The Year of cable discontent

by David Hatch, Tech Daily

For the cable industry, 2007 could be a year of discontent. Lost among the headlines about the transition to digital television and efforts to rejuvenate telecommunications legislation is a bevy of proposals that threaten to reshape the subscription television business.

"This is a tougher-than-normal environment for the cable industry in Washington right now," said Paul Gallant, vice president and senior media analyst at the Stanford Washington Research Group. "There's just a series of priorities that this FCC has that ends up clashing with cable's view of how the government should regulate them."

Per-Channel Pricing, Media Ownership And More

Policy changes under consideration would impact nearly every aspect of the business, from equipment to content and audience reach. The industry is reeling from the FCC's recent recommendation that Congress require per-channel pricing, and there is displeasure with proposed rules designed to ensure the availability of each digital broadcaster's main signal.

Another concern is FCC Chairman Kevin Martin's plan to reinstate the ownership cap governing the audience reach of system operators, which could impact the growth of Comcast. The National Cable and Telecommunications Association, meanwhile, has complained for months about the FCC's December relaxation of video-franchising regulations for new entrants, a boon to AT&T and Verizon Communications as they deploy pay-TV services.

Both companies are deploying faster Internet connections that exceed cable's broadband offerings. Responding to the pressure, Comcast Chairman and CEO Brian Roberts demonstrated a new technology last month that promises download speeds topping what the Bell companies offer high-end customers. But such wideband technology won't be available for a few years.

Other challenges lie ahead: Over the next two weeks, House and Senate lawmakers will hold hearings examining television violence and other programming concerns, with heavy criticism to be directed at the cable and broadcast sectors. Beginning July 1, new FCC rules governing the configuration of cable set-top boxes take effect amidst strong industry resistance.

The potential for "network neutrality" legislation to prevent cable and telecom providers of broadband access from potentially acting as content gatekeepers also remains a threat. While the specter of such regulation appears remote for now, NCTA President and CEO Kyle McSlarrow said it is the biggest worry facing his member companies. "In its most extreme form, if actually passed as a statute, I think it would have very serious consequences for innovation and investment," he warned during an interview.

But McSlarrow downplayed suggestions that 2007 is a make-or-break year, saying it doesn't seem much different than 2005 or 2006, when his association was on the defensive during negotiations over telecom bills. "The FCC has heated up, really over the last year, that's true," he acknowledged, but he expressed confidence that NCTA would prevail.

Suspicious Of Chairman Martin

The succession of proposals affecting cable has emerged in an atmosphere of tension with Martin, its chief regulator. Some in the industry complain that Martin has an axe to grind over operators' refusal to adopt per-channel cable pricing and is using his authority to take potshots at cable.

Martin, who has denied the allegations, alluded to the friction during his appearance in May at the Cable Show in Las Vegas. "It is a pleasure to be here. Actually it is more than that -- it's a surprise! Over the past few months, I wondered whether or not I would even be invited to attend, never mind invited to speak."

McSlarrow declined to comment on the fervor, instead emphasizing that NCTA has its work cut out to educate policymakers about the industry's regulatory needs.

For those keeping score, here's a rundown of the battles the cable industry faces:

-- Boxing day: Beginning July 1, cable set-top boxes must accommodate insertable encryption cards, enabling the units to work with any provider. The FCC says the requirement will foster a robust retail market for the devices, providing an alternative to renting them from cable systems. But NCTA notes that manufacturers could have sold such boxes without a mandate and says the most immediate effect will be higher rental fees for redesigned models.

The FCC has not acted on an industry-wide waiver request or on Comcast's appeal of a rejected petition, though exemptions have been granted, most notably to Charter Communications. Cable systems now lease proprietary set-top boxes and some televisions or related devices already accommodate the removable cards.

-- Cable cap flap: Martin wants to reinstate a cap that the U.S. Circuit Court of Appeals for the District of Columbia overturned in 2001. The threshold limited individual cable companies to serving up to 30 percent of pay-television households, but the court ruled that the FCC didn't provide sufficient justification to maintain it.

Martin now says he has stronger evidence. Comcast already reaches 27 percent, giving it little wiggle room if the chairman succeeds. NCTA believes the courts would reject any new threshold.

-- Carried away: An FCC proposal that cable systems carry each broadcaster's main digital signal has met with a thud at NCTA. Martin wants to ensure that all customers, particularly those with analog cable service, can view broadcast signals after the switch to digital occurs in early 2009.

NCTA insists that operators would voluntarily make the stations available without a mandate, which could bar the adoption of new technologies. It also worries that the agency's approach would strain capacity by requiring carriage of a primary broadcast signal in up to three formats.

-- Tiers of joy: The specter of regulation designed to prevent broadband providers from establishing faster Internet tiers available to companies for a fee remains an ever-present worry for cable. Key Democrats, including Edward Markey of Massachusetts, chairman of the House Energy and Commerce Telecommunications and the Internet Subcommittee, argue that net neutrality is needed to keep the Internet open and equitable.

But McSlarrow said the impact would be "direct price controls" on Internet access. "I think that is extremely unhealthy for the development and growth of broadband in America," he said.

-- Franchised out: The FCC relaxed its local video-franchising rules for new entrants in December in an effort to spur competition. While it is expected to do the same for cable this fall, McSlarrow says his industry should not have been forced to wait for relief handed immediately to the Bells.

-- Price cartel: FCC and congressional efforts aimed at curtailing excessively violent television scenes have revived the debate over whether cable systems should offer per-channel pricing, also known as a la carte. Supporters say the approach would lower prices and give viewers more control. The cable industry says it would result in higher per-channel rates and be the death knell for less popular programmers.

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