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Cable Investments, Sports Blamed for High Rates

A federal report finds the best way to curb increases is to foster competition.

October 25, 2003|Sallie Hofmeister | Times Staff Writer

A 40% rise in cable television bills over the last five years is the result of escalating programming costs and the industry's investments in new technology, according to a long-awaited federal report released Friday.

Requested by Sen. John McCain (R-Ariz.), the yearlong study was conducted by the General Accounting Office amid bitter accusations by cable operators that sports channels -- particularly Walt Disney Co.'s ESPN -- were forcing up consumer prices.

In the end, however, the report left many ambiguities, giving both sides room to continue criticizing each other. It did not specify how much any single entity was to blame for rising rates.

"The primary impact of the report, in our view, is to give cable operators and programmers new ammunition in their public campaign to pin the tail on the bad guy -- casting the other as the major culprit in causing rates to rise," Legg Mason analyst Blair Levin wrote Friday.

The report did single out sports as playing a significant role in driving up the costs that cable operators pay for programming. Cable operators have attacked ESPN for hiking annual subscription fees by 20% for five consecutive years.

According to the report, cable programming costs rose 48% from 1999 to 2002. During that period, the average fees that sports channels charged distributors rose 59%. Some of those higher costs then are passed on to consumers.

"The GAO report affirms what we've been saying about the rapid and unrestrained rise in sports programming costs," Cox Communications Inc., the nation's fourth-largest cable operator, said in a statement.

On Thursday, Cox launched www.makethemplayfair.com, a Web site about how sports channels are driving up cable bills.

Cox Chief Executive James Robbins this month told investors that he would turn ESPN and Fox Sport Net into premium services, like HBO and Showtime, if the sports channels did not scale back rate demands. In that scenario, not all consumers would be forced to shoulder the burden for channels they might not watch.

McCain had supported a plan that would give consumers complete control over what comes over their cable through an a la carte menu that would assign prices to each channel.

But the GAO report said such a practice could wipe out small, niche channels unable to bring in enough subscribers to support their programming and overhead costs. Some of the most popular channels also would have to charge more to underwrite their steep programming costs, the report concluded.

ESPN, which has fought the premium pricing idea, has blamed the rate increases on the huge investment by cable operators in digital technologies. The GAO report said such costs --$75 billion since 1996 -- had had an effect.

"We are heartened to see the GAO confirm that FCC data blaming program costs may be flawed," ESPN said in a statement.

The study concluded that the best way to rein in cable rates, which reached an average $36.47 in 2002, was to spur competition.

The GAO found that cable rates were 15% lower in the 5% of U.S. markets where two cable firms competed head-to-head.

"The GAO report confirms that competition matters," said McCain, chairman of the Senate Commerce Committee, which oversees the cable industry.

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