approximately 22 million — not 3 million — of the nation's 115 million homes do not have access to cable services.

Extrapolating this percentage to the nationwide population, more than 53 million people (19 percent of 281 million) do not have access to cable and will be subject to the whims of an EchoStar-DirecTV monopoly if the proposed merger wins approval from government regulators.

Using a similar methodology, the New York Times
reported in 2001 that some 25 million homes (representing 59 million people) may not be passed by cable, which translates into a national homes passed rate of less than 79 percent.Even DirecTV — while desperately clinging to the 97 percent cable pass rate in the hopes of gaining merger approval — has reported that only 71 percent of its subscribers are able to receive cable service. If DirecTV's pass rate were applied nationwide, it would be safe to assume that some 33 million homes (or 82 million people) do not have access to cable. That's a far cry from "only 3 percent of the country."

As they say in the movies, the jig is up on the 97 percent homes passed rate. It's fiction. I realized last year while driving through Pennsylvania that there is no way in the world that cable services are available to 97 out of 100 homes in the country. A number closer to 80 percent is much more realistic, and it just happens to fit with the Census Bureau's numbers.

If the proposed EchoStar-DirecTV merger goes through, there will be upwards of 50 or 60 million people who will have to take the programming, prices and services that New EchoStar offers them, or they will have to do without. Back in Pennsylvania, if not in Washington, D.C., we call that a monopoly.