Aggressive bidding on new franchises by cable television companies, coupled with steadily increasing demands made on them by local governments, is threatening to stall the industry's development.
Large cable companies are withdrawing from competition to build systems even in lucrative markets like the Washington suburbs because of the demands made by local officials, as well as high interest rates, the lack of trained people to install and manage the systems, and the companies' fear that they might be overextended.
"The industry is finally beginning to realize that they're overcommitted," said one cable official who has fought franchising fights across the country and who insisted on anonymity. "The costs of the 'new builds' are going through the ceiling, the business is not as good as they thought, and at this point the pols want cable so bad the wheeling and dealing won't stop. It is getting rotten out there."
The promises made to cities by some cable companies seem so economically unsound that many observers foresee a yawning credibility gap that may create more problems for the industry.
A leading New York investment house, Warburg Paribas Becker Inc., which has developed a specialty in cable television, said in a recent study that "franchise bids have become increasingly onerous because of the demands of the franchising authorities and competition among the bidding companies." The study noted that the high cost of the competition has "substantially reduced the pool" of bidders.
"I believe that cities believe that if they can get a major corporate operator on the line with no outs, the operator will have to deliver no matter how much money they lose," says Trygve Myhren, president of American Television and Communications Corp., the Time Inc. subsidiary that has become the largest operator of cable systems.
"In the final analysis there is no free lunch. People have reneged on promises before and they'll do it again. The person that gets hurt is the citizen. The prices get jacked up and it's messy situation for everybody."
Even ATC, which has a subscriber base approaching two million and has access to the coffers of its giant parent, has dropped out of franchise bidding -- in Milwaukee, St. Louis and Sacramento.
"In every city, the perspective is that we want cable and we want it fast," observes Gary Hurvitz, vice president for regulatory affairs for Malarkey Taylor and Associates, a leading cable consulting firm.
"Companies are reaching the limits of their resources and new resources are very expensive. Now they look at these markets with a little more critical eye and are saying. 'If you want too much we'll spend our money elsewhere.' It could put the first glimmer of realism back into franchising," Hurvitz said.
Clearly, the new realism Hurvitz sees stems from economic concerns. The cost of building a new cable system is skyrocketing, in part because of the industry's willingness to meet the demands of local governments for the best the technology can offer. The industry routinely uses a $100 million estimate for building a new franchise, but experts say that has become an unrealistic figure.
The construction cost of a new franchise, measured by average cost per home passed by the cable, jumped from about $100 per home to about $300 in 1980, according to the Warburg study. Many franchise applicants now say that figure is nearing $400 per home.
This comes at times when about 27 percent of the nation's nearly 80 million television households subcribe to cable, a figure expected to climb to over 30 percent in 1982. Even the major television networks, only recently bitterly antagonistic to cable, are spending millions of dollars developing programming to fill the dozens of channels new cable systems provide. Many cable firms and other businesses are looking to the medium to bring a wide variety of nonprogramming services into the home, options such as video games and home banking and shopping.
But a series of events raise questions about the ability of the industry and local governments todevelop a sucessful partnership that could lead to that revolution. For example:
* A significant retranchment in franchise bidding is taking place across the country, with the Washington suburbs a prime example of the phenomenon. In Montgomery and Fairfax counties, a number of companies that had publicly expressed interest in a franchise have pulled out. Bids are due in both counties within a month.
Canada's Rogers Telecommunications Ltd., the largest cable company in North America, dropped out of the competition in Montgomery County only five months after pledging to build "the most advanced system" on the continent there.
In Fairfax County, two cable heavyweights, Storer Broadcasting Co. and Warner-Amex, the partnership of Varner Communications and American Express, dropped out, claiming the county wants too much information and may propose too high a tax on profits. Even the consulting firm working with the county on its cable strategy, Malarky Taylor, resigned from its duties, citing a "flawed" bidding process.
* The industry has been shaken by the winning bid for the Boston franchise from Cablevision Systems Development Co., which has pledged to build a two-way system that will cost at least $100 million, offer subscribers 107 channels, virtually give away to the public nearly half those channels, turn over 8 percent of revenues to the city government and keep the subscription fee to only $1.95 a month for at least five years.
Virtually no one in the industry outside Cablevision, the nation's 21st largest system operator, thinks the bid is either realistic or workable.
"I don't like to see things like the Boston bids," complains Robert Lewis, president of Jones Intercable Inc., a Denver firm that has succeeded in the cable businesses by acquiring cable systems and funding the deals by selling limited partnerships. "I'm sure these bids are real to them and will eventually turn a profit, if they can afford the costs of capital and if they have the staying power." Adds Myhren: "We wouldn't take that risk. My educated guess is that it won't work economically."
* At the same time, however, Myhren's ATC is a partner in Mile Hi Cablevision, a firm seeking the prestigious franchise for Denver, a city that claims to be the nation's cable capital because ATC and other major cable firms are based there. Two other firms in Denver, United Cable TV Corp. and Westing house Electric Corp.'s TelePrompTer, the industry's number two firm in terms of subscribers, make up the competition.
The ATC bid in Denver, proposed as a partnership with another Denver cable concern, Daniels & Associates, offers a 220-channel system -- 110 video channels and 110 data channels -- for as little as $3.75 a month, and with all 1,302 miles built within 42 months of the award. "It's the most aggressive bid we've made," Myhren said with a smile.
United said it can build the entire system in 23 months. TelePrompTer, meanwhile, pledged to give the city 20 percent ownership of its franchise, worth as much as $20 million to the city over 15 years.
Included in the ATC bid is a $73-million commitment to locally produced programming, a portable satellite "uplink" enabling Denver conventions, for example, to telecast their meetings, and a $6 million equipment offer, which includes 26 studios, a sophisticated telecommunications center, and a staff of 63 to support the programming efforts. In addition, the partnership is offering a $500,000 commitment to provide equity funds and loans to "disadvantaged" small businesses, and $1 million in loans for "developing two minority entrepreneurial channels."
The stakes in Denver are typical of the kind cities are soliciting and cable companies are offering as the race to wire much of the nation enters a critical stretch. Half the country is expected to be wired for cable by the end of the 1980s, including nearly every major city.
Meanwhile, the industry is in for rough going on other fronts. Some communications activists -- such as Henry Geller, head of the National Telecommunications and Information Administration in the Carter administration -- have called for expanded regulation of cable as a common carrier, regulation similar to that governing telephone companies that would require cable systems to grant access to all comers, an approach the industry vehemently opposes.
A number of jurisdictions, including the District, are studying the possibility of municipal or cooperative ownership of cable systems. Further, some key franchises, already in operation, are nearing renewal time, promising key tests of city government willingness to hold cable operators to their promises.
Congress is virtually certain to consider industry-backed bills restricting municipal authority over cable systems, and the industry's performance in coming months could affect the legislative outcome.
The U.S. Supreme Court has heard arguments on a landmark case, Community Communications Co. Inc. vs. City of Boulder, Colo., that also could set ground rules for how far cities can go in regulating cable. The city is challenging the company's alleged failure to meet its franchise obligations.
"The marketing people will tell the cities anything, but when it comes time to operate, the history in many towns is that you start to hear a different tune," said Alan Boles Jr., a Boulder city attorney working on the case, which has put the city in a bitter confrontation with the cable company, a subsidiary of Telecommunications Inc. (TCI), the nation's third-largest cable system operator