FCC action heightens appeal of unregulated services

NEW YORK — Government regulators may have convinced themselves that their rulemaking last month will be a boon to new cable networks, but most of the industry is greeting Washington’s latest decree with a scornful “You gotta be kidding.”

Instead of giving a leg up to new advertiser-supported cable networks, most industry observers say the latest proclamation of the Federal Communications Commission is likely to administer the most powerful shot in the arm to pay-per-view distributors, who operate completely outside the regulatory domain.

The FCC “has given us no incentive whatsoever to add new basic-cable channels ,” says Harvey Boyd, VP of Post-Newsweek Cable, a top-25 multisystem operator. Boyd is referring to the Feb. 22 FCC decision, which, while infuriating cable operators by rolling back monthly subscriber bills by another $ 2 billion or so, appeared to be encouraging the ops to sign up new ad-supported cable networks.

But the problem, says Phil Laxar, VP of Kblcom, another top-25 MSO, is that the 7.5% markup the FCC would bestow on cable operators who add new networks to the tier with all of the mass-circulation cable webs (ESPN, USA, CNN, etc.) is “ridiculously low.”

The FCC is adding the 7.5% figure on top of the monthly per-subscriber license fee the operator shells out to the new network — a fee the cable system would be allowed to pass along to its subscribers. But the 7.5% emolument still “wouldn’t justify the capital that we’d need to upgrade the channel capacity” of Kblcom’s systems, Laxar says.

Boyd runs the math for a 10,000-subscriber Post-Newsweek system. Under the FCC rule, a new cable network that cost the system 20 cents a month would yield a penny and a half per subscriber based on the 7.5% figure. (The subscriber would shoulder the 20 cents-a-month cost.) A penny and a half multiplied by 10, 000 subs equals $ 150 a month in profit. At that rate, says Boyd, it would take years before the system got back the costs just of installing the equipment at the head end to transmit the new network to subscribers.

By contrast, says John Sie, chairman and CEO of Encore, the minipay movie network, if that operator makes Encore available to its subscribers for $ 3 a month a la carte, the system would be able to keep $ 2 of that fee. If, say, 2, 500 of the 10,000 subscribers to the Post-Newsweek system signed up for Encore, that system would end up pocketing $ 5,000 a month in revenues, not the measly $ 150 from a new basic-cable network.

That’s why pay-per-view distributors like Request Television and Viewer’s Choice, minipay networks like Encore and Flix, and high-priced a-la-carte services like the proposed advertiser-supported Golf Channel are not unduly worried over the FCC’s gung-ho encouragement of basic-cable networks.

Cable operators “are placing a high priority on pay-per-view because it’s not regulated,” says Hugh Panero, president and CEO of Request Television, the biggest PPV distributor.

Jim Heyworth, president and CEO of Viewer’s Choice, a close second to Request , says, “We see no slackening of enthusiasm for pay-per-view as an important revenue source to cable operators.”

“Most of my programming additions will be in the pay-per-view area,” says Patrick Mellon, VP of programming for the Telecable Corp., a top-20 MSO.

Boyd says that if one of Post-Newsweek’s systems engineered an upgrade that added 12 new channels, “we’d choose from a mix of unregulated services. There’d be some pay-per-view channels, a few multiplexed pay networks and an a-la-carte channel. Nothing that’s happened last month at the FCC has altered those priorities.”

One of the ad-supported cable networks that could be hurt by this cable-operator strategy is the Learning Channel. Bill Goodwyn, VP of affiliate sales and relations for Learning Channel, says the network must expand its subscriber base from the current 30 million or so to between 40 million and 45 million before it starts turning a profit.

But if a cable operator who doesn’t carry Learning Channel is willing to take it only for a separate a-la-carte price, the channel will reach just a fraction of that system’s subscribers, Goodwyn says. Under that scenario, it’s possible the channel won’t get to breakeven until the next century.

And if cable operators ignore the FCC’s cheerleading and fill empty channel space with unregulated pay per view and pay TV, at least a dozen proposed new advertiser-friendly networks, which must attract wide circulation to get Madison Avenue’s attention, will fall by the wayside.

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