Ops Blame Nets, Seek Tier Help

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For millennia, cable's message to Capitol Hill was clear: Leave us alone. For a few hours last week, there was a new message: Let's have a chat.

Citing market failures partly induced by Congress, Cablevision Systems Corp. chairman Charles Dolan last week recommended an overhaul of cable law to reduce the power of broadcasters that own cable networks.

Cox Communications Inc. president and CEO James Robbins said he had it up to here with ESPN's rate hikes. Though he resisted calling for legislation, Cox's solution to its ESPN problem — a sports tier — would require a new law if ESPN, 80% owned by the Walt Disney Co., refused to consent to such an approach.

Dolan and Robbins appeared before the Senate Commerce Committee, chaired by Sen. John McCain (R-Ariz.), to vent that rising retail cable rates were the result of aggressively priced sports networks that insist on carriage on the most widely penetrated tier of service.

"Unfortunately, all of our customers are forced to foot the bill for pricey sports programming since Cox is contractually obligated by ESPN to sell its network on our expanded-basic lineup," Robbins said.

For another view, McCain invited Leo J. Hindery Jr., president and CEO of Yankees Entertainment & Sports Network. YES, the television home of baseball's New York Yankees, just emerged from a bruising carriage battle with Dolan's Cablevision.

Leo smells smoke

"It's a phantom to blame on programmers these continuing rate increases far, far in excess … of general inflation. That's just smoke and mirrors," Hindery said.

The Federal Communications Commission's latest cable-price survey, released in April 2002, found that nominal rates rose 7.5% over the 12-month period ended July 1, 2001, while inflation was 2.7%.

McCain has ordered the General Accounting Office to probe whether higher programming costs have further propelled cable rates. The GAO expects to release the report in October.

Hindery had a regulatory message of his own. He urged Congress to force cable companies to treat programmers that they own the same way they treat programmers they don't own.

"It can be handled so simply with this concept of parity. You're treated fairly regardless of who owns you," Hindery said.

At one point, Hindery said he was not advocating mandatory cable carriage of cable networks.

Hindery used to run the largest cable companies — Tele-Communications Inc. and AT&T Broadband — and was an operator ally of Cox and Cablevision. He isn't any more.

"It's the hypocrisy of the industry that has grown to distress me so," said Hindery, who slammed Dolan with an antitrust suit and called in political chits to pressure the New York region's dominant MSO.

The sparring at the witness table amused some lawmakers.

"It's kind of nice to watch them duke it out here," said Sen. Frank Lautenberg (D-N.J.). "But it'd be nice also to get to the truth," he added.

What Dolan wants

From Dolan's perspective, some changes were in order.

Congress, he said, should consider abolishing the requirement that cable subscribers buy a TV station package before any other cable service, and prohibiting any programmer from demanding cable carriage on the most widely penetrated programming tier.

He also recommended re-evaluation of policies that allow broadcasters to withhold their off-air signals unless cable operators carry their affiliated cable networks.

"What customers want today, what they are beginning to insist upon, is the right to select. The customer objects to being told that he must pay for programming he doesn't want in order to be permitted the programming he prefers," said Dolan, who views a la carte as a way of expanding consumer choice and value.

Moving to an a la carte world resonates with McCain and other lawmakers as a way to take cost pressure off expanded basic.

Not the full answer

"The average consumer simply wants a modest meal at a reasonable price. But instead, as a result of the way deals are structured, consumers are being forced-fed a whole five-course feast and get stuck with the bill," said Sen. Ron Wyden (D-Ore.). "I think it's important to look at the à la carte pricing issue."

Gene Kimmelman, senior director of advocacy and public policy of Consumers Union, liked the à la carte idea — as long as the per-channel price were reasonable.

"A la carte is a step forward, but let's remember here that it doesn't eliminate market power. It's still a price set by a cable operator and negotiations with some very powerful programmers," Kimmelman testified.

In his dispute with Hindery, Dolan took his company out of pricing matters by offering to give YES its own channel, allow the network to set its own price and retain all the revenue. YES rejected the offer.

Small cable operator James M. Gleason, president and CEO of CableDirect, supported Dolan's agenda, but added that the FCC should have access to programming prices so it can create a price index for cable networks, and another for local TV stations that demand compensation for their signals.

ESPN, the popular sports network whose rates are going up 20%, was not invited to testify, said Preston Padden, Disney's executive vice president of worldwide government relations.

ESPN blasts back

But before the hearing started, he was armed with ESPN's reaction to ideas about being removed from expanded basic.

"Ripping ESPN and other popular networks out of basic cable and charging more for them is not pro-consumer," ESPN and ABC Sports president George Bodenheimer said in the statement. "This would produce a firestorm of protest from cable subscribers. With cable at $40 and the net cost of ESPN at about $1, there is no basis to take that step."

Cox's monthly price for ESPN climbs to $2.61 per month in August. Though the most expensive basic network, ESPN claims that the channel's net cost to operators is $1 a month after accounting for local advertising sales.

"Absolute, flat out lie. It's an absolute, flat out myth that ESPN is propagating," Robbins said in an interview after the hearing.

In his testimony, Robbins stressed he was not advocating government intervention. But if Cox can't throw programming that costs more than $1 month onto a mini-tier, there is only trouble ahead.

"I'd like to see the marketplace work. If the marketplace isn't working, then we are in a position where we are going to have a train wreck and I would not like to see a train wreck," Robbins said.

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