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I’ve discussed the cable industry at times in the past regarding the failure to provide a la carte cable programming. I’ve also applauded them for the battle against the NFL Network. Today’s installment of why the cable industry is evil concerns a recent filing by the American Cable Association, which represents about 1,100 small and medium-sized cable companies.

Recently, the ACA filed public comments with the FCC regarding the FCC’s Review of the Commission’s Program Access Rules and Examination of Program Tying Arrangements. In essence, small cable providers are placing the blame for high prices and the status quo on the wholesale pricing practices of Conglomerated Media. Their arguments are not without merit. Unfortunately, I was ultimately left with the impression that the ACA proposals were meant merely to serve their own interests in competing against larger cable companies and not for the purpose of serving the wants and needs of their customers.

ACA Members Are Scared of Conglomerated Media

Before we proceed, I wanted to note that the ACA’s submission to the FCC portrays the ACA membership as if it were a collection of simple shopkeepers fearful of mob retaliation if they talk to the cops.

“A note about retaliation by programers and broadcasters. Nearly all programming and retransmission consent contracts contain strict nondisclosure terms imposed by the programer or broadcaster. In responding to the Commission’s questions concerning wholesale practices, ACA members fear the risk of retaliation by certain programming suppliers. Conglomerates like Viacom, Disney, Fox, NBC Universal, and others have many weapons, both overt and subtle, with which to hurt smaller distributors. No small cable company alone can support a fight against any of these companies.”

Its like a bad episode of the A-Team. “I can’t talk to you. Do you know what they’ll do to my family if I do?”

Because the ACA Membership is too scared to talk, key pieces of information are forced to be left out of their report. Specifically, we can’t be told:

• The fees for purported standalone channel offerings compared to fees for bundles; and

• The difference in fees that programmers and broadcasters charged ACA member companies compared to the fees paid by those that are able to provide customers with Comcastic levels of service.

Essentially, their contracts forbid them from talking about price at all.

The Problem, As The ACA Sees It

The ACA asserts that three practices by Conglomerated Media restrict how channels are packaged, offered, and priced at retail:

1. Tying and bundling;
2. Tiering and distribution obligations; and
3. Non-cost-based price discrimination.

Non-cost-based price discrimination merely means that the ACA members are unable to strike as beneficial a deal as the big cable operators are, so I’m not going to address that here. I will address the other two issues however.

Tying and Bundling

Tying and Bundling is the process by which Conglomerated Media get us to pay for all those channels we don’t want. For example, when Disney is negotiating carriage rights with a cable operator, they come to the bargaining table in a very strong position to demand what they want. As you’ll see in the charts below, Disney owns multiple local OTA ABC stations, ESPN, ESPN2 and the Disney Channel. That’s one of the four major networks and three of the top eight costliest cable channels.

TABLE 1 - INDIVIDUAL CHANNEL COST

Those four channels allow Disney to wield enormous power when negotiating deals. Following standard industry practice, Disney has taken to “tying and bundling” these channels with other, less desirable channels. If a cable operator wants to carry the Disney Channel, they have to also carry ABC Family, SoapNeta and Toon Disney. Want to carry ESPN? Then you also need to carry ESPN2, ESPN News, ESPN Classic, ESPN 360 (Internet) and ESPNU.

Programmers and broadcasters “routinely require the carriage of affiliated channels through tying and bundling.” In fact, in order to have the right to distribute the 13 most wanted channels, or their HD counterparts, the ACA members are generally required to distribute at least 60 other channels.

TABLE 2 - TYING AND BUNDLING - SATELLITE CHANNELS

ACA members are also subject to tying and bundling demands in order to retransmit the major OTA networks via cable if those local networks are owned by Conglomerated Media.

TABLE 3 - TYING AND BUNDLING - RETRANSMISSION CONSENT

The ACA summarizes the tying and bundling issue this way: “on average, 30% of channels carried on expanded basic and 45% of channels carried on digital tiers are carried under tying or bundling arrangements…. The expanded basic tier is the most obvious example of a service tier overloaded with channels and costs from wholesale tying and bundling. But it has not stopped there. Programmers and broadcasters have extended their tying and bundling practices to digital tiers, HD tiers, and VOD content.”

Tiering and Distribution Obligations

Tying and bundling are not the only grievance alleged by the ACA members. The ACA also alleges that Conglomerated Media imposes conditions upon the distribution of the channels which forces the cable companies to place the channels on the basic tier. “This means that to obtain the right to distribute a channel to any customer, the cable operator must distribute the channel to nearly all customers.”

As more channels are forced into the basic tier, the price can only go up. Individual cable operators have little ability to fight for channel choice because ownership is concentrated in so few hands.

TABLE 4: THE TOP FIFTY CHANNELS

The ACA’s Conclusion

“The wholesale programming and retransmission consent practices described above harm the public interest and conflict with key communications policy goals in aleast four ways: (i) reducing choice and program diversity; (ii) increasing costs for cable;(iii) reducing competition; and (iv) impeding broadband deployment.”

The ACA’s whining reaches a fever pitch with this: “the ability of ACA members to deliver more choices and more diverse program offerings has become subjugated to profit-driven mandates from the headquarters of media conglomerates.

The ACA’s Proposals

The ACA proposes that the FCC take regulatory action. The proposed regulations have three main components:

• Programmers and broadcasters would be obligated to offer channels on a standalone basis on reasonable rates, terms and conditions. This would not prohibit programmers and broadcasters from selling channels in bundles; they would just need to offer channels individually too.

• Programmers and broadcasters could not condition access to any channel on the obligation to distribute the channel on a specific tier or to a required percentage of subscribers. This would not prohibit programmers and broadcasters from offering incentives for wider distribution, so long as differences in rates, terms and conditions were reasonable.

• Aggrieved MVPDs could seek redress through the existing program access and retransmission consent complaint processes. Programmers and broadcasters could not unilaterally withdraw a channel while a complaint is pending. Additional procedural rules would apply for small and medium-sized cable companies.

The Effect of the ACA Proposals

Upon proposing their regulatory changes, the ACA proceeds to provide examples of the type of “innovative” (cough, cough) services the ACA members would be able provide if the FCC were to enact its proposals.

According the the ACA, the offerings include such incredible innovations as:

• Moving high-priced sports channels to separate tiers.
• Offering certain high-priced channels on a standalone basis.
• Allowing customers to customize channels within packages.
• Offering increasingly costly network broadcast stations on an optional tier.
• Offering a robust expanded basic package better tailored to local markets.
• Offering a wide variety of smaller, lower-cost, channel packages.

The ACA firmly squash any notion that they would voluntarily provide any sort of a la carte programming. “These changes do not mean a regulated a la carte regime. Current technology costs make a la carte a financial impossibility for ACA member systems, the business mode is entirely unproven, and no lawful basis exists for imposing regulated a la carte. Moreover, ACA members report that many customers prefer a basic or expanded basic package with a variety of channels at a reasonable price. At the core of the problem are the wholesale practices that prevent cable operators, especially small and mediumsized cable operators, from offering more choices and better value.”

This paragraph makes it clear what the cable companies are seeking. They want the FCC to intervene and regulate the industry. This would prevent Conglomerated Media from imposing channel lineups on cable operators. That way, cable operators would be free to choose the channel lineup that they would be able to impose upon their customers.

Truly, the emperor has no clothes.

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