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FCC Jabs Cable Costs, Pricing Policies

Alan Breznick
12/28/2006

Taking a much more aggressive posture than in the past, the Federal Communications Commission (FCC) is challenging not only cable's recent price hikes but the way that the cable industry charges for its programming.

In its latest annual cable pricing study, released Wednesday, the Commission takes the cable industry to task for jacking up its overall monthly rates by 5.2 percent in 2004, the last year for which data is available. That widely reported increase contrasts with the 3.0 percent rise in the general inflation rate for the same period.

But the new FCC pricing survey doesn't stop there. The study also stresses that the industry's monthly rates for expanded basic service, the package that most cable subscribers take, climbed by an even higher 6.2 percent over that period.

In addition, the new regulatory study emphasizes that cable prices soared 92.6 percent between 1995 and 2005, or more than three times as much as the Consumer Price Index (CPI) over that decade. FCC Chairman Kevin Martin notes that cable rates shot up at the same time that wireless service rates plummeted 80 percent and interstate telephone rates fell almost 40 percent.

"In 1996, Congress passed a comprehensive statute that embraced the idea that competition was preferable to regulation," Martin said in a prepared statement. "Since then, the price for every service the Commission regulates has decreased – except for cable."

Seeking to buttress the FCC's new telco-friendly video franchising rules, the pricing study promotes wireline competition as the best way to curb further cable price hikes. It plays up the fact that cable rates run 17 percent lower in markets where a second provider competes with the incumbent operator.

"Cable does face some competition from DBS, but our report reveals that DBS and cable do not seem to compete in price," Martin said. "Significantly, however, where a second cable operator is present, cable prices are significantly lower."

The new FCC pricing report also takes dead aim at the cable industry's tried-and-true strategy of adding new channels to programming packages and then hiking the prices of those packages. It disputes the notion that cable providers automatically add value to their programming lineups when they load up their packages with new networks.

Specifically, the FCC veers away from its usual approach of calculating monthly cable rates on a per-channel basis, arguing that "the use of the average rate per channel as a proxy implies that recently added channels are of equal value to previously existing channels." For years, the cable industry has cited flat or decreasing per-channel rates to fend off charges of price-gouging consumers.

"This data is not included in the 2005 price survey report because of the weakness associated with using it," the report states. "The average rate per channel does not reflect the prices offered to consumers because cable operators do not permit consumers to purchase channels included in the expanded basic package on an individual basis, nor do they provide refunds to consumers who opt to have certain channels blocked."

The agency also takes a fresh swipe at MSOs for not offering channels to subscribers on a la carte basis, as consumer advocates have long promoted and Martin strongly favors. "If cable operators offered consumers the option to purchase channels individually, it would be appropriate to consider the prices charged to consumers for those channels," the report says.

Responding to the report, the National Cable & Telecommunications Association (NCTA) and American Cable Association (ACA) both contend that the FCC is missing the point with its pricing surveys.

NCTA officials argue that cable customers get more bang for their buck today because the average cost per viewing hour has dropped over the past 10 years. They reckon that an hour's worth of cable viewing cost 19.2 cents in 2005, down from 23.7 cents in 1995.

"The FCC's pricing survey fails to account for the benefits of bundled pricing, its favorable impact on cable prices, and the greatly increased value of cable services in a digital world," NCTA President Kyle McSlarrow said in a prepared statement. "Ignoring these factors makes the pricing survey obsolete on arrival and an unsound basis for policy decisions."

ACA officials say the FCC is targeting the wrong villain. They urge the Commission to pursue "the media conglomerate programmers" who have been jacking up the wholesale programming rates paid by cable operators and satellite TV providers alike.

"The truth is that more competition on the retail level is not going to do anything to control or moderate consumers' rates until something is done to control wholesale programming rates, terms, and conditions forced by the big programmers onto all video platforms," ACA president Matthew Polka said in a prepared statement.

— Alan Breznick, Site Editor, Cable Digital News

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paolo.franzoi
paolo.franzoi
12/5/2012 | 3:17:19 PM
re: FCC Jabs Cable Costs, Pricing Policies

ESPN (actually Disney) mandates that cable systems carry a minimum number of ESPN channels in order to purchase any ESPN content. That is not the cable companies choice. You have to remember content is king. You would have to force the a la carte on the content owners.

So, you say go ahead force it.

There is a huge change coming on the content side and we shall see how it plays out. With video downloading, you in effect get a la carte. In some cases, this is commercial free. To compensate, you pay a lot more per minute for video downloads than you do for cable. Think about 100 channels running 24/7 at 99 cents a show.

If people move to a la carte the whole content creation business model gets severely impacted. Shows may not have a chance to build an audience. So, less and less money is spent on content creation. Is this a bad thing? Not necessarily, but it is BIG business and none of that changes without BIG lobbying.

seven
falsecut
falsecut
12/5/2012 | 3:17:19 PM
re: FCC Jabs Cable Costs, Pricing Policies
"ACA officials say the FCC is targeting the wrong villain. They urge the Commission to pursue "the media conglomerate programmers" who have been jacking up the wholesale programming rates paid by cable operators and satellite TV providers alike."

Isn't this what the a la carte proposal seeks to address? As I understand it, ESPN, for example, is willing to pay a lot more money for football or baseball because they just tack on an extra charge to the monthly rate they bill the cable providers. So if the consumer instead got an option to pay for ESPN on a monthly basis for $5, the consumer would have to make the choice. If the media conglomerate, Disney in this case, puts the rates up too much then demand will fall.

Has anyone seen what the ACA proposes as a workable way to control those "media conglomerate programmers"? I think that it is obvious that the cable guys don't care if they have to jack up rates so long as they can keep subscribers from going to a satellite provider and keep the regulators from being a problem.
falsecut
falsecut
12/5/2012 | 3:17:18 PM
re: FCC Jabs Cable Costs, Pricing Policies
"ESPN (actually Disney) mandates that cable systems carry a minimum number of ESPN channels in order to purchase any ESPN content. That is not the cable companies choice. You have to remember content is king. You would have to force the a la carte on the content owners."

You assume I want to force this to be so. While I see some real benefits to my being able to opt out of ESPN if I choose to do so, I hear very little debate of alternatives. So far they seem to be:

1. Status quo
2. Limit rates
3. A la carte

If there's other alternatives out there, what are they? And the cable response is either "it's too difficult to implement and hurts new content providers" or they just ignore it and hope it goes away. Maybe the download per view process is the fourth option.
paolo.franzoi
paolo.franzoi
12/5/2012 | 3:17:17 PM
re: FCC Jabs Cable Costs, Pricing Policies

New content providers are very hard to find.

Remember the AFL competed very well with the NFL, but the USFL and the XFL did not. Arena Football does okay, but is not the value of content that the NFL is.

So, if your cable company dropped all its programming and gave it up to play random Youtube videos....what would you pay? If Sattelite kept the current content, which would you choose?

That is the point. There is a rather constant amount of valuable content. It doesn't spring up out of the ether in abundance. HALO was a great game. HALO2 was an okay game. So, there are a few franchises. Those content Franchises (NFL, Blizzard's Warcraft, Mozart, etc.) demand a premium.

Take a look at Sattelite service take rates and the date that NFL Sunday ticket became available. That is the power of content.

seven
DCITDave
DCITDave
12/5/2012 | 3:17:16 PM
re: FCC Jabs Cable Costs, Pricing Policies
re: "Take a look at Sattelite service take rates and the date that NFL Sunday ticket became available. That is the power of content."

Or take a look at my goddam satellite bill during football season.

Regards,
Phil, the NFL mark
paolo.franzoi
paolo.franzoi
12/5/2012 | 3:17:12 PM
re: FCC Jabs Cable Costs, Pricing Policies

You have to pay the premium for channels you don't watch because the media companies declare it so. If you want a la carte programming, you will be fighting with them not the cable companies. The biggest reason is these companies own the best content. And content, not the various distribution channels is the scarce resource. Without access to content, the distribution mechanisms fall away. They wither. You can argue about it, but changing it will a massive economic dislocation.

People don't make content to not make a profit. So, changes in the economic model are wide sweeping and will have unforeseen implications. For example, there might be a lot less content made in the future.

But who knows how it will work out.

seven
falsecut
falsecut
12/5/2012 | 3:17:12 PM
re: FCC Jabs Cable Costs, Pricing Policies
"Those content Franchises (NFL, Blizzard's Warcraft, Mozart, etc.) demand a premium."

Perhaps so, but why do non-users have to pay this premium?

"Take a look at Sattelite service take rates and the date that NFL Sunday ticket became available. That is the power of content."

seven, I re-read this passage a few times again and perhaps what you actually saying is that people flocked to satellite in response to NFLST being available there. I was reading this as the take rates for NFLST itself. However I still think, even in this context, it is a poor analogy for this discussion. It is a good example for the drawing power of content, but I am not talking about an optional choice, I'm talking about a mandatory "choice". If you choose to go to satellite to watch more games, that is a choice you make. But I am not forced to pay up for more programming that I do not utilize.

I'm not sure of the solution, or if there really is one. But I've seen very few options.
falsecut
falsecut
12/5/2012 | 3:17:12 PM
re: FCC Jabs Cable Costs, Pricing Policies
But is NFL Sunday Ticket a good analogy? After all, that is an optional service. Whatever their take rate is, it pales in comparison to the 100% take rate that ESPN has among captive cable subscribers precisely because it is NOT optional.

I understand the market setting powers of some content providers, especially the NFL. It's not unlimited however (although damn close). The NFL Network is in a small number of homes and the NFL is trying to force cable companies to carry it (mostly by creating a lot of "pull demand"(Call your cable company if you don't have the NFL Network)). They are squabbling at least with some carriers about whether it goes in the basic or premium slots for delivery to homes. The NFL, of course, wants it in the basic slot so they get paid for more customers.

Still unanswered here is the fact that these "monopolistic content providers" feel free to raise rates as much and whenever they can because the cable company passes on that rate to their customers, some of whom never watch the network. I ask again for alternatives to a la carte as a solution. So far, all I've heard is 'tough luck', you get status quo. Are there other proposals out there somewhere?

Side note: Lamar Hunt, the late KC Chiefs owner and AFL founder, lobbied for years to get the Chiefs on a Thanksgiving home game. The NFL put the game on the NFL Network this year. Unfortunately for Mr. Hunt, he fell ill on Wednesday, and was in the hospital for the Thursday game. And the hospital cable system doesn't carry the Network, so he had to listen to the game through a phone connection where his daughter laid the phone down next to the TV at her house.
Michael Harris
Michael Harris
12/5/2012 | 3:17:11 PM
re: FCC Jabs Cable Costs, Pricing Policies
You have to pay the premium for channels you don't watch because the media companies declare it so. If you want a la carte programming, you will be fighting with them not the cable companies. The biggest reason is these companies own the best content. And content, not the various distribution channels is the scarce resource.

Spot on. The programmers with prized content dictate carriage terms. They raise prices and MSOs pass the increases on to consumers, as do satellite providers, and the telcos will too. If the FCC wants to use regulation as a lever to mitigate consumer video pricing, the answer is to take aim at the programmers. That's the only way a la carte will happen.
falsecut
falsecut
12/5/2012 | 3:17:08 PM
re: FCC Jabs Cable Costs, Pricing Policies
In a way, I've been avoiding the "hot button" question. I'm well aware of the capitalistic concerns but not sure that helps move the issue of getting options on the table, which was what I was interested in. Any time you get the government involved in choice and competitiveness, you've got a mess. What I'm hearing here is that there are basically only the limited choices that I outlined earlier.

1. We live with what we got.
2. Rates get controlled.
3. Some sort of a la carte is forced on somebody (either the content guys or the carriers) with whatever economic problems that causes.
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