TAUZINS TIERS OF PAIN Ops and Programmers Fear Higher Rates

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Washington -- Cable-industry players fear that legislationforcing the creation of mini-tiers in the name of greater consumer choice would be toughto comply with, based on current affiliation contracts with programmers, and that theycould actually lead to higher subscriber rates.

Cable operators and programmers reacted with dismay lastweek to reports out of Washington that Rep. Billy Tauzin (R-La.), chairman of the HouseTelecommunications Subcommittee, is gearing up to insert Congress deeper into thecable-programming market.

They said Tauzin's bill, however well-meaning, couldhave the unintended consequence of making cable programming more expensive, withprogrammers that are relegated to niche tiers extracting penalties under their existingaffiliation contracts, or eventually demanding higher license fees as compensation fortheir loss of subscribers and advertising revenue.

While mindful that his ideas might boomerang, Tauzinnevertheless plans to offer a bill in June that would allow cable operators to escapeprice regulation in early 1999 if they agree to dismantle expanded-basic tiers.

But according to several MSO officials, any legislation onthe part of Tauzin would have to address current programmer-affiliation contracts, whichtypically either completely bar operators from putting their networks on tiers, orseverely punish them financially for such tiering by charging penalties, in the form ofpremium-license fees, for loss of distribution.

"The issue is: Is it contractually possible [to dowhat Tauzin is asking for]?" asked Michael Luftman, a spokesman for Time WarnerCable. "The problem is that contractually, we are not able to do that ...We'vebeen fighting that fight with the regional-sports networks."

Luftman pointed out that several regional-sports channelsin Time Warner markets that were previously premium services, which could be ordered byonly the subscribers who wanted them, have now evolved into basic networks.

And other operators voiced similar concerns aboutTauzin's proposal.

"We would require some government legislation, becausewe'd be in breach of our contracts [by moving networks off basic or expanded basic totiers]," said Jerry McKenna, vice president of strategic marketing for Cable One.

At Media General Cable, chief financial officer DaveDeJesus said the contracts issue needs to be examined.

"We will review the situation and determine what itwould take [to comply with Tauzin's proposal]," he said.

Even if the contract issue was overcome, McKenna pointedout that networks generate a large portion of their revenue from advertising, and thattheir ability to charge premium ad rates would be hampered if their distribution werereduced by being moved to a tier.

"If you reduce the eyeballs that they reach, it willsignificantly impact their ad revenue," McKenna said. "Then they'll comeback to us and say that they have to make up for that shortfall in our license fees."

McKenna said he doesn't mind the idea of putting ESPNon a sports tier, even though it would mean steep rate penalties. He added that he wouldpass on the costs of those ESPN contract penalties to consumers, and that amount simply"would be the cost of the network" to subscribers.

On the programmer side, several officials also expressedconcerns about Tauzin's plan.

"The ramifications across the entire business arehuge," said Brad Siegel, president of Turner Network Television. "The governmentshould not interfere with us, and it should not be regulating the business. We act asresponsibly as we can. We are operating under market forces."

At CBS Cable, Lloyd Werner, its executive vice president ofsales and marketing, warned against the complications that trying to create myriad tierswould cause operators in terms of marketing such packages and deciding how to groupnetworks.

For example, Werner asked, would a tier include TheNashville Network, VH1 and MTV: Music Television, which are all music networks, but whichindividually appeal to very different audiences?

"I'd be against [Tauzin's plan] from anystandpoint," said Werner, whose stable includes TNN, CBS Eye on People, Country MusicTelevision and CBS TeleNoticias. "The larger the offering, the more channels onbasic, the better it is for the consumer."

Werner also suggested that operators might feel compelledto group established must-have networks, such as USA Network and TNT, together, and to putnewer channels on their own tier. That would make it more difficult to get fledglingnetworks off the ground, Werner added.

"They have less money for marketing and less brandrecognition," he said.

Tauzin said his No. 1 cable issue is that consumers resenthaving to pay higher cable rates for programming that they didn't order and that theydon't want to watch.

It's unlikely that Tauzin at this point has supportfrom House Commerce Committee chairman Rep. Tom Bliley (R-Va.), who has repeatedlydefended the Telecommunications Act of 1996, which calls for broad cable deregulation onMarch 31, 1999.

"Given the current level of competition, the March 31date isn't viable, and [Tauzin's] looking for ways to jump-startcompetition," said Colin Crowell, telecommunications aide to Rep. Edward Markey(D-Mass.), who is the author of legislation (H.R. 3258) to remove the March 31, 1999,sunset.

Crowell said Tauzin hasn't indicated to Markey -- theranking Democrat on the subcommittee -- the number of tiers that would be sufficient toderegulate a cable operator after next March.

Cable-rate-freeze advocate Gene Kimmelman, Washington,D.C., office co-director of the Consumer's Union, said Tauzin's plan, based onthe few details that he had, was progress, but not a panacea.

"Anything is better than nothing," Kimmelmansaid. "Anything that's sort of moving toward more choice and options forconsumers is a step in the right direction."

Cable-industry sources said Tauzin was being deliberatelyvague because he is seeking to engage cable executives in dialogue, but company heads haveresisted Tauzin's requests.

"There is still no case for reregulation ofrates," a cable-industry source said. "I think that's the threshold issuehere. This business is moving ahead and investing in the future the way that Congressintended, and there's no basis for undoing that."

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