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A simple question causes major turmoil in pay TV industry

The question is: "Are you tired of paying for cable channels that you never watch?" Virtually everyone’s answer is “yes.” (Studies say most people only watch an average of seven channels.)

Yet, due to an entrenched pay television industry, the bundling of channels continues and millions of subscribers have no choice but to pay high prices if they want television services at all. Over-the-air broadcast is not a viable option for most.

The FCC says from 1995 through 2011, basic cable television rates have gone up more than 6 percent a year, and subscribers are paying higher fees than ever before. If a viewer wants sports, the cost is usually even higher. ESPN alone demands $5 a month from each subscriber who watches.

“Cord cutters,” a group that is increasingly saying “no” to high cable prices and are cobbling together IPTV options that might include Netflix and Aereo or another combination of “over-the-top” networks that leverage the Internet, are challenging these fees.

The continuing high prices for subscription television have also gotten the attention of Congress. Sen. John McCain (R-AZ) has introduced the Television Consumer Freedom Act of 2013, a bill that would offer incentives to cable companies that unbundle their program packages.

Consumers Union, the policy arm of Consumer Reports, has endorsed McCain’s bill.

“These days, cable customers have to buy larger and larger packages of channels just to get the handful of channels they want. You shouldn’t have to pay for dozens of channels you don’t watch. We have long argued that ‘cable a la carte’ would be a big boost for consumer choice. We support Sen. McCain’s bill because it would create incentives for cable companies to offer consumers more choice over what they pay to watch,” said Delara Derakhshani, policy counsel for Consumers Union.

Most pay television companies and their supporters argue that an antibundling mandate will reduce channel diversity, and smaller channels might not survive if they depend entirely on individual subscriptions. But there are cracks in the industry’s unity, and cable operators are increasingly split on the issue.

Tom Rutledge, chief executive of Charter Communications, the fourth largest cable operator in the U.S. with 5.2 million subscribers in 25 states, said it is clear that consumers are being forced to purchase content that they don’t want or need.

“The tying together of networks by programming giants, combined with a lack of consistency in pricing for distributors and a complete lack of transparency surrounding that pricing, creates a no-win situation for consumers, who are forced to purchase large bundles of program content at prices that continue to escalate despite the myriad alternatives enabled by current technology,” Rutledge recently testified May 14 before Congress.

It is time to give “consumers more choice in this difficult economic climate,” and McCain’s “proposed legislation is a logical step in that direction,” Rutledge said.

Verizon wants to turn the concept of à la carte TV viewing on its head by charging subscribers only for the programs they actually view at home. Terry Denson, Verizon’s lead programming negotiator, recently told the Wall Street Journal that a more logical usage-based approach may eventually come to Verizon’s FiOS TV.

FiOS, he said, is in talks with mid-size and smaller content companies to pay for channels based only on how long a viewer watches. The charges would kick in after about five minutes of viewing of a program.

Verizon’s plan is still in the discussion stages, though it could be a win-win strategy that both lowers Verizon’s overhead while lowering costs for many of its subscribers.

“A lot of people today feel like they’re getting ripped off,” John Bergmayer, senior staff attorney with Public Knowledge, a Washington, D.C.-based public-interest organization that focuses on Internet and other technology issues, told USA TODAY. “So I support Senator McCain’s bill because it’s aimed at giving consumers a lot more choice and flexibility.”

Charter, Verizon and McCain are all up against a mostly unified pay television industry that has powerful lobbyists and is not likely to change without a major fight. In fact, few are betting on McCain’s proposed legislation ever becoming law.

The more likely solution to the bundling problem is probably going to come from competition outside the pay television industry. Online video is already beginning to hurt cable companies, which for the first time are now losing subscribers at a rapid rate.

The Internet offers both program choice and far lower costs, challenging the pay TV business model. The environment is right for a changing of the guard in the television business if current trends continue.