Voices From the Heartland

Michael Pandzik’s National Cable Television Cooperative counts some 8,000 cable operators as members, about half of which have less than 300 subscribers. It’s these so-called "little guys"—of course many ACA and NCTC members serve thousands or hundreds of thousands of subscribers—to which Pandzik, NCTC’s CEO and president, and Matt Polka, American Cable Association’s president and CEO, have dedicated their careers. Both organizations have well-defined roles in the small-to-midsize cable operator community. The ACA represents small operators before Congress and the FCC. The NCTC secures cable equipment and programming contracts on par with its bigger brethren. As Pandzik says, they walk on different sides of the same street, but they’ve got the same objective: looking out for the cable operators that have remained independent as the industry has consolidated around them. CableWORLD: What’s topping your agendas this year? Mike Pandzik: At the top of our list of things to do this year stand two items. The first is to do everything we can to ensure that smaller operators can take advantage of the technological advances our industry has developed. We want to help our members deploy ancillary services such as high-speed data, high-definition television, telephony and video on demand. These need to become deployable in ever smaller and smaller cable systems. As operator profit margins continue to shrink with traditional entertainment television—due to high annual wholesale rate increases and little ability to pass them dollar-for-dollar at the retail level—these ancillary services and their profits become absolutely vital.

Second, as an industry we need to ditch the retransmission consent rules that hamper cable system development and growth. I’m not sure retrans consent ever made any real sense, but as public policy it’s pretty unsupportable today. Why should broadcasters continue to maintain a stranglehold on independent cable operators—forcing them to carry programming they don’t need and that their subscribers don’t want. The ACA is carrying the water on this issue very capably, and we support their efforts without reservation. Matt Polka: Our primary focus this year, our top agenda item, will be relief in retransmission consent. That is a huge problem which forces more content and cost on operators and consumers year after year. It takes away the ability to be able to branch out in some other related aspects of business that Mike is referring to. CW: What’s ultimately at stake in the fight over retransmission consent?

"We’ve got to get rid of retrans…It does not do what it was intended to do—I’m not sure it ever did," says NCTC’s Mike Pandzik.

Polka: What’s at stake really is ultimate viability. Retransmission consent since 1992 has become the primary hammer through which programming and cost and increases are forced onto cable operators and consumers. Breaking up that leverage and that hammer will give our members more flexibility to design their systems as they and their consumers see best, and then give them more flexibility to develop other ancillary services that their customers want. CW: Can you explain the ACA’s proposal to amend the broadcast exclusivity and retransmission consent regulations? Polka: Yes, you’re referring to comments and a petition that we filed [in early March]. The first thing is the petition for rulemaking, which asks the Federal Communications Commission to amend its current rules regarding network non-duplication. Network non-duplication are rules that extend back to the ’60s, which allow a local broadcaster to prevent a cable operator from carrying any out of market broadcasting signal because of the concept of localism, protecting the local signal. However, when coupled with retransmission consent the broadcaster programmer basically has a monopoly market that dictates price without any economic marketplace consideration. And what we are suggesting is that if a broadcaster wants to protect its right to be carried and to basically promote the concept of localism, it has a very clear way of doing that, by electing must-carry. But, if a broadcaster now uses the retransmission consent rules, coupled with the net non-duplication rules, to basically treat its local station as a programming channel where they determine a price for it, and they basically want to sell it, then we believe that our members and our customers should have the right to shop for a better deal. So what we’re asking the commission to do, very simply, is if the local station elects retransmission consent it puts a price on their television station then we as operators have the right to find a better deal, which might mean that we bring in a signal from the adjacent market. CW: The NAB will be all over that. Polka: Of course they will be, because they’re going to say this will threaten the underpinnings of localism. But again, my point is that if broadcasters want to preserve localism, then let them elect must-carry. If they want to treat their station like a programming channel and sell it, then let the marketplace determine what that price is. Because the fact is, as our petition shows, in markets where cable operators have a choice, where either the network non-duplication rules don’t apply because of the small size of the company, or where other stations are significantly viewed, local market stations don’t get engaged in retransmission consent battles because the real marketplace is working there. CW: How attentive is Washington to the concerns of both of your organizations? Polka: I think they’re getting much more attentive. Pandzik: I think so, too. Polka: The fact is they created the rules, and they have the power to change the rules. When they see what’s taken place in the marketplace, basically they have a choice. They know that retail rates to the consumers are rising, and they don’t like that. But they’re beginning to understand why these things are happening, and they have a choice, to either to continue to allow rates to increase or to do something about it. And the nature of media consolidation has not been an issue that has gone unnoticed in Washington. So I think that both the FCC and Congress are getting much closer toward acting toward significant reform. [New FCC Chairman] Kevin Martin was the first one to come out publicly with his support and to announce his support for a family-friendly tier of programming. It’s ironic that last year the large cable MSOs as well as the large cable programmers and broadcasters thought they killed the notion of tiering and a la carte. Well, guess what’s right smack dab in the middle of the plate this year—the same thing. CW: Can programming and equipment cost economics ever favor smaller operators? Pandzik: Let me separate the two. Equipment costs yes, because the cable industry has—there’s probably a better word than degenerated—but that’s what happened on the operator side. When you look across the breadth of our industry we’ve got 1,200 or 1,300 operators, and in one group there’s the Cable TV Co-op and in the other group there’s six or eight other MSOs. What’s happened is, as the big guys have selected certain technical methods to get those signals to the subscribers’ homes, very capable set-top boxes with HD and DVRs built in have dropped from hundreds and hundreds of dollars down to lower prices. And as that happens smaller systems get to buy through us because of our buying power get to achieve a lot of economies of scale. The programming side is a little trickier though, because it’s not an open marketplace. And don’t read into this that I’m for or against a la carte, I’m just making some observations here. [The current programming environment] is like going to the grocery store to buy a six-pack of Pepsi-Cola, but the store makes you buy 30 other items at the same time. How does the marketplace determine the individual value of any of those 30 items when you can’t buy them one at a time? That’s the heart of the problem. It would be easy to say a la carte is the answer. Well, it is an answer, but unfortunately it comes with other problems. Nothing is all good or all bad. Operators have never been able to control as readily as we would like what channels we carry. We’ve never been able to control readily what channels we sell to our subscribers, what packages we choose to assemble and put them in. All that stuff is controlled by contract with the programmers. Operators have very little control over how to market and retail the individual channels. The marketplace is not at work here. Lets say there’s a digital tier with 70 channels in it. One of those networks can say, “Well I’m going to raise my rates 20%.” A, you can’t do anything about it, B, it’s going to be folded into the price for the other 69 channels as well. CW: What’s the solution—charge by ratings and viewership? Pandzik: That’s been kicked around. All of these potential solutions have problems—ratings go up and down. I frankly have serious reservations. You’d have prices up and down all the time. Other channels have high satisfaction but low ratings—you can’t just take that away from people. CW: Is there a solution? Pandzik: Over the last 10 or 15 years these five media conglomerates—ABC, NBC, CBS, Fox and Time Warner—figured out they can tie their packages together. You can buy them individually, but you’ll save a lot more money if you buy them as a group. But if you only buy three or four, you’re going to pay the same money you pay if you buy all 12. They skate so close to the line that would make this kind of tying illegal, but they seldom step over it. To answer your question, cable operators need freedom to package their channels to meet their customers’ needs, not just be subject to the whims of these five families of huge programming combines. It’s a big step. Polka: Going back to indecency and retransmission consent, both of these issues are leading to break up those bundles. As we’ve noted in our filing, we expect the cost of retransmission consent for our members and their customers to approach a billion dollars. That’s just for our membership. Look at the billions of dollars that will be reaped by Disney, Fox, General Electric, Viacom and Time Warner, off of consumers’ backs for localism. So certainly reform to retransmission consent, meaning the end of exclusivity and really the end of tying and bundling services, has to occur. And frankly I think the conglomerates by their own behavior are continuing to push for that result. Secondly, I think that what is very important and would be a solution supported by policy makers is more knowledge about what’s going on in this business. These conglomerate protect contractual information so that we as operators are prohibited from giving our customers more information about what and why they pay for programming as they do. They are so adamant about protecting this information and not letting it come to the public that in the middle of July 2004, at a hearing before the House Telecom Subcommittee, representatives from Time Warner and Disney and Hallmark, as well as TVOne, all said that giving consumers more information on their bills or on the cost of television was not a good idea. The reason why there’s a problem is because Disney, Fox, General Electric, Time Warner and Viacom are accountable to no one. They’re not accountable to consumers, they’re not accountable to cable operators, they’re not accountable to the FCC and they’re not accountable to Congress. They can do whatever they want, and they can hide behind their confidentiality and they can tie and bundle and charge whatever they want, without any scrutiny. The minute that that changes, the minute that Congress looks into it, the minute that there is a programming price index that the FCC would have to gather every year, the minute that cable subscribers know more about the money that they’re sending every month to Disney, to Fox, to Viacom, to Time Warner—the minute that happens, their behavior will change. CW: Do you see that happening in the near future? Polka: I do. Look at what is happening now. The year after ideas of flexibility and a la carte were said to be dead, they’re right back at it. So ultimately it’s going to come back to that. Why does it make sense that when one of our members buys a cable system that was owned by an MSO, their programming rates may jump 30% to 40% for the same programming received by the same house owned the day before by a big MSO? Why does that exist? There’s no reason for that other than the fact that these huge companies can make these deals that benefit themselves. CW: Should there by any volume discounts? Polka: I think there certainly needs to be parity. This is Mike’s area, but one of the things we have fought for together is parity in pricing so that if Mike and our members through the Co-op come to a programmer with a certain number of subscribers we ought to be guaranteed that we’re getting a price that’s commensurate with an MSO of that size. Pandzik: If I could just wave a wand, I’d prefer that there not be any volume discounting. It doesn’t make any sense for a cable system who’d been owned by an independent operator to be bought by a big MSO and the programming cost drops substantially. That just doesn’t make any sense. What you have is cable operators at retail able to raise their rates only 3% or 4% a year at most, while their wholesale rates to buy the programming continues to climb at the 10% or 12% rate. That’s a train wreck just waiting to happen. CW: NCTC redid its ESPN contract a few years before it was up. What was the strategy behind that? Pandzik: What we’re looking for is parity. What we mean by that is if we have 8 million subscribers in a contract and a big MSO has 8 million, we want to pay the same price they do. We want the same terms and provisions in our contract that they do. That tune has not changed, and this is our 21st year of operation. That’s all we want, we don’t want the industry’s lowest prices, because we’re not the industry’s biggest operator. That ESPN contract offered an opportunity to play at that level, and so we did the contract early. CW: So how would each of you sum up the state of small market cable? Pandzik: I’m very optimistic. The cloud that I see—we can handle the hardware side, we know how to run cable systems—is the regulatory cloud. We’ve got to get rid of retrans—it’s overstayed its welcome. It does not do what it was intended to do. I’m not sure it ever did. Small operators have always thrived, even though they’ve been counted out time after time over the last 50 years. We’re still here, we’re still growing, you’re going to see them get into more ancillary services—telephony, high-speed data, high definition, VOD and other services—frankly because that’s one of the very few areas they can make any money. The video side of the business, the wholesale rates to buy cable programming—it’s a deck that’s stacked against the operators, so they figure I can provide those as a public service. Where your money in the future is going to come from is these other services. Polka: Our members are the heartiest bunch of individuals I have ever come to know, in any professional or personal capacity. These are folks that can size up a challenge and meet it. I’m happy to put our members against any company in the country. They do a fantastic job at the same time they provide the true nature of local customer service that has always been desired. The issue for them, and for all of us is we need relief, and we need to change retransmission consent. We need to achieve more choice and flexibility in programming so that our members can better design systems that work for them and their consumers. And ultimately we have to break up the bundles and with that, then we will have more of a true marketplace for cable and for programming, which has been the true desire of Congress and the FCC for some time. CW: For each of your organizations, what has been your greatest accomplishment? Polka: For ACA I think our best days are still ahead. But we’ve had a number of key victories over the years. Last year, despite the efforts of the programmers and the MSOs to say “programming is fine. let’s not make any changes,” the FCC came back in its programming report and said, “Well, we may not think a la carte is that great of an idea but there are a lot of other issues that remain.” Namely, the impact of retransmission consent and the impact on consumers of bundling, and whether or not programmers’ behavior should be subject to antitrust rules. In addition, I would look back to what we were able to accomplish in the News Corp.-DirecTV merger. For the first time, a government entity said publicly that an entity like a DirecTV-News Corp.-Fox would have would have power that could harm competition, and as a result placed significant retransmission consent restrictions on Fox owned-and-operated stations. Then I go back to even some of our earlier days, but it still pays dividends today. In 1996 we were able to achieve deregulation for independent operators that were subject to rate reregulation under the 1992 Cable Act. That meant financial markets opened to them, they became more able to acquire subscribers, to add new services and basically to build their foundation which they are working off today. Pandzik: I think our biggest victory occurred 15 or 16 years ago when we figured out how to do master consolidated billing, master affiliate agreements with networks. We got the networks to go along to allow us to collect the money and the subscriber data and pay the money each with a single big check each month. I agree with Matt—our best years are still ahead—we continue to grow by every yardstick, and I guess that I’m personally most satisfied with the fact that we’ve enabled thousands and thousands of cable systems to remain competitive enough to stay in business and to be profitable. That brings me a lot of satisfaction.