Frontier FiOS Rate Hikes Highlights Rising Cost of Content Dilemma

Oregon’s Metropolitan Area Communications Commission is not taking kindly to Frontier’s plan to substantially raise prices for FiOS video services in serving areas the carrier acquired from Verizon, according to a report published by The Portlander.

The Portlander reports that the MACC’s “sole purpose is to look out for the interests of consumers” – and in a January 20th  letter to Frontier posted on The Portlander web site, the MACC asks Frontier several accusatory questions. For example, noting that Frontier has offered FiOS video customers a year of free DirecTV service if they switch services, the MACC asked whether it was Frontier’s “intent all along to capture Verizon’s customer base and migrate them to DirecTV.”

The letter also quotes statements that Frontier made as part of the approval process for the transfer of Verizon’s cable franchise—statements that appear to contradict actions and statements later made by Frontier. For example, the letter quotes a 2009 statement from Frontier saying, “The retail price of programming is constrained by the competitive market and does not have a lock-step relationship with programming costs. While initially Frontier’s programming costs might be higher than Verizon’s, Frontier believes it can effectively manage all areas of its cost structure and can compete effectively.” Yet in early January when it announced its plan to raise prices, Frontier pointed to programming costs as a key factor in making that decision.

It’s true that Tier 2 and 3 telcos have had difficulty obtaining competitive pricing from cable content providers. But the MACC notes that Bend Broadband, an Oregon cable operator providing a similar level of programming and services as Frontier, is able to keep prices significantly below Frontier’s new rates. One would assume that Bend Broadband gets discounted programming from the NCTC (although that is not confirmed), a content buying consortium for small cable MSOs, which may give it some latitude in holding down costs relative to Frontier’s new rates.

But even if Bend Broadband is a NCTC member, I doubt the preferred NCTC programming rates approach a 50% discount over what Frontier pays. Regardless, the issue does illuminate the impact of the variability of programming costs on retail cable television service rates and the competitive advantage they may or may not bring

The MACC letter also argues that there is “no case” to be made that programming costs for the 13 local commercial channels on Frontier’s local tier of services have increased 50%. They may have a point, but I’m sure current and future rising retransmission consent fees now demanded by local broadcasters played a role in those increases.

There certainly is a valid reason to debate Frontier’s decision to hike retail rates for FiOS video customers in the manner in which they have. The rate spikes they are imposing in such an immediate fashion post merger could be viewed as unreasonable, especially from the end consumer’s point of view. Frontier certainly didn’t do themselves  any favor (or anyone who might want to a similar transaction in the future) by arguing that the fear of higher rates was unjustified and therefore not a reason to oppose the Verizon transaction pre-merger, then doing exactly that after the merger closed. Within that context, Frontier has some explaining to do.

From a big picture perspective, the Frontier FiOS rate hike example puts the the dilemma of the rising cost of content and its implications for consumers and the overall competitive marketplace under a microscope. While its true Frontier could probably have handled their particular situation better, I suspect we will see more of the same going forward.

(Editors Note: Bernie Arnason contributed to this post)