Cable TV's cloudy skies could brighten. What the consumer won't buy forces a hard look at reality
Denver — Cable television was once the talk of many towns. Forty, 70, 100 channels might be coming. Think of the possibilities! Consumers thought - and experimented - and many found that there was little need for that many different channels, especially considering the repetitious and banal programming of many of the channels coming into the home via cable.
As a result, the cable television business has been having a rough time in recent years. This has been the case especially for the pay channel group. Firms such as Home Box Office, Showtime, and Disney have experienced sluggish sales.
But now a recovery appears to be taking place, at least for that segment of the cable business that builds and operates the systems in various ''wired'' cities. Lately, a number of Wall Street analysts have turned bullish on these firms for two main reasons:
* New federal legislation is turning the cable business into what one observer terms ''the largest unregulated monopoly in the country.''
* And costly, time-consuming wiring jobs are now behind the cable companies in many cities.
''This is going to be a very good year for our company and our industry,'' asserts Fred Vierra, president of Denver's United Cable Television.
The prime reason for optimism among cable installers/operators is that Congress recently lifted restrictions on the rate cable operators will be able to charge for basic services - network and local channels, sports channels such as ESPN, Cable News Network's 24-hour news, MTV, Nickelodeon, etc. - two years from now. In 1985 and '86 rates can increase 5 percent a year and then by as much as the market will bear.
Basic rates at present average $9 to $10 a month, ''but we have market research which shows people would be willing to pay as much as $15 for our basic services,'' says Mr. Vierra.
John Reidy, an industry analyst with Drexel, Burnham, Lambert in New York, suggests that total cost to the consumer will stay about even, since cable operators may start charging less for pay services while they raise basic rates. Since the latter bring more to the operators' bottom lines, they have plenty of incentive to alter the ratio while maintaining the same cost to viewers.
The deregulating legislation arrived precisely when the cable industry faced an uncertain future. Unrestrained growth in the 1970s met with lighter interest in cable TV in the '80s. The recent shakeout at Time Inc.'s HBO, the leading pay-service channel, appeared to show that people would not take whatever cable could dish out.
In many cities the multichannel cable offerings just did not appeal to customers as much as cable operators envisoned. Franchises such as Warner Amex Cable Company's in Dallas, for instance, put on a technological parade with 108 channels but found consumers and their money marching to a different beat.
Warner Amex also sold its expensive Pittsburgh franchise, one of the most innovative in the country. The buyer, Tele-Communications Inc., came in only on the condition that the city allow a pared-down cable operation.
In Boston, Cablevision Systems Inc. apparently overestimated demand and underestimated costs. Banks cut off Cablevision's line of credit Oct. 1, and the firm is seeking tax abatements from the city. That has raised howls at City Hall , which granted the franchise to Cablevision because it underbid competitors, promising a $2 per customer charge for a basic 52-channel setup.
In Denver, a lawsuit challenging the right of the cable company to operate a monopolistic franchise actually became a saving grace. It allowed the company to renegotiate its franchise, scaling it back from 80 channels to a financially supportable 61.
In short, the cable industry misjudged consumers' appetite for television, confusing rapid growth with inexhaustible demand. One of the real surprises has been a dampening of consumer enthusiasm for movie channels such as HBO and Showtime. Part of the reason falls to video cassette recorders and movie rental shops, which have taken a serious bite from the home cable movie market.
The industry also oversaturated the market with pay channels. ''We used to think it was a three-, four-, even five-pay world (meaning most customers would buy three or more pay channels in addition to basic service.) But we've had to change our estimates to the possibility of a one-pay world,'' says one cable company executive.
Many companies, in fact, offer their sales people no extra commission for selling more than two pay services. ''We're finding that when people buy three or more pay services because of sales pitch, they end up blaming the cable company for selling them too much and cancel the whole service,'' says one cable company chief.
United Cable's Mr. Vierra and others see consumer disinterest in pay TV not as the death knell for those services so much as a sign that customers won't pay twice for the same product.
Consumers, says Mr. Vierra, don't take long ''to figure out that if you have HBO, Showtime, and the Movie Channel, you're paying both for more movies than you can watch and often the same movies three times, since the movie channels frequently buy the same product.
''We are finding that they will buy more than one pay service if they have a differentiated product, such as one movie channel, the Disney Channel, and maybe (another) channel. The pay services that differentiate will do very well.''
For the industry, Standard & Poor's expects 1984 revenues of close to $7 billion, compared with $6 billion in 1983, and analysts look for cash flow increases approaching 25 percent for several companies. A number of them have finished building expensive urban franchises and look forward to cash flow margins in the 40 percent neighborhood.
Cash flow is vital to cable companies, says Paul Bortz, a cable expert with Browne, Bortz & Coddington, a Denver consulting firm, since depreciation of physical plant is very high.