Laybourne Lashes Out

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Geraldine Laybourne may be the CEO of Oxygen Media, but she was breathing fire last Thursday at an all-day Federal Communication Commission forum on the plausibility of cable companies offering more channels on an a la carte basis.

“A la carte is not the answer. In fact, it is one of the worst ideas I have ever heard,” Laybourne told an FCC panel headed by FCC Media Bureau chief Kenneth Ferree, who has bemoaned the lack of channel choice on cable and has declared himself an unabashed fan of a la carte pricing.

Only one FCC commissioner showed up: Democrat Michael Copps, who in a brief appearance suggested that a la carte might be the antidote to “skyrocketing” cable bills.

According to a Government Accountability Office study last October, nominal cable rates rose 40% over the previous five years, compared to a 12% rise in inflation in the overall economy.

Soaring bills, combined with cable's penchant for clustering networks within large tiers that are offered on a take-it-or-leave-it basis, have fueled interest in Congress in the idea of forcing or coaxing cable companies into offering more programming services a la carte. Unbundling tiers is also viewed as a potential remedy for helping parents block indecent programming without paying for it.

But the cable industry has launched a massive counterassault, arguing that a la carte would destroy the economics of a business model that has spawned a 300-channel alternative to the three-broadcast-network oligopoly that reigned three decades ago and that many Americans under age 40 simply do not recall.

ECONOMIC REMODELING

Echoing the view of big cable operators and programmers, Laybourne said that a la carte, while heralded as a way of lowering cable bills and expanding choice, would have precisely the opposite effect.

The economics of a la carte would result in consumers paying more money for fewer channels, Laybourne said, a statement that reflected the results of a recent study funded by the National Cable & Telecommunications Association that found that a la carte would trigger higher per-channel rates and crush niche networks denied a home within large tiers that help them gain traction with viewers and advertisers.

Cable-network budgets would undergo dramatic change, Laybourne said, adding that a channel like Oxygen, which spends less than 5% on marketing, would need to ramp up promotional outlays to persuade viewers to give the channel a try.

“The idea that we would have to spend that money on marketing is an abomination,” said Laybourne, whose network, launched in 2000, now counts 53 million subscribers.

Channel-surfing that easily introduces a viewer to new programming was also critical, with Laybourne noting that when Nickelodeon was just an idea, kids surveyed said they didn't want the channel. Today, Nick is a cable programming jewel.

That anecdote, she said, demonstrated that large tiers offer cable networks crucial exposure to the casual viewer.

“Consumers would never get a new network under this [a la carte] scenario,” Laybourne said. “There would be less money for good programming.”

Ferree's staff is preparing an a la carte report for Congress due Nov. 18. Several House lawmakers and Sen. John McCain (R-Ariz.) wrote the FCC expressing concern about the lack of a la carte options on cable and about indecent programming that customers can block for free, but still need to purchase.

A decade ago, some cable operators flirted with a la carte, but that was done to avoid rate regulation. Ironically, the FCC shut down some a la carte practices, saying low subscriber interest demonstrated that the per-channel prices charged did not represent a realistic alternative to tiers.

SMALL-OP VIEWS

Small cable operators have been telling the FCC and Congress a different story about a la carte. They assert that a five-company programming cartel (which includes the parents of ABC, NBC, CBS, Fox and Time Warner Cable) hold their broadcasting and marquee cable networks hostage unless small cable companies cave into all their wholesale demands, which typically include carriage on the most widely penetrated tiers, plus annual price hikes.

The bargaining tactics of the five companies, small operators insist, end up hogging channel capacity that would otherwise go to independent programmers like Oxygen and force consumers to buy expensive programming that they do not want or that they consider indecent.

“They are using their market power to reduce local choices and increase costs of cable,” Ben Hooks, CEO of Buford Media Group, a cable company with 56,000 subscribers, told the FCC panel.

Hooks and other small operators that belong to the American Cable Association, while rejecting mandatory a la carte, want the right, but the not obligation, to retail any cable channel a la carte and demand that broadcasters stop tying access to their TV stations to the bundled carriage of their cable networks.

ABC, which did not testify before the FCC, has repeatedly claimed that any cable operator may pay cash for a la carte access to one of its 10 TV stations.

The FCC likely does not have the authority to force a la carte upon cable operators, but it does have power to crack down on tying practices of broadcasters in retransmission consent negotiations. But FCC chairman Michael Powell has noted that after retransmission consent became law, cable operators refused to pay cash for TV stations and encouraged broadcasters to accept carriage of their new crop of cable networks as compensation for their TV stations.

Consumer groups have latched on to the a la carte issue.

Gene Kimmelman, senior director of public policy at Consumers Union, said the suggestion by some in the cable industry that he favors a pure a la carte system that would supplant tiers was a red herring.

He said cable could continue to offer tiers but should offer some components a la carte. He said all cable consumers should buy the basic tier, which includes local TV stations and local access channels, but digital subscribers should be able to purchase digital channels a la carte. Because those subscribers already have set-top boxes, cable operators would not incur additional equipment costs, he said.

“What consumers want is really, really simply: give them more choice,” Kimmelman told the FCC panel, though he added that he didn't know how many cable subscribers would actually elect a la carte.

ADDITIONAL OPERATIONAL COSTS

A la carte foes emphasized cost concerns. Michael Willner, vice chairman and CEO of Insight Communications Co., said retrofitting cable systems into a la carte platforms would involve large capital outlays that would be passed on to customers.

He said the need to hire and train additional customer service representatives, a traditionally weak area of the cable business, would represent a new cost burden that a la carte fans often overlook.

“Cable operators would have to spend really significant amounts of money on technical and operational modifications,” Willner said. “This will absolutely translate into higher prices for all customers, and that's without one single customer opting for a la carte.”

ADVERTISING ARITHMETIC

Cable networks tossed into a an la carte world would see ad revenue evaporate because they could not match the penetration afforded by tiers, said Jon Mandel, co-CEO of MediaCom US, an influential cable ad time buyer.

“The simple arithmetic … shows that there are not enough people to carry the cost of any single channel,” Mandel said. “So program quality would not be the same.”

Mandel rejected the analogy made by some a la carte advocates that cable should be like a supermarket in which consumers that purchase some goods do not need to shoulder the cost for anything else in the store.

“The supermarket carries flashlights and other essentials you just might need and the cost of that inventory carriage is in your potato chips,” Mandel said.

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