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II. CABLE INDUSTRY DEREGULATION HAS LED TO LESS COMPETITION, NOT LOWER RATES.

Cable rates continue to rise unreasonably because cable incumbents lack viable wireline competitors, not, contrary to the claims of the cable industry, because programming costs continue to rise. In the past, cable operators used their control over à la carte tier pricing as a means to charge more, not less, per channel. Today, consolidated cable behemoths are using ownership control of sports and news programming, predatory pricing tactics, and geographic rate discrimination as means to drive out wireline competition. Cable operators should be held accountable for their attempts to evade current rate regulations, not rewarded with further deregulation.

A. Expanding Cable Operator Control of Programming Is Unlikely to Reduce Cable Rates.

1. Cable Operators Historically Used À La Carte Pricing to Evade Rate Regulation.
In 1994, the initial cable rate regulation rules exempted single-channel “à la carte” offerings. Operators began offering à la carte channels on a single and à la carte tier package basis. The single channel price, however, was so high that it only made sense to purchase à la carte channels as a tier package. However, because each channel in the à la carte tier was technically available as a single à la carte channel, cable operators claimed that the à la carte tier package was not subject to rate regulation (as other programming tiers were). On an ad hoc basis, the FCC permitted this à la carte tier arrangement so long as six or fewer channels were packaged together. Ultimately, the FCC found no sufficient justification for the tier restructuring “other than to avoid rate regulation.” Despite this finding, however, the FCC neither prohibited this evasion, nor sanctioned the operators for trying to avoid compliance with rate regulation rules.

The unfortunate consequence of the FCC response is that it creates an implicit incentive for cable operators to aggressively interpret the rate rules to their benefit. For example, an operator with 10 million subscribers manipulates a rule interpretation to add an additional ten cents per month to every subscriber bill. In one year, the rate manipulation has generated $12 million. Even if the ten-cent addition is denied by a local government in a large jurisdiction with 200,000 subscribers, and the FCC rules on appeal that the ten-cent charge was unlawful, at worst, the operator would have to refund $240,000 to the 200,000 subscribers. But it will likely keep the other $11 million it unlawfully collected from other subscribers because the FCC is not going to assess a separate fine or make the FCC Order apply beyond the jurisdiction that issued the challenged Rate Order.

2. À La Carte Pricing Could Result in Channel Substitution, Not Lower Rates.
Cable operators cannot offer every channel on an à la carte basis. Operator-owned programming interests may affect decisions as to which channels will be offered as part of a package or as an à la carte channel. Congress should be concerned about channel substitution. For example, assume in New York City that Cablevision agrees to carry YES Network, drop ESPN from its expanded-tier programming, and make ESPN available as a separate à la carte channel. If there are no substantial savings in programming costs between YES and ESPN, or if programming cost savings are not passed onto subscribers, then the subscriber who did not want sports programming would see no price reduction, and the subscriber who wanted ESPN will have to pay the same price to receive ESPN-less programming or a larger price to receive the same programming with ESPN.

B. Cable Operators Have Not Presented Verifiable Programming Cost Data.
Verifiable programming cost and revenue data is needed to evaluate the impact of programming costs on cable rates. Notwithstanding the fact that a Justice Department investigation and an informal SEC inquiry related to the accuracy of operator-reported data are currently pending, Congress should require the cable industry to provide specific information about all channel programming costs, programming launch fee revenue, and corporate allocation of volume discounts.

• Actual Programming Costs. Cable operators submit only their basic tier channel programming costs to local governments as part of the rate regulation process and do not routinely submit any programming costs to the FCC. Thus, cable operators do not disclose to any regulatory body what they are paying for most of their programming.
  
  
• Accounting Treatment of Launch Fee Revenue. Cable operators receive substantial “launch fees” from programmers – i.e., fees for adding new channels to cable systems, for advertising new channels on existing channels, in program guides, on or with subscriber bills, and for other channel launch-related services – but do not uniformly treat them as programming revenues which offset total programming costs.
  
  
• Allocation of Volume Discounts. Cable operators often delay or refuse to comply with local government requests to disclose terms of their programming contracts, thus making it difficult to determine how volume discounts are allocated. In at least one instance, franchise-level reported programming costs were greater than the operator’s actual costs because the operator negotiated volume discounts for programming, but charged its local franchises as if no discount had been obtained, booking the difference as profit for the corporate parent. According to the 2001 Annual Report Comcast filed with the SEC:
  

  “[O]n behalf of the company, Comcast secured long-term programming contracts . . . Comcast charged each of the Company’s subsidiaries for programming on a basis which generally approximated the amount each subsidiary would be charged if it purchased such programming from the supplier . . . and did not benefit from the purchasing power of Comcast’s consolidated operations.”
  

C. The Effect of Programming Cross-Ownership Remains Unknown.
Without actual programming cost data, it is also difficult to evaluate what effect cable operator cross-ownership of programming networks has had on increases in programming costs and cable rates. Cable operators could be recovering programming fees from subscribers, while also benefiting from fee increases through their programming network ownership agreements. The FCC reported:

• Combined, four of the top six cable operators hold ownership interests in 72 of 92 satellite-delivered programming networks.
  
  
• AOL Time Warner has an ownership interest in 39 networks, i.e., 13% of all national programming networks.
  
  
• Cox has an ownership interest in 25 networks, i.e., 8% of all national programming networks.
  
  
• Comcast has an ownership interest in 9 networks, i.e., 3% of all national programming networks.
  
  
• Cablevision has an ownership interest in 5 networks, i.e., 2% of all national programming networks.
  
  
• Liberty Media has an ownership interest in 41 networks, or 13% of all national programming networks.
  
  
• Comcast has an ownership interest in several regional sports programming channels, and sports programming has been cited as major source of programming fee increases.
  

Local governments urge the Committee to take steps to protect subscribers from potential abuses of à la carte pricing, to ensure transparent and equitable accounting treatment of programming costs and revenues, and to investigate how cable operator cross-ownership of programming affects subscriber rates.

 

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