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FCC Media Bureau Releases New Report Finding Consumer Benefits in the Sale of Cable Programming on an A La Carte Basis

February 9, 2006

The FCC's Media Bureau has released a "Further Report On the Packaging and Sale of Video Programming Services To the Public" finding that consumers "would be better off' under certain a la carte models for delivering video programming. The release of this report, which supplants and contradicts an earlier staff report issued in November 2004, has been expected since Chairman Martin's appearance at a Congressional hearing late last year where he disputed the earlier report. It should be noted that this is a staff level report and it does not necessarily represent the views of each of the Commissioners nor does it specifically recommend or propose the adoption of any specific rules by the Commission. Moreover, as discussed below, the Report shies away from endorsing a "pure" a la carte model. Nonetheless, it can be expected that proponents of a la carte will cite to the report in support of efforts to pressure operators to offer services a la carte.

The November 2004 report found that a la carte regulation would increase operational expenses for cable operators, increase programmers' marketing costs and revenues, and harm consumers by increasing monthly cable bills. The new report criticizes the November 2004 report in unusually harsh terms, stating that it "relied on problematic assumptions and presented incorrect and biased analysis." The new report is particularly critical of a study by Booz-Allen Hamilton that was commissioned by NCTA and cited heavily by the Bureau in the November 2004 report. According to the Bureau, the Booz-Allen-Hamilton report relies on flawed methodology and unsupported assumptions.

The specific findings in the new report can be summarized as follows:

• The November 2004 report understates both the benefits of a la carte and the harms of bundling. According to the new report, a la carte offers consumer benefits, particularly in the form of lower prices, not recognized in the November 2004 report, Moreover, the new report finds that bundling can harm consumers by causing prices to be higher than might otherwise be the case.

• The November 2004 incorrectly assessed the impact of a la carte on advertising revenues and licensing fees. The new report disputes the finding in the November 2004 report that viewership under an a la carte model will decline, thereby reducing advertising revenues and putting upward pressure on per subscriber licensing fees. The new report concludes

that there is no reason to assume viewership will decline under an a la carte model and that actual proof of a network's popularity, as evidenced by a la carte sales, will result in higher advertising revenues. The new report additionally concludes that a la carte could actually make it easier for niche networks (such as minority-oriented networks) to obtain distribution.

• The November 2004 report relies on an incomplete analysis of the marketing costs associated with a la carte and fails to consider ways that operators can reduce a la carte implementation costs. The November 2004 report concluded that there are substantial costs associated with the implementation of a la carte models, particularly equipment costs. The new report finds that these costs could be made manageable by limiting the a la carte model to digital programming services. The Bureau found that while focusing on digital would limit the benefits of a la carte to a smaller universe, the number of digital customers is growing and cable operators are increasingly transitioning their systems to digital delivery format.

• The November 2004 report misstates the impact of a la carte on program diversity. The new report concludes that bundling may actually create incentives for cable operators to carry programming inconsistent with consumer preferences and limits the operators' ability to ascertain demand. Thus, it is suggested, a la carte may actually be preferable to bundling in providing diverse programming responsive to consumer demand.

In the new report's final section, it discusses three specific models which it concludes potentially offer benefits to consumers over current bundling practices. It is noteworthy that none of these three options involve "pure" a la carte (a model under which subscribers can only purchase networks individually). Rather, the Bureau focuses on "mixed bundling", "themed tiers", and "subscriber selected tiers." Under a "mixed bundling" model, the operator would offer consumers the choice of purchasing channels either a la carte or in packages defined by the operator. The "themed tier" approach involves the establishment of smaller, genre-based packages (such as a "Sports Tier" or "Movie Tier" or "International Tier"). The "subscriber selected" tier approach is an alternative whereby the customer, rather than the operator selects the content of the package (e.g., the operator sets a price for a predetermined number of channels that the subscriber can select from among a larger menu of offerings).

Finally, as noted, the new report does not expressly call for specific new government mandates regarding the ways in which cable operators offer service. Rather, the report agrees with the November report's finding that increased competition is likely to result in increased consumer choice. For that reason, the report concludes that it is "critical" that the government implement policies that unleash competition and encourage innovation. We believe that this suggests the Commission may cite to encouraging a la carte as a reason for the agency to implement franchising "reforms" that are being sought by the telephone companies in a separate proceeding currently pending before the Commission.

We would be happy answer any questions that you may have concerning this matter.

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