Deborah D. McAdams /
04.24.2006 12:00 AM
Fending Off A La Carte
Cable pricing battle wears on as telecom bills evolve

WASHINGTON: The rhetoric driving a la carte cable TV pricing on Capitol Hill abated somewhat with the emergence of family tiers and alternative distribution, but the industry stayed on defense as Easter break approached. Various corners of cabledom pelted the FCC's February Further Report, which asserts a la carte would cost less, with studies pointing to the contrary.

Viacom, the cable network behemoth recently divorced from CBS, rolled out a former White House economist to assail the FCC's position. Dr. Bruce Owen, a Stanford economics professor who was once a chief economist at the Department of Justice and the White House Telecom office, said "it would be a mistake for regulators" to use the FCC's Further Report to guide policy. Owen didn't set down any radically new polemics against a la carte--just the usual argument that program diversity would diminish and the correlative costs of unbundling channels would drive prices sky high.

While the postulations fly between regulators and the cable industry, a la carte programming is appearing organically. The Big Three broadcast networks are offering individual programs for downloading, and telcos are looking at ways to do a la carte video delivery. Nonetheless, Derek Baine doesn't expect channel packages to be displaced by a la carte anytime soon.

"It depends on how technologically savvy consumers are," Baine, a senior analyst with Kagan Research LLC, said. "There are ways to get TV programming to your TiVo, to your wireless phone, to your computer... for free, yet there are people out there paying for television episodes. I think that's because a lot of consumers are not savvy with technology. It's a pain to set up a network."

IT'S BEEN DONE

A la carte channel pricing is nothing new. Multichannel video providers in Canada and Europe offer individual channels. A la carte choices are also available in the United States on C-band satellite systems, but packages are still more popular with the Big Dish crowd because they're cheaper, according to Baine, who is writing a dissertation on how cable networks are marketed.

One C-band programming provider, he writes, "offers four leading networks--ESPN, CNN, TNT and Lifetime--for $17.46 a month or $4.37 per channel... Adding a fifth network like Discovery Channel entitles the subscriber to a package discount, and the five channels are actually cheaper than four--$14.95, or $2.99 per channel. By subscribing to the company's 'SuperPak Basic' lineup of 34 channels, the price is $25.99 a month, or only $0.76 per channel."

Baine also said market research demonstrates that people "freeze like a deer in headlights" when presented with the opportunity to pick and choose from a 300-channel universe. Nonetheless, the majority of individual consumers who commented on the FCC's open a la carte docket want to buy channels individually.

"I am sick to death of paying for channels I don't watch. Give us choices and make the cable companies accountable for their increasingly dramatic rate increases," writes Mary Dulgeroff of Pittsburgh, Pa.

"I find it incredibly unfair that I currently must subsidize channels that are useless to me," writes John Ozechowski of Bedford, In.

From Jerry Jackson of Dunn, N.C.: "Why should we be required to buy many of the trash channels that we simply do not want? If we were allowed to buy only the channels we would like to see, then it stands to reason that the prices would come down. Here's a novel idea, help the consumer for a change and save us some money."

UP, UP AND AWAY

The concept of a la carte pricing has been fueled in recent years by increasing cable rates. According to the Consumer Union, a Washington lobby that advocates a la carte, cable rates have increased 64 percent since the industry was deregulated 10 years ago, exceeding the inflation rate by two-and-a-half times.

Baine counters that per-channel rates are flat or down, because packages, or tiers, that once included 30 to 40 channels a few years ago now comprise between 200 and 300.

The rationale for stuffing channels into tiers is twofold--diversity and economics. The pre-Further Report regulatory analysis held that tiering ensured a certain level of program diversity because production costs are spread over a broad segment of society. The economics driving tiers has to do with the way contracts between cable operators and programmers are structured.

"A lot are done that say a network has to be carried on the package that has the most subscribers, " Baine said, which is why many of the same networks appear on similar tiers across the country. "In this industry, you start with basic, go to expanded basic and so forth. Whoever's on that basic package stays there by default. This is a problem most of the operators have faced."

It's a problem for operators because these bulk carriage deals limit how they structure offers. But programmers depend on bulk deals because ad prices are based on how many eyeballs a network reaches. The majority of cable channels also gets a monthly per-subscriber fee from the cable operator. This "sub fee" revenue model started when the cable industry was so new that operators had to beg for programming. Now, programmers beg to get carried on cable systems, yet much to the chagrin of cable operators, sub fees have persisted to the point of conflict.

Cox Cable CEO Jim Robbins publicly cogitated offering pricey sports nets a la carte in 2003, after a significant sub fee hike from ESPN. Robbins said Cox was paying ESPN $2.61 a month for each of its 6.3 million customers that got the network--$16.4 million--nearly 18 percent of the fees it paid all networks. Yet Robbins said ESPN accounted for only 4 percent of viewership on Cox systems across 30 states.

EchoStar is also dropping the "A-word" on a regular basis. During a recent sub fee dispute, the DBS provider expelled Lifetime from its lineup and threatened the network with a la carte before a deal was reached. In another maneuver, EchoStar has asked the FCC to impose a la carte pricing on any network partially owned by Time Warner or Comcast as a condition of those two companies splitting Adelphia.

It's one thing when cable and DBS operators yell "a l a carte" during carriage negotiations, but it's another when one of their rank simply gives it a general endorsement. Charles Dolan, chairman of Cablevision and one of the founders of the cable industry itself, made waves last year when he said "we do not believe in the long-term that selling programming a la carte will be detrimental to either programmers or cable operators."

Meanwhile, the regulatory environment remains uncertain. Sen. John McCain (R-Ariz.) is likely to tack an a la carte amendment onto telecom legislation in the Senate, and while a la carte hasn't appeared on the House telecom bill, there's no guarantee it won't. The predicament leaves the cable industry vulnerable on Wall Street.

"We sense an increasingly less cable-friendly environment throughout Congress/regulatory bodies such as the FCC," writes Rich Greenfield, an analyst with Pali Research in New York. "We hope to gain a better sense of the underlying risks and reality of legislation."


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