News

FCC Report Pans a la Carte

11/18/2004 8:51 AM Eastern

A study for release to Congress Thursday by the Federal Communications Commission effectively panned the per-channel sale of cable programming, claiming that it would not hold down cable rates, as proponents have argued.

“We don’t come out and say that, but there are plenty of inferences that we certainly don’t recommend that,” an FCC source said. “It doesn’t really endorse anything. It just gives a lot of merit to the operators -- big and, most notably, small [operators] -- and programmers that mandatory a la carte would broadly be a problem.”

The study also tackled another hot-button a la carte issue: indecency. The report concluded that efforts by the cable and direct-broadcast satellite industries to promote their digital blocking technologies were preferable to program-sale mandates that would threaten pay TV’s long-established business model of grouping channels in large tiers.

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.).

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.

A Capitol Hill source said that because the report had not reached the Senate, it would be impossible to issue a reaction.

The 108-page report, prepared by the FCC’s Media Bureau, included several recommendations designed to address what it described as real-world concerns about rising cable rates and objectionable programming.

The report concluded that identifiable deficiencies in the program-acquisition market could be addressed by the injection of greater competition at the distribution level, noting nascent efforts by broadcasters aligned with U.S. Digital Television Inc. to use their digital spectrum to provide pay TV services; the increasing interest by Verizon Communications and SBC Communications Inc. in entering the cable business; and the promise of broadband platforms to introduce Internet-protocol video, which currently seems to be following an a la carte model.

“More is going to give you both the idea of retail price competition and innovation competition,” an FCC source said.

The source said the recommendations were offered regardless of whether an a la carte regime was imposed on pay TV distributors.

On rate issues, FCC economists concluded that the purchase of nine networks a la carte would about equal the prices 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 more to maintain access to their favorite channels.

The report also focused on the higher costs consumers would need to shoulder in order for cable systems to establish a la carte services.

“The one thing it does, just by its nature, is increase operational expenses, whether that is the expense of set-top boxes [or] going all-digital,” an FCC source said. “Implementing a la carte costs a decent amount of cash. That’s also true of billing systems, and it’s also true of customer support. Those are the kinds of expenses that get passed on.”

The impact on cable networks with small but loyal viewerships was also analyzed. Those networks told the FCC they could not survive outside of large programming tiers.

“We also discuss, obviously, the potential loss of diversity,” an FCC source said. “All of your traditional diverse, niche, religious, arts networks would have a difficult time, mainly because the advertising revenues are going to have to change, and there is credence to what these people say in the economic world.”

Small cable operators told the FCC that 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.

The report tackled that issue, “but it is not definitive. It’s a lot of `mays.’ There is some legitimacy to that argument,” an FCC source said.

Some argued that a la carte would inevitably lead to price regulation of a la carte channels because cable operators would use pricing strategies to entice customers to purchase tiers.

The report “doesn’t necessarily say that, but reading between the lines, you could infer that,” an FCC source said about the need to price-control a la carte channels.

Consumer groups and family organizations formed an alliance to back a la carte as a means of lowering cable rates and filtering indecent programming at the same time. The report did not dismiss those concerns as unimportant.

“These concerns are legitimate. People are concerned about higher bills. People are concerned about indecency and, to a lesser extent, there is a growing concern about [retransmission consent],” an FCC source said.

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