Cable's success brings chilling scrutiny of D.C.

Decency queries are one headache, but bigger fear is 'a la carte' option for viewers

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Cable is basking in the glory of growing ratings and increased advertiser credibility, and its biggest stars are arguably as popular as those of broadcast TV. But don't let the glow fool anyone. Cable TV is facing what could be its biggest challenges in decades.

Technology gains combined with telecommunications and satellite competition are carving into cable's territory. But federal policy changes could be about to deliver dramatic changes to cable, and the potential impact could be game-changing.

Part of it is cable's very success. Its market penetration and rate hikes have drawn attention from critics and Congress.

Along with all the praise of top-tier cable programming have come increasing questions from Congress about treating the medium that offers a bigger and bigger share of America's media fix differently from broadcast stations when it comes to indecency.

Right now airing a racy scene on broadcast TV may bring rebuke from the Federal Communications Commission. But nothing happens to cable networks when they air the same scene. Amid broadcasters' complaints that the difference gives cable an unfair advantage, the Senate Commerce Committee has been debating whether to apply some of the broadcast TV limits to cable.

But what has cable more concerned is the a la carte programming choice promoted by FCC Chairman Kevin Martin and being proposed in legislation on a la carte or related issues due from Sen. John McCain, R-Ariz., and several congressmen.

picking and choosing

Under such schemes, currently in places such as France, Canada and Hong Kong, consumers pick and choose which cable networks they want. And importantly, they don't generally pay for channels they do not watch. Thus, nonsports fans could drop ESPN, the most expensive of the cable channels and currently a part of basic packages. Households without kids could cease paying for Nickelodeon, and those without women could stop buying Lifetime, potentially saving on their monthly cable bill.

Importantly for conservatives, families that don't want to see risque content also don't pay to support the channels.

A recent USA Today/CNN/Gallup poll notes 54% of those surveyed preferred buying channels individually. Sean Cunningham, president of the Cable Advertising Bureau, says that not only would a la carte fail to reduce monthly costs to the vast majority of viewers and reduce the diversity of programming, it would lead to higher advertising costs for U.S. marketers and weaken their ability to target consumers (see viewpoint on next page).

Mr. Martin has disputed that conclusion as has a February FCC report.

Based on the FCC's own research, the latest report contradicted an earlier FCC study that said costs would rise under a la carte.

The latest study said costs would decline as much as 13% and attributed the reversal to "problematic assumptions" and mathematical errors in using cable industry research as the backbone of the first report. Among the "errors": unsupported assumptions that viewers would spend less time watching TV with a la carte and that ad revenues would decrease.

The new study claims a la carte would make cable networks having to live by consumer demand far more responsive and questioned if it would have significant advertising effects. It said ad rates are based on ratings, not on potential households, and consumers would likely pay for the channels they now watch, dropping only the ones they don't, with the result being minimal ratings impact. While some small unrated channels might disappear, the FCC said other niche channels might gain, being offered by cable companies to spur additional revenue and more easily attracting ad support as marketers target consumers committed enough to pay extra.

Consumer groups have been vocal in their support of a la carte.

"We have always advocated it to stem the tide of rising cable rates and give consumers a choice," says Jeannine Kenney, senior policy adviser for Consumers Union.

She says the warnings of doom presented by media companies aren't supported by experience in other countries.

"Canada has been doing it, and generally speaking advertising and cable have not crumpled," says Ms. Kenney. "It hasn't seen any of the disastrous results that cable companies predict. What has happened is that most providers offer a series of different options where you can pick one by one or pick up a package or a bundle of certain kinds of channels or a number of channels."

An independent researcher, Chris Stern, media policy analyst at Medley Global Advisors, thinks a move to a la carte could hurt the smaller, niche networks, which rely on bundling carriage deals for viewership. Whether prices would rise or fall under such a system is unclear.

"I think it's a glass half-empty, glass half-full" scenario, he says. "Some people say consumers would get hurt because they'd get fewer channels. Other people say consumers would benefit because they'd get fewer channels, for perhaps less money."

There have also been some suggestions that Disney's ESPN could face a risk not from advertising but because its rights fees for sports broadcasts are predicated on charging all cable subscribers. A la carte could force it to spread those fees over fewer households.

The big question about a la carte is whether it will make it out of Congress and in what form.

Sen. McCain is due to offer legislation easing local cable oversight to cable companies offering a la carte, while in the House, U.S. Reps. Nathan Deal, R-Ga.; Mark Kirk, R-Ill.; and Frank Wolf, R-Va., have indicated there is a possibility they will move to include language either requiring a la carte or limiting media companies from preventing it in the FCC's annual appropriations.

tech drives a la carte

Both Mr. Stern and Ms. Kenney say the biggest driver for a la carte may turn out to be technology. As phone companies and Internet providers get into cable, cable companies may have to act to stay competitive.

"If a la carte happens, it'll happen in response to reaction to new technology," says Mr. Stern, citing competition from wireless providers such as Verizon, which are now offering a TV-delivery service or satellite services.

Ms. Kenney says she thinks it's coming.

"I don't think it's well down the road, but it's also not imminent. But with the pressure of telephone companies wanting to compete, I don't know how long they can forestall it. There is growing pressure for reform. Cable has been the dinosaur in not responding to consumer preferences for programming, and it may be that [competitive pressures] for the first time will force it to respond."
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