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I droped E* after 6 years and last 2 years at D* but the E* readers may find the article informative.
How we pay for cable may be about to change By Leslie Cauley, USA TODAY
Thu Mar 2, 7:11 AM ET



Cable TV companies have long said the "expanded-basic" package of channels that most viewers choose is a bargain. For about $41 a month, they note, you can see scores of channels, including CNN and ESPN.


Most of us, though, typically watch only 15 to 17 channels a month, according to industry estimates. Yet expanded basic continues to swell like a hot-air balloon - and so has its price. A few years ago, expanded basic offered about 35 channels; today, 200 to 300 channels are common. The price of expanded basic has jumped more than 40% in five years. In that time, overall prices for goods and services are up just 12%.


Now, thanks to new technology, shifting sentiment in Washington and deep-pocketed rivals such as AT&T and Verizon, the expanded-basic balloon might be about to pop. On the horizon: a la carte programming, which would let people buy only the channels they want and include special-interest packages for sports, news, hobbies and more. (Related items: Popular channels used to push others | Chart: Family packages from major pay TV providers)


The a la carte concept is endorsed by Kevin Martin, chairman of the Federal Communications Commission. The FCC recently found that consumers could shave up to 13% off their cable TV bills with an a la carte system.


Sen. John McCain (news, bio, voting record), R-Ariz., an influential member of the Senate Commerce Committee, is preparing legislation that would reward companies that offer a la carte.


Within five years, the cable industry's system of bundled channels, ever-rising prices and near-monopolistic control will fade into history, predicts Ford Cavallari, a media analyst at Adventis. Satellite TV operators, which have also come to depend on various versions of expanded basic, could also be affected. Together, the cable and satellite TV industries serve more than 100 million U.S. customers. All could face a new frontier of viewing options under an a la carte system.


"I think we are on a slippery slope to something that hopefully will be much better for consumers," says Gene Kimmelman of Consumers Union. "Consumers could wind up with more choices and more control over what they spend and what they get."


The signs of change are global. Cable viewers in Spain, Italy, Canada and Hong Kong already can buy channels individually. In the United Kingdom, viewers can pick from scores of special-interest tiers of programming; some of them offer just a few channels.


In the USA, Verizon and AT&T are building advanced video networks. Both have expressed interest in selling channels a la carte.


Not everyone wants to change the system. Programmers that supply channels to cable companies are reluctant to do anything that might siphon off customers from the Big Bundle, industry slang for expanded basic.


Why? Profit. In the cable and satellite TV world, ad rates are based on the number of "eyeballs" system operators reach. Expanded basic has the longest reach, so it commands the fattest subscription fees and ad rates.


A la carte gives consumers an escape hatch from expanded basic. That's why programmers don't like it. To protect themselves, they bar cable and satellite TV companies from selling their channels a la carte or in special-interest tiers.


Even so, programmers are laying the groundwork - inadvertently, perhaps - for an a la carte system in the USA, Cavallari says.


Last fall, he notes, Disney started offering commercial-free Internet downloads of Lost, Desperate Housewives and other ABC shows for $1.99 per episode. NBC (owned by General Electric) and CBS are doing the same with some of their shows, at 99 cents an episode.


These offerings, Cavallari says, are essentially a la carte content. As the market for on-demand TV catches fire, he predicts, "It will become harder for programmers to argue that you have to keep the (expanded-basic) business model propped up forever."


Charles Dolan, chairman of Cablevision, which owns cable networks and programming, is one of the few cable operators to openly favor an a la carte system. "Fundamentally, (a la carte) would be better for the consumer," Dolan says. "And if you do something that is better for the consumer, financially and economically it's going to be better for the industry."


Charlie Ergen, CEO of EchoStar, the USA's No. 2 satellite operator, is also a booster of a la carte. "We just think it's good business to give customers what they want," Ergen says. "And what they want is a la carte programming."


What viewers want

A recent USA TODAY/CNN/Gallup Poll of U.S. viewers supports that argument. Of those surveyed, 54% said they would prefer to buy channels individually; 43% said they'd rather pay a flat fee for a fixed number of channels. The results challenge what the U.S. cable industry has been saying for decades: that most customers in the USA don't want a la carte programming.

"We don't see a lot of anxiety on the part of consumers looking to pick what channels they want to watch," says Tony Vinciquerra, CEO of Fox Networks, who opposes a la carte. Expanded basic "brings enormous value to the customer."

It's also lucrative for cable companies. With expanded basic, companies don't have to worry about selling channels on their merits; they can just jam them into the bundle. In that one-size-fits-all system, programmers get paid even if no one tunes in.

"The main reason Disney and the others don't want to sell a la carte is because when you give customers the choice, they buy less channels," Ergen says. "Less channels mean you make less money."

Even so, Ergen says, he'd sell programming on an a la carte basis in a heartbeat - if big programmers allowed it. With the freedom to experiment, he says, operators could concoct scores of special-interest packages of content.

Confronted with a blizzard of choices like that, most people would buy lots of content. Ergen figures, "We'd make more money." There's also the fairness factor to consider, he says. "Why does a customer have to buy a package from a cable or satellite operator that has over 100 channels in it?"

Dolan goes a step further, calling expanded basic "anti-consumer." He also says it's helping to keep cable prices "artificially high."

The FCC agrees. With a la carte, its report found, "A consumer could cut his programming bills merely by electing to purchase fewer networks." Also, "A la carte could make service affordable to those who cannot afford bundled rates."

The report noted what consumer advocates have been saying for years: With a la carte, viewers would be able "to pay only for the programming they value." Because the FCC doesn't regulate programming, it can only make recommendations on how content is sold.

Programmers would suffer

An a la carte system would topple the economic equation that's fed the cable industry. Programmers would be hit hard "because their business model for the last decade has been bundling channels," says Paul Gallant, an analyst at Stanford Washington Research.

Consider ESPN, owned by Disney. It's one of the most expensive channels in expanded basic: $2 to $3 a month per subscriber. Many other channels cost 25 cents or less.

Yet only about 30% of consumers regularly watch ESPN, says Vinciquerra of Fox. The cost of ESPN winds up being subsidized by the remaining 70% of viewers. His view is consistent with those of other cable operators.

Disney insists ESPN is popular with the masses; the USA TODAY poll suggests otherwise. The poll indicates just 28% of Americans would pay a fee to buy a sports programming package that included ESPN. Most - 53% - said they probably wouldn't.

About half of Disney's $54 billion market value flows from ESPN. So if ESPN's value plummeted, so would Disney's value to investors.

Trying to avoid government-mandated a la carte, the biggest cable operators have been rolling out "family tiers" of programming. They feature channels with content that is free of sex, strong language and mature themes.

The family tiers are intended to satisfy the FCC, which has been urging the industry to give parents more control over what cable channels pipe into homes.

It's not clear how these new programming packages, which compete with expanded basic, will fare. Most don't offer much: 15 to 16 channels, on average. They don't provide anchor channels such as CNN or any movie channels.

Family tiers cost $13 to $15 a month. That doesn't include $5 to $8 a month for a digital cable TV box and $14 more for basic, which includes local TV signals. (By law, cable operators must sell you basic before they can sell you any other tier. Satellite TV operators are exempt from this rule.) Total tab: $32 to $37 a month.

That's slightly cheaper than expanded basic, which averages $41 a month. Still, the current family tiers are hardly a bargain, especially considering the puny size of the channel packages, says Brent Bozell of the Parents Television Council, a family advocacy group.

"Family tiers are a very bad joke," he says. "They're designed to fail so that cable operators can say there is no demand for family programming."

Programmers, meantime, keep talking up the Big Bundle.

"The expanded-basic bundle is the most economic and efficient way to deliver programming to customers," says Preston Padden, a Disney executive vice president.

Padden says Disney is no fan of tiers - family oriented or otherwise - or an a la carte system. He says an a la carte system would force up rates because there would be fewer viewers for a given channel. "You wind up charging the customer more, even though he's getting less," Padden says.

Vinciquerra of Fox agrees: "I think the (expanded-basic) model, as it is today, works pretty well. To challenge that is to try to fix something that doesn't need fixing."

How, then, to explain the approach of Fox's sister company, BSkyB, a UK-based satellite TV operator? BSkyB offers customers more than 90 packages, some of them with just a few channels. It also has loads of special-interest tiers. Fox and BSkyB have the same parent - News Corp. Yet in the USA, Fox continues to stress bundled packages. Asked why, Vinciquerra says, "Foreign markets grew up differently."

So are U.S. customers well-served by their cable and satellite TV providers? Ergen, the EchoStar chief, says a la carte would help. "We think it's good to give customers choice, and the best choice is a la carte."

His views are colored by EchoStar's own experiences. For 16 years, he notes, EchoStar sold ESPN, CNN and other channels on an a la carte basis. The option was available only to the 2 million rural customers who had huge "C-band" satellite dishes. In those C-band markets, he says, many people still bought programming packages. But many others chose their channels a la carte.

EchoStar, which has 12 million customers across the USA, got out of the C-band business in 1996. Still, Ergen says, the experience was instructive.

"Let's don't try to speak for the customer," he says. "Let's just put it out there and see what happens."