U.K. Up in Arms Over Unbundling

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London -- The British cable market has become a swirling
sea of conflict as a result of the Independent Television Commission's plans to throw
out minimum-carriage requirements for channels in favor of a new system to encourage the
unbundling of networks.

Channels are claiming that they will go out of business due
to the loss of subscription and advertising revenues. And major U.S. programmers with
international operations based here, including MTV Networks International and Universal
Studios Networks, have threatened to leave Britain if the ITC doesn't alter its plans
to change the rules.

The ITC's proposed changes came about after an
18-month consultation process, followed by another monthlong consultation period that
ended May 5, when final comments on the implementation of the ruling were due. In the past
three weeks, a sense of outrage over the ITC's suggested changes has dominated most
discussions on the matter, including those at last week's Cable & Satellite
Europe conference here.

The ITC will not identify its timetable for implementing
the rules, but, judging by the protracted phase of discussion leading up to this
month's comments deadline, feedback on the proposed changes is likely to go on for at
least a month. Implementation of the rules could come by the end of the year.

"We've never set out anything in advance saying
when we thought that it should happen," said an ITC spokeswoman. "We
haven't set out a timetable.

"There were hopes that something would happen by the
end of the year, but we never actually set that," she added. "We wanted
peoples' comments on their thoughts on the implementation timetable."

So far, the spokeswoman said, the ITC has given no
indication that it intends to revise its ruling, but pressure is mounting on many fronts
for alterations to the proposal -- especially to the retroactivity element of the rule
change, which could negate carriage contracts with several years left to run. She
acknowledged that an element such as the retroactivity clause could be altered in the
final planning of the implementation of the rules, but she would not comment specifically
on the strong debate over that clause.

"There have been some negative comments, but there
have also been some very positive comments," the ITC spokeswoman said. "There
are always going to be winners and losers in this sort of thing. We're still in
serious consultation, and we'll take on board any relevant points."

Ironically, the rule changes were initially prompted by the
U.K. cable industry itself. Operators were trying to get the ITC to curb British Sky
Broadcasting's practice of bundling its channels together and mandating that cable
operators carrying those channels cover at least 80 percent of their subscriber bases.
U.K. cable operators said that practice has kept the price of their packages too high, and
they insisted that it has inhibited their attempts to try new marketing initiatives with
more tiers available at lower prices.

But the ITC determined that rather than changing the rules
only for new programming contracts going forward, it would throw out existing contracts
guaranteeing minimum carriage for channels. This means that the initial business plans for
those services will now be wholly out of sync with market regulations, programmers
contended.

"I think that some of the players hadn't realized
that the ITC might come to this decision, and it was obviously a surprise," an ITC
spokeswoman said.

"It's dumb," said one U.K. cable-operations
veteran who has been involved with the U.K. industry since the start. "Six, seven, or
eight channels will go out of business as a result." But, he added, "the cable
operators brought it on themselves because they all complained about Sky, and now, this is
the way that the ITC has decided to go about it."

Live TV, one of the most promising cable-only channels,
last week argued to ITC officials that it may be forced to close if the rules go into
effect. It is preparing a legal case against the ITC, saying that the proposed changes
contravene the 1990 Broadcasting Act.

Kelvin Mackenzie, deputy chief executive of Mirror Group,
backer of Live TV, has written to 100 members of Parliament, saying that the closure of
Live TV would result in the loss of 200 jobs if the rules aren't changed.

Programmers have also started making their arguments to
such important U.K. regulatory bodies as the Office of Fair Trading and the Office of
Telecommunications, saying that the ITC's ruling will have the reverse effect
intended by reducing viewers' choices -- killing off some channels, rather than
increasing choice.

The U.K. cable-operations veteran said the ITC's
thinking is too telecommunications-oriented. He added that the unbundling ruling shows
that the regulator is applying a telecommunications model to the cable industry.

"They think that it's like phone customers --
that the channels should survive simply on the number of customers that they win, without
any other mechanism in place," he said.

A report on the ITC's proposals commissioned by MTVN
International's parent, Viacom Inc., said the ITC's rules are unfairly being
applied to all channels, whether they have market power or not. Instead, Viacom argued,
they should be applied more surgically to limit the market power of dominant suppliers,
such as Sky, which has ownership in most of the higher-rated channels.

The report, prepared by National Economic Research
Associates, added that the U.K. market is already naturally moving away from
minimum-carriage requirements, and that the process should be allowed to continue
naturally, rather than through a "big-bang" regulatory rulemaking such as the
ITC's proposals.

U.K. cable operators have increasingly been conducting
successful tiering tests over the past two years, mostly centered on offering cheaper,
smaller basic packages. And programmers have begun to realize that tiering -- and a
subsequent reduction in their nationwide carriage -- is a new fact of doing business in
the U.K. market.

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