The Bundles and Ties that Bind: Debating Cable a la Carte
Michelle L. Hankins
09/01/2004
To most consumers, offering cable channels individually to provide more choice and eliminate paying for unwanted channels sounds logical. But others argue that to offer cable channels à la carte would all but destroy the cable industry and cause prices to soar.
In May, Commerce, Science and Transportation Committee Chairman Sen. John McCain (R-Ariz.) sent a letter to Federal Communications Commission Chairman Michael Powell asking that the FCC investigate offering more choices to cable consumersand report its findings and suggestions back to Congress.
McCain was alarmed by skyrocketing increases in cable rates, which some estimate at 58 percent over the past 8 years and 3 to 5 times the rate of inflation.
In response, the FCC called on the industry for input and hosted a symposium in late July. Industry speakers who appeared before the FCC's Media Bureau made one thing clear: cable à la carte may sound logical in theory, but in practice it is extremely complex. This issue has pitted consumers groups against cable companies.
As cable operators prepared to read their doomsday predictions before the FCC, Media Bureau Chief Kenneth Ferree cautioned, "Our regulatory posture in this area should be based on fact and not fears."
A recent Booz Allen Hamilton study commissioned by the National Cable and Telecommunications Association (NCTA) asserted that à la carte would hurt the cable industry and its customers. Consumers "would pay higher prices for cable even if they kept the same tier and channels they have today," said Matthew Egol, Booz Allen principal.
The study suggested that customers would pay 7 to 15 percent more for cable each month to receive their current offerings. Egol further estimated that as many as one-half to one-third of emerging cable operators and programmers would go out of business, "resulting in further media concentration."
The study cited an increase in billing costs but did not include OSS upgrades, since those are considered a one-time transition cost versus ongoing costs.
The Debate
As a justification for current cable prices, Booz Allen's argument is that consumers have actually enjoyed falling real costs for cable, because average viewing has increased by an hour.
According to the NCTA, à la carte would increase subscriber fees and reduce the number of channels. The Booz Allen study states that consumers would receive six or fewer à la carte analog channels or 9 digital channels for the same fees they pay for today's bundled packages.
Consumers Union policy advocate Kenneth DeGraff said in a Billing World and OSS Today interview that under the current pricing schemes the cable operators overcharge customers $4 billion to $6 billion a year. "No one is talking about banning bundles," he says. Rather, consumer groups are seeking a mixed choice of packages and à la carte to provide more options.
McCain stated in his letter to Powell: "If the expanded basic package is such a great value, then few consumers will choose an à la carte option when offered, and the cable industry's predictions about the negative effect of such options on some cable networks should prove baseless. If, on the other hand, consumers reject the expanded basic package in sizeable numbers, then it would demonstrate that today's one-size-fits-all, take-it-or-leave-it packages are not such a great value."
A Consumers Union study found that 66 percent of consumers would like to choose their channels. "We don't hear from the consumers that they're happy," said Gene Kimmelman, senior director of public policy and advocacy at Consumers Union, before the FCC.
DeGraff adds that many consumers currently cannot receive many of the niche channels because they are on digital cable, which he says is "prohibitively expensive."
Mark Cooper of the Consumer Federation of America called to the FCC's attention that consumers may have to spend at least $65 per month and receive 90 channels before they can select the digital channels they want.
Cable companies have discussed offering themed tiers, such as a movie or sports collection. Various cable operators and programmers argued before the FCC that some channels would lose viewers, because some viewers might not sign up for a channel if it were in a theme package that included many other channels they would not watch.
Jon Mandel, co-chief executive officer of Mediacom USA, the eighth largest U.S. cable operator, said 30 percent of Oxygen's audience is male, as is 20 percent of the audience for Home & Garden Television. What if these channels ended up in a soap opera tier? Moreover, he asked the FCC's Media Bureau, if 36 percent of Toon Disney's viewers are 18 or older, would they purchase a children's television tier?
But DST Innovis' Michelle Nowak, vice president of product management, says that à la carte pricing could spawn more creative bundling, with more choices and better value. Operators could position their offerings based on consumer buying patterns.
The Death of Diversity
Many niche programmers are alarmed, because they consider carriage through the large bundles critical to their livelihood. Reaching more homes via bundled carriage makes advertising more attractive and impacts advertising rates.
NCTA Senior Director of Communications Brian Dietz says that, if taken off a tier, "networks would lose a significant amount of advertising revenue, because their base would be significantly smaller." Advertising could drop as much as 20 to 60 percent, estimates Booz Allen's Egol.
The Booz Allen study predicted that marketing costs for programmers would rise to 20 to 30 percent of revenues, up from the current 2 to 6 percent. Networks would have to make up those costs by either increasing subscriber fees or cutting spending on original programming.
About 25 percent of cable viewing is "occasional," but such viewing would decrease with à la carte, said Egol. And because 50 to 70 percent of household penetration is the threshold for national advertising buying, many cable channels would not even begin to meet that level.
Those who support choice in cable offerings say, however, that advertisers aren't interested in households reached but "eyeballs," and buy time based on Nielsen ratings and actual viewers, not carriage into homes.
At the symposium, the FCC's Ferree pondered whether targeted advertising to customers who specifically choose a channel might prove even more valuable to advertisers and not as detrimental to ad revenues as the one camp suggests. "Doesn't it net out the same way?" he asked.
But many network leaders, such as Geraldine Laybourne, chairman, chief executive officer and founder of Oxygen Media, argue that the à la carte approach threatens the livelihood of original programming. "It would take us back to a world where there are fewer voices," she says.
Launching a cable channel with a new programming requires $350 million to $800 million, says Laybourne, compared with about $200 million to launch a channel with repackaged content, so a network would find it hard to justify the additional outlay unless it had full coverage.
"We have to rely on drive-by viewing, the surfing, … in order for [the channel] to be picked," Laybourne says of niche channels. For Oxygen to survive in an à la carte scenario, she says, "we estimate that … we would have to triple our marketing expense and basically wipe out our original programming."
Some of today's most popular channels started out as niche programmers, says Convergys' Curt Champion, senior director of marketing.
The Big Five: Channel Hogs
While many at the symposium argued against mandating à la carte, a few voices alluded to problems with the current cable industry that were limiting consumers' options.
Ben Hooks, chief executive officer of Buford Media Group, which operates 78 cable systems with about 56,000 subscribers in six states, spoke out at the symposium about some of the affiliations that threaten diversity in today's cable world. Hooks is also the former chair of the American Cable Association (ACA) and a board member of the National Cable Television Cooperative.
For the 1,000 cable company members of the ACA, Hooks said, "powerful interests" are inhibiting choice, not just the current price plans. "The exercise of market power by a few media conglomerates limits our ability to provide our customers more choice and raises costs," he said. "We want to provide more choice and better value. We can't."
Hooks said that small cable operators would welcome the opportunity to offer niche programming but cannot, because almost all of their channel capacity is tied up by the largest programmers, whose contracts mandate that any channels added to an offering by a cable operator be their own versus those of other programmers. "What you do not see in the record is the fine print of the contracts," Hooks said. "When you report on what might happen to program diversity under a different wholesale regime, you should also discuss how current programming practices hurt distribution of independent channels."
Hooks pointed out that about 75 percent of the top 50 "must-have" channels like ESPN, MTV, CNN and others are controlled by the "Big Five" companies: Viacom, Disney, GE/NBC, News Corp. and Time Warner. These companies, he said, make the rules restricting distribution, forcing small cable operators to deliver each of the top 50 channels to all or most of their customers. "Everybody must receive these channels and, of course, pay for them," Hooks explained. "If I don't agree to that, I do not get the channel."
In addition, he noted that many contracts involving the top 50 channels require cable operators to carry affiliate channels. "In some cases the tie-in is mandatory. In other cases, the tie-in is coerced," he explained. "If I do not carry the affiliated channel, I pay double, or more, for the ‘must-have' channel." This essentially fills up a cable operator's basic and expanded basic service with channels controlled by a few companies. Hooks said the same situation is occurring in the digital world.
Laybourne acknowledged that Oxygen faces pressure from the Big Five programmers but said she still would not want regulators involved.
Wholesale Pricing
"Each channel is not equal," notes Convergys' Champion. A cable provider does not pay the same amount back to each programmer. "Some [channels] can be quite expensive. ESPN might cost more per month than HGTV or TLC or Discovery."
What's more, he says, many cable operators pay for their programming based on volume discounts. "Comcast with 22 million subscribers has a much different programming cost than a small Tier 2 or Tier 3 company would," Champion says.
Hooks said that ACA members - the smaller cable operators - pay programming costs that are up to 30 percent higher than what the big operators pay. This price discrimination, he says, is hurting consumer choice and forcing rural cable providers and customers to subsidize the programming costs of urban operators and consumers.
The Operational Cost Arguments:
The Set-Top Box
Today, many cable providers do not require set-top boxes for basic service. Booz Allen estimates that about 70 percent of American consumers today get analog cable. With à la carte, the cable industry argues, each customer would have to have a set-top box, which Champion says may cost anywhere from $100 to $500. "That would be a considerable impact financially," he say, "not just for the carrier but for the consumer, because each of those boxes carries a monthly fee."
Michael Willner, president and CEO of Insight Communications, the ninth largest U.S. cable operator, asserted that à la carte or a "forced tier regime" would require people to purchase technology that they may not want. He pointed to estimates that it would cost $40 billion to provide everyone with a set-top box. Willner said the industry does not have the capital to support this.
Some suggest that a $50 set-top box is coming, but Willner said right now, the technology does not exist at that price.
Billing
As part of its study, Booz Allen surveyed 8 cable operators to study the cost implications of billing. Operators estimate that the average cost of billing is around $3.25 per month per subscriber. Booz Allen looked at the billing costs of the wireless industry, which it considered to closely mimic an à la carte scenario, and determined that the cost to bill may rise to $5.75.
Billing is a challenge in an à la carte world because many cable systems may not support the number of service codes required for a pure channel choice scenario, according to CSG Systems' Dwayne Ruffin, vice president of product management for the broadband services division. Cable operators today may have a couple of hundred service codes, or up to 1,000 codes on the high end, he says, but this would dramatically increase in an à la carte world.
Convergys' Champion says that each channel would be considered a service by the billing system, as would any bundled offering, installation, rearranging wall mounts, repeat truck rolls, and any other unique procedures. In addition, each promotional offering would require its own code, as would discounts that remove service charges from a bill. Champion notes that not all cable billing systems can handle huge volumes of products and service bundles.
DST Innovis' Nowak says that many operators' billing systems lack a service-oriented architecture, which prohibits them from changing services without also modifying their core code. These changes are costly and time-consuming, because they require the expertise of software engineers as well as additional testing.
DST Innovis has been building a product to support future cable industry needs and accommodate à la carte. A central part of the new system is the product catalog, which will enable operators to establish any standalone package or bundle.
CSG is also working on a product upgrade to expand its service code catalog by about 30 times, an objective based on the outlook for VoIP and additional next-generation services. Ruffin predicts that CSG's retooled product will be able to support about 64,000 individual services - more than enough, he says, to handle à la carte, should it become a reality.
Ruffin does not believe that an à la carte mandate would drive cable operators to purchase another billing system in the same way that VoIP and next-generation services may. More likely, Nowak says, is that cable providers would consult their billing vendors for extensions to existing systems. For à la carte, she says, most cable operators are taking a wait-and-see approach.
As for taxes and fees, Champion notes that discounting products differently will ultimately impact the taxation of a service. The revenues collected by cable operators directly affect local and state government, because the franchise fees paid to the government are based on those revenues.
Customer Care
How to present meaningful information about the options available to the consumer without overwhelming both the CSR and the customer is a challenge. "People tend to complain about the complexity of the service as it is," says the NCTA's Dietz.
"We're working very hard to do something very simple - answer our phones with real, live human beings," Insight's Willner added, arguing that à la carte would make live call center interaction more difficult.
CSG's Ruffin says cable operators would need to create a better customer service interface to give CSRs better insight into the products. One way to do this, he suggests, may be to have some type of customer analytics that would help push out possible offerings. Another way would be to pre-identify offerings by matching preferred customer buying patterns with their geographic location.
Ruffin believes that even if à la carte is offered, cable operators will still offer services mainly through bundles because, simply, there are just too many services that can be offered. A CSR might have to navigate through 200 to 300 different channels to create a package with possible discounts for a single customer. "Some billers may not be able to handle this," Champion says.
"Call center time is going to have to go up initially," says Nowak. "It's just the nature of the beast. I think that's where you're going to see the impact."
The Printed Bill
Today, a line item on a cable bill might represent 75 services - different channels and monthly fees. Once a cable provider breaks down that bundle, there could be 75 different line items, and the billing system would have to recognize a service code for each item and push that information out for the printed or electronic bill.
Any discounting and packaging of channels would have to be reflected on the bill, as well as any prorates for a given month. Champion foresees complexity in a scenario where each line item could possibly have its own prorate.
This could dramatically increase the page count of the bill, as well as the postage costs. In addition, the change in bill format may present readability issues and cause some confusion. Then, when a customer calls with a billing question, the CSR will need more time to scan the bill for the problematic line item.
And if a consumer wants to compare cable prices in an à la carte scenario to previous prices, it will be much more difficult, given that the channel cost breakdown will be presented in a significantly different manner.
OSS Issues
Provisioning and service activation will be affected, because each channel will have to be pushed down to a conditional access system. The OSS will have to handle every single request, adding more volume. Such provisioning will require a plethora of additional service codes that have to be tracked independently on the accounting side of the house.
All orders placed would need to flow through automatically for provisioning. Any manual intervention could cause provisioning delays and customer service issues. If a company has to provision services manually, it may have to translate the order information from the CSR to talk to the conditional access system, which talks to the set-top box in the home. "Anyway you slice it, [manual intervention] is not going to be pretty," Nowak says.
In the field, technicians used to be able to scroll through several channels as a random sampling to determine if a package had been installed correctly, but now they will have to scroll through all the channels, to ensure that all channels the subscriber ordered had been provisioned.
Using the technician at the house to cross-sell or up-sell different products and services will become more complicated. A cable operator today, for example, might know the successful up-sell opportunities for consumers who purchase particular packages, and technicians may up-sell based on that knowledge and information about the package a consumer has chosen. The innumerable possible combinations of à la carte channel packages throw a wrench into such opportunities. Now a technician would have to scroll through the various channels a customer ordered to determine what a likely up-sell would be. This may require additional training or more advance scripting.
And if a customer wants to subscribe to additional channels - especially using a Web self-care site - the expectation is that those channels will be provisioned in real time.
The Canadian Comparison
McCain asked the FCC to explore the cable options available to customers in Canada and determine why similar options were not available to U.S. subscribers. FCC Media Bureau Senior Attorney Ben Golant pointed to operators B Sky B and Cablevision for comparison and asked, why the U.S. estimation of à la carte pricing does not reflect the international examples we see today?
Rogers Cable, Canada's largest cable company, participated in the FCC symposium. Although Rogers offers à la carte channels, Vice Chairman Phil Lind did not come out in support of the pricing scenario. Some argued that this stance was largely to protect Rogers' relationships with other media conglomerates.
Lind wanted to make it clear to the FCC that, although Rogers does offer à la carte options to its digital subscribers, it does not provide the same choice to analog customers due to the expense of set-top boxes. For customers to obtain this level of choice, they must first purchase service at a cost of $32, plus pay the monthly fee for the set-top box.
He stated that most subscribers who go digital in Canada generally do so to get premium channels, not to get à la carte, and that digital is suffering because of its limited distribution. Canadian customers today still gravitate to analog programming, according to Lind, so à la carte would "undermine the economics of our business and it would harm customers on both sides of the border."
In view of that position, the FCC's Ferree asked Lind why Rogers offered so many choices in pricing packages and plans. "The regulators didn't require us to do à la carte," he responded, "we made that decision on our own," based on customer requests.
Lind said that although Rogers' customer care costs increased significantly, à la carte "can be done."
As for what decision the FCC will make, the jury is still out, but FCC Commissioner Michael J. Copps said in July that anything that puts the brakes on cable bills is bound to be attractive at the commission and on Capitol Hill.
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