Memo To Mr. Charles Dolan

Memo to: Cablevision chairman Charles F. Dolan
Re: FCC chairman Martin’s War On ESPN
Date: Dec. 8, 2008
From: MCN Washington News Editor

Mr. Dolan,
 
The rumors are that FCC chairman Kevin Martin will take up residence in Silicon Valley when the clock runs out on the Bush administration in January. That’s a not a bad location for him, actually, in that Martin has clearly been functioning a few Pentium chips short of a motherboard.
 
Undeniably, the last few years have been tough ones for the cable industry under Martin. His contribution to the great American experiment in self-government seems to be that someone who never met a private payroll knew the cable business better than the industry’s seasoned executives.
 
In recent weeks, you apparently became the first person to convince Martin that cable operators can be trusted to keep their rates steady.

It appears that you and Martin have worked out a deal. We’ll know on Dec. 18 whether an FCC majority will go along for the ride.
 
The agreement with Martin is that going forward, no cable programmer may demand access to the vast majority of cable subscribers as so many programmers do today. The same for TV stations that demand compensation for carriage.

Martin’s rationale is that cable operators should be able to take the Walt Disney Co.’s ESPN and the Disney Channel and sell them a la carte, forcing consumers who value those channels most to shoulder all the costs directly. That is supposed to take pressure off cable’s expanded basic tier, leading to year-to-year stability in retail cable rates
 
Martin’s plan would be a comical if the stakes weren’t so high for all cable programmers. It’s based on a number of false assumptions about the motivations of cable operators and the likely direction of monthly cable bills when only half the market (programmers) is regulated by the feds.
 
Suppose Cablevision could put ESPN in a sports tier.
 
Question: Will Cablevision reduce the price of expanded basic to reflect the absence of ESPN, expected to cost $4 per month wholesale in 2009?
 
Answer: Martin’s plan wouldn’t force a price cut. ESPN could be replaced by less valuable programming and the tier charge could be left unchanged.
 
Question: Won’t rates for sports fans go up?
 
Answer: Rates could go down but only if Cablevision allowed its customers to buy a reasonably priced sports tier and nothing else. But Cablevision could require the buy-through of one or more programming tiers before someone can qualify to buy a sports tier. Think of the revenue hit if 15% to 20% of subscribers purchased just the sports tier, assuming the standalone price of the sports tier didn’t turn out to be $150 a month.
 
The most vulnerable cable subscriber is the one who wants to maintain the same level of service after ESPN is ripped from expanded basic. She/he has to buy expanded basic and then the sports tier to remain whole. If her/his cable bill didn’t go up in that case, then there was no reason to break up expanded basic in the first place.
 
So, the only way for wholesale a la carte mandates to produce stable retail rates is for the FCC to freeze retail rates and prohibit all tier buy-throughs. Are you for that, Mr. Dolan?
 
Martin’s plan has another predictably awful downside: A tidal wave of program carriage complaints.
 
When ESPN sits down with Comcast to renew its contract, it can’t demand carriage on the same tier where Comcast is distributing Versus and Golf Channel, networks owned by Comcast. What happens next? ESPN could run to the FCC crying discrimination under the program carriage rules, just like the NFL Network did.
 
When the program carriage tsunami hits, the result could be horrible because the composition of expanded basic will be decided nationally by five unelected bureaucrats at the FCC.

Do you want that to happen, Mr. Dolan?
 
It’s ironic that Martin is maneuvering to exile ESPN from cable’s most popular programming tier. A few years ago, Martin hit the roof after Comcast and Time Warner Cable decided to roll out family tiers but excluded one very important network: ESPN.
 
A point about retransmission consent. Under Martin’s plan, TV stations that demand free carriage will get access to all cable subscribers but TV stations that demand cash could end up in digital Siberia.
 
It would be the first-time since 1992 that all TV stations were not all resident on the basic tier. For Martin to effect that change would be interesting because no one at the FCC cried louder a few years back when Dish Network required some subscribers in some markets to obtain a free second satellite TV dish to receive all of their local TV signals.
 
In a free market, TV stations should be allowed to demand as much money as the market will bear. The problem with retransmission consent isn’t that TV stations demand cash, it’s that the FCC forces cable operators to deal with only their local stations. The solution is to allow cable to bargain with stations in distant markets.
 
Martin says his wholesale a la carte plan is all about the consumer. In reality, his plan is just one more chapter in history’s dark, lamentable catalog of bureaucratic mischief.