MSOs, Net Execs Stage Sit-Down

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More or less as a public service,
Multichannel News invited some key executives from the operator and programmer sides of the business to address the current state of relations between networks and their cable distributors. Frankly, not much got resolved, but the conversation was interesting, anyway. [Portions also will air on The Cable Channel at the National Show.] Joining in were Insight Communications Co. CEO Michael Willner, who is chairman of the board of the National Cable & Telecommunications Association; Geraldine Laybourne, chairman and CEO of
Oxygen Media and an NCTA director; Mediacom Communications Corp. chairman and CEO Rocco Commisso, also an NCTA director; and Lindsay Gardner, executive vice president of affiliate sales and marketing for Fox Cable Networks. Among the back stories: Media
com and Fox Cable (among many other programmers) are in the middle of negotiations, because the MSO is trying to rework many of its programming contracts. Participants met on April 23 in a TV studio overlooking Times Square.
MCN editor Kent Gibbons asked the first question. An edited transcript follows.

MCN: I'd like to start off by asking you a combination first question. I'll start with Mike, the NCTA chairman: How bad is the current state of affairs between programming suppliers and the cable companies that distribute them? And what's the single biggest thing you'd like to see happen to improve the situation?

Michael Willner:
I think that there's been a natural tension between programmers and distributors, which is not new. This is not new news. The tension is, how much are consumers willing to pay for the development of programming and the distribution of programming? Operators have to have sensitivity to how much they can raise their rates in order to deliver top-quality programming.

On the other hand, if we don't provide an economic incentive, the industry would not have been as successful as it's been in taking market share away from conventional broadcast stations. So I think it's a healthy tension. I think the industry will always have it, and I would hope to seek ways not to blow the individual negotiations out of proportion that seem to hit the press every couple of years.

MCN: So the thing you would like to see fixed is the perception there's a problem? Or an over-attention on a few problem areas?

Willner:
There are issues, and there'll always be issues, and we have to deal with them, company to company. When we start airing our dirty laundry in public, we run the risk that somebody else will come in and try to fix our problems for us, and then nobody is going to win.

Geraldine Laybourne:
I have a slightly different view on this, having been in the industry for 22 years.

Willner:
That's because you're a programmer.

Laybourne:
Of course, and that's why they have both of us on the panel. I don't think we've seen as contentious a landscape before. I think that there has been more of an appreciation for the kind of original content that programmers have been able to bring. What concerns me is that there's been this unintended consequence — that programmers gave deep discounts to operators with large volume. And now you see a consolidation in the operator world and the consolidation in the programmer world.

What's concerning about that is that the programmer is being pressured by Wall Street, and 20 percent growth, and all kinds of really tough hurdles to improve their business, so they're not necessarily thinking about the creation of wholly original content.

I was in two large entertainment companies, and it was very hard to get brand-new projects off the ground. It wasn't hard to get thinner slices of things; taking already existing programming and spinning it off. But consumers aren't dumb. They want something from this industry that's original, on a regular basis, and what is particularly concerning at this point in time is that I don't want the operator to forget that the programmer partner can help them figure out this new world of computers and televisions coming together.

It's the first time we've had anything really big — the Internet — that we could take on as a creative challenge together.

The big entertainment companies have a vested interest in protecting their existing business. So they're not really going to be that innovative. And where is the room for the scrappy entrepreneur? I think Oxygen may well be the last widely distributed independent network, and that is not healthy for American consumers.

MCN: So is there one single thing about the way things are now that you would like to fix?

Laybourne:
I would like the operators to remember their roots and I would like the programmers to remember their roots — that we got where we got because we were scrappy and entrepreneurial, and even if you're in a big company, you need to be scrappy and entrepreneurial.

MCN: From the operator side, what's their side of that equation?

Laybourne:
They've risen to the occasion with Oxygen. I think, though, that we're in such different camps right now that the conversation about, 'How can I help your interactive platform?' doesn't go as far as I'd like to see it. I think that's where the innovation needs to happen, and we need to partner, and we need to do it together and we need to figure this out.

MCN: OK. Rocco?

Rocco Commisso:
I see your concern, Gerry's concern, from a different tack. And that is: the true law of unintended consequences occurred in 1982, when the government basically took away the exclusivity provisions that we have with the programmers and introduced retransmission consent.

Today what we find, at least for our company, is that while we were supposed to help satellites get up in the sky to compete with us, the true law of unintended consequences is that [EchoStar Communications Corp.'s] Charlie Ergen and [DirecTV Inc.] are paying lower rates on the programming side than Rocco Commisso is paying, for [my] customers. Notwithstanding the fact that in each of the markets that [DBS and Mediacom] we operate in, we have the largest market share.

If we were to measure on a per-eyeball basis in specific markets where we're in, clearly we should be getting the lower rates as opposed to the higher rates.

What has happened in the last 10 years with programming discounts being given to the larger companies, for the most part, is that companies like myself, that's principally bought and built from having acquired from the larger companies — Cablevision Systems, Cox, Jones Intercable, AT&T, TCI — I find myself giving away a huge bonanza to the programming community by not having the ability to assume the rates that the larger companies were paying the day prior to my owning those systems.

I feel strongly that my customers are getting penalized for being served by who we are, as opposed to some of the larger companies, including the satellite business.

I feel strongly that something has to give here. I think we've been held hostage here: You either go out and launch my services, or I'm not going to give you retransmission consent. I'm talking about, like Gerry has been, the Foxes and the Disneys and CBS and the NBCs of this world.

The dialogue needs to be changed.

Look at what's happening with sports programming, with what's happening with the YES [Yankees Entertainment & Sports] Network here in New York City. And given the fact that technically we could do that now, with digital and with the set-top boxes that we have available — we should be given the opportunity to offer services on an à la carte basis once they get beyond a certain price that we can't afford to pay.

We should not be forced to offer programming which, on a per-channel basis, I don't make any money on. In fact, that phenomenon exists today.

I think if we were to think about these ideas and implement some things going forward, we'll surely give companies like Gerry's company the opportunity to now come in and say: 'We have something to offer, because you can make money out of it. Because I don't think our programming cost is as high as some of the sports-programming costs.'

And two, it gives us the ability to control that major cost. Every day we know that programming costs are a lot larger because of sports programming. But who is controlling that?

It's us, the cable company, that's getting criticized when the rates go up. It's not the programming community. And I just don't think it's fair.

Willner:
One of the problems is that we're a little bit between a rock and a hard place here.

There is a suggestion embedded in Rocco's comments — and I understand where they're coming from — that we need some sort of relief from some government agency. In this particular case, it requires legislation. And one of the things I found about legislation in Washington is, it's a little bit like making sausage. What you put in you have no idea what comes out the other end.

That concerns me, as a matter of process, to fix this problem legislatively.

One of the great gifts that Wall Street has given the satellite industry is the ability to convince them, the Street, that marketing costs are nonrecurring expenses. Which is just absurd.

It was one of those things that because they were in start-up phase, they were in market-grab phase, that they were willing to pay anything for programming just to start taking market share away from the cable operators.

That phase of their development, no matter what happens with the Direct-EchoStar deal, is coming to a conclusion. We think, in our talking with the equity world and the debt world on Wall Street, that they are beginning to become much more realistic about the fact that satellite does operate in a highly competitive world where their marketing expenses will continue.

It means that their balance sheets don't look as good as people thought they did. Certainly their P&Ls [profit and loss statements] don't. And I think that's going to inject a dose of reality in their ability to overpay for programming, which has forced us to overpay for programming, with all due respect and condolences to the programming community.

I think that this problem is beginning to work itself through the marketplace. If we seek a quick legislative solution here, chances are, everybody involved in telecommunications in general will come crawling out of the woodwork and take their bite of the apple. We're liable to fix this problem, we'll win the battle…

Laybourne:
And start a million more.

Willner:
… and we could lose the war, is what really could happen.

Lindsay Gardner:
I think that's a very good point. Once you start the process, you don't know what kind of slippery slope you may be on.

Willner:
Look at '92 for experience on that.

Gardner:
There is
a cultural need for a critical-mass number of genres to be accessible to everyone. There was the suggestion in print recently that there may be an 80-year-old grandmother somewhere who doesn't want to pay for ESPN.

Well, I had a grandmother. She lived just a few miles from the studio here, and she was a big Mets fan, because the Mets are the local team here in New York, and it's more than sports. It's a local institution. People care passionately about it.

In many cities around the country, there's also a financial interest, with communities financing stadiums. I submit that this 80-year-old woman, when her local team makes the post-season, she'll be very interested in ESPN.

If you were to move ESPN or Fox [Sports Net] to an à la carte tier, for the 80-year-old woman who may not always want it, what about the 20-year-old who just cares about Britney Spears and has no interest in news? Do we move CNN [Cable News Network] or Fox News [Channel] out of the basic tier?

Do we move Disney Channel, which so many people value, off of the basic tier?

It's not only of cultural importance to this country, for all of us who have cable or satellite — and that's 80 million households — to have access to a certain core number of genres. It's also the underpinnings, I submit, to your businesses as well, to have a set number of key channels available broadly and widely, and then to work together with programmers.

I'm optimistic about the relationships between operators and programmers. Because I see that a number of programmers and operators are trying to get past this Cold War-mentality of just leveraging and fighting back and forth. To first accept that there's a certain number of channels that are going to go into basic or expanded basic, and then work together to see what we can do to leverage your platform and to leverage our content onto these new value-added tiers — digital and interactive and theatrical video-on-demand.

For example, our company, we have a whole portfolio of channels — sports channels, movie channels, entertainment channels — that we've offered, and we're concluding deals with both of your companies to offer on digital.

Laybourne: Cable really didn't take off until there was a vast amount of great programming available, when cable started to be built out widely across the country, in the early '80s. That's important to keep in mind.

And the basic-cable formula has worked. We've been able to deeply satisfy lots of different groups. Ironically, women were not deeply satisfied. They watch more television but less cable television, and they are paying 85 percent of all bills. But that aside, it is really important to think about what technology will do to the economics of basic cable.

Anybody who has a [digital video recorder], or a TiVo, at home knows that their television viewing habits changed dramatically. Right now, it's not a very big installed base. It's on some DirecTV. Some people who happen to have engineering departments at their offices that can install it.

But once Michael [Willner] decides that he's putting the [DVR] inside the set-top box, then the whole economics of the basic-cable business goes away and you cannot super-serve each one of these niches unless you have two income streams, advertising and license fees. There isn't a network that can work that.

So it's a very tricky thing, and somehow we're going to have to figure this out together. Because you [Michael] and you [Rocco] don't want to see the networks that have helped you maintain your customers go away, because they have no advertising.

Willner:
Well, I would also add to that that when the '92 [Cable] Act passed — and it was a mess of a bill — for cable, it was a terrible outcome. The entire capital-spending program of this industry came to a screeching halt.

Laybourne: Yes.

Willner:
There was no new programming being developed because there was no capacity being added to the networks. Everybody suffered from that. So if there's any message that anybody on either side of this debate can get: We're all going to lose if we seek a solution other than the one we decide upon on our own.

I think that the industry has to work very hard and very realistically. Neither of us have more to lose or gain than the other …

Laybourne:
Amen.

Willner:
… in this debate. And we'd better solve it on our own, before somebody else comes in and tries to solve it. I think that there are some people at slightly further south latitudes than New York City who would love to get their hands around this issue, and make it a political issue.

Commisso:
My suggestion is: Let's talk about the issues. Let's sit down and talk. If I cannot go out and put a rate increase beyond 5 percent, why I should be forced to incur a rate increase beyond that number? It's not just the status quo that I worry about — it's not just today that I'm worried about. I worry about the viability of our business model, on the video side, for the next five years.

Willner: This is an issue, it is a problem, it is one we've been confronted with for more years than I can remember at this point. But this is a terrific business.

I mean, at the end of the day, we have the platform that is so far superior to any other delivery method for voice, video and data services. The power of the bundle is so clear to me. We cannot only stop the erosion of market share to our competitors, but we can start to win customers back because we can do more with our mousetrap than they can do with theirs.

To me, the most important conversations we are having right now are with programmers, to find ways to exploit the technical capabilities that we have in our networks that our competitors don't have.

I, for one, find it much more important that Fox Sports or ESPN enhance their product — so that I can actually deliver it in a better format, with more information, with a richer experience to the consumer — so that more and more consumers will want to come back from satellite rather than think about leaving to go to satellite.

Gardner:
That's a wonderful point …

Willner:
[To Gardner.] Twenty percent is too much. [Laughter.]

Commisso:
Ten percent is too much. [Laughter.]

Gardner:
It's in your plant that lies the seeds of our industry's, and this industry's, best days ahead of us.

There is nothing more local than one of your customers, Rocco, and his or her hard connection back to your plant, and all of the things that you can provide through that plant that your competitors can't and your customers live in communities. They care deeply about their communities, whether it's their local schools, their local teams, local weather, traffic.

As you said, some of the most productive conversations that we're having — that are also getting us away from this Cold War-mentality — is taking the capability of your plant — and your very personal, intimate relationships with your customers — and combining that with the extraordinary content that many of us in the programming world have.

Take local television stations, which are such vast engines of local content. Local teams, product that we create, most of which never ends up on the air. Batting practices, post-game news conferences, enhanced traffic information, different camera angles. That's what we're talking with your colleagues about — creating very compelling, rich, local content that is profitable for both of us right from the beginning, because it comes on top of this basic package that we've had so much divisiveness about.

MCN: Are there places in your markets where there are some success stories, where you've worked together with programmers?

Commisso:
Absolutely. I think Fox is helping us out in a lot of promotions that we're doing, and so are the other programmers. But speaking for our little company, that was no company six years ago: Given what we have bought, which is principally discarded, non-strategic assets of the larger companies that were not upgraded — and given the amount of work that we have done for the last three years, especially, upgrading these systems — I believe, on a per-subscriber basis, we have launched more programming services than any other cable company in the entire U.S.A.

So I'm not here having to be apologetic about what I've done to the programming community. I'm here to plead with them to re-rationalize the economics of the business, so we both survive.

If they're truly our friends — meaning friends of the cable business — yes, let's price the product accordingly.

I go back to the satellite comparison that I gave you. If I want to be a little facetious here — what's the difference between a cable subscriber and a satellite subscriber to a programmer? It's really nothing. They still get the same rates, right?

But when I lose it, when I'm priced out of the market, it hurts me a lot.

That's the place that I never want to end up, where the consumer could say, 'Don't give me any more programming.' We have some of those situations. I had a letter the other day, with a lot of names, senior citizens: 'Mr. Commisso, We don't want anymore programming. Just don't increase our rates.'

Again, it's not across the board. It's only for the borderline cases, or those cases where it's just beyond the price that we charge the consumer on a per-channel basis.

Willner:
I absolutely agree with Rocco's point that there's only so much saturation you can put onto basic analog cable before consumers start to really push back. And our view is that we're already capped, in most of our systems.

As advanced as the systems may be — they may be 750 or 860 megahertz — even those systems, when you add voice, video, and data to them, are bandwidth-constrained. So this is even a bigger issue than cost of programming as far as I'm concerned.

This is a matter of not having to rebuild a 750-megahertz cable system in two years, which we are not going to do.

That means that we ultimately have to be able to recapture that 50 to 550 [MHz] bandwidth, which is the lion's share of what's out there, which is still being used for analog. We have to bring those channels back, and ultimately bring everybody up to a digital delivery method so that we can compress signals.

Five years from now, we expect digital penetration to be in excess of 50 percent in our systems. Sixty percent of our new customers are taking digital right now. And what that means is, when we get to 60 percent [penetration], or 65 or 70 — whatever the magic number is — we can go and find ways of recapturing all that analog frequency, so we can deliver all kinds of digital services to customers.

Now that creates all new problems. It's going to be more splintering of the audience. More choices for people to choose from. So we have a very challenging transition that we in the television business — we in the telecommunications business — are going through.

Laybourne:
What I was going to say — and maybe you disagree with this, I doubt it — but I don't think that the programmers really think about your problems.

Commisso:
We have a friend here. [Laughter]

Laybourne:
And I don't think we are acting as partners because this is the most exciting new platform that we've had in 22 years. It's the newest thing. It's so great for consumers. Maybe I'm so out of it, and I've been doing my thing, that I've missed all the great collaboration. But I don't think we are looking at this as, how do we serve the consumer?

You know, Lindsay talks a good game about this, and if everybody were doing that kind of thinking, maybe it's better than I think it is.

Willner:
I think it's a very early stage. And I agree with you — and I think Lindsay would agree with this, too — these are discussions that have just begun to really start to take place. People are beginning to appreciate the power of the platform.

A programmer at this point can ignore that, and they do so at their own peril, because if they don't fill the content need in this new technology world, somebody else will. Because we're going to deliver it.

Laybourne:
I'll raise my hand.

Willner:
We're going to deliver it. But this is a period of transition. Analog cable will go away. I don't know if it'll take five years or seven years or eight years or 10 years. It will go away, because it has to. It's not efficient, and it doesn't do all the neat things we're talking about.

So we have to convert people to digital. We just don't want to force it on people until there are a few of them left where we can incentivize them, economically, to switch up to it.

That's our game plan, and that's why we're not out there aggressively pursuing new analog carriage of new services, unless they are very, very unique and differentiating, so that they help us through this transition by helping us get more customers onto cable.

Gardner:
Ultimately, the relationship between programmers and distributors has got to be about empowering individuals with choice and access.

That's really the effect of all the technology that you've talked about, and I think we're not so early in the talking stages, Michael. We've delivered to the cable industry a whole portfolio of digital channels. We and others in the industry have embraced digital.

There's not a single deal that we have for the National Geographic Channel that has a different rate between analog and digital carriage. Every one of our distributors for National Geographic has the ability to carry us on digital. Some, such as AT&T, are using National Geographic as a real digital-driver. Others, such as Charter, which has the full ability to use us on digital, carries the National Geographic Channel almost entirely on expanded basic.

We have the movie channel exclusively for digital. We have out-of-market sports packages for digital.

Now, where I think you're correct about the early stages of talk is that we're moving now into discussions about non-linear content with digital.

And yes, we really have to demonstrate that we can deliver the content. That together, we can market it; that on the distributor side, the platform is robust enough to handle it.

I think next year, at next year's NCTA, I expect and hope that there'll be some terrific success stories, and that the temperature between our two industries comes down a bit.

Willner:
When I discuss this, I'm talking about specifically the non-linear services. Because the fact of the matter is, you can and do deliver a lot of those services to our competitors, because they
have the bandwidth capacity.

I know Rocco and I are more focused on our competitive world, and that's us against the guys in the sky. When I look at our platform and say, 'What can I do to reduce the churning of customers off of cable onto satellite and in fact start to win them back,' I appreciate the fact that we have a lot of digital services out there. And we're carrying a lot of them.

We have 60, 70 channels right now in digital in most of our markets. But that's not what I'm referring to in terms of our competitive needs in our industry to begin to really have what I think is a better mousetrap, delivering better services and a better user experience.

Commisso:
I'd like to end on a good note. I see good things coming about. On the distributor side, thank God, we had some other products that are going to become home runs for our business.

I think the video business — everybody knows the numbers — they're not producing the highest margins, or they're not producing the same margins that we had 10 years ago. Because there's been a disproportionate return on that money that's been invested by our industry, by our company, more to the programmers as opposed to distributors.

But we have telephony coming up, we have video-on-demand, we have interactive services. What you have this great product called high-speed data that's putting a real bright star to our future.

MCN: Gerry, a last word?

Laybourne:
I think this is the most exciting time to be in the business of all. And when you look at the way kids are being raised today, where they are so ambidextrous in terms of computers and television, and they are the future consumers. To me, figuring out what that world is going to be like for our future citizens is everything
and I'm thrilled to be in business with the operators. I just wish there weren't two gatekeepers now: the big entertainment companies and the operators.

I'd just like to have the operators be the gatekeepers. [Laughter]

MCN: Mike?

Willner:
I wish we could keep the gates like we used to, I'll tell you.

Laybourne:
Weren't those the good old days?

Willner:
They sure were. But look — as I said earlier, and Rocco certainly articulated as eloquently as usual — this is a terrific business. We have some serious challenges before us, over the short-term. We're in a transitional period right now, one I think where Gerry's concerns can be addressed in this transitional period where the right mix of programming still gets delivered to the greatest number of eyeballs, because it's still necessary for us to do that.

But this is the industry that's already spent $60 billion on the digital transition, which is what the government wanted to have happen in a number of different industries. And this is also the industry that other industries are pointing a finger at, suggesting that we're standing in the way of a digital transition.

Cable has more digital customers than every other industry in telecommunications combined. So it's a little bit disingenuous to try to deflect the real issue of digital transition on the one industry that has put their money where their mouth is — their at-risk capital, no government gifts of frequency space, valued somewhere in the neighborhood of $70 billion for free. So I think the market is working.

I think you'll see more and more digital and high-definition solutions being announced in the weeks and months to come. I know we have a plan in place right now that we're working on.

And we all have to work toward accommodating the bandwidth-management problem that cable operators have and the bandwidth-management problem, frankly, the federal government has to get those frequencies back. That's the challenge.

MCN: Lindsay?

Gardner:
I think more unites us than divides us. Both of us face margin pressure in our core businesses, you in the core basic-video business, us in our traditional big, large cable-network business. And I think we both see that the ways to realize increasing returns are in these ancillary businesses.

There are some of your new businesses that we can't work together on. I don't see an opportunity for a programmer to work with you in telephony, for example.

But in terms of interactive, in terms of these new-product digital tiers, there are plenty of opportunities for our industries to work together. It's going to be our salvation, and it'll be your salvation.

Willner:
Wait a second. Maybe we could do a 15-second spot every time you make a phone call, before you get connected?

MCN
:

What Fox personality would you proffer for that spot?

Willner
:
O'Reilly.

MCN:
Perfect. Thank you.

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