GAO REPORT URGES FCC TO IMPROVE RELIABILITY ON CABLE RATE DATA

McCain, chmn. of the Senate Commerce Committee, said the report showed that “competition matters” and gave a variety of options for policymakers to consider in addressing rising cable rates. “These are complex issues, and I look forward to reviewing the report more closely at a hearing of the Commerce Committee in the near future,” McCain said. He said the report showed that competition drove down rates for cable consumers in markets where there was more than one provider. “The apparent implication for all other consumers is that they continue to be fleeced by their cable operators,” he said. “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.”

NCTA Pres. Robert Sachs said the GAO hadn’t done any economic analysis in spots where there were overbuilders to determine the viability of the competitors. He questioned whether rates in those areas truly were competitive, saying there had been numerous bankruptcies among operators. Companies may be struggling to keep afloat in those areas, he said, so those rates may not be sustainable over the long term.

The report didn’t make specific recommendations on how cable rates might be lowered, although it laid out a number of possibilities. It also didn’t advocate an a la carte option that would allow consumers to pick and choose channels and pay for only what they watched. The report said an a la carte system could impose additional costs on subscribers and “alter the current economics of the cable network industry” so that revenue might fall off for less popular channels, possibly resulting in their demise. The GAO said it couldn’t determine how many customers would be better or worse off in the long run.

Creating a separate tier for sports channels might be viable because that genre has a loyal fan base, GAO said, but sports leagues might be reluctant to cooperate because putting major events on cable might diminish audience share. NCTA was quick to point out that the GAO hadn’t leaned in either direction and thus reiterated its feeling that the current fights between sports networks and cable operators, specifically between ESPN and Cox, should be handled without the govt.’s getting involved.

George Bodenheimer, pres., ESPN and ABC Sports, said he and his colleagues were “heartened” to see the GAO confirm that FCC data blaming program costs for increased rates to consumers “may be flawed, that a la carte is not a panacea and that competition is better than regulation.” A Cox spokeswoman said she, too, was “heartened” since the GAO found that programming costs had risen considerably. “That’s completely supportive of the point we've been making about the rising cost of sports programming,” she said.

As for the FCC, the GAO’s criticism of its methodology for its annual cable reports was unflinching. The agency’s classifications of cable franchises having effective competition don’t always accurately reflect current competitive conditions, GAO said, and that may explain why the Commission reported only that wireline competition resulted in 7% lower rates. GAO said overbuilders forced rates down 15%. “Because the Congress and FCC use this information in their monitoring and oversight of the cable industry, the lack of reliable information in the FCC’s report… may compromise the ability of the Congress and FCC to fulfill these roles,” the report said. GAO recommended that Powell take steps to “improve the reliability, consistency and relevance of information on rates and competition.”

The FCC had previewed the GAO report and had an opportunity to respond. In a letter to the agency, the Commission said the report was “seriously misleading.” While the GAO said the FCC relied too heavily on industry-provided data, the Commission said its annual price survey wasn’t an independent inquiry into competitive conditions, but rather was “a statutorily defined survey based on a legal framework -- adopted by Congress -- which specifies the definition of effective competition.” The letter also said the FCC didn’t have the resources to monitor the entire cable industry to update effective competition designations “on a rolling basis.” The Commission said that the difference between the 7% and 15% price figures could be misleading because the GAO compared the 2 when they were based on 2 different sets of cable operators.

Nevertheless, based on discussions between the 2 agencies, the FCC said it had redesigned its survey questionnaire for 2003 to eliminate questions that relied on estimates and to substitute some questions to try to solicit more accurate answers from the cable operators. It also said it would provide more complete explanations for its questions, since a number of cable operators had complained to the GAO that the FCC questions weren’t specific enough.

Sachs said NCTA supported GAO’s recommendations for modifications in the FCC’s annual price survey forms. He also said he believed the GAO analysis confirmed that cable price increases reflected investments by cable operators in infrastructure and programming. “The report also shows, significantly, we believe, that proposals to reregulate cable program service would not benefit consumers,” Sachs said. He said he was pleased that the report acknowledged significant competition to cable from the 2 national DBS providers.

Gene Kimmelman, senior dir.-public policy, Consumers Union, said the fight between ESPN and Cox illustrated the larger issue of rising cable rates, particularly in markets where cable companies had what he called a monopoly. “In the few communities that have 2 cable companies competing, prices are about 15 percent lower for the exact same services than where there is only 1 cable company and 2 satellite providers,” Kimmelman said. “If all consumers had the benefit of just one additional cable provider, cable customers could save as much as $4 billion a year.” He urged Congress to jump in.

While McCain may lean toward govt. intervention, House Majority Leader DeLay (R-Tex.) said the report showed that competition, not regulation, led to “a better, more reliable product to consumers.” He said consumers had benefited from deregulation in the cable industry. “With digital cable, high-speed Internet and new telephone offerings, the cable industry has met emerging consumer demand while delivering greater value. The market is working,” DeLay said.

House Commerce Committee Chmn. Tauzin (R-La.) said the report showed that competition from satellite and other multichannel TV services was increasing and that the cable industry was responding. House Telecom Subcommittee Chmn. Upton (R-Mich.) said he believed that consumers were welcoming the new services that cable’s investments were bringing. He said the report showed more competition between cable and DBS. “I want to see this healthy competition continue to grow and keep the cable industry’s feet to the fire,” Upton said. Tauzin said he would work with Upton to “further accelerate competition in the media marketplace, spur innovation and promote even better service to consumers.”

Progress & Freedom Foundation Communications Policy Dir. Randolph May said the GAO report was “commendably thorough” and proved that the industry’s infrastructure investments since deregulation of cable in 1996 had been beneficial to consumers. Legg Mason analyst Blair Levin said he didn’t believe Congress would react by regulating cable rates or programming options but the report probably would lead to “a louder public discussion of the issue.” He said he believed the study would provide ammunition to both cable operators and programmers in their attempts to vilify one another for rising rates. “At the end of the day… we view this report as influencing the public atmosphere surrounding the business negotiation between operators and networks, a negotiation in which the government is unlikely to intervene,” Levin said.