Comcast Corp. is moving forward with plans to impose the largest average rate increase in five years on many of its cable television subscribers in the Washington area, less than a month after federal regulators approved the company's $47.5 billion acquisition of AT&T Corp.'s cable division.
Comcast, which has 1.5 million customers in this region, will raise monthly rates an average of about 6 percent as of Jan. 1 for the most popular package of cable programming, which includes regular broadcast channels along with networks such as the Discovery Channel, CNN and ESPN. Customers who subscribe to premium movie packages such as HBO and Cinemax may see their bills go up an additional $1 or so.
Comcast, now the nation's largest cable company, is not alone in raising rates for the new year. Around the country, companies including Time Warner Cable and Cablevision Systems Corp. are notifying customers about rate increases of up to 10 percent.
Consumer advocates questioned whether the hikes can be justified. But the cable industry staunchly defends the increases, saying they are the result of higher programming costs and investment in technological advances that offer consumers more channels and access to new services such as high-speed Internet connections.
"Certainly, I understand there is a concern, but on the whole we think that we provide terrific service," said Dave Watson, Comcast executive vice president of marketing and sales.
The steadily climbing cost of cable television service nationwide has begun to attract the attention of Congress. Sen. John McCain (R-Ariz.), who will soon take over the chairmanship of the powerful Senate Commerce Committee, has already announced plans to hold a hearing on cable television prices. He also directed the General Accounting Office to investigate the cable companies' claims that higher programming costs are forcing them to raise fees.
In the meantime there is little regulators can do to slow the rate increases. In 1996, Congress deregulated cable pricing as part of a decision to rewrite many of the rules governing the telecommunications industry. At the time, federal lawmakers assumed local telephone companies would use their own networks to offer rival pay-television services, producing a new level of competition that would keep prices in check. But the competition never developed, and during the past six years cable rates have risen more than 45 percent, or three times the rate of inflation, according to the Bureau of Labor Statistics.
In contrast, the cost of wireless phone service has dropped 32 percent during the same period and long-distance telephone prices have fallen 25 percent.
The cable industry has spent five years investing heavily in its own networks in an effort to offer consumers a wider range of products, including local telephone service in some areas. The industry said it has spent more than $60 billion to upgrade networks around the country. So far the nationwide rebuilding is 80 percent complete, according to industry estimates.
Cable rates can vary by jurisdiction in part because each system has differing costs. For instance, some communities negotiated extra channels for government and school programming. The prices also reflect the various levels of service that are available and how far along the cable system is with its upgrade. For example, in Howard County, where Comcast has completed rebuilding the local network, no rate increase is planned at present. But subscribers, who have one of the most advanced cable networks in the country, also pay one of the highest monthly fees in the region -- $43.10 a month for expanded basic service.
In Fairfax County, Cox Communications Inc. has no plans to raise rates in 2003, according to spokesman Scott Broyles. Cox acquired the Fairfax system in 1999 for $1.5 billion but has yet to finish its promised upgrade. Broyles said this week that the company has, for the most part, resolved the problems that have plagued the transition. "We are well past the majority of the customer service issues that were brought to light this time last year," he said.
Industry analysts warn that in addition to facing increased programming costs, cable companies also need to keep rates up so they can continue paying interest on their huge debts. For example, Comcast has $30 billion in debt after its $47.5 billion acquisition of AT&T Broadband.
Lenders keep a close eye on cable-system operating margins, and Comcast has some of the healthiest in the industry. The average Comcast cable system has margins in excess of 40 percent. But those margins don't include the cost of paying interest, depreciation and taxes. Now that it is carrying $30 billion in debt, Comcast can't afford to have its margins pinched by rising fees charged by sports leagues and movie studios.
"Margin erosion and leveraged balance sheets don't mix," said Aryeh B. Bourkoff, an analyst with UBS Warburg Fixed Income.
Some consumer advocates noted that the industry frequently complains about higher costs but says little about the growth in revenue from expanded pay-per-view services and advertising. Cable rate increases "should never be appreciably higher than general inflation," said Gene Kimmelman, director of the Washington office of Consumers Union.
Kimmelman also said consumers should be given more freedom to create their own television packages, particularly because Comcast and other companies point to expanded channel lineups to justify rate increases. "They ought to put their money where their mouth is and offer consumers the right to choose just the channels they want to watch," Kimmelman said.