Target: Pay TV's Wild Side
A government crackdown would include cable and satellite's lucrative porn business
By Bill McConnell -- Broadcasting & Cable, 3/13/2005 7:00:00 PM
Cable and satellite operators watched from the sidelines last year while broadcast TV was roasted in Washington for Janet Jackson's and Bono's crimes against public taste. Now it is pay TV's turn in the government's line of fire—and the result could cost the industry a lot more than an FCC fine and public scoldings on Capitol Hill. With newly appointed Attorney General Alberto Gonzales making the prosecution of obscenity cases a priority for the Justice Department, cable and satellite operators face a looming threat to their estimated $800 million in revenues from adult entertainment. But the landscape of cable and satellite programming itself—from the bawdy humor on Comedy Central to the softcore fare on late-night HBO and Cinemax—is also subject to attack as Congress contemplates revising the rules that have essentially given pay TV carte blanche to show anything, at any time.
For social conservatives, who have been emboldened by their role in the reelection of President Bush, the rhetoric coming out of D.C. could not be more welcome. For the pay-TV industry, the coming confrontations present the formidable task of lobbying to protect its interests, avoiding the radioactive PR of seeming to defend pornography, and preparing to fend off legal barrages from federal prosecutors.
Broadcast television suffered Washington's wrath last year for the infamous transgressions of Bono and Janet Jackson. Now it looks like cable and satellite programmers' turn on the hot seat as Congress and the Justice Department contemplate steps that could terminate pay TV's free pass to show anything, anytime.
The industry's wide latitude is threatened on two fronts. First, many in Congress want to impose on cable the same type of restrictions that limit when broadcasters may air their sexiest and edgiest mainstream shows. The other worry for the cable industry is a rising sentiment to eliminate an extremely lucrative line of programming that no broadcaster would dare provide: pay-per-view porn.
If proponents fully realized their goals of restricting indecency and obscenity (the distinction is basically indecency = dirty words, obscenity = dirty pictures), it would have major implications not just for the economics of cable and satellite TV but for their programming itself. For instance, Comedy Central might have to move the profanity-laced South Park out of prime time, and HBO, Cinemax and Showtime likely would find it wise to abandon their late-night softcore programming. The Spice channel might survive only as the name of a cooking network.
But even though the current move to police cable programming appears to have more momentum than past clean-up threats, considerable obstacles remain to be overcome before cable and satellite operators could be forced to rethink their business plans.
Two weeks ago, new Attorney General Alberto Gonzales vowed to pursue “aggressive prosecution” of obscenity cases, an announcement many social conservatives interpreted as a sign the Justice Department is set to expand its anti-obscenity enforcement into increasingly prevalent forms of adult entertainment, such as pay-per-view on cable and DVDs. And indeed, Justice Department spokesman Brian Sierra cautions, “Anybody trafficking in obscenity does so at their own risk.”
Gonzales, a former White House lawyer, placed an obscenity crackdown on the same list of priorities as the war on terror, deterring violent crime, lobbying for victims'-rights legislation, reforming immigration laws and eliminating human trafficking.
“JUSTICE AND HUMAN DIGNITY”
Combating obscenity, Gonzales says, is critical to advancing “the cause of justice and human dignity.”
The campaign comes at a time when social conservatives, having helped President Bush to victory in the past two presidential elections, feel emboldened to press for action on their agenda. On the obscenity front, their concerns arise from what they see as media providers' “whatever sells” attitude toward sexually oriented and explicit content. In fact, groups such as the National Coalition for the Protection of Children and Families, as well as Concerned Women for America, have criticized the Bush administration for not doing more during the past four years.
Dan Panetti, the National Coalition's vice president for legal and public policy, believes that the Justice Department during the tenure of former Attorney General John Ashcroft would have pursued obscenity prosecutions if not for the unexpected demands of the war on terror. “9/11 changed everything,” he says.
Now that the Bush White House has revived its social agenda, Panetti is encouraged that obscenity will be attacked on many fronts: “We'd like for dozens of cases to be brought at one time in federal circuits across the country.”
Although Sen. Hillary Clinton has not come out in support of the most wide-ranging proposals to rein in indecency and obscenity, she last week sharply attacked the entertainment industry for the exposure of children to sex and violence on television and in videogames. She joined a bipartisan call for a government study of the media's impact on young children and urged a uniform ratings system across various entertainment platforms so parents can better gauge what their children see.
The sight of the Democrat from New York alongside Republican Sen. Sam Brownback—who is at the forefront of an anti-obscenity movement in the Senate—touting legislation to require the media-impact study, indicated the new tenor on Capitol Hill that could greatly complicate life for the cable industry.
For the past decade, both the Clinton and Bush Justice Departments focused narrowly on anti-obscenity enforcement, primarily on the trafficking of child pornography. But during his confirmation hearing in January, Gonzales pledged to prosecute more-prevalent types of pornography, as the Reagan administration did in the 1980s.
Including adult pay-per-view channels in a government anti-obscenity campaign would threaten what is by far cable and satellite operators' most profitable product line. Satellite and cable operators, according to Kagan Research, are pulling in revenue of just under $800 million a year from adult movie subscriptions and pay-per-view orders, roughly 40% of pay-TV on-demand revenue. That may not sound like much for an industry expected to tally $62 billion in revenues this year, but the take from adult pay-per-view is almost pure profit. Cable and satellite operators' margins for sex channels, according to several analysts' estimates, run between 70% and 90%. By comparison, cable and satellite operators get to keep only 40% of the retail price of theatrical movies.
ESSENTIAL DRIVERS OF GROWTH
Even for the strongest operators, profits from adult pay-per-view are essential to quickly recapturing the costs of building out their systems' digital capacity, an effort on which the industry as a whole has spent $95 billion since 1996. As more systems go digital and add video-on-demand services, according to Jupiter Research, cable and satellite providers will grow their adult channel revenue by 120% through 2009. (Kagan Research is more cautious, as shown in the graph on page 14.)
Jupiter's Todd Chanko says add-on services such as pay-per-view adult channels will be essential drivers of growth, now that 85% of Americans already subscribe to cable or satellite and new customers will be hard to come by. “All operators have to rely on other ways to generate incremental revenue,” he says.
Fighting a crackdown on porn would present an awkward challenge for cable. Despite the profits, adult entertainment is to the media business what nuclear waste is to energy producers: Nobody rushes to defend it in public. Indeed, last month, news reports about Adelphia Communications' intention to offer the most graphic form of hardcore porn (XXX, in the adult-entertainment business's calibration of the sex acts depicted) on its cable system in Southern California prompted so much criticism that the company quickly abandoned the plans.
Comcast, the country's largest cable company, referred B&C to the National Cable & Telecommunications Association for comment on the obscenity issue. Dealing with the hot-button topic is one of the first tasks faced by new NCTA President Kyle McSlarrow, a Republican with strong ties to party leadership. He says he is “comfortable” with the industry's decision to rely on channel-blocking technology, which he describes as a powerful tool that allows parents to shield their children from adult channels and other edgy fare without hindering anybody's viewing choices. “I don't want to start making decisions about what other people watch,” he says.
Playboy Entertainment Group, which provides 75% of adult pay-TV content though the Playboy, Spice and Hot Network channels, also declined to comment on the Justice Department's efforts. (The other top adult-channel producer is New Frontier, which sells The Erotic Network channels; the company did not respond to a request for an interview. Larry Flynt's Hustler TV is just getting into the business.)
Because porn is radioactive as a PR issue, cable operators and big hotel chains that carry in-room pay-per-view porn channels have largely left the job of defending the business in public to the adult-entertainment industry's trade group, the Free Speech Coalition. Executive Director Michelle Freridge won't identify members but says her group's efforts have the support of the cable and hotel industries. The coalition's more public allies include the ACLU, the Association of Club Executives (which represents strip clubs) and the First Amendment Lawyers Association.
“A lot of organizations and specific companies don't want to attract the attention of their attackers,” Freridge says.
Behind the scenes in Washington, however, cable and satellite operators are scrambling to use whatever influence they can to shield the pay-TV business. Brian Roberts, the CEO of Comcast, will have the opportunity to capitalize on ties he made as co-chair of Philadelphia 2000, the host committee for the Republican National Convention. But that is hardly Comcast's only useful Washington connection; the company's Washington office is led by Kerry Knott, ex-chief of staff for former House Majority Leader Richard Armey.
ANTI-PORN ACTIVIST REJOINS JUSTICE
Although the general public may only be vaguely aware of the amount of money their local cable franchises can pull in from adult channels, conservative activists already are zeroing in on the major corporations' porn profits. “Everything is in place to bring prosecutions against mainstream companies,” says Panetti.
In the past four years, the Justice Department has added 17 attorneys to its Child Exploitation and Obscenity Section and doubled the section's budget to $42 million. Among the new prosecutors is Bruce Taylor, who returned to the department after working as an anti-porn activist. As a Reagan-era Justice attorney, he unsuccessfully prosecuted Hustler's Larry Flynt but won a string of lower-profile obscenity cases.
Gonzales' pledge to pursue anti-porn cases came the same week two top lawmakers vowed to bring pay TV under the same “indecency” restrictions as broadcasters. Sen. Ted Stevens, chairman of the Senate Commerce Committee, promised a showdown with the cable industry if operators continue to insist they are constitutionally exempt from FCC indecency restrictions on broadcasters' allowing objectionable—but not obscene—programming only between 10 p.m. and 6 a.m., when children are least likely to encounter it.
“I think we can put restrictions on cable,” he told the National Association of Broadcasters last week. Stevens predicted that cable operators will lose in court if they challenge indecency restrictions on First Amendment grounds.
Rep. Joe Barton, Stevens' counterpart in the House, seconded the call for cable indecency restrictions. Rank-and-file lawmakers have voiced support for the idea, too. Last year, Rep. Nathan Deal appeared to have enough votes among fellow House Commerce Committee members to amend broadcast-indecency legislation with a provision that would make cable operators sell channels individually (or à la carte, as it's known in the industry), rather than in bundles containing channels some parents might not want their kids to see. Only after committee leaders convinced their members that restrictions on cable might not survive the court challenge did they back off.
Shedding their public shyness about defending their porn operations, the cable executives quickly responded to Stevens' and Barton's comments about indecency restrictions. Operators say channel-blocking technology and the fact that subscribers “invite” cable television into their homes are sufficient protection from new limits on pay-TV programming. “The subscription nature of cable service, and the ability of cable customers to block unwanted programming, strongly differentiates cable from broadcasting,” says NCTA spokesman Brian Dietz.
Because of well-established court rulings, Stevens' saber-rattling about imposing indecency restrictions seems less likely to threaten the pay-TV business as it exists today than would a Justice Department anti-obscenity campaign. Years of court rulings have spelled out at least modest First Amendment protections for programming that would legally be classified as indecent, incorporating such elements as profanity, bathroom humor and explicit references to sex. Cable and satellite-TV operators simply have to make channel-blocking technology available to subscribers who don't want networks that provide content they find objectionable. Indecency is not even banned from broadcast television, after all; it is just corralled by the FCC into those eight overnight hours.
Obscenity, on the other hand, has no First Amendment protections and may be outlawed under local or federal statutes no matter what the venue. The age-old problem, of course, is defining exactly what constitutes obscenity. In 1973, the Supreme Court found that, in order to be considered obscene, content must depict or describe sexual conduct in a way a local community would find patently offensive.
Recent cases have put serious roadblocks in the Bush administration's plans on this front. Congressional attempts to restrict online pornography have been rejected by the Supreme Court on First Amendment grounds. Most recently, a federal district court threw out charges against a distributor of movies simulating rapes and murder. The Justice Department is appealing.
But Justice spokesman Sierra predicts cases will go to trial as they are brought before judges in other districts. “It's up to local officials and juries to decide whether there's been a violation of the law.”
Tailoring its approach to the Supreme Court's concerns, Justice will leave the decisions about pursuing prosecutions to local federal district attorneys—to ensure that local community standards are taken into account—and brought before local juries. The local prosecutions will be assisted by Justice officials in Washington.
The Justice Department has found support on Capitol Hill, from both Senate Judiciary Committee Chairman Orrin Hatch and committee member Sam Brownback. The senators have taken the lead in sponsoring anti-obscenity legislation in the first session of 2005, and both have called on the Justice Department to step up obscenity prosecutions. Brownback has sponsored legislation that would call for federally funded research into the possibly addictive effects of pornography (he maintains that pornography is indeed addictive and contributes to crimes such as child sexual abuse.)
The Free Speech Coalition's Freridge says Brownback is laying the groundwork for a broad attack on adult entertainment. She insists that porn-addiction theories have little credence among most researchers.
“In order for the government to infringe upon free speech, there has to be a compelling reason,” she says. “We believe they are trying to create a record for legislation that would make adult entertainment illegal.”
As far as the National Coalition's Panetti is concerned, however, most pornography is already illegal—and it is time the government said so. “The government can censor this material,” he says. “All we're asking is that the government brings these cases and asks juries whether this content should be protected by the First Amendment. Local communities are going to say no.”
If that happens, cable accountants are likely to look at their ledgers and say Oh, no.
Additional reporting by John M. Higgins
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