Tune In, Turn On, Sort Out

By John Greenwald

Cable television was a strapping adolescent when Congress agreed in 1984 to free the industry from regulation to give it room to grow. Since then the business has developed with a passion. Now a vigorous adult, cable reaches 54% of U.S. television homes and has annual advertising revenue of more than $1.8 billion, compared with just $60 million in 1980. But the industry's rapid expansion and newfound clout have prompted sources ranging from consumer groups to motion-picture studios to call loudly for renewed regulation.

In perhaps the strongest action yet, Senator Albert Gore last week introduced a bill that would empower local communities to set rates for basic cable services. To increase competition among cable-system operators, the Tennessee Democrat would allow telephone companies to enter the cable business. In addition, the bill asked the Federal Communications Commission to study the cross-ownership of cable networks and systems by the same companies. Said Gore, a frequent critic of the cable industry: "Deregulation has allowed too many cable companies to gouge consumers and left too many consumers as unprotected victims."

The measure comes amid quickening competition in the cable industry as firms battle harder than ever to expand their market share. Last week Home Box Office, a Time Inc. company that operates the largest pay movie network, said it will launch a 24-hour comedy channel this fall as its first basic cable service. Two days later, MTV Networks, a sister of Showtime, the second largest pay movie channel, announced plans for similar comedy programming early next year.

But the rivalry hardly stops there. MTV and Showtime are both units of Viacom International, which two weeks ago brought a $2.4 billion antitrust suit against Time Inc.; American Television and Communications Corp., of which Time Inc. owns 82%; and HBO. The action charges the defendants with discriminating against Showtime on cable systems that ATC operates across the U.S. Time Inc. has vigorously denied the charges.

In part, such wrangling reflects industry uneasiness over the proposed merger of Time Inc. and Warner Communications Inc., which will create a strengthened No. 2 cable-systems operator, behind Denver-based Tele- Communications. "The burning issue right now is how much access the Time- Warner group will give to its competition," says an executive of a rival cable company. According to a study by Michael Salinger, a professor of public policy at the Columbia University business school, system operators may indeed show bias toward their own networks over channels owned by other companies. Says he: "I found that ATC systems tend to favor HBO and Cinemax," an affiliated pay service. "Similarly, Viacom ((which also owns cable systems)) tends to favor Showtime."

As cable networks proliferate, many operators are limited in how many channels they can accommodate with outmoded transmission equipment. "The real problem is channel capacity," says Michael Luftman, a spokesman for ATC. Reason: many cable systems were built at least ten years ago, when the technology permitted room for only 36 channels. That capacity will grow to some 70 or more channels in the 1990s as operators around the country install new equipment. The advanced hardware will create more room for rivals on the same system and a wealth of new programming opportunities for everything from local news shows to solemn religious services.

Under deregulation, the rates that cable subscribers pay for basic service and rates for premium programs have moved in opposite directions. Paul Kagan Associates, a California-based research group and trade-magazine publisher, found that the average monthly charge for basic service climbed from $11.90 in 1986 to $14.40 last year, an increase of 21%. At the same time, the typical fee for premium offerings such as HBO and Showtime fell from $10.31 a month to $9.91, down nearly 4%.

Critics of cable have attacked the present industry arrangements on several fronts in Washington. The measures include a bill introduced last month by Ohio Democrat Howard Metzenbaum, chairman of the Senate antitrust subcommittee, that would limit the number of subscribers that any system operator could control to 25% of the total U.S. cable audience. The FCC, meanwhile, is preparing a report on the impact of cable deregulation that is due out next year. In a separate action, the agency has begun reviewing a rule that bars broadcast networks from owning cable systems. The networks already have interests in cable channels that range from NBC's month-old Consumer News & Business Channel to the ESPN sports channel, a venture of ABC and RJR Nabisco.

Experts say it is unlikely that Congress will seriously consider changing its hands-off policy toward cable before the FCC completes its in-depth report. Nor do Washington watchers detect any ground swell of enthusiasm for efforts to roll back the 1984 legislation that deregulated the industry. Says a Senate staffer who keeps a close watch on cable developments: "There's a feeling of 'If it ain't broke, don't fix it.' "

The industry-wide ferment is certain to continue, however, as hundreds of small cable operators merge into regional units or sell out to the giants. Ultimately, the number of systems could dwindle to a handful. "The same thing happened in the movie industry 50 years ago," says Robert Thomson, Tele- Communications' vice president for government relations. "They once had many more studios." With that prospect in mind, the major cable companies are scrambling today to make sure they do not wind up on the cutting-room floor tomorrow.

CHART: NOT AVAILABLE

CREDIT: TIME Chart by Cynthia Davis

[TMFONT 1 d #666666 d {Source: Paul Kagan Associates}]CAPTION: COMPETING FOR CABLE

With reporting by Frederick Ungeheuer/New York, with other bureaus