From: [email protected]
Date: Sun, 12 Mar 1995 11:40:31 -0800
Subject: Cable Regulation Digest 3/13
Reply-To: [email protected]


 CABLE REGULATION DIGEST
 Summary of regulatory news from Multichannel News 3/13/1995. Vol.2, No.11
 Copyright 1995 Multichannel News. Reproduction/distribution is permitted
 so long as this document is left fully intact. NO CHANGES are to be made
 to this document without the written consent of Multichannel News.
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  QUOTE OF THE WEEK
 "I want to thank the Metropolitan Police for their work. And I want to thank
the press for highlighting this item and causing the police to be just a
little bit more diligent possibly in their search for the 1987 gray Buicks
that otherwise crowd our streets."
     FCC Chairman Reed Hundt after his stolen car was recovered last week.

 TCI LOSES OUT IN SAMMONS BID
 In a surprising win, leveraged buyout firm Hicks Muse Tate & Furst and
Marcus Cable Corp. combined to blow out a six-MSO consortium led by Tele-
Communications Inc. in the pursuit for Sammons Communications.
 Sources involved in the discussions said that Sammons reached a handshake
deal with Hicks Muse and Marcus late Thursday night and were drafting
agreements Friday morning. Sammons employees were told Friday morning that a
deal was close to being signed.
 The deal would give Hicks Muse and Marcus up to 1.1 million subscribers.
However, one source familiar with the deal said that some of Sammons'
northeastern systems were excluded from the deal. The TCI group had bid about
$1.7 billion for the entire company, but the terms of the Hicks Muse offer
could not be learned.
 The outcome stunned members of the consortium, which had locked up so many
players that many financiers believed no one else would put up a serious bid.
Assembled by Tele-Communications Inc. and InterMedia Partners, the group
included Charter Communications Corp., Century Communications Corp., Post-
Newsweek Cable Inc. and Knight-Ridder Inc.
 "I've never misread a deal so badly," said a participant in the consortium.
 Adelphia Communications Corp. had circled the auction for weeks, but failed
to submit a formal offer when bids came due March 1, sources said.
 Marcus Cable will serve as the buyer for the properties, backed by Hicks
Muse and existing partner Goldman Sachs & Co. In addition, Los Angeles LBO
firm Freeman Spogloie has agreed to put in new equity, following its
investment in Marcus' acquisition of part of Hallmark Corp.'s cable systems
last year.
 If the Hicks Muse/Marcus bid succeeds, it will go completely against the
drive toward clustering cable systems in local markets.
 Bulking up for sheer size is out. Targeted acquisitions are in.
 Sammons has concentrations in some appealing markets, including southern New
Jersey and Fort Worth, Texas. But the company's systems are spread out over 19
states, largely in small towns, "from Moses Lake, Wash., to Pascagoula, Miss."
as one financier put it.
 Marcus Cable itself has been among the loudest preachers of local
clustering. The 550,000-subscriber MSO has moved aggressively to acquire
systems in Wisconsin, although it has also recently added to its Maryland-
Delaware region as well.
 But very little of Sammons' operation meshes with Marcus' existing systems.
One MSO executive joked that the deal matches a new strategy to cluster
"within the United States."

BELL ATLANTIC TOUTS NEW VOD PROGRAMS
 If Bell Atlantic Corp.'s video-on-demand trial is no blockbuster, it won't
be for lack of programming.
 The telco said last week it will offer consumers more than 700 video choices
in its upcoming trial, in 1,000 homes in northern Virginia. Most major
Hollywood studios, the three main broadcast networks, 18 cable networks and
more than two dozen independent distributors will supply movies and TV shows.
 The test is strictly of video-on-demand -- no cable TV, no time-shifted
programming and no interactive shopping. John Aronsohn, an analyst with the
Yankee Group in Boston, noted that Frontier Corp. (formerly Rochester
Telephone Corp.) recently cut off its VOD trial in Brighton, N.Y., after
concluding that VOD was not economically viable as a stand-alone service.
 But Aronsohn added that Frontier's was a small trial, about 50 homes. Bell
Atlantic's will be much bigger -- possibly ramping up to 20,000 homes -- with
a broader programming mix. The telco should gain valuable information about
pricing, packaging and marketing video, he said.
 "It's definitely a trial worth watching," Aronsohn said.
 Movies will be priced competitively with cable pay-per-view offerings and
with video stores, he said. Other videos, such as selected TV shows, will cost
subscribers 49 cents to 99 cents apiece, said Mitchell Praver, director of
programming and content development at Bell Atlantic Video Services.
 Test homes also will be charged a $7.50 per month access fee (to Bell
Atlantic Network Services) and will pay an undisclosed monthly charge for a
decoder box and other in-home equipment, BVS spokesman Larry Plumb said.
 Bell Atlantic also will experiment with video "packages," such as "Jaws" or
"Psycho," which include original movies and their sequels.
 Network programming will consist mainly of limited reruns-on-demand  as
chosen by the networks. CBS, for example, will provide the series premiere of
Dr. Quinn, Medicine Woman along with a Thanksgiving show featuring Johnny Cash
and June Carter Cash. Other CBS series include 60 Minutes, Dave's World and
sports specials -- all programming owned by the network.
 For technical and other reasons, this portion of the Bell Atlantic trial
will not feature time shifting, meaning viewers will not have the ability to
watch the most recent episode of a show whenever they choose. That will be
tested later. "That is something of real interest to us," said Mark
Harrington, CBS Inc.'s senior vice president of new media.
 Participating in the trials also helps the telcos learn about "how we
operate, the dynamics of the television business," said Martin Yudkovitz, head
of NBC Multimedia and senior vice president of strategic development at the
network.
 "We're not looking for extraordinary buy-rates," Yudkovitz added. "We're
looking to use this for experimental value and to learn from it."
 Bell Atlantic will have 42,000 minutes of programming stored in an Oracle
Corp. server, including about 200 movies, and hundreds of TV show episodes,
special-interest videos and entertainment specials. One of the biggest hits
from the telco's 284-employee technical trial will be on the menu: George of
the Jungle, the old animated comedy. Others range from Alice to Wonder Woman.
How-to titles include Plan Your Garden and Massaging Your Mate.
 Subscribers will be able to simulate VCR functions such as fast-forward and
"fast-reverse," and can call up a bar graph on the TV screen to show how much
time is remaining in the movie, according to Kenneth Van Meter, president of
interactive multimedia platforms at BVS.
 Tests of the first version of the service will run for at least six months,
Plumb said. In the next phase, programming will be provided by Bell Atlantic's
joint venture with Nynex Corp. and Pacific Telesis Group, he said.

 SMITH BLASTS FCC ON VIDEO DIALTONE
Washington -- Bell Atlantic Corp. chairman Raymond Smith last week called for
a major overhaul of video dialtone rules in a bid for wider deregulation that
angered some in the Federal Communications Commission.
 Bell Atlantic was the first Baby Bell to win approval for commercial VDT. It
was also the first to be allowed to be a VDT programmer. Both actions were
controversial steps taken by the FCC.
 Smith, in a five-page letter sent March 6 to FCC chairman Reed Hundt, said
the FCC's VDT rules were delaying the rollout of competitive video services
and needed to be streamlined.
 Keeping current VDT rules, he said, would harm his company's ability to
compete with "incumbent cable operators, the phenomenally successful direct-
broadcast satellite providers" and others.
 Smith's letter offended some senior FCC officials, who said the VDT rules
had been carefully crafted and had not caused delays for Bell Atlantic.
 The National Cable Television Association is planning to respond to Smith's
letter this week, an NCTA spokesman said. The cable industry, concerned the
telcos would cross-subsidize their video services with telephone revenues, has
been highly critical of the FCC's VDT policies.
 Under VDT rules, phone companies are required to offer sufficient capacity
to allow various programmers to use the network on nondiscriminatory terms.
The FCC is also considering capping Bell Atlantic's control of the network at
either 25 percent or 50 percent.
 In his letter, Smith said the proposed FCC capacity cap was unreasonable and
potentially costly.
 "If the Commission were to adopt rules that would allow large portions of
the video dialtone network to lie fallow, Bell Atlantic could not afford to
take the risk of deploying video dialtone service," Smith said.
 Smith's letter outlined several steps "that must be taken to make video
dialtone an attractive platform." He said the FCC should "remove" the
requirement that telcos obtain VDT construction permits, deregulate VDT
services and permit the filing of "informational" rate cards.

 DOLE SLAMS CLINTON ON CABLE DEREG
 Washington -- Telecommunications reform debuted as a 1996 presidential
election issue last week when Senate Majority Leader Bob Dole (R-Kan.) slammed
the Clinton administration for strangling the cable industry with red tape and
for rejecting Republican calls for the repeal of rate regulation.
 "Let's not fool ourselves, the White House's stance on cable TV is proof
positive that it is only interested in making government the biggest player in
the communications industry," said Dole, the GOP's apparent presidential
front-runner.
 The administration staked out its position on cable early on.
 In January, Vice President Al Gore said he would support cable relief when
direct-broadcast satellite and video dialtone were firmly rooted, but not
before. And two weeks ago, Commerce Department Assistant Secretary Larry
Irving told a Senate committee that the GOP plan to lift all cable rates was
unacceptable.
 Dole said that if the White House was serious about competition in
communications, it would liberate cable so the industry could vie for local
phone customers.
 "The point is that if we strangle cable with regulation, we don't get local
competition. That means government will be forced to continue regulating the
communications industry," Dole said.
 Dole's partisan swipes came in remarks to the Republican-supported National
Policy Forum on Wednesday. Dole called for cable deregulation and passage of
pro-competitive telecommunications reform legislation.
 Given the nature of Dole's remarks, the GOP leaders seem willing to make
telecom a partisan issue.
 "Politically, it will not be lost on people that the opponents of this will
be Democrats who still believe in the regulatory regime," Republican National
Committee chairman Haley Barbour said.
 Dole, leading in the polls a full year before the New Hampshire primary,
scolded Gore for supporting the 1992 Cable Act.
 "Vice President Gore has always been a regulator. After all, he was one of
the principal architects of the Cable TV Act. He and the president used it as
a campaign issue -- something about consumer protection as I recall."
 But Dole said the law pushed cable rates higher rather than lower.
 "I still get letters from the consumers themselves complaining their rates
are going up," Dole said.
 Dole said it was time to scrap the faulty rate rules, which FCC chairman
Reed Hundt has said have saved consumers $3 billion.
 He said cable prices would be restrained in the future by DBS.
 "The recent success of direct-broadcast satellite has cable scared and it's
one of the new competitors that will keep them on their toes," Dole said.
 A Gore aide who attended the Dole speech declined to comment.
 Business leaders and lobbyists from cable and other telecommunications
sectors -- some of whom paid $25,000 to attend -- were on hand for the Dole
speech. Also in attendance were Federal Communications Commission members
Susan Ness and Rachelle Chong.
 "I certainly agree with Sen. Dole that cable regulation needs to be
reversed," said Chong, a Republican appointee. "Not all of it. I think parts
of the Cable Act have been very successful: must-carry, program access, for
example."
 Ness, a Democrat, said cable rates have gone up because the FCC's going-
forward rules allow operators to raise rates a maximum $1.50 over the next two
years with the addition of six new channels.
 "The need to increase the opportunities for new programming is
extraordinary," Ness said. Rates also climbed, she added, because of the pass-
through of inflation and other external costs.
 Time Warner CEO Gerald Levin, who spoke on a panel prior to Dole's speech,
said he was hopeful Congress would repeal some cable rules.
 "We believe we must have a bill this year. It's very important for the
industry. As long as broadcast basic -- if that's regulated, I think that's
okay. It's the upper tiers I don't think should be regulated," Levin said.
 Dole warned warring communications sectors to settle differences because he
and Senate Commerce Committee chairman Larry Pressler (D-S.D.) were serious
about passing a major bill not associated with the Contract with America.
 Dole said the "most contentious" issue was Baby Bell entry into long-
distance phone markets.
 "It seems to me the players, not Congress, should resolve it," Dole said "If
you are unwilling to resolve it, we will resolve it for you."
 Democrats have claimed that Republicans in the end won't vote for cable
deregulation because it would mean an increase in cable bills.
 Dole, however, voiced his own theory for junking the regulations.
 "It seems to me that eliminating cable rate regulation does not necessarily
mean that rates will go up. After all, the threat of competition could hold
prices in check," Dole said.

 HUNDT WANTS MORE BASIC SERVICE
 Washington -- Federal Communications Commission chairman Reed Hundt last
week said he favors development of low-priced basic cable service to help the
industry achieve 90 percent penetration.
 Hundt called on local officials to craft policies that would enable cable to
grow.
 "I encourage you to think about the goal of high penetration for a stripped-
down basic cable package and tell me how you think that policy could be
achieved, if you think it is wise," Hundt told the National Association of
Counties on March 5.

 IS PRIMESTAR READY FOR PRIMETIME?
 Bala Cynwyd, Pa. -- The way PrimeStar president John Cusick figures it,
there's really no reason to apologize because his direct-broadcast satellite
service is controlled by a group of huge cable companies.
 "We've certainly taken our shares of arrows on that," Cusick said,
reflecting a picked-on attitude shared by many in PrimeStar Partners L.P.'s
hierarchy. PrimeStar executives feel people in the TV industry -- especially
in the press -- give their company short shrift because of its owners.
 That lack of respect comes despite PrimeStar's signing up more than 300,000
subscribers to its digital television service, even with a number of
competitive handicaps Cusick freely enumerates:
 "I sit back," Cusick continued, "and say, `We've got a service today that's
got half the number of channels of our competitors, we've got a dish that's
got four times the area and we are literally running neck and neck with them.'
I think that speaks volumes for the effectiveness of our distributors."
 PrimeStar isn't exactly neck and neck with its competitors. GM Hughes
Electronics Inc.'s DirecTv has more than 400,000 subscribers, while Hubbard
Broadcasting Inc.'s United States Satellite Broadcasting or USSB has about
300,000 subscribers. Both use equipment sold by Thomson Consumer Electronics
Inc.
 PrimeStar, using the cable model, factors its customer equipment costs
(about $1,000) into the monthly bill.
 Analysts already take PrimeStar seriously. "I think they're for real," said
Michael Alpert, who headed up Comsat Corp.'s early failed attempt at a DBS
service and is now a consultant.
 But even PrimeStar supporters acknowledge the service needs to match
DirecTv's two main advantages -- DirecTv subscribers get to use a much smaller
backyard receiving dish and can only receive about half of DirecTv's 150
channels. Until then, DirecTv is likely to keep widening its lead.
 Wait until next year, Cusick and others at PrimeStar reply. That's when
PrimeStar partner Tele-Communications Inc. expects to launch the first of two
high-powered satellites that will ramp PrimeStar's service up to 200 channels
and allow subscribers to use smaller dishes.
 In addition to the $400 million bet, which requires government approval of a
TCI satellite license deal, PrimeStar has made a number of moves behind the
scenes to prepare for its move into primetime.
 James Gray, a former Time Warner Cable vice chairman, came on in January as
chairman, with, he said, a mandate to help the organization take stock and
clearly state priorities for a business the partners plan to sink a cool
billion dollars into.
 "I think all the pieces are there," Gray said. "It's a classic problem of
taking a small business to something that we know is going to be at a much
higher level, mapping the route to get there and making sure we have the
resources to do it."
 TCI, the biggest PrimeStar distributor, having signed up about half of its
subscriber base, last month set up a separate organization devoted to
PrimeStar. Gary Howard, also TCI's head of mergers and acquisitions, is its
president.
 PrimeStar also has put incentives in place, so that, for many cable system
managers, "it should be one of the stronger areas of cash flow growth this
year," Howard said.
 Cable distributors still don't make quite as much per head from PrimeStar
subscribers as they do from wired cable customers, according to Dan O'Brien,
president of Time Warner Satellite Services, Time Warner's PrimeStar division.
Where wired-cable revenue generally has a 40 percent gross profit margin,
PrimeStar is more like 25 percent, O'Brien said.
 Still, he said, "that's an excellent margin in most industries." And many
cable systems have at least designated one manager whose primary
responsibility is to generate PrimeStar subscribers. Those are the systems
that have had best results, O'Brien said.

 LOAN SNAGS HIT WIRELESS OPERATOR PREFERRED
 Preferred Entertainment Inc. became the latest wireless operator to get hit
by the industry's capital crunch, prompting the Chicago-based company to trim
operations to conserve cash.
 Preferred is trying to recover from the failure of a planned loan deal with
two lenders, Finnish bank Kansallis-Osake-Pankki and North Carolina's First
Union Bank. The banks -- both of which have been dipping into wireless cable
lending over the past two years -- had been offering to fund a $20 million
subordinated credit package.
 But Preferred said that the deal stalled because of "a combination of
factors," primarily blaming KOP's recent merger into another Finnish bank that
prompted a re-evaluation of the bank's pending loans. First Union was not
willing to step up and replace KOP as the lead agent on the deal. KOP and
First Union executives did not return calls seeking comment.
 The company has switched gears and is now seeking just $5 million in new
equity or subordinated debt to carry it through the year.
 At the same time, Preferred is under takeover pressure from major
shareholder People's Choice TV Inc. The Shelton, Conn.-based wireless operator
already owns 23 percent of Preferred and has been wrestling for control over
the company for seven months.
 Preferred rejected a recent PCTV stock swap offer of about $14 in PCTV stock
for each Preferred share.
 Preferred is suffering from a pinch affecting virtually all wireless
operators. Operating snags, rising interest rates plus the threat of
competition from telcos and direct-broadcast satellite services combined to
crush wireless stocks last year shutting down the stock market as a source of
expansion cash.
 Wireless operators were on a roll in 1993 and most of 1994 after lenders and
investors turned their attention to the industry, pumping in an estimated $700
million in equity and loans.
 That gave wireless its first shot at becoming a solid competitor to cable.
Operators suddenly needed money to install expensive hardware into the homes,
fueling sharp increases in subscriber growth. Cash-flush companies seeking
bargains rushed to take over ailing systems.
 However, wireless operators are capital intensive, startup businesses trying
to grow quickly but can't yet generate expansion cash from operations. So any
glitches in the flow of outside equity and loans can sharply disrupt
operations.
 Many financiers believe the capital problem is temporary, but operators
still have to work through the crunch. Los Angeles-based Cross Country
Wireless, an early, strong player, has stalled out and is seeking new money.
 CableMaxx Inc. has scaled back installations following the failure of a $60
million junk bond sale. CEO Tommy Gleason said the company is close to
securing new financing, and has several appealing options.
 "We've shown we can certainly make money in this business," said Gleason,
who has built up a 33,000-subscriber portfolio in two years. "It's just
getting the money to do what we need to do."
 "It's a tough market for everybody," said Arthur Newman, analyst for
investment banker Gerard Klauer Mattison, which has focused heavily on raising
money for wireless ops.
 Newman called Preferred's problem "a temporary setback It's not clear that
this represents any inability to raise capital."
 To conserve cash, Preferred is pulling back a bit. Instead of marketing its
TV package to all consumers, Preferred will concentrate solely on apartment
and condo buildings. Such multiple dwelling units (MDUs) require less capital
per subscriber than single-family homes because the company's pricey microwave
receivers can serve more than one subscriber.
 "We believe with our existing cash position and some additional cash, we can
concentrate on the MDU and commercial market and still achieve a 50 percent
increase in subscribers for 1995," said Preferred CFO Randall Anderson.
 While the company and outsiders agreed that the snag is not life-
threatening, it does leave Preferred short of cash. The company's year-end
balance sheet has not been disclosed, but in September the company had about
$8.6 million in cash. Anderson would not disclose the company's current cash
position.
 The company has used up just $500,000 of an existing $20 million senior
credit line with KOP. But Preferred has violated the covenants of the loan and
KOP will not advance any additional cash. The company acknowledged that it
needs to renegotiate the senior debt package.
 "They do have some cash available," Newman said. "They're not down to their
last penny."

   -=-=-=-=-=-=-=-=-=-=-=-=-=-=And Finally...-=-=-=-=-=-=-=-=-=-=-=-=-
 David Palmer, an auditor fighting signal theft at Western Communications'
Monterey, Calif. system, has his own version of the industry's on-time service
guarantee: [``]Your illegal connection will be shut off within 4 hours or your
cable is free!"

 Anti-piracy folks got pretty nervous in January when a General Instrument
trailer containing a few thousand satellite descramblers was stolen from a
South Florida trucking firm. Half the shipment was PrimeStar DBS receivers
employing the DigiCipher encryption system that the pirates supposedly hadn't
been able to crack yet. Was the theft a random hit or was the trailer targeted
by pirates who had compromised DigiCipher? Well, there's good news from the
underground. The VideoCipher C-band receivers also in the shipment have begun
popping up on the streets of Miami for a couple hundred bucks each. But
someone's still sitting on the PrimeStar units. "They're not worth anything if
they haven't been cracked," said one cable security specialist. "Whoever's got
'em can't sell 'em."

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