Comcast Suit Seeks to Link Clustering to Rate Increases

Plaintiffs in the suit, Caroline Behrend v. Comcast, said Comcast bought systems in Philadelphia and Chicago to reduce competition from rivals including cable overbuilder RCN. Comcast raised rates 11% annually in Philadelphia, where it has 87% of all pay-TV subscribers, the lawsuit said: “Comcast also has market power because it does not face sufficient competition to constrain prices, competition from satellite providers and overbuilders being insufficient to constrain prices.” Due to clustering, 1.8 million Philadelphia Comcast subscribers pay more, said the suit, alleging violation of the Sherman Act.

Comcast disputed the plaintiffs’ allegations and legal theories. It said per-channel prices fell for 11% of Philadelphia residents and almost 1/2 faced smaller per- channel rate increases than pay-TV subscribers elsewhere. One reason Comcast has such large market share in Philadelphia is that it pushed broadband, VoD and other newer services, said analysts. “But the [plaintiffs'] point about competition is true: DBS has not been very successful in Philadelphia largely because Comcast has been aggressive in rolling out new digital services,” said Heavy Reading analyst Adi Kishore: “Philly is Comcast’s home town and they take care of it, so there isn’t much competition, and competition would drive down costs eventually.” Comcast would have been slower to introduce bundled services without clustering’s cost savings, said cable consultants including Bruce Leichtman, a former Continental Cable executive.

The plaintiffs’ situations were similar enough to make them representative of a larger group that may have been hurt by Comcast, U.S. Dist. Judge John Padova, Philadelphia, said. He gave the lawsuit class action status May 2. The judge said the plaintiffs’ economist John Beyer “succeeded in demonstrating the sine qua non of class-wide proof of impact: Damage to each class member because the prices charged by Comcast were higher than the range which would have existed under competitive conditions.” Beyer’s research cites FCC data, which cable lawyers and NCTA have called misleading because it doesn’t take into account customer service improvements and newer services like VoD. Participation in the suit is open to anyone who bought video services besides basic cable alone from Comcast after Dec. 1, 1999, in the city and surrounding areas in N.J. and Del., Padova said. He didn’t discuss the Chicago allegations.

Among Comcast’s central arguments is that it couldn’t have reduced competition by buying adjacent systems because the purchased systems weren’t likely to expand into a Comcast market to compete. It pointed to the scarcity of overbuilders, with just 3% of U.S. towns considered to have effective competition. “Entry into cable TV requires substantial irreversible investment by a potential overbuilder. Because neighboring systems are unlikely to be actual entrants into an already serviced area, the potentiality of their entrance is unlikely to have affected the prices paid by cable subscribers,” Padova wrote, summarizing Comcast’s response: “Overbuilders have not been very successful.” Comcast’s filings in the case weren’t available.

Lack of widespread overbuilding may help Comcast win the case, making it difficult for the plaintiffs to show that the company would have faced more competition if it made fewer acquisitions, analysts said. “There are virtually no overbuilders nationwide because the economics don’t work,” said Leichtman. As for burgeoning telco TV competition, he said, “I'm not sure how clustering would prevent a telco from getting into the video game as opposed to a nonclustered area.” Clustering helps consumers, and it may be hard to prove Comcast broke antitrust law, said Leichtman and others. “If clustering was abolished, operational costs probably would rise for the MSOs, leading very probably to higher prices for consumers,” Kishore said: “The best solution is to facilitate competition from the telcos rather than force operations inefficiencies from MSOs. RCN just doesn’t have the size required to worry Comcast. You'll have a better chance at that from a big telco with deep pockets.”

Two municipal cable consultants disputed the benefits of clustering, saying a cable operator is less likely to raise rates when another company in a neighboring city sells video. “The more you cluster, the more you have only one choice,” said municipal consultant Dick Treich, a former AT&T Broadband senior vp: “You don’t have the opportunity to have a competitor one town over. You have a one-trick pony… Overbuilders do work, and do make sense.” Clustering reduces programming and operational costs for cable operators, but doesn’t trim customer bills, said accountant Garth Aspaugh. “If you have Time Warner and Comcast offering services in neighboring communities and subdivisions, they need to keep their prices pretty much in line with each other, otherwise the communities involved will be upset,” he said: “When you allow them to cluster, those things go away.” Comcast bought Time Warner’s Philadelphia systems as part of the companies’ $17.6 billion takeover of Adelphia last year.

Comcast is among cable operators that Aspaugh and Treich claim have overcharged customers for remote controls and other gear. They said the company recently agreed with several dozen cities the 2 represent to reduce equipment rates, and they're now reviewing the company’s proposed 2007 charges. Nonetheless, Comcast plaintiffs may have a tough time making their case, because it’s difficult to prove that clustering leads to higher rates, Treich said: “I don’t know that I see that this lawsuit is really right on point… It will be tough for an economist to make the linkage.” - Jonathan Make