Why You Could Benefit
From Lower Cable Rates

Oct. 17, 2002 -- Like death and taxes, sharply rising cable rates have been a certainty for tens of millions of Americans. But that may be about to change.

With growing numbers of people switching to satellite TV, cable companies are under pressure to hold down rates, and one major player has already promised to freeze them in some markets. Several of the nation's largest cable companies are also rolling out cheaper packages that are designed to more effectively compete with the enticing offers from satellite companies.

For couch potatoes, the benefits are most likely to be felt first in St. Louis, Fort Worth, Los Angeles and other markets served by Charter Communications, the fourth-largest cable company. Charter executives have become the most outspoken of the cable companies on the need to stop the customer flight to satellite TV. "We've got to think twice about rate increases," says Carl Vogel, chief executive of Charter, which has 6.8 million subscribers in 40 states.

Charter is taking several big steps to keep consumers from jumping ship. For one, the company is developing a new lower-cost package with fewer channels. And Charter made what for a cable company is a radical pledge: Rates will be frozen in its home market of St. Louis through next year. The move followed a recent rate hike.

And in July, AT&T Corp.'s cable-television business, AT&T Broadband, rolled out several new packages in part designed to "compete against the dish," according to a company executive. One new package costs about $50 for 150 channels and about $40 for 100 channels. Previously the lowest-price digital package offered by AT&T, the largest cable company, was about $43 for 125 channels.

Cable companies, which have been raising rates far faster than inflation for years, have good reason to ease up on consumers. Subscriber growth has been flat or declining for most major companies recently. Satellite, on the other hand, is finally hitting the mainstream, adding about 6,500 new accounts per day, for a total of more than 18 million subscribers.

Why? Satellite is often cheaper. Charter executives say many of the subscribers they've been losing to satellite are signing up for a 60-channel, $22.99 package with Dish Network, offered by EchoStar Communications. The closest thing Charter currently offers in St. Louis, for example, is a $45.85-a-month package, with 99 channels.

Satellite TV wasn't always cheaper than cable. Launched in 1994 with DirecTV, satellite television initially cost more because subscribers had to shell out up to $850 for installation and dish equipment. The fledgling service lured cable subscribers primarily by offering many more channels and a clearer digital picture.

More recently, though, satellite companies have eliminated the hookup costs for subscribers who sign up for at least a year of service. Cable providers, meanwhile, have matched satellite's picture quality and channel quantity in many markets. With the competing services now so similar, price is suddenly much more of an issue. "That is the single biggest marketing message our competition has against us," says Mr. Vogel.

Comparing the prices of cable and satellite is tricky. While both have access to the same pool of channels -- from CNN to MTV to HBO -- they don't offer the exact same combinations in their packages. That said, satellite's rates are generally lower, on a price-per-channel basis, according to a 2001 survey by Carmel Group, a consulting firm in Carmel, Calif. Satellite providers charge an average monthly rate of 35 cents per channel for premium service (premium services include pay channels like HBO), while analog cable customers pay $1.07 and digital cable customers pay 46 cents, according to the survey.

The reason is simple. Cable has been relentless in raising prices over the years, while satellite companies have been much more restrained. The two major satellite providers, EchoStar and Hughes Electronics Corp.'s DirecTV, say they have only increased rates a few times since launching in the mid-'90s -- for a total of less than 10%. By comparison, the cable industry has hiked rates by 31% between 1996 and 2001, according to the U.S. Bureau of Labor Statistics.

So far, most of the other big players say they have no plans to offer rate freezes or cheaper packages. Executives at these companies say they have to raise rates because of rapidly increasing programming costs.

They also say they have competitive advantages. In many areas, for example, satellite companies don't offer local channels. And in the cities where they do, satellite companies make customers pay extra for them, while cable companies don't.

And the satellite companies and retailers are milking the situation. In Des Moines, for example, local satellite retailers stepped up their advertising this summer after Iowa's largest cable company, Mediacom Communications, increased rates for some subscribers as part of its conversion to a digital system. "Come on folks. Have you seen the news lately," asks a radio ad run by Air Waves, a local retail chain, for its DirecTV systems. "Who would have cable?"

The message was enough to sway Andrea Daniel. She and her husband switched to satellite after doing a price comparison. She said the choice was $80 a month for Mediacom, or $50 a month for DirecTV, which included a special NFL football channel for her husband.

"I feel like I got everything I had with digital cable, but at a lot cheaper price," says the 27-year-old account executive for a wireless telephone company.

Email your comments to rjeditor@dowjones.com.