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Communications

Highlights from the FCC’s A La Carte Symposium

08.04.04
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The following are highlights from the FCC’s A La Carte symposium held last Thursday. The symposium was intended to illuminate the legal, technical and economic issues surrounding a government-imposed a la carte mandate, in order to assist the Commission in drafting its report to Congress on the subject, due in mid-November.

I. Overview

The morning session of the symposium consisted of six presenters representing cable operators, networks, advertisers and consumer advocacy groups. Each speaker made a 20-minute presentation, followed by a 10-minute question-and-answer period with questions posed by a panel of FCC staff: Ken Ferree, chief of the FCC’s Media Bureau; Ben Golant, a senior attorney in the Media Bureau; and Tracy Waldron, the FCC’s chief economist. The afternoon session was a panel discussion among four university economists, who responded to questions from Mr. Waldron. Commissioner Copps attended the morning session for a short time, but none of the other Commissioners made an appearance.

Perhaps the most illuminating aspect of the symposium was the questions posed by FCC staff, which appeared to highlight issues and questions of fact for which the Commission needs additional information and clarification. In addition, the presentations by Consumers Union and the American Cable Association (“ACA”),1 both a la carte advocates, appeared to preview the positions these organizations will take in reply comments and ex parte meetings. The symposium also shed light on where the a la carte debate is likely headed in the months ahead:

  • It seems that a “mandatory” a la carte requirement imposed on MVPDs (i.e., cable and DBS providers) is politically dead. Not even Consumers Union, a strident critic of the cable industry, is advocating such a law or regulation. Arguments put forth by NCTA, our program networks and others appear to have convinced the Commission that “mandatory” a la carte would harm networks, MVPDs and consumers.
  • On the other hand, the question of a “voluntary” a la carte mandate imposed on networks remains unsettled.2 Questions posed by FCC staff appear to indicate some uncertainty about the harm it would cause networks. Consumers Union, ACA, and several other interest groups are touting “voluntary” a la carte as a tool to combat high cable rates, a lack of programming diversity and media concentration, and these issues may have some traction with the Commission.
  • Third, at least at the FCC, the a la carte debate likely will not focus on issues of indecent or “objectionable” programming.3 These issues were rarely discussed at the symposium, and Parent’s Television Council (“PTC”), a socially-conservative interest group whose primary concern is indecency, was not represented.4

In short, the a la carte debate is far from over. Work remains to be done by program networks to convince the Commission that a “voluntary” a la carte or themed tier law or regulation would harm networks and would be overwhelmingly negative in net effect for consumers. Going forward, we believe that direct ex parte meetings with the FCC would be an effective way for networks to make their case with the Commission and subsequently with Congress.

II. Morning session

John Freulinghausen, Vice President and Partner, Booz Allen, presented a summary of the report prepared by Booz Allen for NCTA. The report found that the vast majority of consumers would be worse off with an a la carte or themed tier mandate of any kind imposed on MVPDs—even if relatively few subscribers selected a la carte or themed tier service. The net effect would be higher prices, fewer networks and less programming diversity because of reduced advertising revenue for networks (a 20 to 60 percent decrease), higher marketing costs for networks, and increased equipment, customer care and billing costs for MVPDs. However, the report did not address the effects of a “voluntary” a la carte mandate.

Mr. Ferree asked two questions about the effects of a la carte on networks’ advertising revenues, and Golant stated that while the cable industry has presented “convincing” arguments about mandatory a la carte, “I’m not too convinced that voluntary a la carte or themed tiers would be bad.” He noted that some MVPDs either currently provide a la carte service (e.g., C-band satellite, BSkyB, and cable operators in Canada, Spain and France) or have expressed a desire to do so (e.g., ACA, EchoStar, Cablevision, and RCN) and asked: “How is it that your study does not reflect … the feelings of very smart and astute business people?”

Geraldine Laybourne, Chairman and CEO, Oxygen Media, gave a very passionate presentation on behalf of program networks. She explained that Oxygen is an independent network that has been able to achieve widespread distribution since its launch in 2000, but if an a la carte mandate had been in effect at that time, Oxygen “would have never seen the light of day.” She described a la carte as “one of the worst ideas I have ever heard of” and supported her position with three key points:

  • new networks would never be developed in an a la carte world because stability of distribution is needed to obtain financing;
  • all program networks would have less value for viewers with a la carte because networks would have to shift resources from programming to marketing;5 and
  • new networks rely on “drive by viewing” to attract viewers, and networks must be “in the grocery store” in order to be sampled.

Mr. Ferree asked Ms. Laybourne whether she thought audiences are “overserved” with programming—i.e., are there too many networks in existence? Ms. Laybourne responded that consumers continually demonstrate that they want more choices in programming. Mr. Golant and Waldron both asked advertising related questions, which, again, may indicate that they are struggling to understand the impact of an a la carte mandate on ad revenues.

Jon Mandel, Co-CEO and Chief Global Buying Officer, MediaCom Worldwide, an advertising buying agency, gave a lively and informative presentation on behalf of advertisers. Mr. Mandel stated that advertisers’ need for programming is “broad and deep” because there are 12,000 target audiences among the U.S. public. Advertisers “buy creatively” to reach certain target audiences, and cable networks give them flexibility.

Mr. Mandel stressed that advertisers look beyond a network’s rating and share data, and also consider its occasional viewers, the qualitative measure of which is its weekly “cume.”6 A network’s cume directly correlates to its total distribution. As an example, he stated that although Discovery Channel only has a 0.5 rating share, it is an attractive medium for advertisers because, on average, 30 percent of MVPD subscribers watch Discovery at some time during the week. It can achieve this cume only because it reaches 82 million MVPD homes.7

Mr. Mandel analogized a new cable network to an obscure food product (such as guava paste, which he recently purchased on a whim and now buys regularly): consumers will try the product only if it is conveniently available to them. He further predicted that as a result of a la carte: (a) cable networks no longer would be an effective medium for advertisers, (b) ad dollars would shift back to broadcast television, and (c) viewers would migrate from television to other entertainment and information sources.

In response to a question from Mr. Ferree, Mr. Mandel stated that advertisers do not care whether viewers have directly paid for a service or receive it for free. From an advertisers’ perspective, the key choice is the decision to watch to a network, and advertisers would not pay a premium for ad time on an a la carte network. Finally, when Mr. Ferree asked what would be the problem of “voluntary” a la carte for networks, Mr. Mandel’s response was a home run: “voluntary” a la carte would lower a network’s distribution and cume, and thereby diminish its ad revenues.

Philip Lind, Vice Chairman, Rogers Communications, summarized the reasons why Rogers Cable has chosen to offer some digital networks a la carte and the ways in which Canadian cable television service differs from U.S. operators’ offerings. Mr. Lind’s key points were:

  • Canada is a small market relative to the U.S., and 30 percent of its citizens speak French;
  • Canadian cable offerings are almost entirely driven by government regulation, which includes mandates for Canadian programming and retail price regulation;
  • Rogers’ broad analog tiers are very popular with subscribers, and the popular networks are available only on these tiers;
  • Only Rogers’ digital tier subscribers can purchase additional services a la carte or in mini-tiers;
  • The 73 networks Rogers offers a la carte generally are new and emerging networks;
  • Rogers voluntarily decided to make some networks available a la carte as a competitive response to DBS (not because of government fiat); and
  • U.S. press reports on Rogers’ a la carte offerings have been “misleading”—broad tiers of analog networks are Rogers’ “core” offerings.

Bennett Hooks, CEO of Buford Media Group (a small, rural cable operator) spoke on behalf of ACA. The context of Mr. Hooks’ comments at the symposium is significant. ACA filed the most substantive initial comments in favor of “voluntary” a la carte. The key points of these Comments were the following:

  • ACA focused on actions of the "Big Five,” which it defined as Disney/ABC/ESPN, Viacom/CBS, News Corp/Fox, GE/NBC, and Time Warner/Turner (but not Comcast).
  • ACA’s foremost concern appears to be with retransmission consent, which it claims is used by certain programmers to “force” certain “unwanted networks” on small operators.
  • ACA claimed that its members often cannot carry independent networks because their system capacity is consumed by networks forced upon them by the “Big Five.”
  • ACA stated that “most problems would be solved if owners of regional sports channels and racier entertainment channels would allow these networks to be moved to a tier,” and proposed legislative changes in:
    1. Federal retransmission consent law;
    2. Antitrust laws, to prohibit price discrimination and tying by programmers; and
    3. Program access laws, to (i) make these applicable to all networks, (ii) prohibit noncost-based price discrimination; and (iii) require wholesale price disclosure to the FCC.
  • ACA also endorsed legislative proposals made by Mediacom Communications8 in the FCC’s media concentration proceeding. These proposals would mandate that:
    1. cable systems have the right to offer a la carte any network for which the license fee is more than two times the average network cost on the same tier;
    2. affiliated programmers cannot tie or bundle networks; and
    3. confidentiality provisions in distribution agreements are prohibited.

While Mr. Hooks’ statements contained the same rhetoric as ACA’s initial comments, he stated that the FCC should include five points in its Report to Congress. None of these expressly called for the legislation referenced above. This suggests that ACA may soften its position in its reply comments, but that conclusion is far from certain. Specifically, Mr. Hooks stated:

"more flexibility in how [ACA members] package channels for customers will go a long way to address concerns about choice, cost and content. For example, the ability to offer a Sports Tier or a Contemporary Adult Tier9 would help us control costs and give customers more choice.… These changes will not necessarily require legislation or regulation, but they might. One way to achieve these changes [to give small operators more programming flexibility] is for the media conglomerates to exercise self-restraint when dealing with smaller distributors. They should listen to our ideas, and try them."

Mr. Hooks stated that ACA members are willing to “test” mini-tiers in their markets. Mr. Ferree stated that the idea of market trials was “intriguing,” but asked whether a small market test would be relevant given concerns about reduced ad revenues. In response, Mr. Hooks stated that other parties’ analysis of the impact on ad revenue is faulty.

Michael Willner, President and CEO, Insight Communications, presented information about the costs and operational problems an a la carte mandate would create for MVPDs. Mr. Willner’s key points were:

  • A la carte mandate would have unintended consequences that the FCC and Congress cannot foresee.
  • The current system is not perfect, but it is working well—as demonstrated by the fact that 85 percent of the public subscribes to MVPD services.
  • Many consumers do not want a set-top box in their home; and many do not want to be overwhelmed by myriad options of programming packages.
  • A la carte would take cable system bandwidth away from Internet and telephony offerings.
  • After having recently completely system upgrades, cable operators do not have the funds to again rebuild their systems to accommodate a la carte.

Gene Kimmelman, Senior Director of Public Policy and Advocacy, Consumers Union, made a typically incendiary presentation purportedly on behalf of consumers. Both the substance and “spin” of Mr. Kimmelman’s presentation differed from Consumers Union’s initial comments, in all likelihood signaling that it will modify its arguments in reply comments.

Consumers Union’s initial comments were fairly weak—only 11 pages long, plus economic analysis purporting to show that cable operators are monopolists.10 Consumers Union proposed a vaguely defined "mixed bundling” mandate, not “mandatory” a la carte imposed on MVPDs. It gave no specific information about proposed laws or regulations, stating only generally that consumers should be offered channels on a stand-alone basis and as part of tiers. It also made no mention of any proposed form of license fee regulation. Unlike ACA, Consumers Union added Comcast/Liberty Media to the list of “media barons.”11

At the symposium, Consumers Union asked the Commission to support the legislative proposals in ACA’s initial comments. Mr. Kimmelman stated that its proposed mandate would apply only to “digital” cable customers and that cable operators would be able to offer both tiers and a la carte services. He accused MVPDs and networks of practicing “deception” by presenting “doomsday scenarios” based on a “mandatory” a la carte.

Consumers Union economist Mark Cooper presented its economic arguments, many of which were not part of Consumers Union’s initial comments. Mr. Cooper’s key points were.

  • Cable subscribers must pay an average of $65 for 90 channels before they can receive digital tiers of service. Consumers are currently “forced” to buy “three big bites” of tiered networks (the basic, expanded basic, and digital tiers), but should have to purchase only 16 channels for $20.
  • MVPD subscribers consist of three consumer groups:
    1. “devotees,” who watch a lot of television (many of whom subscribe to DBS);
    2. “grazers,” who were never defined; and
    3. “captives,” who were described as “lunch-bucket” cable subscribers who want low rates and a limited number of networks.
  • Consumers Union wants to “liberate the captives.”
  • Cooper stated that “the sky will not fall for networks” because their “core viewers” (devotees and grazers) will remain. With respect to advertising, Mr. Cooper argued that distribution is not relevant because advertising revenue is “about eyeballs, not subscribers” and “80 million subscribers doesn’t do you a [darn] bit of good.” He argued that a network’s cume is irrelevant and that Consumers Union’s proposals “will help advertisers get more efficient.”
  • Mr. Cooper stated that subscribers would not need a set-top box for each television set in their home because “routers” could be deployed in conjunction with a single set-top box. (No specifics were given).
  • With respect to increased marketing costs for networks, Mr. Cooper stated that there would be a “little bit of a change.”
  • Independent networks would benefit from Consumer Union’s proposals. Oxygen was described as a “droplet of success in an ocean of utter failure” for independent networks, and, in any event, Oxygen is not a truly independent network because Time Warner and Paul Allen are investors.
  • In response to a question from Mr. Golant, Mr. Cooper stated that the FCC “would not have to regulate rates” in order to implement its proposal.

III. Afternoon session

The afternoon panel of economists included Erik Brynjolfsson, professor of management at MIT; Gregory Crawford, professor of economics at the University of Arizona; David Waterman, professor of telecommunications at Indiana University; and Steven Wildman, professor of telecommunications studies at Michigan State. Neither Mr. Ferree nor Mr. Golant attended this session.

On most points, there was general consensus among the panelists. Most important, the consensus was that the best course for Congress and the FCC would be to do nothing with respect to a la carte. The panelists also seemed to agree that an a la carte mandate imposed on MVPDs would have “disastrous” consequences for MVPDs, networks and consumers, and would have to be accompanied by a “morass” of license fee regulation in order to have any effect. All concurred that increased competition among MVPDs would yield far greater benefits for consumers than any a la carte law or regulation.

With respect to a “voluntary” a la carte mandate, the comments were somewhat less negative. None of the panelists endorsed such a law or regulation. However, Professor Crawford stated that such a mandate “might be worth considering,” and Professor Waterman stated that if Congress were to require the FCC to enact some form of a la carte regulation, then “voluntary” a la carte would be the “least worst” option. He elaborated that although the harms of such a mandate would swamp any benefits, the net effect would be the “least horrible” (in comparison to mandatory a la carte). Professor Wildman responded by stating that any a la carte legislation would be extremely risky and unlikely to improve the current situation.

IV. Next steps

The FCC’s a la carte report to Congress likely will be highly influential on Capitol Hill because the FCC is an expert regulatory agency and is viewed as an independent arbiter. As a result, it is very important that the Commission fully understand the negative impact that “voluntary” a la carte would have for the overwhelming majority of networks.

Our attorneys filed comments on behalf of twenty program networks in this proceeding. These comments set forth, in extensive detail, the various ways in which a “voluntary” a la carte mandate would harm networks and consumers, as well as the magnitude of this harm. However, over 200 sets of comments have been filed with the FCC to date, and, at this point, the Commission may not fully appreciate the harm “voluntary” a la carte would cause networks. Proponents of “voluntary” a la carte have presented a benign and misleading picture of its impact to the FCC.

We believe that direct ex parte meetings with the FCC Commissioners and their staff, as well as key members of the Media Bureau, would be an effective way for program networks to hammer home the negative effects of “voluntary” a la carte in simple and direct terms. While written comments are important, ex parte meetings can put a “face" on the issue for FCC officials by having them talk directly and candidly with representatives of the networks that would be endangered. In a close call, as this may be, such face-to-face communication can be the key to influencing a favorable outcome.

Please let us know if you would like to participate in ex parte meetings with the FCC or if you have any questions about the symposium or this proceeding.

Footnotes:

1 ACA is a trade association of small (and often rural) cable operators based in Pittsburgh, Penn.

2 By “voluntary” a la carte mandate, we are referring to a law or regulation that would restrict the ability of networks to specify tier placement in their distribution agreements with MVPDs. MVPDs would not be required to distribute networks on an a la carte or themed-tier basis, but could voluntarily elect to do so.

3 While the FCC may be reluctant to focus on the issue of indecent programming as a driver for an a la carte mandate because of the overt intonations of content regulation, it is well aware that some organizations are seeking a la carte precisely for this reason.

4 PTC is the only major organization that called for “mandatory” a la carte in its initial comments. Presumably, PTC did not help its cause by submitting ineffective (and arguably unprofessional) initial comments. However, PTC (and its ally Concerned Women of America) may have greater influence in Congress, where concerns about indecent programming are “hot button” issues with some socially conservative members, particularly Rep. Nathan Deal (R-Ga.).

5 Ms. Laybourne noted that while basic cable networks spend only 2 to 6 percent of revenues on marketing, premium networks spend 15 to 25 percent.

6 A network’s weekly ”cume” is the percentage of MVPD homes that watch the network for six minutes or more during a week.

7 Mandel also cited The Weather Channel as a network with a low share rating (0.2) that was attractive to advertisers because of its high cume.

8 Mediacom Communications is a cable operator, not to be confused with Mr. Mandel’s ad buying company, MediaCom Worldwide.

9 Hooks cited E!, FX and Spike as examples of “some of the racier entertainment channels … [that] contain partial nudity, sexually suggestive content and profanity.”

10 Consumers Union simply ignores the existence of DirecTV and Echostar as competitors to cable operators.

11 Consumers Union also referenced E!, The Golf Channel, Outdoor Life Network, G4techTV, and Comcast Sportsnet as part of the Comcast/Liberty Media empire.

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