KENNARDS BIG CHILL Nixes Freeze, But May Ice Pass-Throughs

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Washington -- Federal Communications Commission chairmanWilliam Kennard isn't supporting a cable rate freeze. It looks as if he'sfavoring a frost.

Last week, Kennard declared that cable markets areuncompetitive based on rising rates and cable MSO market share standing at 87 percent, ashighlighted in recent FCC price and competition surveys.

As a result, Kennard set in motion a series of moves thatcould culminate in new policies that would deny cable operators the right to pass throughall programming cost increases to subscribers.

Even if the FCC satisfies itself that cable rate hikes arecost-based, Kennard said it might not be fair for subscribers to shoulder the full load.

Kennard, in office less than three months, said he wantedto send an early warning to Congress that broad deregulation of the cable industry onMarch 31, 1999, as required by law, would be premature under current market conditions.

'The extent of competition that Congress envisioned bythe end of March 1999 is not here and I don't believe it is imminent. I thinkCongress needs to know this,' Kennard said.

Kennard said he might force cable operators to eat higherprogramming costs by offsetting them with advertising revenue, home-shopping commissionsand new network launch fees.

Kennard said the FCC had to engage in 'a hardself-assessment' to decide whether it needs to put a lid on external costpass-throughs.

Kennard told reporters he will also push the industry tocreate smaller programming tiers 'so that consumers are not paying for programmingthey don't want.'

Specifically, Kennard ordered the Cable Services Bureau toconduct an immediate 'inquiry' to verify cable operators' claims that ratehikes are largely attributable to rising programming costs.

Kennard also wants the bureau to probe whether verticallyintegrated programmers are charging more than independent programmers.

'This inquiry will require the cooperation andforthrightness of the industry,' Kennard said in a statement.

Programmers and operators reacted to Kennard'scomments with alarm.

Ed Durso, ESPN's executive vice president ofadministration, said the industry's current use of programming tiers with dozens ofchannels has proven to be 'a good model.'

'Changing the world around into one in which thegovernment is dictating packaging requirements potentially has unintended consequenceswhich nobody could anticipate,' Durso said.

Once again, Kennard dismissed a rate freeze as 'sortof doing brain surgery with a meat cleaver,' an across-the-board solution thatpunishes the good and the bad.

Gene Kimmelman, Washington office co-director of theConsumers Union and rate freeze advocate, suggested Kennard's approach could lead tolower cable rates or at least start to weaken the 'monopolistic stranglehold of TCIand Time Warner' over the industry's programming and distribution networks.

'Gene Kimmelman is just smoking one on this one,'said Leo J. Hindery Jr., president of Tele-Communications Inc. 'People have askedGene to give us the data that he thinks is so dispositive of vertical integration. We knowthe data and it ain't true.'

Hindery was referring to allegations that cable operatorsthat own cable networks have been able to evade regulation by embedding rate increases inthe contracts of their programming affiliates.

Hindery said Kennard's moves were a surprise; heasserted that Kennard failed to recognize that cable markets are more open than localphone markets and cable programming costs are clearly on the rise as demonstrated byESPN's eight-year, $4.8 billion NFL package inked the same day as Kennard'spress conference on Tuesday.

'I find it disheartening that a chairman, who has beenchairman for such a short period of time, feels that conclusions are ready to bedrawn,' Hindery said.

In a report to Congress last week, the FCC found thatcable's market share dropped from 89 percent to 87 percent in 1997. Thedirect-broadcast satellite and direct-to-home industries reported that they ended 1997with 8.5 million subscribers, a 29 percent increase over 1996.

Yet, FCC commissioner Gloria Tristani issued a statementthat said DBS can't fill the 'competitive vacuum' because it lacks local TVsignals and requires upfront costs that put it out of the reach of many Americans.

Dan Brenner, vice president of law and regulatory policy ofthe National Cable Television Association, countered by saying the DBS industry'sadvertisements have been directed at mainstream consumers, not at a narrow class ofelites.

'They're aren't appearing in CountryLiving or Cigar Aficionado magazines. They're appearing in the Sundaynewspaper,' Brenner said.

Joe Waz, Comcast Corp. vice president of external affairs,said it should not be a surprise that the FCC wants to confirm for itself the cable'sindustry claims about higher programming costs.

'That does not mean that the end result has to be orought to be more regulation,' Waz said.

Senate Commerce Committee chairman John McCain (R-Ariz.)said last week he was reluctant to endorse new FCC regulation of the cable industry.

'I think our energies are much better spent doingeverything we can to remove whatever regulatory impediments are inhibiting cable'scompetitors, instead of trying to create new regulatory requirements to inhibitcable,' McCain said in a statement.

Kennard anticipated that kind of reaction by saying hefavored promoting cable competition by having Congress change the law to allow DBScarriers to provide local TV signals; to equalize copyright fees paid by DBS and cablesystems for superstations and distant network signals; and to expand the rights of newentrants to serve apartment buildings.

Ken Johnson, spokesman for House TelecommunicationsSubcommittee chairman Billy Tauzin (R-La.), said the lawmaker is taking 'a long, hardlook' at introducing a bill allowing DBS carriers to offer local TV signals.

Johnson said Tauzin did not share Kennard's'gloomy forecast' about DBS.

'Clearly, there are millions of Americans who wouldconsider pulling the plug on cable if they could receive their local stations viasatellite as well as premium programming,' Johnson said.

The FCC will also conclude a reconsideration of rules thatbar a cable operator from passing more than 30 percent of households with its wires.

FCC sources said it was likely the bureau will send lettersto cable operators and programmers seeking pricing information.

Although cable operators and programmers have jealouslyguarded their contractual arrangements. Hindery said he would cooperate with the FCC.

'I would be happy to sit with them,' Hinderysaid, adding he would also agree to talk about creating smaller programming tiers.

Jayne Wallace, director of media relations for USANetworks, quoted USA Networks CEO Kay Koplovitz saying 'it would be ridiculous forthe FCC to look at private agreements of programmers.'

In 1993 and 1994, the FCC declined to exclude programmingcost increases as an external cost because the record did not show that cable operatorshad any control over programming costs. A federal court upheld the FCC in a challengebrought by various municipalities.

However, the court said the FCC's decision not torequire operators to offset external costs with adverstising revenue could prove to be'unreasonable' if advertising became 'a steady and significant' sourceof revenue.

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