Cable's Fuzzy Image

By Richard Zoglin

It wired most of the U.S. in little more than a decade and vastly increased the number of TV channels available to the average home. It enticed viewers with movie services like HBO and Showtime, brought in superstations from distant cities and popularized MTV. But the industry responsible for these feats is hearing few huzzahs these days. More and more people, it seems, are griping about cable.

Consumers in some areas are complaining about rising rates, shoddy service and long afternoons of waiting for the cable repairman to show up. Broadcasters are arguing that cable enjoys an unfair advantage in the marketplace. Most worrisome of all to the industry, Washington is paying heed. Legislation is pending in both houses of Congress that would impose new restrictions on cable. And the Federal Communications Commission, for years a deregulatory friend, is making noises about reining in the industry.

The prospect of reregulation is sure to be Topic A as industry executives gather in Atlanta this week for their annual convention. Though the severity of Washington's legislation is still an open question, the tide may be turning for one of the hot businesses of the late 1980s. Cable companies are already suffering from investor wariness. The largest U.S. cable operator, Denver- based Tele-Communications, Inc. (TCI), which draws 78% of its revenues from cable, has seen its stock price fall 29% since early October, to 14 3/4. Time Warner, which derives 25% of its revenues from cable programming and operations, has endured a share-price decline of 32%, to 95 1/2, during the same period. "I would say the cable industry is at the North Pole now, a point from which all directions are south," says Alan Gottesman, a financial analyst for Paine Webber. Others are less pessimistic. "In the short term, there is a lot of regulatory uncertainty, but over the long term, cable is still a terrific business," contends John Mansell, who follows the industry for the research firm Paul Kagan Associates.

The industry has been through a heady few years. The 1984 Cable Communications Policy Act, passed in the palmy deregulatory spirit of the Reagan Administration, freed most cable systems from local control over their rates and service. Not surprisingly, the cost of basic cable has gone up since then (by 26% between December 1986 and October 1988, according to a General Accounting Office survey). So has the industry's financial health and its spending on new channels and programming.

In a series of FCC hearings earlier this year, a parade of city officials and consumers charged that local cable systems (which in nearly all cases are the sole providers of cable for their areas) have been acting like arrogant monopolies. Deregulation has "created a monster on the loose," said Edward Quaglia, mayor of Herrin, Ill., where cable rates have risen 125% since 1986. Three months ago, New York became the first state to pass consumer-protection legislation aimed at penalizing cable abuses. And last week the New York City board of estimate, in a preliminary vote, refused to renew the Manhattan franchises of two cable companies, both substantially owned by Time Warner, that have been the target of customer complaints.

Despite all the political heat, a TIME/CNN survey of 600 cable customers in the U.S. conducted by Yankelovich Clancy Shulman turned up a relatively high level of satisfaction with cable services. Only 17% of those polled said they were displeased with their cable company's response to service problems. Fewer still, 13%, said their company failed to provide a good selection of channels. But a little more than one-third (36%) said they were dissatisfied with cable prices. Asked whether they view cable as a good value, 63% said yes. That ranked below such other forms of communication and entertainment as newspapers (83%), local phone service (80%), videotape rentals (72%) and magazines (67%), but ahead of movies in theaters (34%).

The broadcast networks, which are steadily losing viewers to cable, have their own gripes. Cable, they contend, is getting a free ride on the backs of broadcasters, whose signals they are able to retransmit without charge. With the end of the "must-carry" rules, which required cable systems to carry all local stations, the cable operator can decide which stations to pick up and on what channel to place them. Some stations have complained of being booted to higher (and less watched) channel numbers. "Our fate is in the hands of individuals over whom we have absolutely no control," says Darrell Blue, general manager of KVEW in Kennewick, Wash., which was shifted from Channel 12 to Channel 42 by the local cable system. "We just have to smile and take it."

Congressmen, tuned in to such complaints, have become increasingly prone to clamp down. The Senate Commerce Committee is considering a bill, which could reach the Senate floor in June, that would place rate caps and other restrictions on cable companies. In the House a less stringent bill co- sponsored by Commerce Committee Chairman John Dingell was unveiled last week that would reimpose the must-carry rules and institute other consumer- protection measures. Meanwhile, an FCC report examining whether revisions ought to be made in the 1984 cable act is due to be released in July.

Some of the proposals would make life especially difficult for cable:

-- Reimposing rate regulation. Under the 1984 cable act, local systems are exempt from rate caps if they face "effective competition" in their local areas. Such competition is defined as the presence of at least three local broadcast signals. Some legislators would like to revise that definition to require the presence of another cable company or rival delivery system. Since few cable systems have such competition, the move would instantly make most of them subject to rate limits.

-- Restricting concentration in the cable industry. The most extreme proposal would place a cap on the number of subscribers any one cable company could have nationwide. Some legislators also aim to limit the ability of cable operators to have a financial interest in the programming they carry.

-- Fostering more competition. Cable programmers would be required to sell their wares to any competing delivery system at nondiscriminatory rates. And the ban against telephone companies entering the cable business might be lifted.

Some of these remedies have little or no chance of being enacted, but it is likely that some measure of reregulation will pass this year. Many politicians see such legislation as an easy way to strike a blow for consumers without spending taxpayers' money. FCC Chairman Alfred Sikes also wants to trim cable's sails. "I favor eliminating the monopoly at the local level," says Sikes. "I think that either competition or the threat of it is going to be a spur to price competition, better service and innovation."

The cable industry has responded to the onslaught with a fierce counterattack. Deregulation, cable officials argue, has enabled the industry to expand rapidly, to the great benefit of viewers. "We wired America," says Robert Thomson, vice president of government affairs for TCI. "That's very, very expensive. Also, we created a new universe of television programming." A cap on rates, contends Time Warner President N.J. Nicholas, would "severely inhibit, if not eliminate, any innovation in new products or new channels." If price limits on basic cable service were instituted, more systems might compensate by putting some channels now included in that service (ESPN and TNT, for example) on a separate "tier," thus increasing the costs for consumers.

As for service problems, cable executives attribute them largely to the industry's growing pains. "Basically, this industry has been invented in the last ten or twelve years," says James Mooney, president of the National Cable Television Association. "Yes, we've had some problems, but the industry is dealing with them in a serious way." The N.C.T.A. decided in February to institute voluntary customer-service guidelines. Among the goals: all customer phone calls will be answered within 30 seconds, and service interruptions will be repaired within 24 hours.

If the cable industry is disturbed by the prospect of reregulation, it is also worried about the consequences of a totally unfettered marketplace. Most fearsome is the notion that telephone companies might enter the cable business. The phone companies, whose wires into homes could conceivably be upgraded to carry TV signals, have the technological capability and customer- ! service savvy to become formidable rivals. Until now, phone companies have been barred from providing cable service because of their regulated-monopoly status. But FCC Chairman Sikes and some in Congress favor allowing the phone companies to get involved, though probably only as "common carriers" of programming provided by others.

Other potential rivals to cable are on the horizon. Two consortiums of media companies have launched direct-broadcast satellite ventures. One, Sky Cable, promises to deliver up to 108 channels to placemat-size home antennas by late 1993. Another, K Prime, is set to start this fall with a more limited channel selection. But widespread acceptance of DBS or any other alternative to cable may be years away. "Waiting for competition in the cable industry," says Representative Edward Markey, chairman of the House telecommunications subcommittee, "has been like waiting for Godot."

That sounds like a rationale for reregulation, and many cable executives welcome modest reform from Washington. Their goal, almost more important than damage control, is to get the matter resolved as soon as possible.

CHART: NOT AVAILABLE

CREDIT: TIME Chart by Joe Lertola

CAPTION: TUNING IN, PAYING UP

With reporting by Naushad S. Mehta/New York and Nancy Traver/Washington