Cable Systems Try Something New on Pricing : Broadcasting: To preempt regulation, many operators offer a low-price ‘economy’ package of channels. Oddly, in the long run, the end result may be higher prices for many subscribers.

This summer cable television subscribers around the country began receiving letters from their cable companies explaining that they could save 10% on their monthly bills by giving up nearly half the channels they currently receive.

Not surprisingly, there have been virtually no takers. But if subscribers took time to read the fine print on the flyer accompanying their bills, they would find that the new option in service is the result of pressures to re-regulate the industry and control spiraling program costs.

Many local cable systems are now offering subscribers the choice of getting local broadcast stations, public-access channels and perhaps a couple of cable networks or superstations at a rate fully 90% of what previously had been charged for nearly twice as many channels.

In a process known in the trade as re-tiering, local cable systems, including many in Southern California, are rejiggering the packages of channels they offer viewers and, consequently, their prices.

Although in most cases subscribers can barely detect the changes on their monthly bill, cable companies are nonetheless setting the stage for what could be radically higher rates in the near future.

Re-tiering is “a tricky pricing structure that runs counter to cable’s cost structure,” said Gene Kimmelman, legislative director of Consumer Federation of America. “They charge a lot for what they basically get for free and very little for the most expensive programming.”

Cable companies pay virtually nothing to re-transmit local, over-the-air broadcast signals but pay a high fee to carry program services such as ESPN or TNT. Consumer advocate Kimmelman argues that cable companies are using the prospect of re-regulation to “lock in” subscriber rates at a high level without giving cable TV viewers a correspondingly broader choice of channels.

Yet re-tiering, according to cable system operators and programmers, is supposed to solve two vexing problems for the cable television industry.

First, it represents a preemptive strike against possible re-regulation because local cable systems are offering low-cost levels of service that the government might legislate anyway. Congress is now considering regulation that would mandate a so-called “broadcast,” “economy” or “lifeline” tier with a minimum number of channels at a monthly price regulated by the Federal Communications Commission.

More important, re-tiering isolates the more expensive cable channels into a separate level so that cable companies can pass along anticipated price increases to the consumer. It is this second tier--which contains many of the popular new channels associated with cable TV--that would not be subject to rate regulation under the proposed legislation.

In the future, cable subscribers could be paying a lot more for channels they have been accustomed to getting as part of a “basic” package.

“Right now, the price differential is only 40 cents a month,” said Robert Thomson, vice president of government relations at Denver-based Tele-Communications Inc., the country’s largest owner of local cable systems. TCI led the way by shifting several cable TV networks into a second, or “expanded basic,” tier earlier this year.

“We knew 40 cents is not enough to make people jump ship. But the point is, it’s for the future. If that became $1 or $1.50 or more, then there might be people who take the (lower) tier,” he said. Since Congress passed cable deregulation in 1984, local cable systems have moved away from a la carte offerings of channels in favor of broad categories of basic and pay channels.

In most systems, the basic package has come to include all of the local broadcast stations, public-access channels and usually a dozen or more cable networks such as ESPN, C-SPAN, USA Network, CNN, TNT and MTV. Also frequently included are “superstations” such as WTBS and WGN, which are local TV stations re-transmitted over a satellite.

Cable companies found the broad categories easier to market and cheaper to administer. Subscribers either chose a single basic package or could buy different combinations of pay channels such as HBO, Showtime, the Disney Channel or regional sports channels.

But the majority of the country’s 54 million cable households subscribe to the basic package, as opposed to the pay channels. Growth in pay television has slowed considerably in recent years because the movies that used to attract subscribers are now available earlier on home video.

Instead, the big growth in cable television has been among the so-called basic networks, which are spending greater amounts on programming to provide “network-quality” shows.

Since late 1986--when the 1984 deregulation went into effect--the average monthly rate for the lowest-priced basic cable service increased nationally by 43% to $15.95 per subscriber. In Los Angeles, the increase has been even higher--up 67% over the same period to $17.09.

One major reason for the price hike is the increased programming costs that the basic networks pass along to local cable systems, which in turn pass it on to consumers.

USA Network, ESPN and TNT together have doled out more than $1 billion since 1988 in a bidding frenzy for expensive sports and entertainment programming rights.

Earlier this year, Atlanta-based Turner Broadcasting System Inc.--which owns TNT, cable networks CNN and Headline News and superstation WTBS--and ESPN each paid $450 million for new four-year National Football League contracts.

Similarly, USA Network has spent $250 million over the past couple of years to buy network reruns of “Miami Vice,” “Murder, She Wrote” and “The Equalizer,” in addition to box-office hits such as “Die Hard” and “Three Men and a Baby.” USA Network is also commissioning 24 made-for-cable movies annually, with budgets between $2 million and $3 million each.

Now cable networks are passing along their higher programming costs to the local cable system in the form of higher fees. Typically, these fees are assessed on a per-subscriber basis. TNT, for example, charges local cable systems 20 cents per subscriber, but that will rise to 25 cents per subscriber next year.

Moreover, Turner is negotiating to levy a surcharge of 12 cents per subscriber to help pay the costs of its new NFL contract. ESPN wants to charge local cable systems 14 cents--on top of its 32-cents-per-month subscriber fee--to defray NFL costs

“Our programming costs have risen 30% to 50% on an annualized basis for the last three years,” said Virginia Westphal, vice president of marketing, sales and programming for San Francisco-based Viacom Cable. Viacom, along with such major cable system operators as Times Mirror Co.--which also owns The Times and other media properties--Tele-Communications Inc., United Artists Communications Inc., Jones Intercable Inc. and Century Communications Corp., has instituted a “negative option” tier of seven to nine cable networks.

A negative option means that certain high-priced basic cable networks such as ESPN, USA Network, TNT and CNN are broken out into a separate level of service that subscribers continue to receive at no extra cost unless they notify the cable company that they no longer want those channels.

The idea is similar to book clubs that send a new title every month unless a member sends back the reply card saying that they do not want the book. If Viacom subscribers downgrade to the basic service, they are charged 75 cents to $1.20 a month less, depending on the market and system.

“Most of the networks moving into ‘negative option tiers’ contain major sporting events,” said William Grumbles, executive vice president of Turner Cable Network Sales, who is responsible for wholesaling Turner’s four cable TV networks to local cable systems.

“Operator concerns are primarily related to sports rights fees. They just want the flexibility to charge more if those fees escalate,” he said, adding that he did not think that would happen because “most of the escalation has taken place over the last 12 months.”

Cable networks, however, are worried about re-tiering because it could hurt prospects for continued growth. Unlike pay TV channels, which get income only from subscriber fees, basic networks also depend on advertising for revenue.

As the price gap between the “broadcast” tier and “expanded basic” tier widens, as is expected, subscribers may drop the latter in favor of the former. A loss in subscribers means the basic networks would have to lower their ad rates.

“If we’re in less homes, the same rating point will produce a smaller audience and therefore less revenue,” said David Kenin, senior vice president of programming for USA Network. Kenin said basic cable networks needed more advertising revenue to back heavier investment in programming.

Ironically, however, it has been just that expensive campaign to upgrade the image and quality of their programming that now may lead to re-regulation of the industry and slower growth in the future for basic cable networks.

CABLE OPTIONS In Los Angeles, seven of the city’s 14 cable TV franchises have launched some form of re-tiering in recent weeks. The options vary among systems and cable TV companies, but typically include a “basic” consisting of all the local broadcast TV stations, public-access channels and superstations. Customers who want to receive cable networks such as TNT, USA or ESPN usually must pay $2 to $3 a month extra. Here are two examples: KING VIDEOCABLE CO LIMITED BASIC (26 CHANNELS): $14.40 BASIC SERVICE (33 CHANNELS): $16.25 COPLEY / COLONY HARBOR CABLEVISION INC BASIC (26 CHANNELS): $16.50 BASIC PLUS (51 CHANNELS): $19.50