Programmers Balk at Martin's Changes

Chairman pushes unbundling, but the industry pushes back

FCC Chairman Kevin Martin's dogged determination to force cable programmers to unbundle their channel offerings as a way of lowering prices continues to get a chilly reception from cable networks. In fact, several networks, including ESPN, MTV and the Turner networks, sent an unusually terse letter to Martin. Says ESPN Executive VP Ed Durso: “We don't believe they have jurisdiction to do this. So, that issue will be played out afterward if they vote to take some action.”

Would ESPN take the FCC to court, a place the agency finds itself a lot these days? “It is certainly something we would consider,” Durso says.

Martin has long argued to groups large and small that cable should have to sell channels to subscribers on a standalone basis. But the FCC's consideration of program access rules in various contexts has moved to the wholesale side, to cable operators who are often required to buy networks in bundles, so that to get a network they want, they may have to buy several they don't.

The cable industry is divided on the issue. Smaller cable operators, represented by the American Cable Association (ACA), favor unbundling. Larger operators, represented by the National Cable & Telecommunications Association, say they don't want the FCC dictating “to whom programming must be sold and/or the terms and conditions.”

Martin's latest proposal, outlined recently after a surprise visit to the ACA convention in Washington, was to require cable programmers to sell channels priced higher than a certain amount—say, 75 cents or $1 per sub—to operators on a standalone basis if the cable operator didn't want to buy it in a bundle. In other words, a cable operator could buy ESPN without being required to buy any other channels in a bundle.

For Martin to get his way, he will almost certainly have to get the backing of Democratic members Michael Copps and Jonathan Adelstein. Commissioner Robert McDowell is not on board. He says he has not seen the proposal “formally or informally,” but in terms of government-mandated unbundling in general, he is no fan. Commissioner Deborah Tate is also a fan of market forces over government intervention.

McDowell's dissent seems solid. “First of all, I don't think it's needed,” he says. “Second of all, I think it can't be done without economic regulation. Third, I don't know what the unintended consequences would be. Would it actually drive up prices to consumers and reduce the amount of channels available to them?”

In the letter to Martin, ESPN President George Bodenheimer, MTV Networks Chairman Judy McGrath and Turner Broadcasting System Chairman/CEO Phil Kent were among several cable executives who told Martin the FCC didn't have the power to impose such a system, and that it's a bad idea to boot.

“Many new and diverse programmer services, particularly those aimed at underserved and minority audiences, would not have been launched, nor would they survive in a mandated wholesale or retail a la carte environment,” the letter said. They said that the result would be popular networks “stripped out of expanded basic, forcing consumers to pay an extra charge to watch them.”

The cable-programming executives added that the move would inevitably lead to price controls, and that the most successful networks would be penalized for their popularity. The only consumers they said would pay less were the “rare” ones who would buy only a handful of channels. But even those persons might suffer, because although paying less, the quality of the networks they would be buying would be diminished by the lack of tens of millions of other subscribers who opted out. Consumers, the cable executives warned, would be “outraged.”

But Martin frequently and publicly mentions that cable rates have doubled in the last decade. Cable ops say the rates are driven by the marketplace, and program bundling is an industry distribution system that the FCC should leave alone.

ESPN has argued that unbundling will be devastating to consumers because, as Durso puts it, “they will pay more and get less. Every single analysis of a la carte-like distribution proposals has come to that same conclusion,” except for a study commissioned by Martin that supported a la carte and was widely disparaged by cable executives.

At a variety of Capitol Hill hearings, legislators on both sides of the aisle told Martin that he needed to focus on the digital transition and not on trying to unbundle cable programming. “Stay focused on the task at hand,” said Fred Upton, former chairman of the House Telecommunications & Internet Subcommittee.

Durso agrees: “We certainly would hope that they would all take that into account and that at the end of the day the Chairman will decide to put the resources of the commission and their attention on other matters.”

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