Cable and Satellite Television Network Tiering and “a la Carte” Options for Consumers: Issues for Congress

Cable and Satellite Television Network Tiering and “a la Carte” Options for Consumers: Issues for Congress

Order Code RL32398
CRS Report for Congress
Received through the CRS Web
Cable and Satellite Television
Network Tiering and “a la Carte”
Options for Consumers:
Issues for Congress
Updated January 18, 2005
Charles B. Goldfarb
Specialist in Industrial Organization and Telecommunications Policy
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress

Cable and Satellite Television Network Tiering and a la
Carte Options for Consumers: Issues for Congress
Summary
Multi-channel (cable and satellite) television is the single largest component of
the entertainment sector. It is estimated that in 2003 Americans spent $235.52 per
person on cable and satellite television, and on average watched 949 hours of non-
broadcast cable and satellite programming. Multi-channel television is a major
source of news and informational programming and diverse entertainment
programming, including niche programming. Some consumer advocates complain,
however, that, as a result of the industry-wide practice of offering almost all
advertiser-supported cable networks in a single tier only, consumers are forced to
purchase networks they are not interested in receiving in order to obtain the networks
they want. For example, in order for consumers to obtain desired children’s
networks, such as Nickelodeon or Discovery Kids, they must purchase the expanded
basic service tier that includes networks whose programming some consider not of
interest or objectionable. These advocates claim consumers would be better off if
they had the option to purchase just the individual cable networks they want (this is
frequently referred to as “a la carte” purchasing) or, at the least, to purchase smaller
tiers that include fewer of the cable networks they do not want.
The large cable programmers, who provide most of the popular cable (and
broadcast) television programming, respond that a single large expanded basic
service tier represents the most efficient way to offer programming and that allowing
customers to obtain networks on an a la carte basis or in small tiers would raise costs
– and hence prices to consumers – and also reduce the diversity of programs offered,
so that consumer welfare would suffer in the long run. They claim a single large tier
reduces the risks associated with introducing new cable networks and helps support
niche networks.
In response to requests from key members of the House and Senate Commerce
committees, the Federal Communications Commission (FCC) prepared a report that
concludes that replacing the current tiered pricing system with mandatory a la carte
purchasing would likely increase the monthly cable bill for those households that
subscribe to nine or more cable networks. Currently, the average household watches
approximately 17 channels and therefore could expect its monthly bill to increase
between 14% and 30%. The FCC based its conclusion on a study submitted by the
National Cable and Telecommunications Association. The FCC also concluded that
the current practice by large cable programmers who also own broadcast stations of
tying retransmission consent for their broadcast signals to carriage of their less
attractive cable networks may harm consumers, but that this practice should be
reviewed by the antitrust authorities rather than the FCC. In the Satellite Home
Viewer Extension and Reauthorization Act (P.L. 108-447), however, Congress
instructed the FCC to prepare a study regarding the impact of the current
retransmission consent rules on competition in the multi-channel television market,
including the ability of rural cable operators to compete with satellite television in
the provision of digital television signals to consumers. This report will be updated
as events warrant.

Contents
The Issues Before Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The FCC “A La Carte Report” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
The Current Cable Programmer Business Model . . . . . . . . . . . . . . . . . . . . . . . . 10
Market Imperfections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Proposals to Give Subscribers More Purchasing Options for Cable Networks . . 18
Proposal: Prohibit Tying Carriage of Popular Programming to Carriage of
Less Popular Programming . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Proposal: Prohibit Programmers from Requiring Their Networks to Be
Placed on the Expanded Basic Service Tier . . . . . . . . . . . . . . . . . . . . . 22
Proposal: Require Distributors to Offer Networks a La Carte and in Small
Tiers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Proposal: Place High Cost Sports Networks on a Separate Cable Tier . . . . 26
List of Tables
Table 1. Cable Channels Receivable vs. Viewed . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Cable and Satellite Television Network
Tiering and a la Carte Options for
Consumers: Issues for Congress
The Issues Before Congress
Multi-channel (cable and satellite) television is the single largest component of
the entertainment sector. It is estimated that in 2003 Americans spent $235.52 per
person on cable and satellite television, and on average watched 949 hours of non-
broadcast cable and satellite programming.1 In addition to these subscriber revenues,
cable and satellite television generated more than $16.4 billion in advertising
revenues.2 Approximately 88% of households with televisions subscribe to multi-
channel service.3 Besides commanding a significant portion of Americans’
discretionary spending, multi-channel television is a major source of news and
informational programming and diverse entertainment programming, including niche
programming. The question of how best to make cable and satellite video networks
available to consumers therefore has been the subject of serious debate in Congress.4
The purpose of this report is to discuss the pros and cons of the current industry
practice of making the bulk of multi-channel programming available to consumers
1 “U.S. Entertainment Industry: 2003 MPA Market Statistics,” Motion Picture Association
Worldwide Market Research, at p. 57 (“Consumer Spending per Person per Year”) and p.
55 (“Media Consumption based on Hours per Person”), available upon request from the
website [http://www.mpaa.org].
2 This figure, presented in the National Cable & Telecommunications Association
( N C T A ) w e b s i t e “ I n d u s t r y O v e r v i e w , ”
[http://www/ncta.com/Docs/PageContent.cfm?pageID=310] (viewed on 11/19/2004), citing
Kagan World Media, Broadband Cable Financial Databook, includes cable network
revenues, local/spot revenue, and regional sports revenue, and appears not to include
advertising revenues generated by the satellite companies, thus understating total revenues
generated by cable and satellite television.
3 According to the Federal Communications Commission’s Tenth Annual Report on
Competition in Video Markets, released on January 28, 2004 (at p. 115, Appendix B, Table
B-14-5), as of June 2003, 88.29% of all television households subscribed to a multi-channel
video service, but that might overstate the total as a small number of households subscribes
to multiple services (for example, cable and satellite service). Since June 2003, satellite
subscriptions have risen significantly, and many of those new subscribers had not been cable
subscribers.
4 See, for example, the statements, pre-filed testimonies, and transcripts of the Senate
Committee on Commerce, Science and Transportation Hearing on Escalating Cable Rates:
Causes and Solutions, March 25, 2004, and the Senate Judiciary Subcommittee on Antitrust,
Competition Policy, and Consumer Rights Hearing on the News Corporation/DIRECTV
Deal: Marriage of Content and Global Distribution, June 18, 2003.

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in a single large package only and of various proposals to give consumers additional
purchasing options. These options include purchasing smaller packages or
purchasing on a network-by-network basis (frequently referred to as “a la carte”
purchasing).
Currently, virtually all cable system operators make cable networks available to
customers only in a limited number of packages (or tiers):
! The basic service tier, typically consisting of a package of local
stations (local broadcast stations and public, educational, and
governmental (PEG) access programming)5 plus a few advertiser-
supported cable networks.6
! The cable programming service tier, referred to in the industry as the
expanded basic service tier, consisting on average of 36 advertiser-
supported cable networks.7 This tier typically includes many of the
most popular cable networks, ranging from Nickelodeon and the
Discovery Channel to MTV. Cable operators require subscribers to
purchase the basic service tier in order to purchase the enhanced
service tier. Since approximately 90% of subscribers purchase the
expanded basic service tier, most customers have this enhanced
basic service tier in mind when they talk of “basic service.”
! Various premium tiers, typically consisting of a small package of
“premium” program networks (such as HBO and Showtime), usually
offered without commercial advertising.8
! Pay-per-view channels with programming (first-run movies, live
concerts, boxing matches, sexually-explicit programming) that
subscribers pay for on a program-by-program basis.
The direct broadcast satellite (DBS) distributors of multi-channel television also
offer the bulk of advertiser-supported networks on a single tier, analogous to cable’s
5 Local cable systems are required to have a basic offering that includes the local broadcast
channels and , if available, PEG channels. See “Consumer Options for Selecting Cable
Channels and the Tier Buy-Through Prohibition,” Federal Communications Commission
Fact Sheet, February 2003, at p. 1.
6 The Government Accounting Office found that on average the basic service tier includes
25 networks. See Issues Related to Competition and Subscriber Rates in the Cable
Television Industry, General Accounting Office Report to the Chairman of the Senate
Committee on Commerce, Science and Transportation (GAO Report), October 2003, at p.
5.
7 GAO Report at p. 5.
8 Although premium networks typically do not include commercial advertising, they do
typically include a significant amount of promotions for other programs on that network.

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expanded basic service tier, with additional premium tiers and pay-per-channel
programming available.9
Some consumer advocates complain that, as a result of the industry-wide
practice of offering almost all advertiser-supported cable networks in a single
package only, consumers are forced to purchase networks they are not interested in
receiving in order to obtain the networks they want. As shown in Table 1, even those
subscribers who receive more than 120 cable networks view, on average, fewer than
20 networks in a week. (Some subscribers, however, may watch a larger number of
networks over a longer period of time – either as a result of casually surfing across
networks or because some networks they watch on occasion did not happen to have
programming of interest to them in that particular week – and may value access to
those additional networks.) Consumer advocates claim consumers would be better
off if they had the option to purchase just the individual cable networks they want (a
la carte purchasing) or, at the least, to purchase smaller tiers that include fewer of the
cable networks they do not want.10
The large program providers, who provide most of the popular television
programming, respond that a single large expanded basic service tier represents the
most efficient way to offer programming and that allowing customers to obtain
networks on an a la carte basis or in small tiers would raise costs – and hence prices
to consumers – and also reduce the diversity of programs offered, so that consumer
welfare would suffer in the long run.11 They claim a single large tier reduces the risks
associated with introducing new cable networks and helps support niche networks.
(The economics underlying the cable programmers’ business model, and its reliance
on a single large expanded basic service tier, is discussed in detail in the next two
sections.)
Some cable system operators have taken a middle road position, arguing that in
most – but not all – cases requiring consumers to take a single large expanded basic
service tier is more efficient than giving consumers the option of purchasing
networks a la carte or in smaller tiers, but that the decision on how to offer networks
to customers should reside entirely with the cable system operators. They assert that
cable operators should neither be required to offer networks a la carte or in small tiers
9 Satellite television providers and cable operators distribute the same program networks,
which are generically referred to as cable networks. In most situations, the market analysis
and public policy issues surrounding consumer options for cable networks are the same
whether the multi-channel distributor is a cable system or a satellite system. For simplicity
of exposition, when this report refers to cable, it also implicitly includes satellite. In those
situations where analysis differs for cable and satellite, the report explicitly identifies those
differences.
10 See, for example, the Testimony of Gene Kimmelman, on behalf of Consumers Union and
Consumer Federation of America, before the Senate Committee on Commerce, Science and
Transportation (Kimmelman Testimony), March 25, 2004, at pp. 3-4.
11 See, for example, the Testimony of George Bodenheim, president, ESPN, Inc. and ABC
Sports, before the Senate Committee on Commerce, Science and Transportation, March 25,
2004, at p. 1.

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nor be restricted by the government or programmers from offering networks a la
carte or in small tiers.12
Table 1. Cable Channels Receivable vs. Viewed
Number of Channels
Average Number of
Average Number of
Receivable
Channels Receivable
Channels Viewed
11-20
15.4
5.5
21-30
24.7
6.8
31-40
35.4
10.2
41-50
45.7
12.6
51-60
55.9
15.2
61-70
66.4
15.3
71-80
75.9
15.4
81-90
84.5
15.5
91-100
95.1
16.6
101-110
105.2
18.4
111-120
115.9
16.5
121+
183.2
19.2
Source: Nielsen Media Research, National People Meter Sample, August 25-31, 2003,
presented by the Television Bureau at [http://www.tvb.org/rcentral/mediatrendstrack/
tvbasics/10_Channels-RecVsViewed.asp], viewed on 11/19/2004.
The issue of cable program tiering has come up in several policy debates
currently before Congress.
In the debate on indecent programming, some consumer advocates have
complained that in order for consumers to obtain desired children’s networks, such
as Nickelodeon and Discovery Kids, they must purchase the expanded basic service
tier that includes networks whose programming they consider objectionable.13 Most
12 See, for example, William P. Rogerson, “Cable Program Tiering: A Decision Best and
Properly Made by Cable System Operators, Not Government Regulators,” November 10,
2003, at pp. 5-7. This study was prepared and funded by Cox Communications Inc. and
attached to the Testimony of James O. Robbins, president and chief executive officer, Cox
Communications, Inc., before the Senate Committee on Commerce, Science and
Transportation, March 25, 2004.
13 See, for example, the letter dated March 4, 2004, from L. Brent Bozell, III, founder and
(continued...)

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cable operators have recently agreed to provide all customers, upon request and at no
additional charge, the equipment needed to block objectionable programming.14 But
some consumer advocates claim consumers still are forced to bear inappropriate costs
and inconveniences. They assert that cable operators build into the price they charge
for the expanded basis service tier the licensing fees for all the networks on the tier,
including the fees for those networks some consumers do not want to receive. These
consumer advocates also claim subscribers are inconvenienced by the need to
program the equipment to block the unwanted programming. Some have proposed
that cable operators allow customers to purchase networks on an a la carte basis or,
at the least, offer a smaller (or different) expanded basic service package that
excludes the objectionable networks.15
In the debate on cable prices and media ownership concentration, cable
operators have argued that one of the major contributors to rising cable prices is the
sharp increase in license fees that programmers charge cable operators, especially for
sports networks.16 The General Accounting Office (GAO) found that the average
license fees cable operators paid to purchase programming increased by 34% between
1999 and 2002 – an average of 26% for 72 non-sports networks and 59% for seven
national sports networks.17 James Robbins, chief executive of Cox Cable, reportedly
stated at a Goldman Sachs investors conference in October 2003 that ESPN sought
a 20% annual increase in its fees from Cox, while Fox Sports proposed a 35%
increase for 2004.18 He stated that Cox pays ESPN $2.61 a month for each
subscriber, more than it pays for the seven top-rated advertising-supported networks
combined, and that ESPN accounted for 4% of Cox customers’ viewing, but 18% of
Cox’s programming costs.19 These major sports programmers contractually require
13 (...continued)
president, Parents Television Council, to Sen. John McCain (Bozell letter).
14 “NCTA’s Sachs Tells Families ‘Cable Puts You in Control’ in Speech to Cable Public
Affairs Conference,” NCTA press release, March 23, 2004. According to the press release,
this commitment was made by the 10 largest NCTA member companies and many smaller
cable companies that, in all, serve about 85% of cable subscribers in the United States.
15 See, for example, the Bozell letter or the Kimmelman Testimony.
16 See, for example, the Testimony of Charles F. Dolan, chairman of Cablevision Systems
Corporation, before the Senate Committee on Commerce, Science and Transportation, May
6, 2003, at pp. 4-5; the Testimony of James O. Robbins, president and chief executive
officer, Cox Communications, Inc., before the Senate Committee on Commerce, Science and
Transportation, May 6, 2003, at p. 1 (Robbins Testimony of May 6, 2003); and the
Testimony of James M. Gleason, president and chief operating officer, CableDirect, and
chairman, American Cable Association, before the Senate Committee on Commerce,
Science and Transportation (Gleason Testimony), May 6, 2003, at pp. 7-8.
17 GAO Report at p. 22.
18 David D. Kirkpatrick and Geraldine Fabrikant, “Sports Fan Is the Prize, or the Victim, in
Cable Fight,” New York Times, October 6, 2003, at pp. C1 and C4.
19 ESPN generates significantly more advertising revenues for cable operators than do most
other cable networks, however, which partially compensates for the higher cost. ESPN
claims that “local ad sales revenue offsets a significant portion of the wholesale cost. As
(continued...)

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that their sports networks – which are viewed as “must have” programming by most
cable and satellite operators – be included by operators in their expanded basic
service tier, not sold to consumers as a separate, premium tier.20 Some consumer
advocates and some cable operators argue that although sports fans have a very
strong demand for sports programming, only a small minority of expanded basic
cable customers watch sports programming, and therefore most consumers would
19 (...continued)
a result, the net wholesale cost for ESPN is about $1.00 a sub[scriber] per month.” (“ESPN
Reaffirms Value to Cable,” ESPN Press Release dated May 6, 2003, provided to the Senate
Committee on Commerce, Science and Transportation for its hearing on May 6, 2003.)
20 This contractual requirement was upheld recently by an arbitration panel in a specific
dispute involving Cablevision and the YES Network, which is owned by the New York
Yankees and offers Yankee and New Jersey Nets games. That dispute has been perhaps the
most visible contractual dispute between a cable operator and a sports programmer about
the rights of the cable operator to place a sports network on a separate premium tier instead
of including it in the expanded basic service tier. In 2002, Cablevision had refused to carry
YES, claiming that the monthly subscription fee of $2 per month per subscriber was too high
and that its 2.9 million New York and New Jersey area customers should be allowed to
choose if they wanted the network by providing the network as a separate, premium tier.
Yankees games were blacked out, and approximately 45,000 Cablevision subscribers turned
to DirecTV, which continued to carry the YES network as part of its expanded basic service
offering. In 2003, just before the opening of the baseball season, in negotiations that
included the Mayor of New York City and the Governor of New Jersey, YES and
Cablevision agreed to a temporary solution by which Cablevision would offer YES for a
year as a premium channel, charging customers $1.95 per month for YES or $4.95 a month
for a premium package that also included MSG Network and Fox Sports Net New York,
which between them televise the games of five professional sports teams – the Mets, Knicks,
Rangers, Islanders, and Devils. (YES also allowed Time Warner Cable to offer the YES
network as a premium channel. Cablevision and Time Warner reduced their rates for
expanded basic service by between $0.50 and $1.00 when the YES channel was put on a
separate tier.) Cablevision and YES agreed to submit to binding arbitration to determine
whether Cablevision could continue to offer YES to its subscribers as a separate premium
tier outside the extended basic service tier. About 1.5 million Cablevision customers chose
to subscribe to YES. Thus, YES lost almost half the license fee revenues it had been
receiving from Cablevision for its cable subscribers. On March 24, 2004, the three-man
arbitration panel voted unanimously that the games should be shifted to the widest possible
audience – expanded basic cable service – for six years. Although the exact terms of the
arbitration decision were kept confidential, various news sources reported that the arbitrators
set the per subscriber license fee at $1.83 per month, lower than the $2.28 sought by YES.
But it appears that Cablevision had to pay the license fee retroactive to the start of the 2003
baseball season, which would have allowed YES to recoup the previously lost license fee
revenues. (See “News in the Yes Network, Cablevision Battle,” at
[http://abclocal.go.com/wabc/news/print_WABC_03244_cablevisionyanks.html], viewed
on 3/31/2004, “YES 1, Cablevision 0,” at [http://www.reuters.com
/newsArticle.jhtml?type=televisionNews&storyID=4649545&section=news.html], viewed
on 4/13/2004, and the GAO Report, at p. 38.)

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benefit if the program were provided to customers as a separate programming tier.21
At least one major cable operator appears to want the discretion to offer sports
networks on a separate, premium tier, but does not currently seek to offer such a tier.
Cox Communications president James Robbins, stated in his May 6, 2003 testimony
before the Senate Commerce Committee:
Tiering presents an intriguing solution to restore an acceptable price value
proposition for the most expensive networks – perhaps those that charge Cox a
wholesale prices of more than $1 per subscriber. If operators had the flexibility
to sell these networks – sports channels or others – on a separate tier, consumers
would gain an opportunity to manage their cable expenditures by choosing
whether or not to buy certain programming. Likewise, programmers would be
motivated to keep their prices reasonable to remain on expanded basic cable line-
ups.22
In response to a question from Senator McCain in the March 25, 2004 Senate
Commerce Committee hearing, however, Mr. Robbins stated that he had successfully
completed negotiations with ESPN for a license fee increase that was significantly
less than 20% and, as a result, he no longer wants to offer ESPN to customers as part
of a separate, premium sports tier.
In the debate on cable prices and media ownership concentration, small cable
operators sought congressional action
to ensure that the programming conglomerates cannot force consumers and cable
businesses to take bundled services or require that these services be carried on
the lowest levels of service.... Congress should amend telecommunications laws
to provide that no programming provider can require that its services be carried
only on the basic or expanded basic level of service. Rather, to give consumers
choice and to allow the market to determine what gets on TV, programmers
should be required to make their services available as part of a separate
programming tier, or even a la carte.23
The small cable operators also proposed that Congress amend the retransmission
consent laws to prohibit broadcasters that also own cable networks from requiring
cable operators to carry those cable networks on their systems in order to obtain
retransmission consent for their broadcast signals.24
21 For example, in his testimony before the Senate Commerce Committee on May 6, 2003,
Cox Communications president James Robbins claimed that “Our research shows that less
than 20% of our customers are avid TV sports viewers. But sports programming is
disproportionately driving up cable prices for everyone.” (at p. 2.) In contrast, ESPN, in
a press release dated May 6, 2003 that it provided for the same hearing, claimed that “86%
of Americans ... consider themselves sports fans.” (at p. 3.) The ESPN press release does
not address how many of those sports fans actually watch sports programming.
22 Robbins Testimony of May 6, 2003 at p. 2.
23 Gleason Testimony at p. 7.
24 Ibid at p. 13.

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On the other hand, the program providers claim that their business model
depends crucially on maintaining the large expanded basic service tier and that
allowing (or requiring) cable operators to offer cable networks a la carte or on small
tiers would threaten the financial viability of the industry, to the detriment of
consumers.25
The FCC “A La Carte Report”
On May 18, 2004, House Commerce Committee chairman, Joe Barton, ranking
member, John Dingell, Telecommunications Subcommittee chairman, Fred Upton,
Telecommunications Subcommittee ranking member, Edward Markey, and
Representative Nathan Deal sent a detailed letter to Federal Communications
Commission (FCC) chairman Michael Powell asking the FCC to perform a study,
within six months, that provides information needed to make an informed decision
on the potential merits and drawbacks of proposals to allow cable and satellite
operators to offer programming to their subscribers on an a la carte or themed-tier
basis. They asked the FCC to determine the extent to which cable and satellite
operators currently have the option of purchasing individual cable networks and of
offering them to subscribers on an a la carte basis; to study the likely impact of a la
carte and themed-tier offerings on retail rates; to investigate the likely impact of a la
carte and themed-tier offerings on advertising revenues; to investigate the impact of
the current retransmission consent process on consumers’ ability to select their own
programming; to investigate the likely impact of a la carte or themed-tier offerings
on the diversity of programming; to study the unique characteristics of rural and
smaller markets; to estimate how many households would have to invest in set-top
boxes in order to receive a la carte or themed-tier offerings; and to study what legal
issues might arise if Congress decided to mandate a la carte purchasing.26
On May 19, 2004, Senate Commerce Committee chairman John McCain sent
a letter to FCC chairman Michael Powell urging the FCC “to use any existing
authority you have to promote, or to create incentives to promote, an a la carte pricing
option, in conjunction with whatever tiers cable and satellite companies already
offer.”27
Responding explicitly to these letters, on May 25, 2004, the FCC initiated a
docket seeking comment on “factual questions regarding the provision of a la carte
and themed-tier services on cable television and direct broadcast satellite systems.”28
The Commission sought factual information relating to all of the questions in the
letter from the members of the House Commerce Committee.
25 See GAO Report at p. 34.
26 Letter dated May 18, 2004, from Reps. Barton, Dingell, Upton, Markey, and Deal to FCC
Chairman Michael Powell.
27 Letter dated May 19, 2004, from Senator John McCain to FCC Chairman Michael Powell.
28 FCC Public Notice, “Comment Requested on a la Carte and Themed Tier Programming
and Pricing Options for Programming Distribution on Cable Television and Direct
Broadcast Satellite Systems,” MB Docket No. 04-207, DA 04-104, May 25, 2004.

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On November 24, 2004, provided to Congress its Report on the Packaging and
Sale of Video Programming Services to the Public (FCC Report).29 The report
summarizes the comments and analysis submitted by interested parties in the
proceeding and incorporates statements made by expert witnesses at an a la carte
symposium sponsored by the FCC’s Media Bureau. The FCC did not undertake an
empirical study of its own, but did perform analysis using an economic model
prepared by Booz Allen Hamilton that was filed as an attachment to the comments
of the National Cable & Telecommunications Association (NCTA).30 The FCC
focused on the impact of implementing a mandatory a la carte purchasing
requirement, rather than on the impact of giving subscribers the option of purchasing
programming either in tiers or on an a la carte basis. The major conclusions of the
FCC Report (at pp. 6-7) are:
! a la carte regulation will likely increase operational expenses for
multichannel video program distributors (MVPDs) in three main
areas: (1) equipment and infrastructure; (2) customer service
operations; and (3) billing and back office support.
! unless constrained by regulation, many of these increased costs
would likely be passed on to subscribers, resulting in higher
subscriber fees.
! under an a la carte mandate, networks formerly sold in tiers would
need to significantly increase their marketing expenses to induce
consumers to affirmatively select the network.
! any type of a la carte requirement would have a significant negative
effect on a program network’s advertising revenues and license fee
structure. This may cause many program networks to fail, thus
adversely affecting diversity. The most likely to feel the brunt of
such a mandate would be networks serving small niche interests,
such as religious programming, programming aimed at minority
interests, arts programming, and independently owned networks.
The impact on program networks seems likely under either a
mandatory or a voluntary a la carte regime.
! under a mandatory a la carte purchasing requirement, only those
households that would purchase fewer than 9 program networks
might see a reduction in their monthly cable bill. Households that
purchase at least 9 networks would likely face an increase in their
monthly bills. The average cable household watches approximately
17 channels, including broadcast stations. If the average household
purchased each of these channels under an a la carte regime, it would
likely face an increase in its monthly bill under a la carte purchasing
of between 14% and 30%.
29 The Report is available on the FCC website, [http://www.fcc.gov].
30 Booz Allen Hamilton, The A La Carte Paradox: Higher Consumer Costs and Reduced
Programming Diversity, June 2004, Attachment A to Comments filed by NCTA.

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! public policy should focus on creating incentives for more MVPD
competition in the marketplace, and for fostering video on demand,
digital video recorders, and video over internet protocol that give the
public more control over their video choices.
! broadcasters that also are producers of cable programming, in their
retransmission consent negotiations with cable and satellite
operators, sometimes tie access to their popular broadcasting
programming to the purchase and carriage of less attractive or less
desired cable network, which may be anticompetitive and harm
consumers. But the antitrust authorities, not the FCC, are best
positioned to remedy this situation.31
The FCC Report does not explain how it modified the Booz Allen study to reach its
own empirical conclusions.
The Current Cable Programmer Business Model
The current cable programmer business model is designed to maximize short
term and long term industry profits. To the fullest extent possible, it takes advantage
of economies of scale and scope as well as some elements of market power and some
market distortions. In so doing, it is in many ways very efficient but according to
critics does not fully serve consumer welfare. This business model has not developed
independently of the market structure. The industry is characterized by a small
number of large programmers that provide the bulk of popular cable (and broadcast)
networks32 – and that are starting to integrate forward into distribution33 – as well as
a small number of cable and satellite providers that serve the vast majority of cable
31 In Sec. 208 of the Satellite Home Viewer Extension and Reauthorization Act
(“SHVERA”, passed as Title IX of the FY2005 Consolidated Appropriations Act, H.R.
4818, P.L. 108-447), Congress instructed the FCC to complete an inquiry and report to
Congress regarding the impact of the current retransmission consent rules (and also the
current network non-duplication, syndicated exclusivity, and sports blackout rules) on
competition in the multi-channel television market, including the ability of rural cable
operators to compete with satellite television providers in the provision of digital television
signals to consumers.
32 According to data from Kagan World Media, Economics of Basic Cable Networks 2003,
“Cable Network TV Household Growth” at pp. 34-35, “Average Prime-Time Ratings” at p.
42, “Average License Fee per Subscriber per Month by Network” at pp. 53-54, and “Cable
Network Ownership” at pp. 59-63, six major media companies (which include the
companies that own the four major broadcast networks) are full or partial owners of 43 of
the top 50 cable networks as measured by number of households reached; 30 of the top 34
as measured by average prime-time ratings; and 28 of the 30 cable networks with average
license fees (paid by cable systems to cable networks) per subscriber per month of $0.14 or
more.
33 For example, News Corp., which owns the Fox broadcast and cable networks, has
acquired a controlling interest in DirecTV.

CRS-11
and satellite television subscribers.34 Although independent programmers’ and cable
systems’ interests often coincide with those of the large programmers and system
operators, the industry business model presented by corporate executives and Wall
Street analysts at congressional hearings is the one developed by, and tailored to the
interests of, the large programmers (and, to a lesser extent, large distributors). For
example, employing a single large tier that allows efficient cross-promotion of cable
networks on affiliated networks is most efficient for large programmers with multiple
cable networks.
Most relevant for the public policy issue of consumer options for selecting cable
networks, the current cable programmer business model is based on the vast majority
of subscribers purchasing the large expanded basic service tier of advertising-
supported cable networks (in addition to the basic service tier) and a smaller group
of subscribers purchasing additional programming on premium tiers and/or on a
“pay-per-view”basis.35 The business model employs the following strategies:
! By carefully assigning cable networks to basic or premier tiers and
using two primary programming revenue sources – direct payments
for programming (in the form of per subscriber license fees and per
use charges assessed on cable system operators) and advertising
fees36 – programmers simultaneously benefit from the willingness to
pay of those viewers with a general demand for cable programming,
3 4 According to data provided by NCT A on its website, at
[http://www.ncta.com/Docs/PageContent.cfm?pageID=86] (“Statistics and Resources”) and
at [http://www.ncta.com/industry_overview/top50mso.cfm?PageID=327] (“Top 25 MSOs”),
both viewed on 11/19/2004, in the spring of 2004 the ten largest multi-system cable
operators served almost 59.160 million of the approximately 73.8 million households
receiving basic cable service (80.1%), the five largest served 68.3%, and the two largest
served 44.0%. In addition, the vast majority of satellite television customers is served by
the two major DBS providers, DirecTV and Echostar.
35 During the question and answer portion of the March 25, 2004 Senate Commerce
Committee hearing, Cox Communications president James Robbins stated that once digital
cable has been fully deployed, the cable business plan will become a “video on demand”
model with most programming provided on an a la carte basis. But, he stated that was a
future business model that could not be implemented until the industry undertook an
additional $30 billion in needed capital investment.
36 Cable programmers also increasingly receive revenues from product placement – the
visible placement of a branded product in the programming itself. Product placement is
especially prevalent on advertiser-free premium programming because it represents a way
for companies to show their product without the clutter associated with back-to-back
commercials on advertiser-supported channels. Cable systems (though not programmers)
also enjoy rapidly growing revenues from non-programming services such as high-speed
Internet access and telephone services. According to NCTA, the number of cable modem
customers increased from 1.9 million in the first quarter of 2000 to 17.3 million in the first
quarter of 2004 (see [http://www.ncta.com/Docs/PageContent.cfm?pageID=313], “Cable
Modem Customers,” viewed on 11/19/2004. According to NCTA, the number of residential
cable telephony customers increased from 180,000 in the first quarter of 2000 to 2.5 million
in the last quarter of 2002 (see [http://www.ncta.com/Docs/PageContent.cfm?pageID=311],
“Residential Cable Telephony Customers, 2000-2002,” viewed on 11/19/2004.

CRS-12
those viewers with a high intensity of demand for specific
programs, those advertisers that seek large audiences, and those
advertisers that seek targeted audiences. In 2003, programmers
received $12.3 billion in gross advertising revenues and $12.1
billion in license fees from cable and satellite companies, an almost
50-50 split.37 The revenue stream from subscribers insulates
programmers somewhat from business cycle effects that reduce
advertising revenues during recessions.
! By providing all but premier programming on a single large tier, the
cable operators minimize their investments in scrambling and
unscrambling equipment38 and many consumers avoid investments
in (or leasing of) unscrambling equipment (digital television sets
with built-in unscrambling capability or addressable set-top
converter boxes) that would be needed for subscribers to make a la
carte channel selections or to choose among a number of small tiers
and for cable operators to charge for these.39 Although data are only
fragmentary, it appears that somewhere in the vicinity of half of U.S.
television households currently have the customer premises
equipment needed to unscramble and be billed for individual
networks or small tiers.40 According to the GAO Report, the average
leasing charge is approximately $4.39 per box per month. Since
each television set requires a separate box, a two-television
37 Kagan World Media, “Cable Program Investor,” April 19, 2004, at p. 1. Net advertising
revenues in 2003 were $10.5 billion. Cable programmers also received $0.8 billion in other
revenues.
38 If networks were offered on an a la carte basis, or in small tiers, cable operators would
need to scramble all of the networks they transmit to ensure that subscribers were unable to
view those networks they were not paying to receive. Those subscribers choosing a la carte
or small tier options would need premises equipment capable of unscrambling the scrambled
signals they were paying to receive. See GAO Report at pp. 32-33.
39 GAO Report at pp. 32-33.
40 To estimate this total, a number of disparate households must be added together.
According to Kagan World Media’s State of HDTV 2003, in 2003 there were 1.7 million
households with advanced analog cable set-top boxes. The same source estimated that the
cumulative number of digital cable set-top boxes in 2003 was 37.5 million, but with an
estimated 1.42 boxes per household, the total number of households with digital boxes was
2 6 . 4 m i l l i o n . I n a d d i t i o n , t h e N C T A w e b s i t e r e p o r t s ( a t
[http://www.ncta.com/Docs/PageContent.cfm?pageID=86], viewed on 11/19/2004) there
were 24.9 million subscribers to non-cable multichannel video program distributors in
December 2003; the vast majority of these get digital satellite service with the capability for
ordering and billing for individual networks or small tiers. In addition to these
approximately 53 million households there are an unidentified number of households that
have purchased digital television sets with that capability (though many of those households
also have non-digital television sets that could not receive and be billed for individual
networks or small tiers).

CRS-13
household might have to pay $8.78 in leasing charges each month.41
This market effect from a single tier that does not require customer
premises equipment with unscrambling capability will become less
important as digital penetration increases since digital technology
provides the ability to select and bill for individual channels or
multiple tiers.42
! By requiring cable and satellite operators to offer all but premier
programming on a single large tier, cable programmers in effect
create a composite product, “basic cable programming,” that
subscribers must take or leave. Since today consumer demand for
cable programming as a whole appears to be relatively “price
inelastic” (insensitive to price increases), programmers can increase
the per subscriber fee for their most highly demanded cable networks
and cable systems can pass through these increases in tier rate
increases. It appears that demand for basic cable programming, as
a single package, is less price-sensitive than demand for individual
networks, and therefore price increases can be more readily
sustained with a single expanded basic service package than with a
la carte offerings or small tiers.

! With most advertiser-supported cable networks on a single large tier,
subscribers have the widest possible choice of cable networks to surf
among, and “casual” viewing is maximized. At any particular time,
viewers who have purchased networks a la carte or in small tiers
may not have any programming they choose to view on the channels
they have paid for and therefore may turn off the television
altogether, but if they had access to the full panoply of the basic
enhanced service package they might find programming to watch
when surfing all channels. The larger the audience, the more
attractive cable programming is to advertisers, and thus the greater
the advertising revenues to cable programmers. In a competitive
market this would be expected to lead to lower charge to
subscribers.43
! With most advertiser-supported cable networks on a single tier, it is
less risky to introduce a new advertiser-supported cable network. By
41 According to a NCTA policy paper entitled “The Pitfalls of a la Carte: Fewer Choice,
Less Diversity, Higher Prices,” (May 2004, at p. 12), the average home has 2.5 television
sets.
42 GAO Report at p. 33.
43 The cable advertising market has several anomalies. The disparity between the price per
thousand viewers that advertisers pay broadcast television and the price per thousand
viewers they pay cable has widened over time. As a result, even though advertiser-
supported cable now commands a total audience that exceeds that of broadcast television,
cable advertising revenues continue to significantly lag broadcast advertising revenues.
Also, cable advertisers apparently continue to value the potential cable audience size as well
as the actual audience size.

CRS-14
being part of a large package, a new cable network does not sink or
swim based on its immediate audience reception. Rather, the system
operator can allow the new cable network to acquire an audience
through a combination of cross-marketing (promoting the new
network on existing networks) and subscriber channel-surfing. By
contrast, under a la carte, viewers must make the up-front decision
to pay for a new cable network, perhaps without having had the
opportunity to see any of its programming in advance. Similarly,
with a large tier, large cable programmers can efficiently market new
networks by advertising the new networks on their existing
networks.44 This marketing strategy is less effective if, as in an a la
carte environment, many of the viewers receiving the marketing
messages on the existing networks are not subscribed to the new
network – and therefore cannot easily check out that network in
response to the marketing message.
! Placing most advertiser-supported cable networks on a single large
tier facilitates the competitive strategy of large programmers to
proliferate new networks, which may act as an impediment to entry
by independent networks.45 The larger the tier, the more efficient it
is for large programmers to cross-promote their networks and to
exploit brand identification (FOX, ESPN, Discovery, MTV, etc.).
Large programmers can take advantage of the market power they
enjoy from owning popular networks (see the discussion in the next
section) to pressure cable and satellite system operators to carry their
new networks. Distributors may be faced with the choice of
replacing independent networks with these new networks or
expanding their system capacity to be able to carry more networks.46
44 The efficiencies from marketing new cable networks on existing networks have provided
a strong incentive for industry consolidation – both horizontally, as programmers seek to
exploit scale economies by offering multiple cable networks, and vertically, as distributors
integrate backward into partial ownership of programming that they can cross-promote on
their other channels.
45 Network proliferation represents a type of brand proliferation, which has been the subject
of intense analysis in the economics literature, beginning with a seminal article by Richard
Schmalensee, “Entry deterrence in the ready-to-eat cereal industry,” Bell Journal of
Economics, 9 (Autumn), pp. 305-327. The general argument is that by proliferating slightly
differentiated products dominant firms can crowd “product space” in a fashion that raises
rivals’ costs, reduces their expected revenues, and deters entry.
46 The cable industry has argued that cable rates, properly measured, have not actually
increased for consumers. The industry claims that the number of networks that subscribers
receive when they subscribe to expanded basic service has increased at about the same rate
as the price for expanded basic service and, as a result, the price per network has remained
relatively constant (and actually has fallen in terms of price per minute of viewing time).
See, for example, Jeffrey A. Eisenach and Douglas A. Truehart, Rising Cable TV Rates: Are
Programming Costs the Villain?, October 23, 2003, a study supported by ESPN, Inc.
Conversely, to the extent the market is operating efficiently so that the most highly
demanded programming will tend to be offered first and additional, lesser valued channels
(continued...)

CRS-15
Cable and satellite operators may have some incentive to resist
making the additional investment needed to do the latter, but that
incentive is muted by the fact that customer demand for enhanced
basic service is relatively inelastic and cable and satellite operators
therefore can raise rates to recover the additional costs. This
programmer strategy also may create incentives for independent
networks to sell cable and satellite operators an equity interest in
their networks in order to maintain their distribution channels.
Market Imperfections
The multi-channel television market can never resemble the perfect competition
model beloved by economists. Although subscription television clearly is valued by
consumers and has substantially increased consumer choice, the market exhibits
elements of market power and some market distortions that, if exploited, can harm
consumers. In the current market structure, there are few market incentives to
constrain costs and hence prices.
! Popular programming will always engender market power because
it is highly demanded and, by definition, has no perfect substitute.
Talent – athletes, actors, directors, writers, program producers – can
command high salaries precisely because consumers want to see the
programming that only these talents can produce. While talent
should be rewarded, consumers do not benefit when talent (and the
team owners, programmers, and distributors that package the talent
for consumers) is rewarded more than is necessary for it to continue
to generate popular programming.47 The large programming
companies and program distributors have the incentive to share in
the rewards to talent and may not have the incentive to contain the
46 (...continued)
of programming will tend to be offered only as additional capacity is made available, the
marginal utility (or value) to consumers of an additional channel will tend to fall as
additional channels are made available. Thus a constant price per channel does not
demonstrate that the market is serving customers well. Moreover, some subscribers have
claimed that additional channels just make it more difficult for them to find the channels
they prefer; for them, additional channels have a negative utility or value.
47 For example, 42 major league baseball players reportedly have 2004 salaries that exceed
$10 million. (See “Major league baseball: 2004 salaries,” USA Today, April 9, 2004, at p.
10C.) Team owners are able to offer such large salaries (despite the league’s salary cap and
attendant penalties for exceeding the cap) in large part because of the very high payments
they receive from broadcast and cable programmers for the rights to televise their games.
It is likely that such players would continue to play baseball, and perform at an equally high
level, if their salaries were lower. These players are competitors who seek to star in their
sport and are unlikely to have alternative job prospects that would compensate them at a
comparable level.

CRS-16
size of those rewards if they are able to share in them.48 As
discussed below, the current business model fosters their ability not
just to share in, but also to leverage, these rewards, and thus is not
likely to constrain rates to consumers.
! The large cable programmers – especially those that own broadcast
network television stations – are able to exercise market power, as
demonstrated by their ability to require cable and satellite operators
to purchase and carry their less highly demanded networks in order
to purchase and carry their popular networks and by setting the terms
on which the distributors may make the networks available to
consumers. Sometimes the primary source of the market power is
not ownership of popular cable programming, but rather the
programming on the broadcast stations owned by these large
programmers. Cable and satellite operators must obtain
retransmission consent to carry these broadcast programs.49 That
consent often is provided only if the cable and satellite operators also
carry all or most of the programmer’s cable networks.50 The GAO
found that cable networks owned by a broadcaster were 46% more
likely to be carried by cable operators than networks not owned by
48 One way for programmers and distributors to share in the rewards is to own and control
more of the programming, which may partially explain the pattern toward greater vertical
integration backward into program production. As discussed in CRS Report RL32026,
Market Dynamics and Public Policy Issues in the Video Programming Industry, in order to
have the market leverage needed to attain cable and satellite carriage, independent content
providers increasingly must give a substantial equity interest in their cable networks either
to a “mega-programmer” (such as Viacom, Discovery Networks, FOX, or Disney) or to a
major cable distributor (such as Comcast or Time Warner). This has allowed the
programmers and distributors to integrate backward. At the same time, in some instances
the owners of the talent, such as professional athletic teams, are increasingly vertically
integrating forward into the creation of sports networks, to allow them to hold on to as much
of the rewards as possible. For example, the New York Yankees have created the YES
network and the National Football League has created its own network. But, as discussed
in CRS Report RL32026, vertical integration also allows programmers to exploit economies
of scope and reduce risk, and these efficiencies can benefit subscribers.
49 The Cable Television Consumer Protection and Competition Act of 1992 (P.L. 102-385)
established new standards for television broadcast station signal carriage on cable systems.
Under these rules, each local commercial television broadcast station was given the option
of selecting mandatory carriage (‘must-carry”) or retransmission request (“may-carry”) for
each cable system serving the same market as the commercial television station. Under
“must-carry”, the cable system must carry the broadcaster’s signal, but the cable system
does not have to pay for the programming. Under retransmission consent, the cable system
is not permitted to carry the broadcaster’s signal without the station’s consent – and at a rate
of compensation (typically in the form of money, advertising time, or additional channel
access) determined by private negotiations.
50 The large cable programmers claim that they make their broadcast signals available on a
stand alone basis, but cable operators respond that the prices the programmers set for those
stand alone signals are uneconomic relative to the prices for carrying a package of broadcast
and cable network signals.

CRS-17
a broadcaster or cable operator.51 This can limit consumer access to
independent programming and result in consumers paying for less
preferred programming.
! The GAO Report found that cable operators face price-constraining
competition only in the 2% of markets where there are wireline
overbuilders that offer consumers a wireline alternative to cable.52
Although most households have access to satellite service, to date
satellite competition has proven insufficient to constrain prices.53
The lack of competition among distributors reduces their incentive
to resist programming price increases because the distributors are not
heavily penalized when they pass through those increases to
subscribers (and perhaps advertisers).
! In most markets, consumers directly demonstrate how much they
value a product or service through their willingness to pay for it –
withdrawing from the market as prices increase beyond their
willingness to pay. Cable programmers’ two primary revenue
sources at best indirectly measure how consumers value the
programming. Advertising revenues measure advertisers’ valuations
of the audience, not subscribers’ valuations of the programming.
Intensity of consumer demand is at best indirectly measured. Per
subscriber license fees more closely measure consumer valuations,
but still only indirectly. Cable and satellite operators pay fees for
each subscriber, whether or not the subscriber watches the network.
Although the fee is assessed on a per subscriber basis, the level of
the fee negotiated for each network will indirectly reflect the number
of subscribers who actually view the network and the intensity of
demand (intensely demanded networks should command higher
license fees from distributors since subscribers with high demand
intensity might switch to a competing distributor if the network were
no longer carried). At the retail level, consumers are allowed to
exercise their willingness to pay for cable programming as a whole,
in the form of a single large expanded basic service tier, but not their
willingness to pay for individual networks or small tiers.
! The advertising market does not appear to value audience efficiently.
The gap between the cost per thousand viewers (CPM) for prime-
time advertising on broadcast television and advertising on general
cable networks has grown to 61% in 2003-2004 – $24.47 for
51 GAO Report at p. 30.
52 GAO Report at pp. 9-11.
53 Ibid at pp. 9-11. Cable television is somewhat insulated from price competition from
satellite television in part because cable operators are able to offer packages of cable,
telephone, and high-speed Internet access services that satellite operators cannot offer. For
a discussion of the competitive impact of bundling services, see CRS Report RL32232,
Bundling Residential Telephone, Internet, and Video Services: Issues for Congress.

CRS-18
broadcast vs. $9.63 for cable.54 One might expect some differential
because there will be higher transaction costs associated with
advertising on many different cable networks, each with a small
audience, versus advertising on a few broadcast networks with large
audiences. But this differential far exceeds those costs. Cable
“eyeballs” continue to be less valued by advertisers than broadcast
“eyeballs”.
Proposals to Give Subscribers More Purchasing
Options for Cable Networks

Consumers are well-served by the multi-channel television industry when they
receive the programming they want at reasonable prices that provide sufficient
incentive for the on-going production of responsive programming.
Multi-channel operators now have a larger total viewing audience than
broadcasters55 in part because of technological advantages: cable and satellite
technologies can offer more channels, can provide better signal quality, and can
charge consumers directly for programming, which allow them to respond to
consumer tastes while maintaining two primary revenue streams. These
technological advantages provide the multi-channel television industry with the
potential for serving consumers well. Of course, how well any individual household
is served by the industry will depend in part on that household’s tastes and needs –
for example, its preference for niche vs. popular programming, its preference for a
very limited number of networks vs. a wide variety of networks, etc.
Some aspects of the current cable programmer business model appear to benefit
most consumers and foster certain U.S. media policy objectives. In particular, new
and diverse programming may be fostered by limiting subscribers to a single large
expanded basic service tier. If some threshold level of the cable audience moved to
a la carte purchasing or chose small, narrowly focused tiers, it could be more difficult
for a new cable network to build an audience, even if it were on the expanded tier.56
As explained earlier, limiting all subscribers to a single tier can ease roll-out of a new
cable network by maximizing the casual viewing audience that surfs across networks
and by facilitating programmers’ efforts to promote the new network on existing
networks. Similarly, existing cable networks that serve niche audiences might be less
likely to survive if consumers could purchase networks a la carte or in smaller tiers,
which would decrease the number of expanded basic service subscribers. Niche
54 John M. Higgins, “The Great Divide: Why is the CPM gap widening if cable keeps
grabbing viewers from broadcast?”, Broadcasting & Cable, March 29, 2004, at p. 1.
55 According to two Cable Advertising Bureau reports, “Ad Supported Cable’s Highlights
& Milestones in Total Day” and “Ad Supported Cable’s Highlights & Milestones in
Primetime,” available at [http://www.onetvworld.org], viewed on 12/15/2004, during the
2002/2003 broadcast season (9/23/02-9/12/03), cable captured 51.3% of total television
viewing, and 49.7% of prime-time television viewing, on a season basis.
56 Unfortunately, that threshold level is not readily identifiable.

CRS-19
networks that have relied on casual viewers but do not have a large enough base of
viewers who would purchase on an a la carte basis might lose too many casual
viewers to remain viable. Several niche cable networks have voiced concern that a
move to a la carte purchasing could harm them.57 Nearly 40 members of the
Congressional Black Caucus have expressed concern that a la carte purchasing could
result in a loss of diversity in programming and that new cable networks, such as TV
One, which serves the African-American community, and ESPN Deportes, a
Spanish-language sports network, might never have been launched in an a la carte
environment.58
It is not clear, however, how many subscribers would shift to a la carte
purchasing or to smaller tiers if those options were made available. A substantial
portion of cable and satellite households is accustomed to a wide choice of networks
and likely have a number of household members with different programming tastes.
For these households, the more limited choices available under an a la carte or small
tier option might not be attractive. Moreover, to select the a la carte or small tier
options, subscribers would have to have the technology in place to unscramble cable
signals, just as subscribers must do today to receive premium channels. Current
recipients of premium channels and all subscribers with digital televisions have the
equipment needed to unscramble the signals. But a large proportion of analog
subscribers would have to lease set-top boxes, which currently are available from
cable operators at an average price of $4.39 per television set per month, thus
reducing the potential price savings from choosing more limited tiers.
In addition, cable programmers might raise per subscriber license fees to make
up for the lower advertising revenues generated when a la carte and multiple small
tiers are available. To the extent they raise those license fees and cable operators
pass through those fee increases in their rates, the sum of prices for individual
programs or small tiers might be higher for many subscribers than the price for a
single large tier. Also, cable operators might have the incentive to minimize the
“cannibalization” of the expanded basic service tier by setting a la carte and small tier
prices in a way that made those options attractive only to a very small portion of
households with very narrow viewing tastes.59 Thus the “threat” to the cable
57 See, for example, Letter dated March 8, 2004 from Judith McHale, president and chief
operating officer, Discovery Communications, Inc. to members of the Senate Committee on
Commerce, Science, and Transportation. Discovery Communications has four shareholders:
Liberty Media Corp. (49.0%), Cox Communications, Inc. (24.5%), Advance/Newhouse
(24.5%), and Discovery founder John Hendricks (2%). (See the Discovery Communications
website, [http://corporate.discovery.com/] (then hit “shareholders”) and Kagan World
Media, Economics of Basic Cable Networks 2003, at p. 59.)
58 “NCTA Faults Lawmakers’ Request to FCC to Study ‘A La Carte’ Cable Programming,”
Daily Report for Executives, Regulation & Law, BNA, Inc., No. 97, May 20, 2004, at p. A-
12.
59 As a simplistic example, if the per network a la carte price were $10.00 per month and the
price for an 60-channel enhanced basic service package were $45.00, then only those
customers with very narrow video tastes that are satisfied by four networks would select the
a la carte option.

CRS-20
programmer business model from allowing a la carte or multiple tier purchasing
options might not be substantial.
It is possible that by offering those options, the needs of what proves to be a
small minority of households with very narrow viewing tastes could be met without
undermining the viability of an expanded basic service tier that supports diverse and
new networks. Still, it appears that allowing or mandating a la carte or small tier
purchasing options might retard the introduction of new cable networks and endanger
niche program networks.
The current cable programmer business model may simultaneously benefit
consumers by exploiting efficiencies (which could lead to lower cable rates) and
disadvantage consumers by fostering programmers’ ability to leverage their market
power (which could lead to higher cable rates). Several proposals have been made
to Congress that are, in effect, variations on the theme that subscribers should have
greater decision-making power over the cable networks they receive. Several focus
at the programmer level, several at the distributor (cable or satellite operator) level.
The various proposals would:
! prohibit programmers from requiring cable and satellite operators to
carry their less popular networks in order to attain access to their
popular networks, and – more specifically – prohibit programmers
that own broadcast stations from tying the retransmission consent
they give cable and satellite operators to carry their broadcast
programming to the carriage of the programmers’ cable networks.60
! prohibit programmers from requiring cable and satellite operators to
offer the programmers’ networks in the expanded basic service tier
only.61
! require cable and satellite operators to offer subscribers the options
of purchasing smaller program tiers or purchasing networks a la
carte.62
! require sports programmers and cable and satellite operators to offer
expensive sports programming on a separate tier.63
60 See, for example, Gleason Testimony at p. 13.
61 See, for example, Gleason Testimony at p. 7. Also, during mark-up of the Committee
Print of the Satellite Home Viewer Extension and Reauthorization Act of 2004 in the House
Subcommittee on Telecommunications and the Internet, on April 28, 2004, Rep. Deal
introduced, and then withdrew, an amendment that would have required the Federal
Communications Commission to prescribe rules to prohibit any MVPD from entering into
a contract with any video programming producer that would preclude the MVPD from
voluntarily offering a la carte or special tier programming to the MVPD’s subscribers.
62 See, for example, Kimmelman Testimony at pp. 3-4.
63 See, for example, Robbins Testimony of May 6, 2003 at p. 2.

CRS-21
Proposal: Prohibit Tying Carriage of Popular Programming to
Carriage of Less Popular Programming
Some cable operators have alleged that integrated programmers with local
broadcast stations and cable networks tie retransmission consent for the broadcast
signal to carriage of an entire suite of cable networks.64 They have further alleged
that these tie-ins sometimes extend beyond carriage on the local cable system and
that these tie-ins may require multi-system operators to carry the suite of cable
networks on all their cable systems and/or for time periods that extend far beyond the
period covered by the retransmission consent.65 Such tie-ins can result in cable
system operators providing programming their customers do not prefer or passing
through high programming charges to customers.
The proposal to prohibit programmers from requiring distributors to carry less
popular programming in order to gain access to more popular programming would
give cable and satellite operators greater discretion in choosing cable networks that
meet their customers’ tastes. This would tend to benefit customers. In addition, it
would be beneficial to independent cable networks and to small cable systems that
have the capacity to carry only a relatively few networks.
Some programmers that own broadcast stations claim that, in some cases, it was
cable operators not programmers who initially proposed that their compensation for
retransmission consent take the form of carrying the programmers’ cable networks
(as well as the broadcast signal) at a low charge or no charge, rather than paying a
high price for the retransmission rights to the broadcast signal. At the time, the cable
operators had available capacity on their systems but not much cash to pay for
programming. Now the situation is reversed: the cable operators have limited
available capacity for additional cable networks and many would prefer to pay higher
prices for the broadcast programming and free up scarce capacity on their systems.
A prohibition on tie-ins potentially could have a number of other market
implications that could benefit but also could harm consumers. It would strengthen
the negotiating position of distributors and independent networks relative to the large
programmers that own multiple cable networks and broadcast networks. In the case
of tying retransmission consent for popular broadcast programming to the carriage
of less popular cable networks, a prohibition would set limits on the impact of current
law, which is intended to strengthen the negotiating position of broadcasters relative
to cable and satellite operators. The current law states:
no cable system or other multichannel video programming distributor shall
retransmit the signal of a broadcasting station, or any part thereof, except–
(A) with the express authority of the originating station.66
64 See American Cable Association Petition for Inquiry into Retransmission Consent
Practices, filed with the Federal Communications Commission on October 1, 2002.
65 Ibid.
66 47 U.S.C. § 325(b)(1).

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It does not authorize the Federal Communications Commission to regulate the terms
and conditions of the retransmission consent agreements, beyond imposing a good
faith negotiations standard and a prohibition on providing any distributor exclusive
retransmission consent.
Under a prohibition, the large programmers might, in the short run, be able to
generate just as much revenue simply by raising the prices for their popular
programming (rather than obtaining revenues indirectly – and perhaps with a lag –
from the new networks). But several strategies at the heart of the current cable
programmers business model would be constrained. If distributors chose not to carry
the large programmers’ less popular networks, the programmers’ efficiencies from
cross-marketing and branding would be diminished. In turn, this could lead them to
raise per subscriber license fees. Also the strategy of proliferating networks could
be curtailed, which could make it easier for new independent networks to enter the
market.
As explained earlier, the FCC’s A La Carte Report concluded that broadcasters
that also are producers of cable programming, in their retransmission consent
negotiations with cable and satellite operators, sometimes tie access to their popular
broadcasting programming to the purchase and carriage of less attractive or less
desired cable network, which may be anticompetitive and harm consumers. But the
FCC claimed the antitrust authorities, not the FCC, are best positioned to remedy this
situation. In the Satellite Home Viewer Extension and Reauthorization Act,
however, Congress instructed the FCC to complete an inquiry and report to Congress
regarding the impact of the current retransmission consent rules (and also the current
network non-duplication, syndicated exclusivity, and sports blackout rules) on
competition in the multi-channel television market, including the ability of rural
cable operators to compete with satellite television providers in the provision of
digital television signals to consumers.67
Proposal: Prohibit Programmers from Requiring Their
Networks to Be Placed on the Expanded Basic Service Tier
The proposal to prohibit programmers from requiring cable and satellite
operators to offer the programmers’ cable networks only on the expanded basic
service tier would place the decision for cable network tiering entirely in the hands
of the cable and satellite operators. In most situations, distributors share the large
programmers’ preference for a single large expanded basic service tier, and thus the
impact of the prohibition on consumers might be limited. But there may be situations
in which programmer and distributor interests diverge and, more generically, the
prohibition would create an opportunity for distributors to experiment with their
cable tiers.
For example, while cable programmers receive about half their revenues from
advertising and half from per subscriber fees assessed on cable and satellite
67 Satellite Home Viewer Extension and Reauthorization Act, passed as Title IX of the
FY2005 Consolidated Appropriations Act (H.R. 4818, P.L. 108-447), Sec. 208 (no U.S.C.
number).

CRS-23
operators, those operators get almost 90% of their revenues from subscribers and
only a little more than 10% from advertisers.68 An optimal tiering strategy for
programmers therefore may not be optimal for distributors. Moreover, cable and
satellite operators do not have a retail layer to insulate them from consumers, and
therefore may be more responsive to consumer complaints about the placement of
specific networks on tiers.
Cable operators may choose to experiment with cable tiers – and even with a la
carte pricing – if they perceive that these additional offerings might increase their
profits. When the per subscriber license fee for a cable network does not appear to
be in equilibrium with subscriber viewing patterns,69 then the operator will have the
incentive to either decrease payments to the programmer or increase revenues from
end users or both. By placing a high-cost network on a separate tier, the operator
might be able to reduce payments to the programmer by only paying for those
subscribers who actually desire that network while maintaining (or at least not
decreasing by as much) the revenues received from subscribers. If the operator were
able to take a high-cost cable network off its expanded basic service tier, place it on
a separate tier, and then re-price the expanded basic service tier in a way that did not
lower revenues from that tier by as much as it gained revenues from the new separate
tier, it would benefit from having the discretion to place cable networks on tiers as
it saw fit. As discussed earlier, GAO found that satellite operators do not provide
sufficiently strong competitive constraints on cable operators to constrain prices, and
therefore the shift of control over the placement of networks on tiers from
programmers to distributors might not reduce rates to consumers so much as
redistribute the profits from programmers to distributors.
Cable and satellite operators may be more willing than programmers to take
particular cable networks off the expanded basic service tier and place them on
premium tiers because they only indirectly benefit from the strategies of cross-
promotion of networks and network proliferation that directly benefit programmers,
which depend heavily on a single large expanded basic service tier.
Proposal: Require Distributors to Offer Networks a La Carte
and in Small Tiers
The pros and cons of limiting consumers to a single large expanded basic
service tier vs. giving them the option of purchasing cable networks a la carte or in
small tiers have been discussed at length earlier in this report. When cable system
operators require subscribers to purchase a single large expanded basic service tier,
without an option for the purchase of individual cable networks or small tiers, some
purchasers will be forced to buy more programming than they want, and perhaps at
68 Kagan World Media, Broadband Cable Financial Databook 2003, tables entitled
“Kagan’s 10-Year Cable TV Industry Projections” (pp. 11-13) and “Total Cable TV
Advertising Billings (1980-2013)” (p. 19), and Kagan World Media, “DBS Report,” June
27, 2003, table entitled “DBS Industry Projections 2002-2013” (p. 9).
69 For example, Cox Cable alleges that ESPN represents 18% of Cox’s total programming
costs but only 4% of Cox’s viewing audience. ESPN responds that Cox fails to take into
account additional local advertising revenues Cox receives by carrying the ESPN networks.

CRS-24
an outlay that is greater than they would make if allowed to purchase individual
networks. Thus, some purchasers are worse off when forced to purchase large tiers
than they would be if they could purchase individual channels.
An a la carte rule might constrain the large rewards that athletes, performers,
and producers earn – and that raise the costs (and prices) of such programming – if
substantial numbers of subscribers with low intensities of demand for the sports or
entertainment programming chose a la carte or small tier options that did not include
the high-cost programming. Certain sports and entertainment programming is highly
valued by a small portion of cable subscribers. However, currently such
programming is funded by imposing higher rates on all subscribers to expanded basic
service. If that programming had to be supported only by subscribers with high
intensity of demand, either those subscribers would have to pay more, or the talent
producing that programming would have to accept lower compensation.
But an a la carte requirement also could have disadvantages for some
consumers. Large service tiers make it less risky for a cable or satellite system to
introduce a new cable network. With a large tier, the new cable network does not
succeed or fail based on its immediate audience reception. Rather, the system owner
can allow the new cable network to acquire an audience by having viewers
accidentally tune in to the network. By contrast, under a la carte, viewers must make
the up-front decision to pay for a new cable network, perhaps without having had the
opportunity to see any of its programming in advance.
Similarly, with a packaged offering, the local cable system operator can
efficiently market new networks by advertising the new networks on its existing
networks. This marketing strategy is less efficient if, as in an a la carte environment,
many of the viewers receiving the marketing messages on the existing networks are
not subscribed to the new network and therefore cannot easily check out that network
in response to the marketing message.
Also, the availability of a large package of networks is expected to increase
overall audience size because at any particular time viewers who pay a la carte may
not have any programming they choose to view on the channels they have paid for
(and therefore might turn off the television altogether). But if they had access to the
basic enhanced service package, they might find programming they enjoy when
surfing all the channels offered in the package. The larger the cable audience, the
more attractive cable is to advertisers, and higher advertising revenues might allow
programmers to decrease per subscriber license fees, which, in turn, could result in
lower rates for the expanded basic service tier.
In addition, offering a la carte and small tier options in addition to a large
expanded basic service option would, according to the major industry association,
significantly increase cable operators’ customer services expenses, as more customer
service representatives would be needed to explain the options as well as process the
more complex orders.70
70 “The Pitfalls of A La Carte: Fewer Choices, Less Diversity, Higher Prices,” National
(continued...)

CRS-25
As a result of these factors, it is possible that the sum of the individual prices
for each network that a typical household subscribes to in an a la carte environment
could be higher than the single price for the expanded basic service tier. At the same
time, the choices available to consumers could be reduced both because they would
only have available to them the networks they paid for and because there are likely
to be fewer new networks due to the higher risk associated with a network launch
when many subscribers make a la carte network purchases.
The extent to which these effects of an a la carte requirement would actually
occur would depend on the proportion of subscribers who chose the a la carte option
vs. the enhanced basic service package. If the a la carte option were chosen only by
a very small portion of subscribers with narrow video tastes that can be met by a
limited number of networks, it may create a very weak disincentive for new network
launches.71 But if the a la carte option were widely selected, the disincentive could
be substantial.
The pros and cons of an a la carte (or small tier) option will be affected by the
rate of consumer transition to digital equipment. From one perspective, the benefits
of a la carte purchasing are reduced for the majority of customers who do not
currently have customer premises equipment (in the form of a digital television set,
an advanced analog set-top box, or a digital set-top box of the sort that comes with
digital cable or satellite service). They would have to lease such boxes (current rates
are about $4.39 per month per television set) to be able to select and be billed for
individual networks or small tiers. Yet to the extent that the lack of customer
premises equipment reduces the number of households that might forsake the
expanded basic service tier for a la carte purchasing or small tiers, the threat to the
viability of the expanded basic service tier and cable programmers’ business model
is reduced. Cable executives generally agree that, as digital penetration of the
household grows, the current business model will evolve into a video on demand
model.72
There is potentially an additional issue relating to small tiers. Even if cable and
satellite operators were to offer one or more small tiers, those tiers could not meet the
needs of each and every household equally well. Businesses every day must
determine the best way to meet the needs of their customers. But if there were a
requirement that cable and satellite operators offer small tiers, could they also be
subject to regulatory (as opposed to market) challenge about the choice of networks
placed on those tiers? It would likely be extremely difficult for a regulatory body to
determine what constitutes an “acceptable” line-up of networks on a small tier or an
“acceptable” suite of small tiers.
70 (...continued)
Cable & Telecommunications Association Policy Paper, May 2003, at pp. 15-17.
71 But some of the signal scrambling/unscrambling, billing, and customer service costs
associated with a la carte purchasing are fixed and must be borne even if only a small
number of subscribers choose the a la carte option.
72 See footnote 35 above.

CRS-26
Proposal: Place High Cost Sports Networks on a Separate
Cable Tier
Major sports networks are unique in a number of ways. First, the per subscriber
license fees to cable and satellite operators for major sports networks are far higher
than those for almost any other networks. In 2001, when the average license fee per
subscriber per month was $0.13 for national cable networks, the license fee for ESPN
was $1.53 and for FOX Sports was $0.70.73 By the end of 2003, the license fees for
ESPN and FOX both exceeded $2.00 per subscriber per month.74 Regional sports
networks, such as the YES Network owned by the New York Yankees, also have
relatively high per subscriber license fees. GAO found that license fees for sports
networks have been growing at more than twice the rate of non-sports networks.75
Second, with the exception of the Super Bowl, World Series, and some Olympic
events, only a minority of television viewers regularly view sports programming, and
many households never watch such programming. Thus, under the current system
of sports programming being offered on the expanded basic service tier, with a per
subscriber fee imposed based on total subscribership rather than on actual viewers,
sports networks represent a far higher portion of cable operator programming costs
than they do cable operator viewers. James Robbins, chief executive of Cox Cable,
reportedly stated at a Goldman Sachs investors conference that ESPN accounted for
4% of Cox subscribers’ viewing, but 18% of Cox programming costs.76
73 Kagan World Media, Economics of Basic Cable Networks 2003, September 2002, table
entitled “Average License Fee per Subscriber per Month by Network,” at pp. 53-54.
74 Peter Grant, “Cox to Blame Cable Sports for Rate Surge,” Wall Street Journal, October
6, 2003, at p. B1.
75 GAO Report at p. 22.
76 David D. Kirkpatrick and Geraldine Fabrikant, “Sports Fan Is the Prize, or the Victim, in
Cable Fight,” New York Times, October 6, 2003, at pp. C1 and C4. This claim appears to
be consistent with other available data. According to Nielsen data analyzed by TN Data, in
2000 (the latest year for which data were available), the average U.S. television household
watched 213.5 hours of nationally televised sports programming including the Olympics,
200.4 hours excluding the Olympics. (See Kevin Downey, “Sports TV get pricier and
pricier. Here’s why.”available at [http://www.medialifemagazine.com/] news2001/ apr01/
apr09/4_thurs/news1thursday.html, viewed on 5/12/2004.) Of the 200.4 viewed hours,
103.6 were on broadcast networks, 74.7 on expanded basic cable networks, and 22.1 on
broadcast syndication. (There was additional viewing of regional cable networks.)
Assuming half the Olympics viewing was on cable networks, the average U.S. household
watched about 80 hours of sports programming on expanded basic cable networks in 2000.
According to a recent Nielsen Media Research report entitled “Average Daily Viewing
1949-2003,” in the broadcast year September 2000-August 2001, U.S. television households
spent on average 7 hours, 47 minutes per day watching television; this increased to 8 hours,
12 minutes in September 2002-August 2003. As discussed earlier, a little more than half
that viewing was of cable networks. On average U.S. households watch a little less than 4
hours of expanded basic television per day – or about 1,420 hours per year. Thus, about
5.6% of household cable viewing is of national sports networks (80 ÷ 1420). Given the very
high per subscriber charges for ESPN and FOX Sports networks, it certainly is likely that
the proportion of programming costs associated with those national sports networks exceeds
(continued...)

CRS-27
Third, for the minority of television viewers who are sports fans, their demand
for sports programming is intense and they are more likely than the viewers of other
programming to subscribe to a premium sports channel if that were the only source
of the desired sports programming. For example, when Cablevision took the YES
Channel off its expanded basic service tier and made it available to subscribers in two
options – on its own for $1.95 per month or as part of a new premium sports tier at
$4.95 per month – about half its subscribers elected to receive the YES Channel
through one or the other of those options.77
Fourth, although programming of major sports is viewed by cable and satellite
operators as “must have” programming, the sports programmers report financial
losses from winning the rights to these major sports. For example, News Corp.
reported on February 12, 2002 that it took a $909 million operating charge in the
second quarter because of its three major professional sports television contracts.78
According to Steve Sternberg, senior vice president and broadcast research director
at TN Media:79
There’s a cachet to having sports, especially major sports. They’re like a loss
leader. Sports promote the networks’ primetime lineups and sports are one of the
things that drive people to their internet sites.
Sports programmers apparently have made the strategic business decision to get into
a competitive bidding environment to attain the rights to popular sports events even
with the knowledge that, if they win the bid, they would be unlikely to recoup those
costs directly from the sports programming shown. Rather, sports programmers may
expect to benefit indirectly by exploiting the sports events to market their other
programming to the highly desirable teenage and young adult male audience – both
by cross-marketing their other programs and by “branding” their networks. Those
programmers, of course, seek to recover as much of the costs as possible from
program distributors – through the very high per subscriber fee imposed on cable
operators and, for those sports programmers that own broadcast networks, through
attempts to get their local stations affiliates to share the cost burden.80
76 (...continued)
the proportion of cable and satellite viewer time spent watching national sports networks
approximately as claimed by Mr. Robbins.
77 See footnote 20 above.
78 Peter S. Battin Media, “Television Sports Rights 2003,” October 23, 2003, available on
[http://www.gouldmedia.com/nv_rpt_tsr03.php], viewed on 5/12/2004.
79 Kevin Downey, “Sports TV get pricier and pricier. Here’s why.” available at
[http://www.medialifemagazine.com/news2001/apr01/apr09/4_thurs/news1thursday.html,
viewed] on 5/12/2004. Broadcast and cable networks maintain Internet sites to provide
additional information to viewers with high intensity of demand for their programming, to
provide an additional marketing tool for their programming, and to gain additional
advertising revenues. These Internet sites are potential profit centers.
80 See, for example, John Eggerton, “CBS, Affils Deal on NCAA,” Broadcasting & Cable,
December 8, 2003, at p. 10..

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Given these unique characteristics, the consumer benefits from a la carte
purchasing may be greater for major sports networks than for other cable networks,
and the consumer disadvantages may be less. Since the costs of major sports
programming are disproportionately large relative to the audience they attract, when
major sports networks are included on the expanded basic service tier those
subscribers who are not sports fans are forced to bear a substantial burden. If major
sports programming represents almost 20% of programming costs and half the
subscribers do not watch that programming, then those non-fans are bearing almost
10% of total programming costs to fund programming they do not want.81 Placing
major sports programming on a separate tier would benefit these non-sports fans. At
the same time, given the intensity of demand that sports fans have for major sports
programming, it is likely that a substantial portion of sports fans would be willing to
purchase that programming separately. As indicated earlier, half of Cablevision’s
subscribers paid separately to receive the YES Channel. Thus, it appears unlikely
that the cable programmer business model, based on a single large expanded basic
cable tier, would be threatened by placing major sports networks on a premium tier.
In the March 25, 2004 Senate Commerce Committee hearing, James Robbins of Cox
Communications stated that he opposed any requirement that cable operators be
required to offer networks on an a la carte basis, but that Cox would consider offering
a separate sports tier.82 In that hearing, Mark Goldstein, director of physical
infrastructure issues at GAO, indicated that sports programming represents the best
choice of programming for a separate tier.83
81 Although an imperfect analogy, automobile purchasers typically can choose between a
standard package of features and one or more premium packages. It is unlikely that a high-
cost feature that is sought by only half of all customers would be included in the standard
package.
82 Senate Committee on Commerce, Science and Transportation Hearing on Escalating
Cable Rates: Causes and Solutions, March 25, 2004.
83 Ibid.