Booz Allen Defends Study - Broadcasting & Cable

Booz Allen Defends Study

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Consultant Booz Allen Hamilton said Wednesday it was right the first time when it told the FCC a la carte cable pricing would result in higher prices to consumers and reduce diversity of programming.

It released a statement Thursday in response to the FCC's new report saying that a la carte was, instead, ecomically feasible, and laying into the earlier Booz Allen report as full of errors and miscalculations.

"In November 2004, the FCC independently corroborated the methodology and conclusions of a report prepared for the FCC's a la carte inquiry," said Booz Allen in a statement.

"At that time, other independent economists also corroborated our conclusions. In December 2005, in a letter to the FCC's Chief Economist, we acknowledged - and corrected - a mistake in one of our calculations. We shared with the FCC our findings that, after making the appropriate adjustments, our conclusions remain unchanged."

We continue to stand by our conclusions and underlying assumptions."

Those include that:

"A la carte pricing would result in higher costs to consumers for comparable access to cable programming.

"Diversity would suffer. A significant number of cable networks, including those that offer innovative and untested formats, will be forced out of business before they have a chance to build the audience they need to become profitable. Others will have to make dramatic budget cuts, harming the quality of their programs."

The FCC said in its annoucement of the new report that Booz Allen had conceded to one key mistake affecting the estimated per-channel price, citing a letter from a Booz Allen executive.

Study co-author Matt Eagol said that the FCC chose to talk about only one side of that issue--which had to do with whether you counted TV stations as cable networks when figuring the per-channel cost--and that the letter made clear that to make the correction on "both sides of the equation" would not change the final conclusions.

Below is a copy of the letter, supplied to B&C by Booz Allen:

December 16, 2005


Dr. Leslie Marx
Chief Economist
Federal Communications Commission
445 12th Street SW
Washington, DC 20554


Dear Dr. Marx:

I am writing to you in connection with the report that Booz Allen Hamilton prepared on behalf of the NCTA in July 2004, entitled, “The a la Carte Paradox: Higher Consumer Costs and Reduced Programming Diversity.”

In his remarks at the “Open Forum on Decency” conducted by the Senate Committee on Commerce, Science and Transportation on November 29, 2005, , Chairman Martin noted that our report had “fail[ed] to net out the cost of broadcast stations when calculating the average cost per cable channel under à la carte pricing.  As a result of this mistake, the report understates the number of cable channels a consumer could purchase under à la carte pricing without seeing an increase in their bill.“ 

We reviewed the July 2004 analysis in light of the Chairman’s statement and found the following:  To be consistent with the assumptions in our analysis, the anticipated charges for the basic tier of broadcast stations (which, under current law, must be purchased by all customers) should have been consistently removed from the calculation of the “breakeven“ number of cable channels that a customer could buy without seeing an increase in his or her bill.  Specifically, as Chairman Martin’s statement suggested, revenues from the broadcast basic tier should have been excluded from the operators’ video average revenue per user (ARPU) before calculating the average cost per channel under à la carte.  And those revenues, along with revenues from premium, pay-per-view and video on demand, should also have been excluded in calculating how many à la carte channels the average consumer could purchase before facing an increased monthly cable bill.  

Accordingly, we have revised the calculations found in Figure 2 and Appendix 8 of our July 2004 report to incorporate both these adjustments.  The revised calculations are set forth in the following chart and explained below:

Revised Calculation of Average Price Number of Cable Networks Taken Before Increase in Consumer Bill

Calculating the average number of cable channels that a consumer would receive without an increased cable bill under à la carte involves two steps.  First, we calculate the average price per cable channel that a consumer would likely face under the various scenarios we evaluated.  Second, we calculate how many cable channels the average consumer would be able to purchase under each à la carte scenario, based on the per channel price from step 1.  This number is derived from the remaining ARPU after subtracting other costs, including broadcast basic and additional digital set top box costs, that would first have to be paid before any spending on à la carte cable channels.

For step 1 – the average price per channel purchased à la carte -- we deduct from the $55 average video ARPU the $15 broadcast basic cost (row J in the chart) and the $11 in other revenues not attributable to basic cable that is not attributable to basic cable (rows B, C and D, the sum of which appears in row E).  This reduces the average cost per channel taken to a revised range of $2.54 to $3.37.

For step 2, calculating the breakeven number of cable channels before a consumer would face an increase in their monthly bill under à la carte, we need again to subtract the revenues attributable to broadcast basic, premium, pay-per-view, and video on demand. 

When both these adjustments are made, the estimated number of cable channels that a consumer would be able to purchase on an à la carte basis does not differ significantly from the results in our 2004 report.  The 2004 report estimated that digital customers would be able to purchase 7 to 9 à la carte cable channels, while analog customers would be able to purchase 6 to 7.  Making the two offsetting adjustments results in a range of 8 to 10 channels for digital customers, and 6 to 8 channels for analog customers.

Our conclusions therefore remain unchanged as a result of these two adjustments.  Under all of the scenarios evaluated, consumers would be able to purchase fewer than the 11 cable channels that they regularly watch today, for the same price that they currently pay to receive the entire basic and enhanced basic tiers.

Please don’t hesitate to call me with any questions at 212-551-6555.

 Sincerely,

John Frelinghuysen BOOZ ALLEN HAMILTON INC.
Vice President 

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