Little Ops Say the Squeeze Is On

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The owners of the cable industry's smallest systems are asking if it's time to break from the National Cable & Telecommunication Association, and to appeal for Congressional help against what some have come to call OPEC — the Organization of Programming Extortion Companies, that is.

"The NCTA would like us to lobby with them rather then stomp around the halls in Washington yelling, 'Help us,' " said Neal Schnog, president of 23,000-subscriber Uvision LLC, which serves 20 towns in Oregon. "But I just don't agree. They're not fighting hard enough."

The nation's largest cable operators have ceded their profit margins to such vertically integrated content providers as The Walt Disney Co. and AOL Time Warner Inc., making up the difference through the launch of such new products as video-on-demand or interactive TV, the small-system operators said. They claim they can't follow that strategy.

Five years ago, programming costs made up between 25 and 30 percent of a cable system's budget. They now make up 55 percent of that cost, small-system executives said.

INTERNET HOPES

For rural operators, cable modems have become the best hope of making up for lost system revenue.

"We're pinning our hopes on high-speed data [revenue], because the programmers don't want to be our partners anymore," Schnog said.

Programmers know that if the small terrestrial systems fail, they can still sell their content through direct-broadcast satellite, he added.

The nation's smallest broadband companies have been chilled by predictions that such popular networks as Lifetime Television and Black Entertainment Television may be contemplating triple-digit fee increases when their current contracts expire.

Programmers cite revenue losses from a soft ad market and price increases from their programming producers as reasons for the anticipated hikes.

For instance, executives at expanded-basic staple Turner Network Television acknowledge that the channel will raise its rates to cover the costs of acquiring National Basketball Association and National Association for Stock Car Auto Racing (NASCAR) TV rights, as well as off-network TV and theatrical film acquisitions.

MODEL BREAKDOWN

At some point, rising programming costs cause the small-system cable operator's business model to simply break down, said Matt Polka, the president of the American Cable Association, the small-operator trade group.

"ESPN has had 20 percent increases five years in a row now," he said. "You take that out to 60 networks.

"We're not in favor of regulation, but at some point, consumers will get involved and then Congress will shine a light under a lot of rocks and (programmers) won't like it," Polka added.

So what happens next? Was the last price increase the one that will cause small operators to just say "no," and drop networks?

For Walter Kemmerer, general partner with Pine State Management Inc. in Pennsylvania, the answer is "yes."

"I'm waiting for contracts to run out and I'm dropping," he said.

Pine State — whose 24 systems serve 12,500 subscribers in Maine, New Hampshire and South Carolina — said he intends to drop New England Sports Network when its contract expires at the end of this year.

When NESN was a pay network, Kemmerer bought the channel for $2 per sub and sold it for $3.95, he said. The arrangement netted him $60,000 in annual profit.

But then the network's owners, the Boston Red Sox and Boston Bruins, turned the regional sports net into a basic channel, and Kemmerer's cost for just that network took a $250,000 swing.

Instead of earning $60,000 a year from just the customers who really wanted to see the baseball and hockey games, Kemmerer would have needed to pay $200,000 — and spread the cost across Pine State's entire customer base, he said.

Kemmerer said he's not concerned that dumping the sports network will send sports fans scrambling to DBS. He believes his local-origination sports programming is Pine State's retention anchor.

"We've been a good corporate neighbor" by connecting clustered systems with fiber, he said. "In each town, they see their local kids play … on any given night, they can see the boys playing in one town, the girls in another town, [junior varsity] in another. That's something DBS will never do."

ON DON'T-NEED LIST

But Kemmerer conceded that nature also gives his company a competitive leg up, especially in his northernmost systems. Customers would likely need to clear away a half-acre of trees to get a good look at DBS, he chuckled.

Other networks are on Kemmerer's hit list, too.

"I don't need Turner South, [Fox] Sports [Net] South. If I have to bite the bullet and dump them, I'd rather do that and give a good bang for the buck on basic cable," he said.

Companies that threaten to dump networks often find their hands tied because the vertically integrated companies, such as Disney and AOL, link access to popular services like Cable News Network— or even broadcast networks like Disney's ABC — to agreements to carry other channels with lesser distribution.

"If it comes down to 'You can't have CNN,' we go to the Hill. If there's one thing the Hill understands, its small business," Kemmerer said.

LOATH TO DROP NETS

Buford Media Group president Ben Hooks said he's not yet committing to any course of action. Although Buford has dropped networks in the past, Hooks said he's loath to do that because it confuses customers.

"But if you let a programmer misbehave, the price goes up," he said.

Unrestrained costs could lead to the eventual à la carte marketing of networks, which digital technology would enable, Hooks noted.

"When the industry has had enough, and we tell Washington we can deliver one channel at a time, what will happen then?' Hooks asked.

Historically, program packages have worked well for cable, but the price of the basic tier is now getting out of reach. He compared the problem to buying a car: Not everyone can afford a Mercedes-Benz, and not everyone wants one. You have to have an option for the customer who only wants to buy a Volkswagen, in Hooks's view.

DATA HAS LIMITS

Out West, Catalina (Calif.) Cable TV Co. owner Ralph Morrow said he's used Internet revenues to prevent consumer rate hikes for the last three years.

But there's only so much that segment can grow, as there are only 1,600 homes on the whole island of Catalina.

"I'm trying to keep my rates down," said the operator, who's also the mayor. "My business is only good because I keep my price low."

He charges $33 for 77 channels, which keeps him competitive with the "little dish," he said. He's keeping that rate until there's no alternative but a hike for his 1,416 subscribers.

So far, Morrow has coped by swapping out pricey nets for those with more reasonable rates. Last year, he dropped Disney Channel rather than pass its cost as a basic along to his customer base. Instead, he added Noggin.

This year he's juggling Spanish networks to get the one with the best rate.

You can hear Morrow's teeth grind when he talks about sports costs. Of his $33 charge, $6 goes for just three sports networks: Fox Sports West, Fox Sports West 2 and ESPN.

"When I write that check, I just cringe," he said. But without televised games, islanders would have to sail over to the mainland and get a hotel for the night to attend sporting events. Instead of dropping sports nets, he continues to try to convince the Fox Sports execs that he deserves an out-of-market rate.

If programming licenses increase, he will poll his customers in the not-too-distant future, Morrow said. "I'll ask, 'To keep rates constant, tell us what you want us to drop.' "

INDIES ON BUBBLE

Operators fear that as the industry approaches the fourth retransmission-consent cycle, networks like Oxygen and The Weather Channel — which are unaffiliated with the vertically integrated companies — will get pushed off their lineups.

The ACA members converged on Washington at the end of April to attend as many Congressional hearings as possible, in hopes of finding a sympathetic ear.

"Do programmers really care for cable as a partner?" asked Polka. "I think not. If not for cable, that took a chance, they wouldn't be here today.

"We're completely exasperated. We have to do something if we have a hope of saving our businesses."

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