The Federal Cable-Protection Commission

Problem: Solved?

The Federal Communications Commission last Friday unanimously voted to free cable operators from their obligation to sell cable channels they own to rival satellite and phone companies.

In a bizarre justification, FCC chairman Julius Genachowski said ending the unambiguous rules would prevent anti-competitive activity in the market because the FCC would retain the right to review industry abuses on a case-by-case basis. Lawmakers called that an invitation for endless, time consuming litigation that will deprive consumers of competitive choice and favor the still-dominant cable television industry.

“The sunset of the program access rules could lead to a new dawn of less choice and higher prices for consumers,” said Rep. Ed Markey (D-Mass.), one of the original authors of the rules. “If we do not extend the program access rules, the largest cable companies could withhold popular sports and entertainment programming from their competitors, reducing the competition and choice that has benefited consumers. I urge Chairman Genachowski and the FCC commissioners to extend the program access rules that have helped to level the playing field in the paid television marketplace.”

The FCC’s decision could have profound implications on would-be competitors, particularly start-ups like Google Fiber that could find itself without access to popular cable networks at any price.

At a time when cable companies and programmers are constantly pitted against each other in contract/carriage disputes, the deregulatory spirit at the FCC is likely to irritate consumers even more.

Phillip “How nice of the FCC to think about poor cable companies” Dampier

The FCC claims it will continue to protect sports programming from exclusive carriage agreements — a potentially critical concession considering the history of “exclusive, only on cable” programming contracts was largely focused on regional sports channel PRISM.

Comcast successfully kept the popular Philadelphia-based network (today known as Comcast SportsNet Philadephia) off competing satellite services and cable operators by only distributing the network terrestrially. A controversial FCC rule (known as the “terrestrial exception”) states that a television channel does not have to make its shows available to satellite companies if it does not use satellites to transmit its programs. Cox Cable has its own implementation of that loophole running in San Diego.

Derek Chang, executive vice-president of DirecTV, says Comcast’s local market share dominance is a direct consequence of SportsNet. More importantly, Chang believes even if Comcast says it will sell the network to competitors, it is free to set prices for SportsNet as high as it wants.

“They win either way,” Chang said. “They’re either going to gouge our customers, or they’re going to withhold it from our customers.”

Verizon FiOS has secured the right to carry the channel on its system, but won’t say how much it pays.

The PRISM case is today’s best evidence that exclusive agreements do hamper competition — Philadelphia is hardly a hotbed of satellite dishes, with a 40-50% reduced satellite subscriber rate attributable to the lack of popular regional sports on satellite.

FCC Chairman Julius Genachowski’s cowardly lion act is back. Will anyone at the FCC stand up to Big Telecom companies while busy watering down pro-competitive policies?

Historically, satellite dish owners and wireless cable customers were the most likely victims of exclusive or predatory programming contracts, with some cable networks refusing to sell their programming to competing technologies at any price.  Others charged enormous, unjustified mark-ups that made the technology non-competitive. Today, wireless cable television is mostly defunct and home satellite dish service has largely been replaced with direct broadcast satellite providers DirecTV and Dish.

Today’s programming landscape is more complicated. The FCC would argue that unlike in the 1980s, most cable programmers are no longer directly controlled by yesteryear’s Tele-Communications, Inc. (TCI) and Time Warner (Time Warner Cable was spun off into an independent, unaffiliated entity in March, 2009), which collectively controlled dozens of popular cable networks. But programmers’ know their best customers remain cable operators which maintain a dominant market share in every major American city.

Friday’s ruling has implications for telco-TV providers and satellite dish companies that may find programming negotiations more complicated than ever. AT&T U-verse and Verizon FiOS may find access to cable-owned programming difficult or even impossible to obtain if cable operators decide their unwanted competition is harmful to their business interests.

But an even larger challenge looms for the next generation of video competition: Google Fiber TV and “over the top” online video.

Nobody is complaining about Google’s robust gigabit broadband offering, but Kansas City residents originally expressed concern about the company’s proposed television lineup. As originally announced, Google Fiber TV was missing HBO and ESPN.

A competing cable system without ESPN is dead in the water for sports enthusiasts.

Google has since managed to sign agreements that expand their channel lineup (although it is still missing HBO). But nothing prevents channel owners from dramatically raising the price at renewal. That is a concern for smaller cable operators as well, who want protection from discriminatory pricing that awards the best prices to giant multi-system operators like Comcast and Time Warner Cable.

The most important impact of the FCC’s decision may be for those waiting to launch virtual cable systems delivering online programming to customers who want to pick and choose from a list of networks.

The FCC’s “new rules” give programmers who depend on tens of millions of cable subscribers even more ammunition to kill competing distribution models like over the top video. Start-up providers who cannot obtain reasonable and fair access to cable programming will have to depend on the vague policies the FCC claims it will enforce to prevent egregious abuse. But the FCC is not known for its speed and start-up companies may face enormous legal fees fighting for fair access that is now open to subjective interpretation.

Cable operators will be challenged to find enough open video channels to support a gradual transition to IP-based video, which could mean an early end to analog cable television in large parts of the country.

The former chief technology officer of Charter Communications, Marwan Fawaz, noted cable operators will need at least 24-32 free analog channels to duplicate their digital lineup — considerably more than many operators have available on today’s crowded cable dial.

Fawaz

The transition to digital cable won’t be easy for some consumers, many who actively dislike set top boxes on every television and the endless rental fees that often accompany them.  Cable operators face more resistance from customers than their telephone and satellite competitors, who have always required equipment on every television in the home.  But with the demand for increased broadband speeds, new network-capable DVR boxes that can be accessed from other televisions in the home, and the never-ending addition of new HD channels, converting analog signals to digital is the most cost-effective way to free up space to handle today’s demands on existing cable systems.  The alternative would be expensive upgrades to increase available bandwidth — an investment unlikely to win favor on Wall Street or in company boardrooms.

Cable operators are taking different approaches to the challenge.  Comcast has been systematically reducing the number of analog signals on its cable systems, using that space for new digital signals, including HD broadcasts and faster broadband.  Time Warner Cable has deployed a transparent “on-demand” system for its lesser-watched digital channels that only transmit them into neighborhoods where viewers are watching them. Smaller operators are also moving to adopt nearly all-digital cable television lineups, especially on older systems that have already exhausted available space for new channels and services.

Fawaz says cable’s progression to IP-based delivery of cable channels is inevitable, a matter of “when” not “if,” according to an article in Light Reading:

For operators that don’t expect to have that much capacity available to them soon, he suggests that they could start off in smaller stages, perhaps beginning by moving Video-on-Demand services and some “niche” networks over to IP and supporting them with hybrid QAM/IP set-tops or gateways. Another transitional option, at least from an in-home multi-screen perspective, is to start using specialized transcoding that can convert QAM video to IP and pass those streams to tablets, PCs and other devices using the home’s Wi-Fi network.

Most cable operators are supplying customers with digital adapters that can accommodate digital signals on older, analog televisions, without a giant set top box taking up space.  To make the transition easier, operators typically provide up to 2-3 boxes for free for 1-2 years and then bill customers a nominal rental fee thereafter.

An increasing number of cable customers will become familiar with these “DTA” boxes in 2012.  Time Warner Cable, the nation’s second largest cable operator, will continue its progression to convert its cable operations to mostly-digital this year.  Time Warner’s customers in Maine were the first to experience the switch, with mixed results.  Fawaz expects some remnants of the analog lineup, as well as some limited support for QAM channels, will remain for the next 7-10 years.

Boxee, the manufacturer of an Internet-enabled tuner that works like a set top box, has launched an attack against a cable industry plan to encrypt basic cable channels, calling it costly to consumers and the environment:

Amidst flat and declining cable TV subscription numbers, Cable companies are lobbying the FCC to force every cable subscriber to rent cable boxes or cable cards even if they don’t want or need them now.

Currently cable companies must deliver broadcast channels in a way that enables tuners like Boxee Live TV (and the ones in your TV) to display those channels without any extra hardware.

Now the cable companies are asking the FCC to change the rules and turn access off. Their main excuse being that it will reduce the need for the cable guy to drive to your house to disconnect your cable and thus be better for the environment. Considering this ruling would also mean millions more set top boxes and cable cards are manufactured, distributed, and attached to electric outlets (see below for consumption), their argument doesn’t hold water. It’s akin to a cable executive taking a private jet to an FCC meeting, but insisting on having recycled toilet paper on-board to help save the environment.

Boxee

Boxee and other consumer groups oppose the industry’s encryption plan because they say it would deliver no tangible benefits to consumers — just higher cable bills for new equipment that rents for $5-15 a month for each box.  It will also render third-party devices like Boxee, Slingbox, and TiVo almost useless for watching cable television.

Boxee claims cable companies like Time Warner Cable could earn hundreds of millions in new revenue leasing an estimated 10-21 million additional set top boxes to their customers nationwide — more than double the existing number.  Boxee also believes the cable industry is effectively trying stop QAM reception — watching digital cable channels over a television equipped with a basic tuner without a set top box.

Consumers faced with a choice between a cable company-owned set top box or an independent third-party tuner like Boxee may find few reasons to consider the latter when it also requires the former to work properly. The additional equipment also represents an increase in energy consumption.  Set top box electricity consumption can rival major home appliances, Boxee says.

While simultaneously complaining about the spiraling costs of sports programming such as MSG Networks, the nation’s two largest cable operators are planning to cut checks worth $80 million to help bail the NY Mets baseball team out of some of its long term debt.

The New York Times reports both Comcast and Time Warner Cable are preparing to funnel funds into the team through regional sports network SNY.

Time Warner Cable and Comcast are nearing a plan to finance SNY’s purchase of four shares in the Mets, worth $80 million, said one person e with knowledge of the plan who was not authorized to speak publicly.

[…] That means they will have much-needed cash to pay off their substantial debts. But it would be a slightly quirky way of doing it. The deal would mean 16 percent of the Mets would be owned by SNY. The Mets’ parent company, Sterling Equities, owns 70 percent of the network.

[…] Lee Berke, the president of a media consulting company, said that Time Warner Cable and Comcast “don’t want to see the team stumble as it has been, because it directly impacts what they’re putting on TV. This is shaping up as a multiyear downswing for the Mets, and this is a way to keep them above water.”

[…] As for Time Warner Cable and Comcast, it was not immediately clear why they would not invest directly in the Mets. But the two companies clearly want to put money into Wilpon’s financially beleaguered hands (the club has lost some $120 million in the last two years), even if it has to be routed through SNY, to ensure that the team meets its $200 million goal.

[…] Together, Time Warner Cable and Comcast own about 30 percent of SNY. The network started carrying Mets games in 2006.

That investment comes at the same time cable operators are increasingly vocal about sports programming costs.

“ESPN, through … sheer muscle, has been able to say to us, ‘You will carry this service on the lowest level subscription you offer, and you will make all of them pay for it,’” Matt Polka, CEO of the American Cable Association, a trade group told Newsweek. “My next-door neighbor is 74, a widow. She says to me, ‘Why do I have to get all that sports programming?’ She has no idea that in the course of a year, for just ESPN and ESPN2, she is sending a check to Disney for about $70. She would be apoplectic if she knew … Ultimately, there’s going to be a revolt over the cost. Or policymakers will get involved, because the costs of these things are so out of line with cost of living that someone’s going to put up a stop sign.”

Cable analysts continue to be astonished by an inflation rate in sports programming rates that rivals health care costs.

“Every time [there is] a huge increase we can’t believe it, and then there’s another huge increase,” says Laura Martin, an analyst with investment bank Needham & Co. “The rapidly rising cost of sports, especially the new NFL contracts, increases the likelihood that sports will be forced by the government to be on a different tier within three years, by our estimates.”

Cable industry investment in sporting teams is now becoming a familiar headline.  In early January, the Los Angeles Times reported Time Warner Cable was considering buying the Los Angeles Dodgers at a price that could exceed $2 billion.  It would compliment two new regional sports cable channels Time Warner plans to launch in southern California featuring the Los Angeles Lakers.

At a time when cable television rates continue to spiral upwards in excess of the rate of inflation, Time Warner Cable’s interest in spending several billion dollars to acquire a professional baseball team seems strange.

The Los Angeles Times reports the cable giant is considering buying the Los Angeles Dodgers at a price that could exceed $2 billion.  It would compliment two new regional sports cable channels Time Warner plans to launch in southern California featuring the Los Angeles Lakers.

Time Warner Cable Sports president David Rone confirmed the cable company has a strong interest in carrying the Dodger games.  Purchasing the team outright could be much easier (and eventually cheaper) than negotiating against competing broadcasters and cable networks just to acquire the airing rights.

But at the same time customers are facing higher cable bills after the latest round of rate increases, it is ironic a cable operator complaining about programming costs and expenses would suddenly be willing to part with billions for a single baseball team.  For New York sports fans coping with the loss of MSG, sports programming Time Warner calls too expensive, it could prove counter-productive to complain about the cost of sports on the east coast while considering a $2+ billion purchase out west.