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Cable TV Customers Losing Options: Two Midlevel Channel Packages Axed Here. Nationally, a La Carte Idea Faces Tough Go.

Posted on: Sunday, 30 April 2006, 12:00 CDT

By Sam Kennedy, The Morning Call, Allentown, Pa.

Apr. 30--Just as support for "a la carte" cable TV programming is surfacing at the highest levels of Washington, D.C., the menu for Lehigh Valley consumers is shrinking.

Service Electric is eliminating its two midlevel basic channel packages on Monday. Customers must now choose between a new stripped-down economy package consisting mostly of local stations at $19 a month, or the full 91-channel lineup for $46 a month.

Some viewers are so put off by the scale back they're ready to drop cable altogether.

"I'm going to satellite," said Fidel Espinoza, 45, of Bethlehem. "I want options.…I'm not asking for much."

Elizabeth Marshall, 27, has decided against using Service Electric in her new Easton home.

"I simply refuse to pay nearly $50 a month," she said. "It runs counter to my sense of appropriateness."

A la carte programming would give Espinoza and Marshall exactly what they want: the ability to pick, and pay for, only the channels they like. Sports fanatics could get ESPN and history buffs the History Channel, minus the MTV.

While the concept fares well in public-opinion surveys and recently won the endorsement of Federal Communications Commission Chairman Kevin Martin, it faces fierce opposition from the cable industry.

Despite its reputation, however, the industry is not a monolith. It consists of businesses that vary in size and purpose and whose interests sometimes conflict.

The story behind Service Electric's decision to drop its midlevel channel packages reveals a surprising willingness to compromise among some of those businesses. It also goes to show why much of the anger toward the region's biggest cable operator -- and toward many other independently owned operators throughout the country -- is misplaced.

Service Electric Cable TV & Communications of Allentown says it did not want to drop the channel packages: The unpopular change was foisted upon it by programmers.

(The region's No. 2 and No. 3 cable operators, RCN Corp. and Blue Ridge Communications, have avoided this predicament by not offering midlevel channel packages in the first place.)

Unseen forces

Programmers are the companies that create the content -- that is, TV networks and production companies. Most are part of larger media empires, or conglomerates, namely Disney (whose properties include ABC and ESPN), Viacom (CBS and MTV), General Electric (NBC and Bravo), Time Warner (TBS and TNT), News Corp. (Fox) and Discovery. For the sake of simplicity, programmers can be thought of as one-half of the cable industry.

The other half, then, would be what are generally referred to as cable operators, such as Service Electric; they get the content into people's homes.

Many cable operators -- particularly the independents such as Service Electric, which is owned by the family of founder John Walson Sr. -- are open to giving consumers more control over what channels they do and don't get. If they don't support a la carte, per se -- and few do -- they are at least willing to experiment with tiers, or groupings of channels, not unlike Service Electric's about-to-disappear channel packages.

Programmers, on the other hand, are virtually uniformly opposed to changing the current business model, which is designed to force-feed consumers channels they don't want. It's based on a punitive rate structure, which they enforce with an iron fist.

Here's how it works:

Cable operators pay programmers a per-subscriber fee for access to their networks. For example, Disney gets about $2.50 a month for each subscriber who gets ESPN, according to an industry source.

But, under the rate structure, the programmer's fee goes up exponentially as the number of customers who get a channel goes down. A cable operator, then, can end up paying much more -- perhaps four times as much -- for a channel whose household reach is limited.

For programmers, the underlying objective is simple: to get their channels into as many homes as possible so they can demand higher advertising rates.

The decision

So, Service Electric found itself in a lose-lose situation as customers opted for its midlevel channel packages over its full channel lineup, company General Manager Jack Capparell explained.

Essentially, its midlevel channel packages -- its tiers -- had become too popular. Either it could dump the channel packages, which by their very nature limited the household reach of those networks they did not include, or it would see the cost of its full-channel lineup skyrocket.

Restricted by confidentiality agreements, Service Electric has not named the programmers that forced its hand. "We tried to go with the concept of giving people options, but programming-wise, contractually, we hit a wall," Capparell said.

Industry watchdogs said they have no reason to doubt that explanation.

"This is classic programmer behavior," said Jeannine Kenney, an analyst with Consumers Union, publisher of Consumer Reports. "This is how these bundles have gotten bigger and bigger, and more costly, every year."

Kenney and other a la carte advocates say the underlying problem is media consolidation.

Further complicating issues

In reality, the cable industry is not divided neatly into two halves -- programmers and cable operators. Some media conglomerates own both.

Time Warner's Turner Broadcasting division includes the TBS and TNT networks, while its cable operator serves 11 million customers in 27 states. Comcast Corp. of Philadelphia has the E! and Style networks and 21 million cable customers. (Two others in this category are Cox Communications and Cablevision.)

Some media conglomerates, such as Disney and General Electric, also own both local broadcast stations and cable networks. And, when negotiating per-subscriber rates with cable companies, they use access to those broadcast stations as a bargaining chip.

"There's no market force at play in these programming decisions," said Dan Isett of the Parents Television Council, an advocacy group that supports a la carte as a means of giving parents a way to keep objectionable programming out of the home. "What we're talking about is the free-market solution to this problem."

"I can't think of an another industry where you are forced to buy an enormous number of things you don't want in order to get the few things you do want," he said.

The cable industry's largest trade group, the National Cable and Telecommunications Association, is leading the fight against a la carte. Its membership includes programmers and cable operators, including Service Electric and RCN Corp.

The association says a la carte would not, in the long run, save cable customers money. Rather, they'd end up paying more even as they get less.

Because cable networks would have smaller viewerships, programmers would have to charge cable operators higher per-subscriber rates to maintain current revenues, the association says. Many networks, unable to attract paying customers, would go out of business.

"The great diversity that is available through cable and satellite could be wiped out," said association spokesman Brian Dietz, citing religious networks and channels that cater to minority groups as likely candidates for extinction.

Michael Goodman, an independent cable industry expert at the Yankee Group in Boston, said the impact would ripple through the economy as entire sections of the programming industry -- networks, production companies, advertising agencies -- die off. He predicted the number of cable networks would fall from a couple of hundred to a few dozen.

"Think of how many people are going to get put out of work," he said.

Although the Consumers Union and the Parents Television Council do not deny that some networks could go out of business, they take issue with such cataclysmic predictions. They accuse a la carte opponents of using scare tactics.

"There's very little evidence that a la carte would raise prices," said Isett of the Parents Television Council. "If it did, it would be the very first time in the history of Western economies that competition made prices go up."

The primary audience for this debate is lawmakers in the nation's capital, where both sides are engaged in furious lobbying campaigns to influence a raft of possible legislation, including at least one bill that could be announced as early as this week. Nobody expects the cable industry to change the way it does business unless forced to do so by an act of Congress.

Service Electric merely offered its customers a couple of midlevel basic tiers -- a far cry from true a la carte. But even that was enough to provoke a forceful response from programmers.

sam.kennedy@mcall.com

610-820-6517

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Source: The Morning Call, Allentown, Pennsylvania

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