TERENCE SMITH: Cable television, the medium that has already drastically altered American TV viewing habits over the past 20 years, is changing.
ANNOUNCER: The boundaries among media are blurring.
TERENCE SMITH: Cable no longer means just television, but high- speed Internet access...
ANNOUNCER: VH1.com gives subscribers immediate access to the artist and music they love.
TERENCE SMITH: ...Video on demand...
MAN: Like in the movie "Bedazzled," which we're going to fast forward a little bit...
TERENCE SMITH:...And interactive communication.
MAN: Now I am looking at the main camera angle, I am going to switch to the other camera angle and get a different perspective on the same game.
TERENCE SMITH: Cable television has extended its reach across the nation: Today more than two-thirds of American homes get their television reception via cable. But even as the industry is adding new features and advanced digital technology, the cable customer is faced with a maze of endless choices, endless price structures, and a nagging suspicion that he is not in the driver's seat on the information highway.
ROHIT SHUKLA: Did they go and ask consumers, "is this what you want?"
TERENCE SMITH: Rohit Shukla is on the board for information technology in the City of Los Angeles. He says he was surprised by the level of anger among constituents when it comes to cable.
ROHIT SHUKLA: The cable industry will tell you, "you have a choice." My perspective as a regulator is that you really don't have a choice, that these things are being pushed on you whether you like them or not.
TERENCE SMITH: The cable industry has spent almost $50 billion upgrading its infrastructure and billions on new programming. But for consumers caught in the midst of a technological revolution, change isn't always good.
DIANE WITZ: The reception is grainy at best, and the service is even worse. They have to call a customer service office in Denver to get somebody to help them with their local cable system here.
TERENCE SMITH: Diane Witz is president of a Homeowners Association in West Los Angeles. She says her neighbors, whose TVs have poor over-the-air reception, have little recourse when it comes to cable.
DIANE WITZ: There have been people that have complained that they've had to wait two weeks to get a service person out, and then they're told there's an eight-hour window that that person is going to show up, during the week, during the day, when they are supposed to be at their job. And that's simply unacceptable.
TERENCE SMITH: The digital cable rolled out in parts of Los Angeles provides clearer picture and sound and room for many more channels. But the local cable provider changed customer options with the conversion, forcing some to sign up for the more expensive digital service if they want certain premium channels, like Home Box Office. The city, Witz says, can do little once it has awarded a franchise.
DIANE WITZ: You can't let the companies run roughshod over the public. Essentially you have a word-of- honor situation, and time and time again it's proven that that does not work.
TERENCE SMITH: Consumer groups say cable rates nationwide have risen 31 percent since passage of the 1996 Telecommunications Act, which deregulated cable. But Robert Sachs, whose organization represents cable operators, says the majority of the increases came before deregulation actually went into effect. Since then, he says, the increases have been only a few percentage points above inflation.
TERENCE SMITH: Regardless of whether the increase came under regulation or deregulation, 31 percent over five years sounds like a pretty steep increase and way ahead of inflation.
ROBERT SACHS: It sounds that way unless you take account of the fact that the product mix has changed as well. So this is not like gas or electricity where you're paying for the same unit of energy. With cable, operators have been adding new channels and services each year.
TERENCE SMITH: Gene Kimmelman, of Consumers Union, says the increases result not from the upgrading of services, but from the lack of real cable competition.
GENE KIMMELMAN: Before you ever get to what the consumer pays, cable companies receive a lot of money from advertisers, and then they receive money for the new digital services and high-speed services. When you add that new revenue in, it totally covers the cost of programming and network upgrades, so the rate increases for basic cable service or expanded basic cable service are almost all gravy to the cable company. Almost all goes to the bottom-line profit.
TERENCE SMITH: Less than 5 percent of the nation's households have a choice when it comes to cable service. Oxnard, California, is one of only about 100 small communities with two systems. The result here, they say, has been more options and lower cable prices.
DENNIS SCALA: I think that not only did it lower the rates, but it kept them down.
TERENCE SMITH: Dennis Scala is a management analyst for the city of Oxnard.
DENNIS SCALA: They rolled out more channels, they improved their already good service to their customers. And I believe that it's resulted in a much better level of service in the community.
TERENCE SMITH: But analysts say there is little financial incentive for a competing cable service to enter an already-served market. Cable operators maintain there's already plenty of competition from direct broadcast satellite, which is now in one in five homes with multi-channel service.
ODIE DONALD: We're outpacing the cable industry three to one in terms of growth, so satellite is a very viable competitor.
TERENCE SMITH: Odie Donald was until recently president of Direct TV, the nation's number one satellite television provider. He contends that frustration with local cable service is sending customers to satellite.
ODIE DONALD: That is one of those things that give us an edge, because customers seem to be fed up with the rising prices. You can just about count on it like clockwork-- you wait a year, you're going to get an increase.
TERENCE SMITH: Direct TV is very aggressively going after customers disenchanted with cable –
MAN IN COMMERCIAL: -- up to 13 NFL games every Sunday if you want them.
MAN IN COMMERCIAL: I love you.
TERENCE SMITH: Ironically, it is this very competition, as well as the threat from even newer technologies, that is driving cable operators to develop even more upgrades.
JERRY KENT: I see us remaining price-competitive going forward, plus, frankly, we are going to be able to provide enhanced services that satellite can't provide.
TERENCE SMITH: Jerry Kent is president and CEO of Charter Communications, the nation's fourth largest cable operator.
JERRY KENT: Satellite is slowly becoming obsolete, and the reason is they are a broadcast medium, they don't have a two-way interactive path. Whereas cable, we have a broadband pipe into the home that has full two-way interactivity.
TERENCE SMITH: Yet even some in the cable industry think that most Americans may not yet be ready for these enhanced services.
NICKOLAS DAVATZES: Like most new inventions, technology is ahead of the marketplace. And what we are trying to do is decide what are the appropriate applications that the consumer will accept in which you can actually make at least one dollar's worth of profit.
TERENCE SMITH: Nick Davatzes is president and CEO of the A&E Television networks.
NICKOLAS DAVATZES: I personally believe that the change will be quite slow -- because when people go home, there's still going to be a significant number of them. Today I would predict that probably 75 percent or 80 percent are going to watch television passively -- because people are working so hard now, when they go home, I am not so sure that they're ready to be engaged in that way.
TERENCE SMITH: Consumer groups question the need for still more options and upgrades, when the typical consumer only watches 10 or 12 channels.
GENE KIMMELMAN: Just imagine a world where a consumer could pick just the channels he or she wanted to watch and just pay for those channels. I am certain it would cost a lot less that when cable companies are charging consumers today.
TERENCE SMITH: Rohit Shukla thinks free market competition has not been responsive enough to consumer needs. He says the Federal Communications Commission must give some regulatory power back to the cities that award franchises.
ROHIT SHUKLA: I think they have got to reopen the issue of what they regulate and what role local franchise authority and local cities and municipalities have.
TERENCE SMITH: The new chairman of the FCC, Michael Powell, is seen as a champion of the cable industry and the free market approach. But at a recent convention with cable operators, he warned that consumer ire could heighten calls for re-regulation.
MICHAEL POWELL: Consumer value must always remain high with the product and services you deliver. Prices, choices, and quality, if thwarted, will amplify calls for government intervention, as it has so often.
TERENCE SMITH: Given cable's wide popularity and the numbers flocking to new services, the cable industry feels it has met consumer needs.
TERENCE SMITH: Does that create an obligation on the industry to protect the low-income consumer?
ROBERT SACHS: I think it does, and most cable systems offer a basic broadcast tier of service for $10 or less a month, which includes all those local broadcast signals. And that's-- what?-- 25 or 30 cents a day.
TERENCE SMITH: But as other technologies, such as local phone companies, enter the competitive arena, Rohit Shukla sees a future even more confusing.
ROHIT SHUKLA: You watch, a thing that you have taken for granted for 50 years, 30 years, 20 years, 15 years, is suddenly about to become a wild west.
TERENCE SMITH: So you're predicting a future in which the consumer may have more choices, but may not be very happy about it?
ROHIT SHUKLA: Yes. Absolutely, absolutely.
TERENCE SMITH: Stay tuned.