As cable operators roll out high-definition television throughout the U.S., a murky regulatory environment has them treading cautiously.
Even though the Federal Communications Commission doesn't regulate how cable operators price or market HDTV, it has warned MSOs not to create any barriers to a quick digital-TV deployment. A partial result of that warning: Operators that proffer HD video have been reluctant to charge big money for it, even though most HDTV users fall into high income brackets.
"We do have a wealthy clientele who would be willing to pay more than we are charging," said Steve Kipp, spokesman for AT&T Broadband (now part of Comcast Corp.) in Washington state. "But we need to comply with the FCC and its mandate at this point."
That MSO recently launched HDTV in the Seattle market and charges $4.80 for an HD-capable sidecar attachment to existing digital set-top boxes.
It's not exactly a mandate, but in April, FCC Chairman Michael Powell issued a "proposal for voluntary industry actions to speed the digital television transition" from all industries involved.
For example, TV makers were asked to start building digital over-the-air tuners into new TV sets. When the consumer-electronics industry failed to meet Powell's expectations in July, the FCC mandated DTV tuners less than a month later.
Observers took the action as a clear statement to all industries that ignoring his suggestions could invite new regulations.
Powell's proposal suggested that cable systems with at least 750 megahertz of capacity "carry, at no cost, the signals of up to five broadcast or other digital programming services" and let subscribers rent or buy HDTV-capable set-top boxes by January 2003.
Cable operators — fully aware of the wrath exacted on the consumer-electronics industry in August — have scrambled to keep Powell happy, lest he start re-examining digital must-carry or the other mandates that give cable execs recurring nightmares.
"The political process is putting pressure on them," said Robert Rini, a broadcast attorney at the Washington firm of Manatt, Phelps & Phillips. "If they started charging for it [as a separate service tier], that might ruffle some feathers at this point."
Rini, who is negotiating several retransmission-consent agreements for TV stations in various markets, said HDTV carriage has become a hot topic. Cable operators are balking at broadcasters' attempts to gain carriage for their HDTV and digital signals.
In the absence of digital must-carry, cable operators have held the upper hand.
"That's one reason that Powell came out and started wagging his fingers at all of these industries," Rini said.
Jerald Fritz, senior vice president of legal and strategic affairs for Allbritton Communications, a station group comprised of ABC affiliates, said the charges for HD-capable boxes aren't fooling anyone.
"They may not be charging for the service, but they're charging … for the box," he said. "That's a profit center. It's another way for them to increase their coffers without paying the broadcasters."
By incorporating HDTV fees into set-top equipment levies, cable operators have managed to charge for high-definition without technically running afoul of Powell's proposal. But in searching for a balance between respecting the FCC's wishes and charging a fair price for a legitimate premium service of significant value, cable operators continue to test the limits.
In November, AT&T Broadband canceled its plans to enact a $75 access charge for new HDTV subscribers in Seattle, shortly after hearing that several FCC staffers were dissatisfied with the proposal. Kipp said the timing was coincidental and tied to the closure of the merger of AT&T Broadband and Comcast, which doesn't charge an HDTV-access fee.
But Philadelphia-based Comcast is now evaluating a possible one-time fee to help recoup the added costs of the integrated HD digital set-top boxes viewers need for the service.
Of course, some cable operators are charging extra for HDTV content that doesn't come over the air. For example, Cox Communications Inc. in Fairfax, Va., launched a five-channel HDTV service in October for a $9.99 set-top box rental fee, and charges an extra $6.95 for Discovery HD Theater.
Subscribers also must pay extra for Home Box Office or Showtime, if they don't already subscribe to the standard digital version (no analog versions of those channels are available in Fairfax).
"It has been extremely well-received so far," said Alex Horwitz, a spokesman for Cox's Northern Virginia operations. "The demand has outpaced our expectations."
The focus on charging for HD-capable boxes, rather than service tiers, holds another benefit: cost averaging. Under the 1996 Telecommunications Act, cable operators can average equipment fees, or charge the same amount for analog boxes as they do for digital ones, even though the new digital boxes are far more expensive.
For example, Time Warner Cable charges $5.95 per month for all of its leased boxes, including HD-capable ones, according to a spokesman.
The perception that all subscribers are somehow subsidizing HDTV subscribers may irritate consumer advocates, but the practice also serves the FCC's goal of hastening the digital TV transition so that the federal government can take back and re-auction the broadcasters' analog spectrum.
And that doesn't mention the obvious benefits to cable.
"If I'm a cable operator, I have a long-term plan to replace all of my analog boxes with digital boxes," said Gerry Kaufhold, an analyst with Cahners In-Stat (a unit of Multichannel News parent Reed Business Information) "It's probably smart bookkeeping."
But it also has risks. The 1996 law also states: "Such aggregation shall not be permitted with respect to equipment used by subscribers who receive only a rate regulated basic service tier," and it defines the basic tier as "any service tier which includes the retransmission of local broadcast signals."
It makes no mention of whether the signals are analog or digital — or whether or not they're in HD. "If the HDTV is going out over the air, that seems like a basic tier," said Frederick Ellrod, a municipal attorney with Miller & Van Eaton.
In addition, local franchise authorities still regulate the basic tier, which raises an obvious question: "If it sounds awfully like a basic tier, then it would be subject to rate regulation," said Ellrod.
Of course, the marketplace may restrict cable operators' HDTV pricing to a greater extent than fears of regulation. With so little HDTV content now available, cable operators are already limited.
"If you charge them for a box rental, it's just much easier than charging them for a tier," said Kaufhold. "Cable operators are much more concerned with marketing considerations than legal considerations right now."
Indeed, while pressure from the FCC and creative lawyers has its place, cable operators appear to be focused outside the Beltway when it comes to HDTV.
"I don't know if I want to get into the business of charging for local broadcast content anyway," noted Tom Pierce, AT&T Broadband's director of video marketing for Washington state.
Perhaps that's a wise strategy for more than one reason.