Co-Op's Frank Hughes, the Little Op's Pal

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It's been said there is strength in numbers. That's the credo of the National Cable Television Cooperative Inc. (NCTC), the Lenexa, Kan.-headquartered organization that represents MSOs reaching some 13.5 million subscribers across the U.S. — many in the nation's heartland and in small, rural communities. As senior vice president of programming, Frank Hughes is the point man in contract negotiations, during which he's looking out for the programming and attendant financial interests of the small operator.

Considering that smaller MSOs already allocate a much higher percentage of their operating budgets to programming than their larger counterparts, Hughes remains resolute in his resolve to fend off some programmers' attempts to pass through what he considers to be disproportionate and unjustified license-fee hikes to NCTC member companies. Hence, the give and take between the NCTC, media conglomerates and independent programmers is critical in determining what many people around the country ultimately see on the small screen.

In an interview with Multichannel News
news editor Mike Reynolds, Hughes discusses the co-op's place in the cable landscape, addresses its often-contentious relationship with Disney/ABC Cable Networks and MTV Networks, and handicaps the contest for channel placement in certain genres. An edited transcript follows:

MCN: Does battling rising programming costs remain your raison d'etre?

Frank Hughes:
Without a doubt. The NCTC's mission is to lower the operating costs of our member companies through group purchasing. The majority of our member companies pay a much higher percentage of their operating costs toward programming than their larger MSO brethren. Programming costs for many smaller MSOs represent [the] 35-percent to 45-percent range of their total budgets, and I think you'd find that most large MSOs are in the 20-percent range. So it's a significant difference.

Obviously, when you get the Indians together for group purchasing, you can hopefully lower the cost of programming, hardware and equipment purchasing, which are a significant part of their monthly operating expenses.

MCN: Consolidation on the programmers' side has had to make your job more difficult.

Hughes:
When a programming company owns multiple services and it is able to leverage against the other networks, it puts them in a stronger bargaining position. At the same time, you've had the cable industry consolidate. It has made it more difficult for both sides actually, I'm sure.

MCN: Speaking of consolidation, what do you make of Comcast Corp.'s bid for AT&T Broadband?

Hughes:
In a business where the top five or six MSOs control 85 percent of the cable subscribers, those big companies have enormous clout and leverage their position with programmers. Comcast has already said it thinks it could lower its programming costs substantially through volume discounts through such a merger. The unfortunate fallout of such an arrangement could be that the programmers would look to smaller operators for higher annual increases to help offset the 'hit' they could take from a combined Comcast-AT&T.

MCN: With 13.5 million subscribers, isn't the co-op one of the big guys?

Hughes:
Obviously, our goal is to leverage the group as a whole in order to try to get to a level playing field. I don't begrudge the top MSOs leveraging their size for better agreements. We're simply trying to do the same. But it's a little more unwieldy when you have 980 companies. But we have been able to achieve, in many cases, some efficiencies that otherwise the members couldn't get.

MCN: Programmers don't have to go out and talk to individual members as much, right?

Hughes:
Programmers don't have to do contracts with our 980 member companies, bill 980 companies and get 980 companies to report and pay license fees on a timely basis.

MCN: The size of your membership varies greatly.

Hughes:
Our two smallest member companies [Hydraburg Cable of Hydraburg, Alaska, and Webster Cable of Webster, Ky.] have 28 subscribers and our largest [Adelphia Communications Corp.] has 4 million subscribers.

The tough part is that [programmers typically] have some minimum requirements on the size of systems they want to deal with, in the 5,000-subscriber range. And of those 980 companies I mentioned earlier, those companies serve about 6,000 cable systems of which — let me make sure I've got the right numbers — almost 5,000 of those systems are less than 5,000 subs .

MCN: In addition to master contracts, do you negotiate for individual members, or groups of members?

Hughes:
No. Pretty much every one of our master agreements is on behalf of every one of our members. Our smallest member pays for a service; the largest one pays the same rate. We're all in this together and we treat every member equally.

MCN: Are video-on-demand and subscription video-on-demand something you're spending a lot of time on these days?

Hughes:
VOD and SVOD are issues for down the road. Right now, the vast majority of our members are focused more on some of the basics: digital and pay-per-view, and rolling those services out, in an expeditious manner.

MCN: You mentioned pay-per-view and digital. What's the action on those fronts?

Hughes:
As a system upgrades to digital, via HITS [Headend in the Sky] or the HITS2 Home model, it's just like any other operator, they are adding basic digital networks. They are adding digital music services, pay-per-view services, premium-multiplex services. All of the above.

To many of them, though, pay-per-view is a much newer phenomenon. There, you get into just some of the billing issues. Many times, these systems do need to upgrade their billing systems to accommodate that, and it's a much steeper learning curve.

MCN: There has been some headend consolidation among operators for things like digital upgrades, pay-per-view, high-speed access, Internet service, ad sales …

Hughes:
Yes, there has been some sharing of headends between member companies. With the fixed costs incurred in doing those things, it's very difficult for a small system to make that work, and that's where, obviously, many of our members that own multiple systems are in the process of tying headends together to get better efficiencies for both offering high-speed Internet access, ad sales, launching digital.

If you have 10 systems of 300 subs, you tie those all together, and now you can do some things that individually are very difficult to do.

For example, member A may be rebuilding its headend and then wants to provide transport, if you will, to member B. They share those resources where the companies are located contiguously, somewhat close to each other.

We do run into this with programmers, too, and some of them have not quite yet accepted that fully. I don't think they understand it yet and realize what the benefits are to them.

MCN: Is this a recent trend?

Hughes:
It's been going on, actually, for a few years, but it has really accelerated over the last year or so.

MCN: Direct-broadcast satellite is obviously a major competitor to all of cable and maybe to your members a little bit more, given some of their rural locations. What have you done to battle DirecTV Inc. and EchoStar Communications Corp.?

Hughes:
Over the past few years, we have provided more marketing-type services to our members in the way of promotional materials, bill stuffers, TV spots and newsletters that we have encouraged them to use in their communities to be sure and extol the virtues of cable, and what the advantages are of cable over DBS.

In smaller communities, your media outlets are somewhat limited. You are not doing broadcast television; you're not doing radio. It's usually more direct communication with subscribers.

The smaller systems have been impacted somewhat more adversely than larger metropolitan or urban systems, just due to the limitations in capacity. To rebuild [a] half-million-subscriber system or a 500-subscriber system, the headend costs are somewhat identical. It's a challenge, and especially for companies that own numerous systems, to get them rebuilt and upgraded in a timely manner to compete effectively against DBS.

MCN: If EchoStar and DirecTV get together, would that compound the situation?

Hughes:
I think that's too early to tell. They would have to choose similar technology and that could take years to roll out. That might draw their focus away from being as aggressive as they have been on the subscriber-acquisition front. But I don't know. I think only time will tell.

MCN: You mentioned HITS and HITS2Home earlier. What's your relationship with those guys?

Hughes:
We've had a master agreement with HITS now for a little over two years. TCI [Tele-Communications Inc.], AT&T [Broadband] developed this to help their smaller systems that face the same challenges as many of our members. For the vast majority of our members, HITS is a very efficient way to increase their channel capacity.

We've been talking with HITS about their QT [Quick Time] service, which uses QAM [quadrature amplitude modulation] technology for some of our smaller member systems, those serving less than 3,000 subscribers. We've been reviewing whether with the QAM technology that systems can upgrade their headends, maybe for less than $20,000, and offer an array of digital services.

MCN: Is that underway?

Hughes:
There are already 10 to 20 systems in the process of rolling it out right now. In the next couple of months, we'll be hearing more about this.

MCN: That's $20,000. The other ones are north of $50,000 or $60,000?

Hughes:
Depending on how many pods you access. But yes, it's generally anywhere from $50,000 to $80,000.

MCN: What about HITS2Home?

Hughes:
HITS2Home was developed last summer. We've had many of our members roll that out and find in those systems with less than 2000 subscribers this to be a very good vehicle to upgrade their customers who want digital products and premium multiplexes.

And some of those systems have easily, in just the last six months, achieved 15-, 20-, 25-percent penetration. That's terrific.

Installing a dish at a home is somewhat labor-intensive. But if the customer wants digital, that's the only customer that you do this with. There is no fixed cost at the headend. It's all variable cost, about $350 per home under H2H.

MCN: TNN: The National Network. CMT: Country Music Television. TV Guide Channel, Lifetime Television. They're not members?

Hughes:
Of the majors, the only other one is USA. We're working with USA right now. We are hopeful to come to an agreement with them here sometime in the next quarter or so.

MCN: You've been around for a long time; these networks have been around for a long time. What's the holdup?

Hughes:
Well, each one of them is a unique situation. In the case of Lifetime, I wish I could tell you why. I can't. They have been very difficult to set up meetings with and to explain their position.

TNN and CMT have been acquired by [Viacom Inc.'s] MTV Networks; we are discussing an agreement with them at this time.

TV Guide? We ended any discussions with [Gemstar-] TV Guide [International] Inc. regarding all of their products late last year, and notified our members as such.

We just felt that the agreements they were offering were not very compelling for operators, much less small operators, and we don't have a master agreement with them.

MCN: Was TV Guide in the fold before?

Hughes:
We went back many years with them on the TV Guide Channel. Last year, when they finally came out with contracts for their IPG, which they didn't have for at least a year and a half until they got their situation resolved with Gemstar, it was very difficult.

With the difficulty of those agreements and with the attitude they've taken, I think these companies have spoken loudly that they don't give a s—t about small operators. I think the fact that they don't have agreements with the NCTC says that very clearly and loudly, and we have tried to convey that to our members each and every month.

MCN: You have a master agreement with Oxygen Media. What's the timing for some of the rollouts?

Hughes:
I think you'll see many of our members roll that service out over the next few years, and I think you'll see it become a very popular service.

MCN: Where do you stand with WE: Women's Entertainment?

Hughes:
The former Romance Classics? We've had agreements with the folks at Rainbow [Media Holdings Inc.] for all of their networks. They've been supportive of the NCTC and we have many members that carry the new WE.

MCN: You don't have an agreement with Lifetime, but that doesn't mean your members don't carry the service?

Hughes:
They obviously can — that's their business to choose who they want to affiliate with.

MCN: Is there room for three women-targeted services?

Hughes:
We think in their own way, they're all somewhat unique, but ultimately I think the marketplace will decide that long-term. All three of them have their own niche, I guess.

MCN: Let's turn to Fox for a while. FX was renewed a couple of years back — without retransmission consent — in the 25-to 28-cents per-sub, per-month range. Given that it has NASCAR [National Association for Stock Car Racing] and is building its original programming, how valuable is this service for you?

Hughes:
It has been one of the most active, from a standpoint of members launching this year. We monitor that every month. And this year, I will say [that] FX has seen a lot of new distribution, as they have throughout the industry. I think a lot of that has been brought on by NASCAR.

MCN: National Geographic Channel is another service in the Fox camp. Where do you stand with them?

Hughes:
We knew Nat Geo was going to be a very popular service, one that our members would find very appealing. We completed an agreement with Nat Geo late last year and put together a very creative agreement with them.

MCN: Is it one laden with launch fees and marketing support?

Hughes:
Launch fees, marketing support, flexibility for analog or digital. And that's terrific. Not everybody has a lot of analog capacity left. We'll put things on a digital tier and price it accordingly and let the customer choose. Nat Geo has gotten some terrific distribution so far this year, yes.

MCN: How about Fox Family Channel?

Hughes:
We had numerous major agreements expiring at the end of last year. Fox Family Channel. The Golf Channel. Home Box Office. Home & Garden Television. They have all been renewed. Once again, the members, ultimately, they have to individually sign up on that renewal. I think there has been a sign-off of 95 percent.

MCN: Programmers seeking more than a 5-percent hike have to present their proposal to your board. Is that a longtime practice?

Hughes:
We implemented it a little over a year ago…

MCN: I guess there's been a lot of traffic before the board?

Hughes:
[Laughter]. Board meetings have been very busy. We put in a revolving door on the front of the building for the board meetings.

Once again, I think the industry at large would be shocked to see what some of the proposed rates are for small operators. Smaller operators pay anywhere up to 300 percent more than their large MSO brethren.

I expect differences, but there is no valid justification for that. Some of these services — I'd rather not name them — come out and say they've bought this cable network and now the rate is going to go up to this, because we're investing more in it. They're stuck with some long-term deals and don't have flexibility on adjusting the wholesale fee to the larger MSOs, so they're trying to saddle the small operators with the cost of those deals.

MCN: [Laughter]. Anybody you want to mention?

Hughes:
It's really tough.

MCN: Fox News Channel has surpassed Cable News Network in the ratings of late. What kind of distribution do they have with your members?

Hughes:
Fox News offered huge launch fees years ago, in return for 10-year deals. We've had some difficulties with them because of our agreement. Now, it's down to seven years left on it, and they want to offer those incentives to people with 10-year agreements. So we don't see as many members launching under our agreement because it's a contractual problem.

MCN: You did a long-term deal with Odyssey Network a couple of years back. Next month, it will officially become the Hallmark Channel. Do co-op members need more family services?

Hughes:
I guess the marketplace will determine that. The new Hallmark Channel — years ago, it had limited distribution. It didn't seem to be going anywhere, and I think the changes they have made have been very positive. And it is unique and it's terrific programming, and I think they will do very well.

MCN: On the business-news side, CNBC is well-established. CNNfn has not been, nor has Bloomberg Television. What kind of relationships do you have with those two networks?

Hughes:
We've had agreements with Bloomberg for years. We are just getting ready to renew our agreement that expires later this year. CNNfn, we're working on a renewal with those folks. Obviously, CNNfn has been much more of a digital service over the past few years than it has analog. We had agreements with CNBC.

MCN: Did you guys ever get anything done with NBC Cable for the Olympics?

Hughes:
Never did. We have somewhere around 300 member companies participating in our CNBC agreements, serving a little over 2 million subscribers that passed on the Olympics last year.

MCN: Was it just too expensive? Not enough return on the surcharge and maybe not enough ad-insertion capabilities?

Hughes:
All of the above.

MCN: With the Winter Games in Salt Lake City coming up, are you still talking? Has that moment passed?

Hughes:
The moment hasn't passed. We are continually discussing things with NBC Cable about reaching a reasonable, mutually beneficial agreement.

We felt encouraged, though, that our members stood by the co-op's recommendation. Unfortunately, some were not able to, due to retransmission considerations. It's too bad that it takes that type of leverage on their behalf to get the Olympics carried.

MCN: With respect to MTVN, you guys had a well-publicized spat. There was a big hike for Nickelodeon; I think about 17 percent. There were also issues about penetration rates for other networks. That's been resolved. How do you sit with MTV Networks these days?

Hughes:
Well, our agreement with MTV Networks still has some time left on it, and we have gotten through the rocky time we had with them a few years ago. We're hoping that we can continue that relationship we've had.

We are right now in the process of working on, putting together an agreement for TNN and CMT. And initially, it's not real encouraging. But these things are never done until they're done. So hopefully we'll continue to work through it, and get something that's not so much tilted in their favor and a little more favorable for our members.

MCN: TNN has the World Wrestling Federation. It's in the top 10 in primetime now and is spending a lot of money on acquisitions and new shows.

Hughes:
It's virtually universally distributed by our membership. They have existing contracts already. But they have made it very clear within the industry that they expect to be very aggressive. And I'll be the first to admit that, boy, they're not kidding when they said aggressive.

My concern is that everybody should share in this somewhat equally. Why are these rates being put on the shoulders of small operators?

MCN: A couple of years back, there were quite a lot of switch-outs from CMT to Great American Country. You guys were in the middle of that in a meaningful way.

Hughes:
[Laughter] We have a long-term agreement with Great American Country, and it has received a lot of support from our members. Years ago, the other party didn't want to do a master agreement with the NCTC. Once again, we always tell our members, we either hang together or hang separately.

But obviously we can be somewhat influential in some cases and they saw that Great American Country provided a good product at a very fair and reasonable price. It sounds so simple, but that's really all it takes a lot of times.

MCN: Still, with MTVN. The Suite…

Hughes:
My favorite topic.

MCN: [Laughter] I'm sure.

Hughes:
We've got to get Disney in here somewhere.

MCN: [Laughter] In due time. Within The Suite, MTVN is trying to push VH1 Classic, MTV2, Noggin. I think they're looking for about 38 cents per sub per month for the whole thing. Where do you stand with them?

Hughes:
We're still working on an MTV digital suite agreement, too.

MCN: Let's get to Disney now. There were lots of retransmission disputes last year. ESPN gets a 20-percent rate hike every year: It's a rite of spring at this point. They're pushing for SoapNet carriage and more Toon Disney distribution. How do you feel about Disney these days?

Hughes:
Well, I guess, all of those things you mentioned provide job security.

The NCTC has not completed an agreement with SoapNet.

It is somewhat harder, I guess, doing agreements with services that are born out of retransmission consent. Are these services that, through consumer research, people really discovered were important or was it another case of a big company saying, 'We've got this leverage, let's create something, and shove it down operators' throats?'

And in many cases, I think that's how these things have gotten started. I don't want to make their job any easier by having a master agreement that makes it easy for our members to complete an agreement with them.

I really want them to earn it and make it as difficult as possible for those services.

MCN: Do you guys work with the networks individually? Do you have a master agreement with Disney that covers the different networks, or is each one kind of separate?

Hughes:
We have an agreement with Disney and Toon Disney, but not with SoapNet.

MCN: Is Toon Disney a good service?

Hughes:
Um. We are involved in some issues right now with Disney that relate to digital carriage. Once again, it's this whole issue of some programmers asking things of small operators that they don't ask of big operators.

MCN: Are they looking for analog?

Hughes:
Without getting into the specifics, it's different carriage terms, rates and positioning.

MCN: What's your take on Playhouse Disney, the new preschool network that's slated to launch early next year?

Hughes:
It's so new. We haven't seen the proposal yet. It depends on what kind of interest our members express.

MCN: How do you feel about ESPN?

Hughes
: We've done it to ourselves with our agreements with ESPN. To me [the annual 20-percent rate increases] isn't much of a story at this point. It happens every year.

MCN: I would suspect NCTC doesn't have a master agreement with the Fox Sports Net regional services.

Hughes:
NCTC does not have any master agreements with any of the regional sports networks. I don't know if we want to. Dealing with ESPN is difficult enough. I don't know if I'd want to deal with 15 different ones.

MCN: There you go.

Hughes:
But in any event, the increases that some of them have seen actually makes ESPN look tame. You go to some of the deals these teams have signed and the license fees are up above the $2 range for some of these regional sports networks. They have to shoulder as much of the blame as anybody else.

MCN: Are the local and regional sports services more important, though? That's what the local fan really wants, right? The costs may be higher, but is there some justification to that?

Hughes:
Yeah, I … I don't know. Here in the Kansas City area, it's the [National Hockey League] Blues out of St. Louis, and it could be the [Major League Baseball] Cardinals out of St. Louis. It's also the [Major League Baseball's] Kansas City Royals.

Out here [in the Midwest], the regional sports services can run across several states. That's not local. It's obviously regional and there is certain interest in the teams, but that varies by the different sports.

But the fact is, sports fans are a very vocal and loyal audience. Just as music fans want their MTV, sports fans want their ESPN, or their regional sports services. Sports are obviously very important, but the costs are very, very high.

MCN: Let's talk about some other big programmers. Discovery. Discovery Health. There's also The Health Network. Is there a big demand for this genre?

Hughes:
Unfortunately, their distribution is diluted because of each other, and I think people are trying to figure out which one, long-term, is the more viable one. In this case, I don't really know if there is room in that category for two.

MCN: How about BBC America? They seem to be pushing that service a bit.

Hughes:
Yes, through digital. BBC America is getting more and more distribution. The Discovery digital networks have been out there in front from the beginning. They've helped nurture the whole digital basic category.

MCN: What about the more-established Travel Channel?

Hughes:
I think we've finally seen, starting from the mid-part of last year, some significant changes at that service. It used to be a little urban. I think the programming changes they've made have made it a more appealing service to smaller operators. It's one of the top-five services being launched this year by co-op members. Once again — for smaller members with limited capacity — it maybe wasn't one of the first 30 they carried as they upgraded but it's definitely in their mix when they go to add new services.

MCN: How about in the Turner camp? There are some regional considerations for some of your members with Turner South, right?

Hughes:
It's one of the few services we have an agreement with that is a regional service. I was somewhat skeptical but I have to say it's done okay. They've put some [Atlanta] Braves games on and other regional programming that's obviously helped drive the distribution. We've had a vast number of our members in the southeast launch Turner South.

MCN: They're also looking to move Boomerang.

Hughes:
Boomerang — we just completed that agreement a couple of months ago. It's not on HITS yet. That was one of the reasons we delayed in doing that agreement. Our members rely on HITS so much. It's somewhat of a disadvantage if a network for our members is not on HITS.

MCN: How much are they pushing CNNfn? Is that something that's come across your negotiating table lately?

Hughes:
I'll just say yes.

MCN: What about Turner Classic Movies?

Hughes:
For the first few years. It was a very attractive service for our members to launch on analog. Hundreds and hundreds of members have carried TCM for years.

Are they on HITS or not? I thought it was. No, it's on Galaxy I. But it's been a very popular service.

MCN: You said you have some good rapport with Rainbow? Does Bravo play in the heartland?

Hughes:
You know, it seems to be. Once again, I think with some of the changes they've made. You know, with these smaller systems, the capacity is often 35, 40 channels. Once you get through carrying your staples and your must-carries, you only have so much room; there's only so much shelf space until you upgrade.

I know Bravo wouldn't like to be called a second-tier, but I mean you have to carry the ESPNs, the CNNs and the Discoverys of the world. Those are almost must-carries themselves.

MCN: What's your sense now that Black Entertainment Television is in the Viacom camp these days? What about The Major Broadcasting Corp. Network and New Urban Entertainment TV? Is there room, interest for three African-American services among your members?

Hughes:
Yes, we have agreements with all of them and we haven't heard much from BET since the acquisition by MTV. But obviously, they're the biggest and most well-distributed. I think to have some other alternatives and all of those alternatives, they're available via HITS, and our members, if they launch digital, they'll evaluate those networks and we'll see if they add any incremental benefit.

MCN: Is it similar for Hispanics? There seems to be a real spate of Hispanic services that are ramping up.

Hughes:
Yes. Absolutely, yes.

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