Cable boom ends, as do easy profits

May 23, 1994|By New York Times News Service

NEW ORLEANS -- After years of reeling in dollars, the cable television industry, buffeted by regulation, competition and uncertainty about the future, is now just reeling.

As cable executives gather here this week for their annual convention, the mood among many is grim -- uncharacteristically so for an industry that produced a boom as long and as loud as any in recent business history.

Perhaps the most acute symptom of the industry's malaise is its sudden lack of interest in adding new channels. Booths at the convention center were staffed yesterday by representatives of the Military Channel, the Home and Garden TV Network and about 120 other fledgling operations. Each was hoping to earn a spot on the dial. But, for the most part, the big cable systems were not buying.

"Let's see how many of those new channels are at the cable convention next year," said Betty Cohen, the executive vice president of Turner Broadcasting's Cartoon Network. Her channel, which started in October 1992, is on cable systems serving about 10 million households, far below what it had hoped for.

What has chilled the ardor more than anything, cable executives say, is price regulation, as demanded by Congress and practiced by the Federal Communications Commission.

For years, cable systems were able to expand the number of channels they offered virtually at will, passing the costs on to viewers by increasing monthly cable bills.

In 1992, over the veto of President George Bush, a law was passed ordering rate reductions and opening the way to RTC competition from telephone companies and others. The FCC has ordered rate rollbacks that it says will amount to $3 billion -- presumably delighting consumers but sending the cable industry into a defensive crouch.

Big cable systems like Tele-Communications Inc. and Time Warner Cable have blamed the FCC and its rate cuts for virtually every setback they have suffered this year.

When the planned marriage of Tele-Communications and Bell Atlantic fell apart, when stock prices for several cable giants fell 30 percent or more since October, when Cablevision Systems said earlier this month that it was laying off 3 percent of its work force, the FCC was invariably invoked as the villain.

The FCC, in turn, says the industry's troubles are temporary and that nothing federal regulators are doing should preclude further expansion.

All grown up

Both sides would agree that the days when the cable industry grew like a teen-ager are gone. And in some ways, that is what has happened: The cable industry has reached maturity. It served 41 million households in 1985, 61 million last year. Two-thirds of the nation's homes have cable now; in 1985, fewer than half did. Those numbers will not just keep shooting upward.

"I'm basically an optimist," said Brian Roberts, president of Comcast Corp., one of the largest cable system operators. "But there's no question that the first generation of executives who built the achievements of this industry are demoralized." Comcast itself, which had enjoyed 120 straight quarters without a decline in profits, saw that streak end in the last quarter when profits slid by 3 percent.

With profits down, companies cannot invest in new technologies as soon as they would like, which will delay the advent of the much-ballyhooed 500-channel cable system, said Jessica Reif, a media analyst with Oppenheimer Inc. If such a system arrives, many cable executives say it would primarily offer pay-per-view movies and other services that consumers must pay for separately, rather than additional new channels on the model of CNN or Lifetime.

"The FCC is ruining this industry," Ms. Reif said.

One senior cable channel executive began a staff meeting two weeks ago with the pronouncement, "Basic cable is dead." By that he meant that the old system of widely distributed channels backed by monthly customer bills and advertising dollars could expand no further under the new regulations.

This blue-sky-is-falling view is not universally supported within the cable industry itself.

"To say basic cable is dead is a huge overstatement," a consultant to several of the biggest cable channels said on condition of anonymity. "Some of these people are crying about the regulations because they think crying will play well."

And the idea that the FCC is to blame was rejected by the commission chairman, Reed E. Hundt.

"That's just silly," Mr. Hundt said. "This industry is not in any way ruined. They're going through a period of flatness."

The commission will closely monitor the effect of the rate cuts on the industry, he said, and will quickly make adjustments if needed. Mr. Roberts and some other cable executives acknowledged that they had found Mr. Hundt and other commissioners at least willing to listen to their concerns.

What the rules say

In simple form, the FCC says that a cable operator may take only a 7.5 percent profit above the cost of adding a new basic channel to a system.

In the past, basic cable channels were added frequently to systems as part of an exercise in guaranteed profits. Each cable channel was sold by its creators, or programmers, to a cable system. A new channel typically might charge the system operators a fee of 10 cents for each household served by the cable system.

In the boom years, systems would often add several channels annually and raise viewers' monthly bills to recover that 10 cents per household and much more.

After adding three new channels and paying the programmers 30 cents a month, the cable system could charge the customer an extra $1 a month, making a 70-cent profit per household. Under the new 7.5 percent limit, according to the system operators, the additional monthly charge to households for three new channels might be more like 32.25 cents: the same 30 cents to the channels, plus 2.25 cents profit.

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