AT&T stays cautious

It's raising cable rates 4.8%, but, given the trouble the company is in, at least one analyst thinks that's too little

Despite its financial problems, AT&T is taking the moderate road in hiking rates this year, boosting prices an average of only 4.8% next month.

While that's higher than the 3.4% rate of general inflation, it's lower than other operators' hikes and the 10%-plus jumps that were common before Congress slapped operators with rate regulation in 1992.

Cable rates are no longer regulated, the provision of the 1992 Cable Act limiting rate hikes having expired two years ago. But operators are so afraid of reprisals from regulators and the loss of customers to DBS that they have so far tried to control themselves, even though it's the easiest way to boost cash flow.

AT&T could use the help. The cost of launching new-media products has hammered the cable unit's profits, with cash flow dropping 12% during the third quarter.

Nevertheless, AT&T said that combined broadcast basic and enhanced basic rates should rise an average of 4.3%. Prices will go up more for systems adding extra programming, about 11% of customers.

Subscribers on systems that are adding three or more channels to their packages will get an average 6.6% increase. An AT&T executive noted that systems that aren't adding new channels will not raise their basic rates more that 5%.

Rates for pay services such as Home Box Office and Showtime are going up $1 in many markets, from $11 or so for a single service to about $12.

In AT&T's Quincy, Mass., system, for example, enhanced basic will rise 5%, from $33.79 to $35.48. In Denver, the package will increase 4.9%, from $27.68 to $29.06. San Francisco customers will see prices go up 5%, from $30 to $31.50. San Jose, Calif., rates will rise 4.4%, from $40.05 to $41.84.

AT&T's move is more cautious than that of other operators. Cablevision Systems Corp. is increasing prices 7%, while Time Warner and Cox are holding their increases to an average of 5%.

Media analyst Richard Bilotti said that the AT&T hikes are probably too low. Basic price hikes are a trade-off between maximizing cash flow and sending customers to DirecTV or EchoStar.

Still, Bilotti believes that operators could pass through basic rate increases of at least 7% without losing too many customers.

That's because basic rate hikes have a relatively moderate effect on operators' best customers, those who are buying pay or digital services. In systems with a $35 enhanced basic rate, for example, a 5% basic rate hike would come to just 3.5% to 4% for a higher-end customer, whose monthly bill is $45 to $50 to start with.

Keeping those customers happy is most important, and raising basic rates takes pressure off rates for new services. "The simple conclusion is that a basic rate increase disproportionately affects the least valuable subscriber and is a modest price change for the best cable customers," Bilotti said.