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Pay subs: Theyre for the birds

Satellite providers continue to grab the bulk of new pay-TV subscribers, further picking away at cable's lock on the multichannel business, according to government numbers released last week

Odd as it may seem, the report was good news to the cable industry. Evidence of fierce competition from satellite companies provides fresh ammunition for cable operators' effort to fight off new government regulations.

"This competition is reason enough to reject government micro-management of these communications markets," said David Beckwith, spokesman for the National Cable Television Association.

Cable's share of multichannel subscribers continues to decline, according to the FCC's seventh annual report on video-programming competition. Cable systems served 80% of the market as of June, down from 82% the year before. Although cable was able to add to its overall number of subscribers, direct-broadcast satellite providers captured almost 70% of the new subscribers to pay-TV services. Two years ago, cable's hold on the pay-TV business stood at 85%.

The competition, cable industry officials say, is incentive enough to prevent cable franchises from dramatically increasing rates and to spur them to add new services, such as digital tiers with scores of extra channels, high-speed Internet services and, eventually, interactive TV.

"Cable is competitive in all service offerings and has stepped up customer-service expenditures," Beckwith said.

With new pay-TV subscribers picking satellite 3 to 1, cable operators are nervous about several FCC initiatives that they say could hamper their flexibility. The industry's concerns include cable open access, restrictions on interactive TV, and mandatory carriage of both analog and digital broadcast signals during the transition to digital television.

But the FCC so far isn't showing much sympathy and continues to give serious consideration to open-access-style regulations, although that may change when Republicans gain a majority on the panel following George W. Bush's inauguration.

Despite the inroads made by DBS, the agency concluded this summer that satellite providers are having only "modest influence" on the demand for cable service. That's in large part, the FCC said, because DBS is making its biggest inroads in mostly rural areas, where many homes aren't served by cable. In areas with less than 25% urban population, satellite carriers have captured 18% of the pay-TV business. In markets that are more than 75% urban, the DBS share drops to 8%.

Cable's critics on the other hand, say the FCC should be moving more aggressively to impose new regulations because most cable franchises remain the primary source for multichannel services in most areas and have enough market muscle to raise prices as they see fit. What's more, the FCC's numbers show that the top-10 multiple-system operators are gaining more and more cable subscribers. "We have disagreed with the FCC about the relationship between DBS and cable since day one," said Mark Cooper, research director for the Consumer Federation of America. "The growth of DBS has not restrained cable price increases, and the industry remains highly concentrated and uncompetitive."

Cooper noted that the FCC reported that nearly all non-DBS rivals to cable, such as microwave "wireless cable" and telephone company overbuilders, are disappearing or faltering. "The FCC is now admitting that the local exchange carriers are history," he said. "We said they would disappear. Nobody listened, and now they are gone."

But the cable industry says its prices are well in check, thanks entirely to pressure from satellite carriers. They say cable rates, while they continue to rise faster than inflation-4.8% in the year ended in June vs. 3.2% for the Consumer Price Index-are increasing much more slowly than cable costs. License fees paid to programming networks rose 12.2% during that time. Also, capital expenditures for upgrading to digital tiers and other improvements have climbed 89.3% since 1998.

Cable analyst Tom Eagan of USB Warburg, on the other hand, says cable's good behavior on rates is due to a mixture of pressure from DBS and jawboning from the NCTA during the first year after rate regulation of upper programming tiers expired. "It was a combination of not wanting to irritate Washington and competition from satellite," he said.

This year, Eagan is predicting that cable rates will rise between 4% and 6%, with operators scrambling to compensate for climbing programming costs by adding digital-tier and high-speed-modem customers. "The year 2000 was about competing with satellite for new customers; I think 2001 will be about accelerating the rollout of new services."