DirecTV, EchoStar Get Help In Battling Programmers

By | March 29, 2004 | Feature

The high-stakes battles that pit price-gouging television programmers against increasingly resistant satellite and cable TV service providers are becoming more frequent than ever, and Congress is taking notice.

Consumers are complaining to their lawmakers that runaway rate hikes are testing their devotion to paying whatever is charged to enjoy their MTV and other favorite channels on cable and satellite television. The good news for U.S. satellite operators DirecTV and EchoStar Communications [DISH] is that they will not need to fight the battle of reining in programming costs alone. Cable TV operators are just as vulnerable to rate hikes. Indeed, all of the multichannel video carriers increasingly are digging in their heels to avoid hefty rate increases.

Cable companies had better get the message and act on it soon because key members of Congress are clamoring for action to combat soaring subscription television prices. The Senate Commerce Committee, chaired by no-nonsense Sen. John McCain (R-Ariz.), heard testimony last Thursday from cable industry executives who gladly dumped a boatload of blame on the programmers.

“Price discipline is increasingly difficult in the face of the rapid, unrestrained rise in the cost of programming,” according to the testimony of James Robbins, president and CEO of Cox Communications [COX]. Another problem is that media companies that own TV networks are insisting subscription TV providers also carry their less appealing channels, he added.

Earlier this month, EchoStar lost the rights to provide Viacom [VIA] programming, including CBS owned-and-operated affiliates in 16 key markets, for two days. The dispute was resolved when EchoStar caved in to Viacom’s demand that the satellite-TV operator carry the “Nicktoons” channel in exchange for including rights to the CBS programming (SN, March 15).

McCain left no doubt during his opening remarks Thursday he abhors escalating cable rates. To support his position, the senator cited a previously released report from the Federal Communications Commission (FCC) that found the overall average monthly rate for consumers subscribing to a cable or satellite service had increased 8.2 percent from 2002 to 2003. Since 1996, cable rates have increased 56 percent or nearly three times the rate of inflation.

McCain further explained that he asked the General Accounting Office (GAO) to conduct a review of the increases, and the report issued last fall showed competition from a wired competitor is the key to lower rates. Satellite television services, surprisingly, are not the solution, McCain said.

The GAO report found competition from another wired competitor resulted in an incumbent cable operator charging rates that are 15 percent lower, McCain said. A subsequent study from GAO suggests that, in some markets, the presence of a wired competitor may reduce rates an “astounding 41 percent,” he added. Because only 2 percent of all markets have a wired competitor, incumbent cable companies face little price competition and, consequently, 98 percent of U.S. consumers are “taken to the cleaners,” he said.

Consumer choice was dealt another blow last Wednesday, McCain said, when an arbitrator ruled that Cablevision [CVC] must offer the “YES Network,” which features New York Yankees games, on the cable operator’s expanded basis service. That requirement comes even though 91 percent of Cablevision customers chose not to purchase the YES Network when given the choice last year, he added.

DBS Dart-Throwing

DirecTV, the largest U.S. satellite TV operator with an estimated 12 million subscribers, is starting to talk about becoming lead dog in the multi-channel pack by refusing to pay any programming hikes that top the rate of inflation.

“We are not going to accept double-digit-percentage rate increases anymore,” said Bob Marsocci, senior director of communications at DirecTV. “Programming costs are a tremendous expense. This isn’t just an issue for us. It is an issue for any company that is in the business of distributing programming.”

The “last resort” of taking a channel down the way EchoStar did when it could not reach an agreement with Viacom is bad for the service provider and the consumer, Marsocci said. However, DirecTV also could make that sacrifice, if needed, because it is not going to just accept “unreasonable” rate increases.

The solution, favored by McCain, may well be to offer subscribers the option of paying for the channels they watch rather than lumping large amounts of diverse content into basic tiers that consumers now buy in take-it-or-leave-it bundles.

Jimmy Schaeffler, a satellite broadcasting and media analyst who heads The Carmel Group consulting firm of Carmel-by-the-Sea, Calif., expanded consumer choice to prevail.

“Look for lots more a la carte programming,” Schaeffler said in an interview Thursday evening. “A trend could emerge for sports and other programming to be sold separately as premium channels to subscribers. Sports is the focus but this trend ultimately will affect all types of programming.”

The dynamics of sports, television and business economics are converging to form “the perfect storm,” Schaeffler said. All three will combine to create great change in the years the years ahead, he added.

–Paul Dykewicz

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