News

FCC Prefers a Full Buffet

11/21/2004 7:00 PM Eastern

Washington— It looks like a la carte can’t compete with cable’s expanded-basic buffet.

Last Friday, the Federal Communications Commission released a staff report that broadly dismissed claims that selling cable networks a la carte or in mini-tiers could address rate and indecency issues in a manner that wouldn’t rock the industry.

The FCC report — an exhaustive look at the regulatory structure and business relationships in today’s pay TV market — was the second time in 13 months in which a federal entity subjected a la carte issues to careful scrutiny and found the exuberance of its advocates to be misplaced.

Last October, the Government Accountability Office reported that a la carte would likely raise rates for subscribers that wanted to maintain the same level of service and punish many networks that couldn’t survive unless bundled in the same tier with dozens of networks.

The FCC report, requested by key members of Congress, was careful to point out that concerns about distortions in the pay-TV market were genuine.

But the report made one thing abundantly clear: Mandated a la carte was not the way to go and was fraught with dangers for all constituencies: distributors, programmers and subscribers.

“Although the current [pay-TV] business model may result in some consumer dissatisfaction, government intervention through a la carte regulation likely will harm [pay-TV providers], program networks, and especially [pay-TV] subscribers,” the 122-page report said.

The National Cable & Telecommunications Association rallied the industry, commissioned an economic study and rounded up support from numerous outside groups to quell notions that a la carte could supplant tiering without devastating consequences.

“The FCC report to Congress makes clear that government-mandated, per-channel pricing would not offer any benefits to the vast majority of consumers and would, in fact, result in higher prices, fewer choices and less diversity in programming,” NCTA president Robert Sachs said in a statement.

As expected, consumer groups yelped that the report was yet another instance of a bureaucracy captured by industry and dismissive of proposals that contained real alternatives to bundling.

“The study was rigged against consumers in favor of large cable companies, giant broadcasters and other media behemoths,” Consumers Union senior director for public policy and advocacy Gene Kimmelman said in a statement.

FULL AIRING OF ISSUE

But the FCC report did address virtually all points raised by a la carte proponents.

One idea advanced by Consumers Union and the Consumer Federation of America was that some set-top costs associated with a la carte could be avoided by rigging a single digital set-top to a router, which would distribute TV programming to other TVs not equipped with set-tops.

“CU/CFA provides scant evidence of the commercial feasibility of this solution,” the FCC report said.

The report added that if such a proposal were as economically efficient as CU and CFA suggest, then it would make sense for direct-broadcast satellite carriers EchoStar Communications Corp. and DirecTV Inc. to incorporate it. They don’t, however — instead, they rely on a digital set-top for each TV.

The FCC was asked to study a la carte issues in a letter sent in May by key Capitol Hill lawmakers, including House Energy and Commerce Committee chairman Joe Barton (R-Texas) and Reps. John Dingell (D-Mich.), Fred Upton (R-Mich.), Edward Markey (D-Mass.) and Nathan Deal (R-Ga.).

Deal, for example, advocated what he called voluntary a la carte, which would allow distributors to purchase programming a la carte, but sell it at retail anyway they wanted.

Senate Commerce Committee chairman John McCain (R-Ariz.) also sought the commission’s opinion on whether the agency currently had legal authority to impose a la carte rules. [The FCC said imposing a la carte would raise serious statutory and constitutional concerns.]

The FCC report tackled all the tough issues but found none of the claims in favor of a la carte worthy of agency or congressional action. Instead, the FCC identified the entry of more competition in the pay TV market, coupled with growing consumer demand for video on demand and digital video recorders, as developments driving the market toward non-linear services that give consumers greater control.

On rate issues, the FCC concluded that the purchase of nine networks a la carte would about equal the price consumers pay for expanded basic. A la carte would likely lead to higher bills, because the average cable home watches 17 channels, including local TV stations.

In other words, consumers would pay much more to maintain access to their favorite channels.

“If the average household purchased each of these channels under an a la carte regime, it would likely face an increase in their monthly bill under a la carte sales of between 14% and 30%,” the FCC said.

ZASLAV: NO SILOS

NBC Universal Cable president David Zaslav said the report showed that “a la carte really just creates silos of services, makes it a lot more expensive, a lot less efficient, and ultimately, it reduces choice significantly.”

On consumer equipment, the FCC said that the average monthly cost of a set-top was $4.87 and the average home has 2.5 TV sets. Each TV set would need a set-top in order to make a la carte selections.

“Thus, moving to an a la carte or tiered system would immediately add an average $12 per month in cost for each home without set-top boxes before subscribers even begin to make program selections,” the FCC said.

The report said a la carte would wreak havoc on cable systems, requiring the massive overhaul of billing and back-office systems to accommodate thousands of discrete programming purchases that a bundling system avoids.

“A large percentage of these increased cost are likely to be passed on to subscribers, causing an increase in residential retail [pay TV] rates,” the FCC said.

The FCC was also sympathetic to the needs of programmers. In an a la carte world, programmers would lose penetration, which would siphon advertising revenue.

To maintain current revenue, they would have to raise license fees, which would be passed on to subscribers. But higher license fees could cause cable companies and subscribers to lose interest in the channel, another hit to revenues that would starve programming-investment budgets.

EXTRA COSTS CITED

A la carte, the FCC added, would require networks to spend a significant amount of revenue on marketing to keep consumers aware of, and interested in, their services. Tiering avoids much of those costs.

“The loss of cost savings, combined with the loss in advertising revenues and the likely rise in license fees to compensate such losses, may cause many program networks to fail, thus adversely affecting diversity,” the FCC said.

African-American targeted service TV One praised the FCC report. “The evidence is now in from virtually all the experts that an a la carte mandate would have a devastating impact on diversity in programming,” CEO Johnathan Rodgers said in a prepared statement.

On indecency, the FCC said because a la carte would raise cable rates, consumers’ ability to block programming (in some case, using free technology provided by cable operators) was a more efficient system under a cost-benefit analysis.

“As a tool to allow subscribers to block objectionable content from reaching their homes, an a la carte requirement seems to be a particularly blunt instrument,” the FCC said. “Technical solutions that block unwanted content exist today at a lesser cost than a mandated a la carte requirement.”

ADDRESSING CLOUT

The FCC also addressed concerns of small cable outfits that say Time Warner Inc., Viacom Inc., The Walt Disney Co., NBC Universal and News Corp. use their clout to make them carry expensive networks their subscribers don’t want to buy in a large tier. They also complain about discrimination, that they have to pay more for programming than large cable systems under an unjustified volume discount system.

At least with regard to TV networks, the FCC said Congress intended for retransmission consent (the ability of TV stations to negotiate cable carriage) to allow TV stations to extract value for their product, either through cash deals or cable programming carriage barter arrangements.

“… The current retransmission consent process is a function of the statutory framework adopted by Congress and we cannot conclude that it is not working as intended,” the FCC said.

If small cable operators believe that retransmission consent is producing illegal tying arrangements, the Justice Department’s antitrust division was the government entity best equipped to deal with those allegations, the FCC said.

Linda Moss contributed to this report.

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