Regulators keep consumers in mind

Broadcasters are salivating at the promise of “retrans” dollars flowing into their coffers during the next few years.

But there’s also an unease about the potential for the issue to blow up in Washington, as legislators and regulators take a hard look at the prospect of higher fees for cable and sat-TV operators translating to higher prices for consumers.

A Beltway review could even lead the biz down the road to the dreaded federal mandate that cable operators offer “a la carte” programming options. The fear is that the more cable operators raise the prospect of rising costs leading to higher cable bills, the solution of regulators would simply be to let consumers pick and choose what channels they want to pay for.

A la carte is a nightmare scenario for operators and the Hollywood majors alike, because both camps rely on the traditional bundling of cable channels to make money and ensure distribution.The highly public showdowns between station owners and operators in markets large and small also lend an air of dysfunction to the retransmission consent negotiation process, established by law in 1992.

Under the law, station owners have two options when it comes to cable carriage of their stations. They can choose the “must-carry” route, which means the station is guaranteed a slot on the cabler’s most basic service package without any compensation, or they can opt to negotiate a retransmission consent agreement, or “retrans,” in which there’s no guarantee the sides will come to terms. Station owners have to inform operators of their choice for each station every three years.

The must-carry/retrans rules were established at a time of rising concern about the market power of megacable operators like John Malone’s Tele-Communications Inc. and Time Warner Cable. Cablers at the time had no competish from satcasters (DirecTV bowed in 1994) or telco providers, and operators were increasingly using their distribution heft to wring equity stakes and other concessions from programmers.

Cable operators say the landscape has changed dramatically since then, with DirecTV, Dish Network, Verizon’s Fios and AT&T’s U-Verse offering competitive service, not to mention the burgeoning world of broadband video. But the largest cable operators are unlikely to raise too much of a fuss in Washington, out of fear of speeding lawmakers on the path to an a la carte mandate.

Smaller cable operators, however, are making more and more noise about the inequity of retrans. The Pittsburgh-based American Cable Assn., which represents more than 1,000 small- and medium-sized cable operators, filed a complaint with the FCC in 2008 asserting that small-fry operators are often forced by broadcasters to pay significantly higher retrans fees than larger operators simply because they don’t have the leverage that a Comcast or Time Warner Cable brings to the table.

ACA members tend to serve rural areas and outlying areas of urban centers. Broadcasters can demand high fees because they often won’t lose too much in the way of audience base if the operator does not carry the station. But the cabler needs to have local stations on its menu to be competitive with DirecTV and Dish Network, which have the benefit of national scope. The ACA calls it “pure price discrimination,” which is the sort of anti-competitive red flag that tends to get the attention of lawmakers.

“The marketplace has changed so significantly (since 1992) that the rules shouldn’t exist like this,” says ACA prexy and CEO Matthew Polka. “The more of these (retrans) disputes that occur, they’re just going to bring into focus the harm that it is causing in the video marketplace.”

Smaller operators are generally amenable to a move to some form of a la carte service, because they are frustrated by the channel-bundling demands of large cable programmers. If an operator wants to carry USA Network or Disney Channel, for example, they also have to take a raft of other channels from NBC U and Disney.

“The time for a la carte is closer than we think,” Polka says.

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