Senate Weighs New Basic Tier

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Washington -- Creeping gridlock in the Senate over
satellite delivery of local-broadcast signals is breeding new cable-competition ideas that
sponsors hope will accompany broad cable-industry deregulation next March.

At least two ideas are bubbling to the surface: One is to
create a low-cost, price-capped basic tier, and another is to ease must-carry rules in
markets where consumers can receive all local TV signals with off-air antennae.

Not surprisingly, cable-industry sources said they opposed
the new basic-tier plan, and broadcasters said they would fight such a drastic change to
their hard-won must-carry rights.

Senate sources emphasized that the proposals were in
gestation; they're still hopeful for a deal authorizing direct-broadcast satellite
companies to beam local-TV signals into home markets and to package them with national
programming services, just like cable operators do.

But new ideas have begun to surface for two reasons: Senate
Commerce Committee chairman John McCain (R-Ariz.) and Senate Judiciary Committee chairman
Orrin Hatch (R-Utah) are at loggerheads on a key issue with respect to DBS provision of
local-TV signals, and time is running short on the 105th Congress.

Hatch, in his bill (S. 1720), favors requiring DBS carriers
to provide all local-TV signals if they elect to provide even one -- a provision supported
by the cable industry and by local-TV stations. Hatch has yet to hold a hearing on the
bill.

McCain, who has not yet introduced his local-DBS bill, is
opposed to full must-carry obligations immediately. He supports the gradual introduction
of must-carry to allow DBS carriers to gain traction in the market.

According to Senate sources, snags in the McCain-Hatch
relationship have forced Commerce Committee leaders to begin developing legislative
proposals that would not have to travel through the Judiciary Committee prior to reaching
the floor. Committee leaders are considering changing cable law so that operators would be
required to offer all subscribers an inexpensive lifeline service that must include
local-broadcast signals.

"It's a lifeline tier that's available at,
say, $5 or $6 per month, and it includes all of the local signals," a Senate source
said.

Operators would have the option of including
cable-programming networks on the basic tier, but a cable operator would be unable to
recover the cost of a cable network offered on basic from a subscriber who declined to buy
expanded basic -- the operator would be forced to recover the cost from subscribers who
purchased both tiers.

"At $4 or $5, you would be at an unreasonable rate,
because it costs more than that to build the network and to provide the services,"
said a Washington, D.C., cable attorney.

Cable operators, the attorney said, must be allowed to
recover the cost of regulated services from the subscribers who purchase them.

"It becomes a taking. You can't have taking
without just compensation. That's just 'constitutional law 101,'" the
attorney said.

A lifeline-basic approach has been advocated for years by
some in the DBS industry, DirecTv Inc. president Eddy Hartenstein chief among them.

Hartenstein has testified that cable operators'
ability to offer basic tiers that include local-TV signals and national cable networks
hurts competition.

That's because a cable subscriber who wants to buy a
DBS package while retaining basic-cable service might be forced to buy the same
satellite-programming networks twice, in some cases.

Under the lifeline-basic proposal, a cable subscriber who
buys a DBS dish might wind up receiving ESPN twice (once from the cable operator, and once
from the DBS operator), but the subscriber would end up paying for it only once.

"We've been lobbying for this sort of thing for a
long time," said Jeff Torkelson, DirecTv's vice president of communications.

Matt Polka, president of the Small Cable Business
Association, said the lifeline-basic idea would be a "nightmare," because the
majority of cable operators that he represents offer only a basic tier.

"I would say that more than one-half of them do, for
sure -- closer to two-thirds to three-quarters," Polka said.

The SCBA has about 300 members that provide cable service
to 2 million subscribers. Eric Breisach, a small-cable attorney with Bienstock & Clark
in Kalamazoo, Mich., said small operators do not have enough subscribers to justify the
costs of splitting a one-tier system in two.

"You couldn't recover the headend costs over the
subscriber base," he said.

The second idea -- easing must-carry rules -- would allow a
cable operator within a DMA to drop local-TV signals if subscribers could obtain all of
the local signals with off-air antennae.

It was not clear whether the burden would fall on the cable
operator, the subscriber, the local stations, or some other source to determine whether
subscribers in a DMA receive acceptable off-air pictures.

"If a home can get all of those signals, the argument
would be, 'Why force the cable operator to put them on the system?'" a
Senate source said. "Why shouldn't the cable operator have the option of making
A/B switch technology and off-air technology available to those subscribers, just like
[U.S. Satellite Broadcasting president and CEO Stanley E.] Hubbard does with his DBS
service."

Amending the must-carry law in such a way would get some
operators off the hook in terms of carriage of both analog- and digital-TV signals,
freeing up channels that could be used to compete with DBS. The change would also serve to
reduce carriage complaints filed at the Federal Communications Commission.

"You can be assured that the broadcast industry would
lobby against such a thing," a broadcast-industry source said.

Jeffrey Krauss, a telecommunications consultant in
Rockville, Md., said cable-system architectures would conform to the new must-carry
proposals, as operators have created subheadends in various parts of franchise areas.

But, he added, it would be "a matter of luck" if
systems' designs matched the coverage patterns of local-TV signals.

Having different channel lineups posed other problems,
Krauss said.

"You run into marketing problems if you have one
lineup in one part of the county and a different one in another part," he said.

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