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À La Carte Pricing Poses Risks

By | July 19, 2004

      Congressional interest in pursuing legislation to let U.S. television viewers pick and choose the individual channels they want to buy each month from their satellite and cable TV providers is under attack. Opponents claim such a policy could disrupt natural market forces and lead to much higher prices for the most popular channels.

      That concern was voiced last week from many fronts, ranging from multichannel television service providers to a Washington think tank. No legislation is pending in Congress but the idea of a la carte pricing was the topic of the House telecommunications subcommittee hearing that aired the views from nine different panelists last week.

      The concept was blasted last week in a Booz Allen Hamilton study commissioned by the National Cable & Telecommunications Association (NCTA) as well as in a new report from the Cato Institute. Even if no consumers were to choose the a la carte option, consumer prices for current tiers would increase between 7 percent and 15 percent, Booz Allen Hamilton found.

      Officials at Littleton, Colo.-based EchoStar Communications [DISH] support giving customers what they want to watch when they want to watch it but the company faces pressure from programmers to take an entire group of programming to receive a popular channel, said Marc Lumpkin, the company’s director of communications. Such real world complications would make a la carte pricing difficult to implement, he added.

      “When a programmer refuses to provide critical channels, unless we agree to a larger package of usually less attractive channels, it makes it difficult for us to provide a la carte services,” Lumpkin said. “Basically, our hands are tied by the programmers.”

      El Segundo, Calif.-based DirecTV filed comments with the Federal Communications Commission (FCC) Thursday that opposed a la carte programming. One reason is that programmers would charge “extremely high” affiliate fees for the individual distribution of channels. A second reason is that such a change would be expensive for programmers to offer such uniquely tailored services to each subscriber.

      Potential “market distortion” and increased complexity in distributing programming caused DirecTV to urge policymakers to proceed with “extreme caution” before adopting even voluntary a la carte pricing.

      Pricing Pitfalls

      Any attempt for Congress to require satellite and cable TV operators to offer a la carte pricing would “dramatically” raise prices for most consumers, according to the Booz Allen Hamilton economic study submitted Thursday by NCTA to the FCC.

      Aside from potentially driving up the price of popular channels, a la carte pricing would limit programming diversity and choice, Booz Allen Hamilton found. Smaller niche and independent non-vertically integrated networks would tend to disappear, the report concluded.

      The NCTA’s full court press against a la carte pricing last week also included the release of an analysis by two University of Chicago constitutional law experts who claimed that both a la carte and themed-tier requirements would violate the First Amendment.

      Separately, the Cato Institute last week unveiled its own findings that showed a la carte pricing potentially could cause the most popular channels to rise substantially in price. In addition, the institute warned that lawmakers might try to wield a form of censorship by influencing decisions by cable and satellite TV operators about what channels to include in any family fare programming tiers that ultimately might be offered.

      “You can push on one variable but another one will pop up,” said Adam Thierer, director of telecommunications studies at the Cato Institute. “Now, we are putting the quality and quantity of programming at risk.”

      The criticism of a la carte pricing continues along the path set forth last fall by the General Accounting Office’s (GAO) study that concluded such a policy could result in higher per channel rates and price hikes for certain consumers.

      Three-pronged Disaster?

      According to Booz Allen Hamilton, there would be a negative impact on consumers from each of three potential a la carte scenarios:

      • One option is to require all programming, except broadcast channels, to be available only on an a la carte basis rather than as part of a tier;
      • An optional regime would allow the sale of all programming, except broadcast channels, on an a la carte or a tier basis;
      • A third approach would be to let consumers purchase small, content-based tiers of services that also would be available as part of a larger tier.

      In each scenario, almost all consumers would be “significantly worse off,” the NCTA said in its FCC filing. Even if consumers still had the option of purchasing the currently existing tiers, instead of choosing a la carte, the price of those tiers would be significantly higher than it is today, the NCTA argued.

      Brian Dietz, NCTA’s senior director for communications, said the nine panelists who testified Wednesday before the House telecommunications subcommittee offered a range of views about a la carte pricing and included support for this association’s position from representatives of cable networks and operators. However, small cable operators opposed mandatory a la carte but favored legislation to let them restructure their programming contracts to offer voluntary a la carte.

      Groups in favor of a la carte pricing that testified included Consumers Union and Concerned Women For America. American consumers support cable a la carte, according to a national, scientific poll released by Consumers Union. The survey found that two-thirds of cable customers surveyed in May would prefer the option to pick their own channels, and 59 percent would pick fewer channels than they currently must buy in their current cable packages. Roughly 29 percent of the respondents to the survey said they would still choose fewer channels even if their bill didn’t decline proportionally.

      A since-withdrawn amendment to the pending Satellite Home Viewer Extension Act by Rep. Nathan Deal (R-Ga.) would have required satellite and cable to offer programming a la carte. However, he and other lawmakers wrote to the FCC to request a study about the impact of a la carte and themed-tiers on the multichannel video marketplace. Deal’s goal is to not force consumers to buy programming that they may not want and may consider objectionable.

      Currently, programmers require both cable and satellite service providers to purchase large packages as a condition for receiving the broadcast networks. However, the broadcast airwaves used by the networks have been given to the programmers by Congress, and they represent an asset of the American public, Deal explained in a statement about a la carte programming.

      Canada is possibly the only country that has given a la carte pricing a try but it has been a limited attempt that only has include niche, digital channels.

      Michael Hennessy, president of the Ottawa-based Canadian Cable Television Association, said a la carte is “not a serious option,” relative to theme programming packs.

      “Pure a la carte is an opportunity for customers to pick one digital channel,” Hennessy told Satellite News Senior Analyst and Senior Editor Paul Dykewicz. “It is not in any way a material part of the revenue stream.” Such a digital channel can be purchased for $1.88, Hennessy said.

      “None of our versions of ESPN or other top-tier cable services that are on analog can be offered a la carte,” Hennessy said.

      A customer has to lease or buy a digital box for every set if they want programming a la carte, Hennessy explained. Under Canadian law, a customer still has to buy a basic tier of service before a la carte can be selected. Other than programming in French-speaking parts of Canada, nearly all of the popular Canadian channels remain on analog, he added.

      What largely is available on digital channels in Canada are niche sports, movie, and lifestyle networks. While available a la carte, Canada’s digital channels are more of a supplement to popular analog services, he added.

      One provider in Canada actually put a la carte at the center of its business plan and that company, Look TV, went into receivership.

      In a speech before the Washington Metropolitan Cable Club June 29, Hennessy said it seems “quite odd” that U.S. regulators would look at a la carte, because it is a “none-too- successful” aspect of the Canadian system.

      –Paul Dykewicz

      (Brian Dietz, National Cable & Telecommunications Association, 202/775-3629; Michael Hennessy, Canadian Cable Television Association, 613/688-5559; Adam Thierer, Cato Institute, 202/789-5211; Susan Herold, Consumers Union, 202/462-6262; Consumers Union, Marc Lumpkin, EchoStar, 303/723-2020; Bob Marsocci, DirecTV, 310/726-4656)

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