News

Little Ops Unafraid to Take On Net Powers

6/08/2003 8:00 PM Eastern

A year ago, when he needed political allies, Rupert Murdoch turned to the little guys.

Murdoch, chairman of mighty News Corp., wanted to stop the proposed merger between EchoStar Communications Corp. and DirecTV Inc. parent Hughes Electronics Corp. Miffed that DirecTV slipped through his fingers, Murdoch fused a diverse coalition that included the American Cable Association, the decade-old group formed by small cable companies.

ACA's president Matt Polka remembers the conversation quite clearly.

"We got a call from [News Corp.], saying, 'Hey, we really appreciate ACA, what you have said about the DirecTV-EchoStar merger and would love to talk to you about commonality," Polka said, accepting the invitation.

Fickle allies

But Polka didn't hang up the phone without sending his own message.

"I said this personally: Just know that a year from now, when you guys go after DirecTV, we are going to be opposed to you," Polka said.

"Now here we are."

Events in recent weeks have proven Polka correct. In April, when News Corp. announced plans to take control of Hughes for $6.6 billion, Polka's group quickly geared up to block the combination, fearing unfair competition from what would be a major competitor and supplier.

For many years, small cable has complained about rising programming costs and the business practices of large media conglomerates. For just as long, Congress and the Federal Communications Commission have declined to take action.

But the momentum seems to be shifting, at least on the surface. It isn't just small cable that is crying out. Cablevision Systems Corp., with 2.9 million cable subscribers, and Cox Communications Inc., with 6.2 million subscribers, have gone public and embraced ACA's key message about programming costs, enough so that Senate Commerce Committee chairman John McCain (R-Ariz.) decided to have a hearing on the subject last month.

McCain has already asked the General Accounting Office, which probes markets and companies for Congress, to review the sources of rising nominal cable rates. GAO is expected to file the report in October. What the report says could trigger legislative moves by McCain, who has urged top cable companies to provide consumers with more a la carte options along the lines established by Cablevision and Yankees Entertainment & Sports Network.

Pleasin' Gleason

"We're very pleased to see the traction that it is getting and we're very pleased to see that some of the bigger cable operators are joining us and seeing what we have been talking about for so long," said James Gleason, ACA's chairman as well as president and CEO of CableDirect, a 40,000-subscriber cable company based in Sikeston, Mo.

ACA, which represents 1,000 companies with 8 million subscribers, has repeatedly accused the biggest media companies of abusing their market power. ACA alleged that News Corp., Viacom Inc., and the Walt Disney Co., General Electric Co., and AOL Time Warner Inc. require small cable companies to pay higher programming fees than large cable companies.

ACA added that the broadcast giants condition access to their local TV signals on the purchase of multiple cable networks on a take-it-or-leave it basis.

The bottom line: consumers are forced to pay more for existing services and purchase programming they may not want to view.

ACA has created a special acronym for the five firms: OPEC, for Organization of Programming Extortion Companies.

"The price and the tying are offensive," Gleason said. "[News Corp. has] been the most difficult to get retransmission consent deals with, of all the major guys."

Disney is a close second by virtue of its ownership of ESPN, the popular sports network considered to be the most expensive basic cable network. ESPN's rates are going up 20% in August, angering small and large cable companies alike.

Disney's stance

Disney, meanwhile, refuses to take pricing pressure off the expanded basic tier by allow a la carte or sports tier distribution of ESPN.

Disney and News Corp. don't make a habit of rebutting every small cable complaint. But Preston Padden, Disney's executive vice president of worldwide government relations, denied the bundling charge by noting that Disney offers the ABC signal on a standalone cash basis.

ESPN lashed out at a la carte proposals, saying they would drive up programming prices for millions of sports fans at a time when ESPN represented a small percentage of a typical $40 monthly cable bill.

A News Corp. lobbyist complained that ACA would not quit until the Fox signal is offered for free.

"We do want it free," Gleason said. "We're just redistributing free, over-the-air television. And we do want it free and so do the big [cable] guys."

The National Cable & Telecommunications Association has formally declared that it would not attempt to block the News-Hughes merger. ACA, claiming it has none of NCTA's programmer-operator internal conflicts, has taken the initial position that the deal should be blocked.

Retrans giveback?

Appearing before the House Judiciary Committee on May 8 and sitting at the same table with Murdoch, ACA member Neal Schnog, who serves 8,300 subs in Oregon, called on the FCC and the Justice Department to stop the News-Hughes combination.

Short of that, Schnog said News Corp. should forfeit its retransmission consent rights, which would result in small cable's free access to the Fox broadcast signal, with no tie-ins to Fox programming allowed.

ACA fears that Murdoch will use control of DirecTV to drive up the cost of News Corp.-affiliated sport networks, Fox News Channel, FX, and National Geographic Channel. Small cable operators couldn't say no to higher rates because any channel they dropped would show up on DirecTV.

"The thing that is so scary is that if they control DirecTV, they have the ability to extort programming fees higher than we've every seen," said former ACA chairman Steven Weed, CEO of Wave Broadband, which serves 23,000 subscribers outside Seattle.

Murdoch attempted to mollify DirecTV competitors by volunteering to comply with FCC program access rules for as long as those rules remain in effect.

"It's not enough," Polka said. "The conditions they have suggested have nothing to do with the sports issues that we have raised, have nothing to do with tiering and a la carte, and have nothing to do with retransmission consent."

Strike at mergers

ACA has learned to play the Washington game that rewards finesse. Polka's group knows that passing legislation is a rare event and coaxing the FCC to adopt rules at a rate that wouldn't deplete ACA's resources is just as rare.

But ACA has taken advantage of those moments when companies are most vulnerable: when they need federal approval to merge.

Three years ago, at a public forum at FCC headquarters, Weed sat at the same table with Time Warner Inc. president Richard Parsons and extracted a promise that AOL Time Warner would not tie access to Time Warner cable programming to distribution of AOL's high-speed service. At the time, few understood that the deal had already been worked out and the Weed-Parsons exchange was strictly for show.

ACA last year raised concerns that the merger between Comcast Corp. and AT&T Broadband could jeopardize small cable operator access to digital programming provided by AT&T's Headend In The Sky (HITS) facility. Comcast and ACA reached an amicable agreement.

News Corp. and ACA members have not engaged in any merger-related bargaining, Polka and other ACA leaders said.

Unlike NCTA, ACA has an extensive regulatory and legislative agenda aimed at program suppliers. It's been suggested that NCTA is more than happy to let ACA take the lead.

NCTA dissent

But NCTA, in fact, has urged ACA to cool it, insisting that new laws and regulations would fall prey to the law of unintended consequences.

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