SENATORS RAISE QUESTIONS ABOUT PROGRAMMING COSTS ON CABLE RATES

After Stevens questioned cable operator complaints about programming pricing, industry executives insisted they didn’t need Congress to make any legislative changes. Stevens said 68% of cable operators’ costs were affected by programming costs and said cable companies had posted profits of 30-40%, even in a recession. Cox CEO James Robbins said programming costs had risen from 12% of total costs to 30% since 1992 and Cox’s programming cost per subscriber had grown twice as much as average revenue per subscriber.

Cable operators consistently referred to several concerns: (1) Rising programming costs. (2) Network broadcast retransmission consent, which Robbins said was being used by some networks to force nationwide carriage of unproven cable networks. (3) Increasing the 35% TV ownership cap would bolster programmers’ leverage. Cablevision Chmn. Charles Dolan said the govt. should reconsider its mandated “must buy” of basic cable. Expanded basic service also needs reconsideration, he said. “Government must buy through mandatory basic. Industry must buy through expanded basic. Network must buy through retransmission consent,” Dolan said. “These there are the building blocks of ever-escalating cable prices.”

Consumers Union Dir. Gene Kimmelman said Congress should require operators to unbundle programming and alter laws that enabled media consolidation. He said cable rates had risen nearly 50% since the Telecom Act passed. Kimmelman said more consolidation would bring higher prices and the proposed News Corp. acquisition of Hughes Electronics and DirectTV would raise both cable and satellite TV prices.

Sen. Wyden (D-Ore.) expressed support for a la carte pricing. He also said media consolidation was a concern because fewer content opportunities would be available and consumers and small cable companies would be forced to challenge the “media conglomerates.” Both Robbins and Dolan said a la carte pricing was technically difficult for cable providers to deliver.

Several senators, including Sens. Smith (R-Ore.) and Nelson (D-Fla.) asked about cable investments in broadband. Robbins said cable companies had taken the lead in pricing for broadband. Kimmelman acknowledged that cable investment in broadband and other advanced services for consumers was “substantial.” However, he said the additional revenue from those investments was enough to cover costs and cable rates shouldn’t rise because of broadband or other advanced services investments.

Stevens expressed concerns that cable companies were exempt from Universal Service Fund (USF) requirements. Robbins said Cox paid into USF for all phone-to-phone services it provided. But when questioned by Stevens on USF payments on broadband, Robbins said Internet service obligations for USF were complex and should be addressed separately.

Programmers said it was irresponsible for cable industry leaders to blame programmers for high prices. YES Network Chmn. Leo Hindery said vertical integration of cable systems had become a “discrimination tool” for the nation’s larger cable operators. He said independent programmers were being held “hostage” by cable operators and said Congress should pass legislation that would protect the viability of independent programmers. McCain asked Hindery to provide documentation on such discrimination against independent programmers.

ESPN defended itself from charges that its high rates were the cause of cable’s woes. In a written statement submitted to the Commerce Committee, ESPN and ABC Sports Pres. George Bodenheimer said programming fees for cable cost about $11 a month, while cable service cost on average $40. “By focusing only on the cost side and ignoring revenue directly and indirectly associated with ESPN services, they are trying to use programmers in general and ESPN in particular as the scapegoats to justify their retail price increases and preserve their high margins,” Bodenheimer said.

CableDirect COO James Gleason said programming costs were driving up costs for rural cable providers, but many of the cable channels were controlled by large conglomerates that muscled smaller operators. McCain also asked for documentation on “abusive conducts” by media conglomerates, which Gleason said would be hard to provide because of confidentiality clauses in programming contracts. Gleason suggested that more transparency should be brought into cable pricing.

The General Accounting Office (GAO) raised questions about the FCC data on cable rates and how the agency classified competition in cable franchises. William Shear, GAO acting dir.-physical infrastructure, said the FCC’s annual survey of cable prices might not be a reliable source of information on cost factors that caused cable rate increases. Shear said the GAO would release its full report on cable rates and FCC survey data in Oct. It’s too early to tell whether independent programmers are being discriminated against by cable operators, Shear said, responding to a question from McCain. The GAO report also won’t include larger issues such as USF or media consolidation, he said.

The FCC provided minimal instructions on how to complete the cost factor section of the survey, Shear said. The FCC survey allowed cable companies a variety of ways to evaluate “various cost and noncost factors.” He said the FCC’s classification of effective competition to cable franchises didn’t accurately reflect market conditions. In its study, the GAO found only 2 cases were where a finding of effective competition was reversed.

In response to Shear’s testimony, McCain said rates were about 17% higher in areas where there was only one multichannel video service provider. While Shear said the GAO hadn’t finished its study or showed such results, he did say McCain’s statistic appeared to be on the right track. DBS service in an area didn’t lead to lower rates, he said.

Meanwhile, NCTA issued a White Paper Tues. that suggested that while cable prices had increased “significantly” in recent years, the product had been “greatly enhanced” as a result. NCTA attributed the price increases to costs of technology, content and labor. It said the industry had made a $75 billion investment -- more than $1,000 per subscriber -- in advanced broadband networks. That investment has brought digital tiers, CD-quality music, video-on-demand services, high-speed Internet access and local phone service in some instances, NCTA said. What’s more, it said, the cable industry has invested billions in original programming and program acquisition. “Cable customers are enjoying more value for their entertainment dollar, and the increased viewership of cable networks reflects that value,” NCTA Pres. Robert Sachs said. Among the White Paper’s points were that program networks were facing increasing costs from sports and other entertainment, vertical integration in the cable industry had diminished and didn’t affect programming prices, retransmission consent requirements imposed by the Cable Act of 1992 were driving up consumer prices, cable’s labor costs had increased sharply and franchise fee requirements added to the cost of cable service.