Financial Pinch : Cable TV: A New Season of Austerity

Two years ago, Group W Cable won a fierce competition for Santa Ana’s cable franchise by promising the Orange County city a dazzling array of futuristic technology and millions of dollars for local TV programming--all at low customer rates.

But today, like cable firms in cities across the nation, Group W says it can no longer afford to keep many of these promises. It stunned Santa Ana officials earlier this year by asking for major cutbacks in cable services and a hefty rate hike.

The scramble to win cable franchises is over and companies that once promised a multitude of services to win these awards--from Los Angeles to Boston, from Milwaukee to Dallas--are now trying to renege on their commitments.

Industry’s Potential

These cutbacks do not affect the news, movies and sporting events that millions of cable customers currently receive. But they could affect the industry’s potential to be more than a home entertainment vehicle--a potential once strongly promoted by cable operators.

Indeed, at the height of the franchising wars, from 1979-1983, industry leaders confidently predicted that the nation would soon enter a brave new world of cable television.

In one city after another, cable firms vying for millions of dollars in potential profits predicted that customers would soon be able to produce their own TV shows at local studios and utilize “two-way” technology permitting them to shop, bank and even vote at home.

Now, the industry has entered a more austere period. Many of these sophisticated proposals have been scaled back, eliminated or deferred indefinitely.

While many local officials have insisted that companies honor their promises, virtually every cable firm seeking such changes has won concessions.

‘Victim of Own Hyperbole’

“The cable television industry has become a victim of its own hyperbole,” said Howard Gan, a consultant who had advised Los Angeles on cable issues.

“Today, a multitude of promises made by cable television companies are not going to be kept. To many people, this trend raises disturbing questions about the future of the industry.”

It also raises questions about consumer rights. The retrenching by cable companies comes at a time when local government’s ability to regulate cable television--and protect consumers’ interests--is eroding.

Some cable firms have threatened to abandon their franchises or engage in costly, long-term litigation unless cities allow them to renegotiate.

More important, a new federal law that took effect on Dec. 29 strips municipalities of the power to regulate customer rates. Basic monthly cable rates range from about $6 to $10, according to industry sources.

Under the legislation, local governments will retain the right to levy an annual tax on cable operators, but they can no longer require companies to provide funds for a variety of customer services.

“I think cities and cable operators reached a compromise with this legislation, but consumers may be the big losers in the long run,” said Robert Smith, Sacramento’s cable administrator.

“Whether companies will abuse their powers to overcharge customers, whether cable ever lives up to its promise of being something more than just movies and sports, remains to be seen.”

Why are cable firms cutting back services?

Companies contend that the cost of building and operating the systems has skyrocketed. They also claim that some of the new services have failed to attract customers.

Carl Pilnick, a Los Angeles-based consultant who has advised Santa Ana, Miami and New Orleans on cable TV, said companies knowingly made promises they could not keep.

‘Local Access’

“The competition was just like any other auction, and companies felt they had to outbid each other, at any cost, just to win the franchises,” he said.

“Then, after the franchise was won, they started to worry about building what they had promised. . . . they tried to convince cities that the systems should be scaled back.”

During the franchising wars, for example, companies typically offered to build, fund and operate a multitude of neighborhood studios for so-called community-produced or “local access” programming.

“It didn’t matter if one company promised 16 studios and another promised 17, both clearly in excess of what a city might need,” Gan said. “What mattered was winning.”

Companies also promised cash grants to community groups, million-dollar payments to the cities themselves and elaborate data transmission networks linking schools, banks, governmental offices and other institutions.

Some firms promised services that had nothing to do with cable television.

In Sacramento, for example, one firm tried to win political support from an environmental group by promising to plant 20,000 trees. Other companies pledged to support drug-abuse programs in Miami and an Afro-American museum in Detroit.

Cable industry leaders charge that city officials pressured firms into making such promises.

“Cities tried to turn cable television into a political football . . . to milk the industry for all it was worth,” said Paul Kagan, a Carmel-based industry economic analyst.

“Companies knew they were being pressured into unrealistic concessions, but they had to play along.”

Cable administrators were quick to demand services that neighboring cities had won from companies, and the process just kept feeding on itself, added James Mooney, president of the National Cable Television Assn., the cable industry’s Washington-based lobby.

Some companies, like American Television and Communications Inc., the nation’s second largest cable operator, dropped out of franchise competitions in Los Angeles and other large cities because they believed the bidding had gotten out of hand.

Trygve Myhren, chairman and chief executive officer of the Time Inc. subsidiary, explained that cities “were asking for monies to upgrade City Hall, monies for public works projects, monies for libraries and streets that even average voters wouldn’t vote for.”

Costs Underestimated

Cities and cable operators agree that firms building urban cable television franchises ran into unexpected business difficulties.

In some communities, companies have failed to secure financing and delayed construction. Elsewhere, firms built elaborate cable systems but did not get enough customers. Virtually all operators said they underestimated the costs of building in urban areas.

For example, in Los Angeles, United Cable TV, which won a bitter political battle last year for the East San Fernando Valley franchise, announced less than 12 months later that it has not been able to secure the financing to build the system.

Company officials said they would be unable to make a profit unless United Cable was allowed to reduce the number of channels from 106 to 77, defer $5 million to $7 million in commitments to local programming and extend their franchise by ten years.

The council agreed to reduce the number of cable channels that United must offer, and is expected to deal with the company’s other requests in several weeks.

Meanwhile, companies that won cable franchises in South-Central Los Angeles in 1982 and in Boyle Heights in 1981 have yet to begin construction because they have not secured financing.

Los Angeles Councilwoman Joan Milke Flores, who chairs the council’s Cable Oversight Committee, said United Cable and other firms “made a lot of promises they couldn’t keep.”

She agreed, however, that these firms are “definitely taking losses. It doesn’t do the city any good if a cable operator goes broke.”

These economic problems have plagued some of the industry’s biggest companies.

Warner-Amex Inc., for example, this year was forced to sell its Pittsburgh franchise and sparked controversy over moves to cut back services in Dallas and Milwaukee.

Three years ago, Warner made headlines--and won franchises--by offering the QUBE system, a home service allowing viewers to “talk back” to their TV sets via two-way technology.

Now, however, Warner says it badly miscalculated the costs of building urban cable systems and “overpromised” services, according to Drew Lewis, chairman of the board.

Lewis, who was Secretary of Transportation under President Reagan, visited Warner’s franchise cities earlier this year to explain that the firm would lose millions of dollars in each system unless it could scale back commitments, including the QUBE service.

Elsewhere, Washington, Portland, New Orleans, Miami, Minneapolis and Sacramento have had to settle for less elaborate cable systems than were originally awarded. City officials say similar cutbacks are likely in Boston and Chicago.

“There is a belief that the large urban markets weren’t all they were cranked up to be, especially with the costs of systems that companies were proposing,” said Morris Tarshis, the New York City cable franchising director.

However, Tarshis said some companies have “painted themselves into a corner” by “crying out so loudly about the costs of building cable in the cities that now they have trouble convincing lenders to give them support.”

In New York, for example, four companies that won franchises in Queens, Brooklyn, the Bronx and Staten Island have had difficulty securing the estimated $1 billion needed to construct all the systems. The franchises were awarded two years ago, but construction has yet to begin.

Despite these concerns, however, cable analysts believe the industry will experience dynamic growth in the next decade.

At the Western Cable Television Show in Anaheim this month, for example, financial analysts repeatedly predicted a glowing future for cable, with millions of new customers by 1990 and growing profits from advertising sales.

By the end of the decade, Kagan estimates that cable television will reach 59% of an estimated 96 million television households. He projects that industry revenues will soar from $9.7 billion to $21.2 billion.

Given these forecasts, why are cable companies cutting back services?

Industry analysts believe the rosy financial predictions for cable television depend in large part on the scaling back of urban franchises.

“Many companies will not become profitable if they are forced to build these original proposals,” Kagan said, adding: “All the healthy forecasts for cable assume that such modifications will be made.”

But Gan questioned those assumptions, saying: “Everyone in the cable industry knows that, especially in urban markets, you expect to take losses in the first 6-7 years, but then turn around and make a pretty good profit in the next 10 years.

“Assuming that’s the case, how many of these losses that cable companies complain about now are par for the course . . . how many of the cutbacks are just an effort on their part to get out of the red earlier and make a profit sooner?”

Gan said many companies have experienced financial losses, but noted that others built urban systems and did not attempt to scale back. Colony Communications, for example, built its San Pedro franchise on time and according to plan, he noted.

Jack Clifford, president of the Providence Journal Newspaper Co. subsidiary, explained: “We didn’t just bid on every franchise that came along. We didn’t get carried away.

“As a company, our economic growth has never been predicated on telling cities that we have to go back to the bargaining table and renegotiate any contracts.”

Cities have taken different approaches to proposed cable cutbacks.

Some, like Santa Ana, have engaged in politicized negotiations with the cable company. Council members broke off talks before the November city election, fearing voters would oppose candidates who agreed to scale back cable services.

However, local officials resumed talks in late December and the Santa Ana City Council is expected to vote soon on a package that would allow Group W to eliminate $13 million in commitments. Meanwhile, Group W, a Westinghouse subsidiary, has been fined $10 million for failing to build the system as promised, the largest penalty ever imposed by a city on a cable firm.

Other cities, like Los Angeles, have agreed to cutbacks with little controversy. Flores said there were no protracted talks because the council just wanted “to get the East Valley system built . . . to get this problem behind us, to let the construction finally begin.”

A few cities have simply rejected proposed cutbacks. Lakewood, for example, is preparing for what could be a long, costly legal battle to make Tribune Cable, a subsidiary of the Chicago-based Tribune Co., honor its $2-million commitment for community programming.

Under the new federal legislation, however, it is not clear how much power local governments will have to regulate cable.

The law’s first major test is expected in Santa Cruz, where Group W has sued to block the city from seeking new applicants for its cable franchise, which expires in 1986.

Santa Cruz contends that Group W has not met the city’s demands for improved customer service, including a request that the company operate the cable system as a business partner with the community.

Group W, in a wide-ranging lawsuit, charges that Santa Cruz has violated a provision in the new federal law requiring local governments to prove that companies are not providing “reasonable” service before terminating a franchise.

If the company prevails, the new law might severely limit local government’s power to penalize cable firms and replace them with different companies, according to City Manager Richard Wilson.

Currently, local officials’ most potent negotiating tool--”the ultimate hammer” as Pilnick termed it--is setting subscriber rates. But that power will be lost in two years under the new law.

Local governments reluctantly agreed to give up that power because recent FCC decisions “made it clear” that cities would soon lose such powers entirely, said Carol Bellamy, president of the New York City Council, who represented cities in the federal negotiations.

Cable industry leaders have said that companies will be bound by market conditions in setting rates and will not overcharge customers.

“We’re going to see cable firms setting rates in accordance with what people are willing to pay, just like in any other business . . . this power will not be abused,” Mooney said.

‘Mesmerized’ by Promises

Others are not so sure.

“I feel that when the public knows what’s happened, and who is to blame for taking away local rate regulation of cable television, we’ll tell them, ‘Write your congressman, tell them about it,’ ” Tarshis said.

Meanwhile, local officials are more skeptical about cable television.

Flores said the Los Angeles City Council--like other local governments across the nation--was caught up in the heat of cable franchising and was “mesmerized” by extravagant promises.

Although council members were warned to be wary of such proposals, Flores said: “I don’t think anybody really thought much about that.

“If we had been given a little crystal ball or used some foresight, maybe we would have realized we were getting promises that wouldn’t be kept. But the cable companies weren’t worrying about that. They just wanted to win at any cost.”

The lesson has not been lost on other communities.

In Philadelphia, municipal officials earlier this year urged competing companies to “come clean” and tell the city what they really intended to offer--not what they thought council members wanted to hear, said Stanford Hines, a deputy city attorney.

And in Cleveland, the only large city that has not selected a cable operator, local officials said they have asked companies to build a no-frills, “down-to-earth” cable system.

“We had no interest in going through all that pie-in-the-sky nonsense that other cities have gone through,” explained City Administrator Edward Richards.

“We could have been ridiculous and asked for all that, or we could have been realistic. The choice was pretty clear.”