A key headline from the big convention of broadcasters here last week was that some of them want to get into the cable business.
Make that the wireless-cable business — with a national footprint.
Leading the charge is Emmis Communications Corp. chairman Jeff Smulyan, who has a low-cost plan to enter the pay TV market. He thinks the idea can gross $5 billion within five years, assuming a 10% rate of household penetration.
The nation’s 1,400 commercial TV stations would collectively have to pony up about $700 million, either in cash or in-kind equivalents.
The system, predicated on all or nearly all TV stations in a market pooling their digital spectrum, would deliver five or six local TV stations in HDTV, along with 30 to 50 traditional cable networks.
And all that would sell for about $25 a month, after the purchase of a $99 set-top box with a smart antenna.
“It gives the American public a third choice at a cost that is significantly less than what they are paying now for cable and satellite. The economics are incredibly compelling,” Smulyan said at a crowded press conference last Tuesday at the National Association of Broadcasters convention here.
The ambitious plan was made possible by a 1996 federal law that effectively gave each TV station a free digital channel.
For TV stations, plunging into the pay TV business is not a luxury, but a necessity, in order to create a second revenue stream and combat cable’s assault on their local advertising market, Smulyan said.
“We’ve allowed third parties to take control of our business,” Smulyan said. “MSO dominance is really pressuring broadcasters in a number of ways.”
Although past attempts by wireless cable operators have failed, Smulyan said leaps in technology give him hope that his system can flourish.
At present, digital broadcasting allows a group of stations to send out dozens of video and audio channels, based on advances in transmission-compression technology and improved set-tops and antennas.
The inclusion of PVR-type hard drives in set-tops would drive the service beyond static, plain vanilla cable.
27% AT $99
“The great news for us is that the technology has shifted in our favor and we think it is a monumental shift,” Smulyan said.
According to a study Smulyan funded, 27% of respondents said they would take the service if they had to pay for a $99 box and 49% said they would go for it with a free box.
At the press conference, Smulyan announced the names of 11 TV-station groups that had agreed to join him.
Over the next few months, these broadcasters intend to cement the business plan.
“I think what he has put on the table is pretty exciting,” said NAB board chairman Phillip Lombardo, CEO of Citadel Communications Co., owner of three ABC stations and one CBS affiliate. “All of us have committed to move forward and work on the business plan together.”
The plan is predicated on their being a single broadcast entity in control of the system.
USDTV Inc., an entity separate from Smulyan’s, has already begun using digital broadcast spectrum to offer wireless cable in Salt Lake City; Albuquerque, N.M.; and Las Vegas, charging $19.99 for a dozen-channel package that includes local stations, ESPN and Fox News Channel.
USDTV chairman and CEO Steve Lindsley said he wants to be like Southwest Airlines and JetBlue Airways: He hopes a low-cost service can pick off cable subscribers unhappy with paying for programming they don’t watch.
“We think we are going to wreak havoc on the cable side,” Lindsley said, predicting 20 million subscribers in 10 years.
John Tupper, president of Prime Cities Broadcasting Inc., which has joined Smulyan’s effort, said he was “hopeful that Jeff can get together with the USDTV group.”
Smulyan emphasized the need for a united front.
“We need one solution. If we have 10 solutions, we all fail and all we do is make the MSOs that much stronger,” he said.
USDTV’s venture-capital funding is an issue. Smulyan wants ownership to remain with TV stations that have spent $3 billion upgrading stations to digital.
Joseph Kraemer, a broadcast analyst with LECG in Washington, D.C., said broadcasters needed to form one firm. Competing systems would undermine the business, “not unlike those of you who study the telecommunications industry and watched the competitive local-exchange carriers chew each other up into bankruptcy.”
Under Smulyan’s plan, all stations will get paid a retransmission fee. Tupper said he expects to keep 30% of the $25 per-month-fee. Under federal rules, TV stations have to surrender 5% of their pay-TV revenue to the U.S. Treasury.
Some are skeptical that the plan’s foundation concept — that all TV stations must participate — is sound.
“Do you think NBC, ABC, CBS, Fox, UPN and [The] WB are going to go for one of these plans?” Lowell W. (Bud) Paxson, chairman and CEO of Paxson Communications Corp., asked rhetorically.
“I think it’s going to be a very, very monumental problem to get together enough broadcasters to accomplish this in every market.”
Paxson said he’s in discussions with 15 entities (none he would name) that are interested in leasing spectrum from him because he has installed multicast technology in stations reaching nearly 60% of the country. Financial terms floated in those talks are better than the economics he’s seeing in Smulyan’s plan.
“I can make more money at a $1.50 per home, per year, per channel than I can from them,” Paxson said.
Paxson said his leasing scheme is viable only if the Federal Communications Commission requires cable operators to carry his multicast services: “My plan does not work without [multicast] must-carry.”
Smulyan said the major networks will soon realize that his plan strengthens the network-affiliate relationship.
“I’m the ABC affiliate in Tucson. On channel 9, I carry ABC. Why can’t I carry ESPN on 9A and the Disney Channel on 9B and ABC Family on 9C?” Smulyan asked.
“It’s a perfect marriage between our stations and our networks.”
Cable has plenty of weapons to deal with new competition from local TV stations, whether it’s new pricing and packaging terms for video or promotions linking cable service to high-speed data and telephony services.
Aware that cable has crushed many an overbuilder, Smulyan said his low cost structure will shield his concept from cable’s counteroffensive.
“We don’t have $80 billion in debt to pay off,” Smulyan said. “We can actually take the pain, if they want to get in a price war, far better than publicly traded cable companies.”
Smulyan sidesteps an obvious concern: What happens to the “perfect marriage” if Comcast Corp. buys the Walt Disney Co., giving the top cable MSO control of the ABC network and 10 ABC stations?
“I won’t get into the question of what happens when one of the major cable entities rolls up a major broadcaster,” Smulyan said.
Smulyan’s plan could lead to a regulatory collision with some big cable operators over programming issues.
According to a cable attorney consulted, TV stations that use their digital spectrum to provide channels of pay-TV service are not considered multichannel video programming distributors under federal program-access laws.
As a result, cable operators would not be required to sell their satellite-delivered networks to Smulyan and USDTV, because those providers would not be the legal equivalent of the major direct-broadcast satellite providers, DirecTV Inc. and Dish Network.
REGIONAL SPORTS HOLE?
These new competitors might find that although they want to sell just a few dozen channels, they might not be able to get their hands on cable networks that could win subscribers fast; namely, regional sports networks.
USDTV’s Lindsley said his lawyers examined the question and determined that his company was not protected by the program-access rules.
“The 1992 Cable Act does not treat the broadcasters as you would the satellite guys. We have to go back and fix the language associated with the law,” Lindsley said.
Smulyan did not share that view.
“We’ve had anti-trust lawyers here all the way. We believe we can deal with all of that,” Smulyan said.
The issue could become moot in October 2007, when the program-access rules are due to expire. Smulyan’s reliance on critical cable programming could trigger a fight to preserve, or even expand those rules.