BY ALICIA MUNDY, K. C. NEEL AND STACI D. KRAMER The Federal Communications Commission Ninth Annual Report on Video Competition, released New Year’s Eve, confirms that cable rate hikes were much higher than the nation’s rate of inflation last year and noted that cable began losing subscribers in the second half of 2002. In analyzing the rate increases of 6%-plus, the agency explained that the hikes were partly due to the hefty increases in the cost of programming as well as the cost of upgrading systems. And it noted that cable rates reflected additional channels and other services offered to customers. But it also indicated that rates were kept in check when the cable operator had competition from over-builders and other providers. The report is likely to add fuel to the fire under Sen. John McCain (R-Ariz.) when he takes over the Commerce Committee in January. He has pledged to hold hearings on cable rates. The announcement that cable was losing subs, apparently to DBS, wasn’t entirely unexpected, a telecom lobbyist explained. DBS gained about 2 million new viewers, accounting for 20.3% of the subscription TV market. As of June 2002 cable had 76.5% of that market, down two points. A lobbyist opined that the FCC was suggesting a link between consumer satisfaction and sub losses, though an FCC staffer said that was not the case. Discussing the impact of cable consolidation, the report noted that in 2002, four of the top six cable MSOs were also in the programming business, and operators control many of the 31 regional sports nets. “Sports programming warrants special attention because of its widespread appeal and strategic significance for MVPDs,” the report said. Cable operators weren’t surprised by the report, and they were already painfully aware they were losing customers. Still, NCTA tried to put a positive spin on the news. “The report confirms there’s increasing competition in the multichannel video marketplace, where three out of four consumers choose cable, while one in four chooses a competitor, and where all consumers benefit through great new services, content and technology,” said NCTA president Robert Sachs in a prepared statement. American Cable Association president Matt Polka agreed, noting that his members have been somewhat successful in getting their customers to understand they are passing along costs that are being passed to them by programmers. “Regulators and consumers want to know why rates are rising,” he said. “Well, we can tell them, and we are. Programming rates are skyrocketing, and things like retransmission consent don’t help either.” Robert Routh, an analyst for Natexis Bleichroeder Inc., said the summary of the report leaves him wondering about cable’s future with video-only subscribers. “What I am afraid of, if DirecTV is giving away the dish now if you lived in a house, why wouldn’t you get one? It’s free. Free installation, too,” said Routh. “How much opportunity for growth does cable have? It has advanced services and is better positioned, but satellite has a compelling cost/value proposition.”

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