Cable stable fears new a la carte label

While many networks prefer fixed price, some operators might benefit from plan

By JOHN DEMPSEY

The cable industry last week was obsessed by its most dreaded phrase in the French language: a la carte.

Relishing his role as the villain of the piece is Kevin Martin, chairman of the FCC, who seems hell-bent on steamrolling Washington into forcing cable operators to sell each network to their customers for a separate price (a la carte), instead of bundling them into a 60-channel tiered package that retails for about $50 a month.

Nets in the $50 tier include all the big ad-supported ones, highlighted by five that reach more than 89.7 million subscribers apiece: Discovery, ESPN, CNN, TNT and USA.

The possibility of losing the security of a 60-channel bundle is freaking out cablers, whose nightmare scenario goes as follows: Thanks to a government edict that upends its business model, cable network X starts to hemorrhage viewers, stumbles off a Nielsen-ratings cliff and winds up a corporate derelict, its balance sheets overflowing with red ink.

But Mike Egan, a cable-TV consultant and principal in Renaissance Media Partners, says that, while cable networks hate the idea of substituting an uncertain a la carte for the comfortably lucrative basic-cable tiers, there are more than a few cable operators that might want to see some changes in the status quo, even a shift as radical as a la carte.

"Cable operators are at the mercy of the biggest media companies," Egan says. The media companies with the most desirable clusters of cable networks -- Walt Disney, Time Warner, NBC Universal, Viacom and News Corp. -- "gouge the shit out the operators" when the contracts come up for renewal, as Egan puts it.

ESPN will pocket a humongous $2.8 billion this year from cable-operator license fees, a figure that will rise to $3.28 billion in 1996, according to projections from Kagan Research. Fox News is preparing to ask cable operators to pay quadruple what they're shelling out now as current deals expire in the next year or two -- from a monthly average of 25¢ a subscriber to $1 a sub.

The nets respond they need big increases from the ops to help offset programming costs, which keep skyrocketing every year. And, the networks insist, high-visibility programming keeps subscribers tuning in; the resultant ratings boost helps the cable system because it retains two minutes within each hour to sell to local advertisers.

But dissident cable ops are not mollified by these network arguments. "What many operators want is for the federal government to bail them out of bad contracts with cable networks," says Josh Bernoff, media analyst with Forrester Research.

Although a la carte would be a potentially frightening leap in the dark for many reasons, some cable ops say it would give them more control over the license fees that they funnel to the networks.

For example, Bear Stearns reports that a cable network would have to jack up its prices to make up for households lost as a result of a la carte pricing. Instead of disappearing into a 60-channel bundle where each network's fees don't get broken out individually, the jacked-up price would flash in neon lights because it would show up on the subscriber's bill as a separate entry, just like HBO.

Taking MTV as an example, Bear Stearns says that if the network kept only 50% of its subs post-a la carte, its monthly rate would have to climb dramatically, from 28¢ a sub to $1.06.

But the cable op would build its own costs into the new monthly rate and then pay the network only for the subscribers who actually buy MTV. If the network wanted to go after more customers in order to bump up its ratings and harvest more advertising dollars, MTV would have to lower its monthly price, not raise it.

The FCC's Martin will soon release an a la carte study that should give comfort to the two groups most disgruntled by the way cable operates: dollar-conscious activists who claim that the price of monthly cable bills is soaring much faster than the rate of inflation, and parents who are convinced that networks like FX, MTV and Comedy Central are warping the minds of their children.

Leaks of the FCC study indicate that, contrary to a 2004 commission report, a subscriber can buy as many as 14 basic-cable networks a la carte for less than the 60-channel package. If the analysis holds up, cost savers would break out the party hats, and protective parents would buy only networks with programming that stayed within the broad outlines of a G or PG rating.

If a la carte were to become the new model, the reign of destruction that cable networks are nervously predicting is not inevitable, says Shari Ann Brill, VP and director of programming for Carat USA, the media buyer. Although she's not in favor of a la carte, Brill says it's not necessarily true that networks will suffer crippling losses of Nielsen ratings if, say, only half of their current subscribers pay the extra monthly fee.

"ESPN's rating is not based on the 90 million homes that can get access to it," Brill says. "The rating is based on the people who actually watch it."

Which implies that ESPN can easily write off the homes that don't buy it under a la carte because they never looked at the network anyway.

But that analysis discounts the channel surfers who accidentally land on a network they rarely watch, like what they see and hang around long enough to be counted by the folks at Nielsen.

Wall Street threw itself into the discussion last week but mostly ended up discounting the possibility that Congress would pass a law mandating a la carte. Kathy Styponias, media analyst for Prudential Equity, said in a report the FCC might back off its move to a la carte if cable took the step of "voluntarily agreeing to the same decency standards as now apply to broadcasting."

But even if the cable ops and networks refused to compromise, Styponias says any legislation imposing a la carte would be "constitutionally suspect" and get thrown out by the courts.

Beyond the legal problems, Jessica Reif Cohen, media analyst for Merrill Lynch, says the "the lobbying power" of the media congloms would go a long way toward keeping congressmen from muttering the phrase a la carte, even in their sleep.