The cable conundrum

The rising cost of cable TV is drawing the ire of customers and attention from the Competition and Consumer Protection Office, but a copyright law passed last year could be to blame for the industry's woes.

By Aleksander Nowacki

Last week, the Competition and Consumer Protection Office (UOKiK) launched a probe into potentially monopolistic practices at Aster City, Warsaw's largest cable TV provider. Market insiders are concerned that the case could bite even further into cable companies' shrinking profit margins, although analysts question the authorities' ability to curb pricing practices that anger many consumers.

Aster City management was unavailable for comment last week on the UOKiK's allegations that its 67-percent price increase imposed on subscribers to its "Antena" package is in breach of anti-monopoly laws. According to the UOKiK's president, the company has not made a convincing case to justify the increase and, in particular, failed to account for the way costs are assigned to specific packages.

The probe comes in the wake of last month's Supreme Court ruling that satellite and digital TV cannot be considered competition to cable vendors, as their prices rule out substitution.

"We are monitoring (the Aster City case) closely and are very worried about the development," said Krystyna Kanownik, spokeswoman for Gdynia-based cable operator Multimedia. She went on to say that, together with the Supreme Court's ruling, it represents a threat to the industry.

Andrzej Ostrowski, president of the Polish National Chamber of Cable Communications (OIGKK), said that the decision reflected a failure to appreciate the rising costs that cable vendors have to face.

However, he blamed the lion's share of the cost increase on last year's new copyright law, which obligated cable vendors to sign 14,000 deals with copyright management organizations in less than three months.

According to UPC Telewizja Kablowa's spokewoman, Dorota Zawadzka, the share of programming in cable vendors' costs is higher in this country than in any of the European Union member states. The costs soared following a legal change that forced free-to-air pan-European channels off the air, to be replaced by domestic channels for which cable vendors are charged by the broadcaster.

Aster City justified the replacement of the more popular channels with lower-quality programming to its customers by claiming that it allows them to keep prices down. However, after prices rose at the beginning of the year and again in June, it now faces growing discontent among customers.

"The law stimulated the market in a negative way," said Tomasz Węgrzyński, deputy president of the OIGKK. "It became neurotic." He named a growing number of lawsuits against cable operators as the chief consequence of the law.

Dorota Jasłowska, spokeswoman for the National Broadcasting Council (KRRiTV), said that the act "came under criticism from all those concerned." The Sejm is currently working on an amendment that would give the cable vendors a grace period from the new law until May 1 next year.

The cable business has replied to increasing operational costs with a wave of consolidation. Last week saw the acquisition of TPSA's cable companies in nine cities across the country by the second largest player on the market, Multimedia Polska.

According to Marcin Duszyński, a market analyst at Capital One advisory firm, the largest market players are interested in UPC Polska, the country's largest cable vendor, with 906,000 subscribers. The company is in the process of restructuring its debt, most of which is held by other UPC subsidiaries. Delaware-based UPC Polska has filed for bankruptcy protection under Chapter 11 in a U.S. court. The restructuring applies to 93 percent of UPC Polska's debt, or $876 million (zł. 3.44 billion)

Duszyński expects that the move may herald the sales of some of UPC's assets, which may fuel another wave of consolidation. According to Ostrowski, there are not enough mergers and acquisitions on the market. Although nearly 80 percent of the country's 3.5 million cable TV subscribers are serviced by the top 15 operators, there are as many as 507 cable vendors on the market. He expects that the consolidation process may yet be hindered by the anti-monopoly authorities.

Duszyński thinks, however, that the UOKiK is unlikely to be able to significantly change the cable vendors' practices due to its inadequate definition of the market. The UOKiK views the whole country as a single market, while companies define their markets locally. As a consequence, none of the operators are anywhere near the 40-percent market share that would warrant special attention from the authorities, even though most operators face no competition in their respective localities.

The Supreme Court's ruling, which gives cable vendors the status of "dominant operators," may yet change that.