CABLE REGULATION DIGEST
A summary of regulatory news from Multichannel News 4/04/1994. Vol.1, No.14
Copyright 1994 Multichannel News. NO CHANGES are to be made to this document
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CONTEST ANNOUNCEMENT: I'm announcing the first Cable Regulation Digest
contest, for applying the new FCC rate formula. The winner will be the first
person to e-mail me the monthly rate benchmark for ANY regulated U.S. cable
system. To keep it simple (!!) I will accept an accurate calculation of the
benchmark, BEFORE adding back inflation or "external" cost increases to get the
final rate actually charged to subscribers. This is for an enhanced basic
subscribe
I will hold on to the entries and verify them for accuracy when subscriber
bills go out. All entries should be sent to
[email protected].
First prize is the winner's choice of "Master of the Game" the new biography of
late cable baron and Time Warner chairman Steve Ross, or "Re-Engineering
Government", or "Listening to Prozac". It depends on which book the winner find
more appropriate.
Cable Digest Soundtrack: Oh, the FCC has absolutely made this a Nine Inch
Nails week, "The Downward Spiral". Grinding, screeching, industrial music to
soothe the soul.
QUOTES OF THE WEEK
"The ideal system is Aspen. It's owned by TCI, has extremely high income and
it's not very big."
Sandford Bernstien & Co. analyst Tom Wolzien,
describing how the FCC rate formula will
affect different systems.
"At $200 an hour, I'm the most expensive Xerox clerk you've ever seen"
Cable lobbyist scrambling simply to
get FCC documents into his
clients' hands.
IS THIS THE MAGIC CABLE FORMULA?
One thing the FCC did not "release" last week was the actual formula by which
a cable system can determine its rate. However, one formula did emerge in
documents the commission filed with the Office of Management and Budget. FCC
staffers said those documents were drafts and contain errors. They would not
say, however, whether the formula is inaccurate. Other netizens have formulas
slightly different from this one.
Here it is, but we warn you that it may not be accurate. We also warn you that
it is not simple.
2.04
+(0.07*MSO) {MSO=1 if an indy, 0 if an MSO.
+(0.0097*Nlog # of systems)
+(8.14/# of subs)
-(1.45/# of total channels)
+(0.253*non-satellite channel/total channels)
+(0.103*Additional Outlets/Total Subs)
+(0.172*Remotes/Total Hookups)
+(0.057*#tier2 subs/total subs)
+(0.353*Tier Charges/Total Charges)
+(0.069*Nlog of median household income)
----------------------------------------
Nlog of Benchmark
All of this is based on Sept. 1992 data. Take the resulting benchmark, reduce
by 17%, add back 3% for inflation plus another amount for external costs and
voila, your per subscriber rate.
Have fun!
FCC'S NEW MATH: AS EASY AS TRIG
WASHINGTON -- The Federal Communications Commission's new cable rules hit the
streets last week, but the process of determining rates is so wickedly difficult
it will likely take weeks to assess the precise effects on subscribers.
As the commission began issuing hundreds of pages of rules, forms and
directions last Wednesday, operators struggled to grasp the issues and details
and, most important, divine the new formula to set rate benchmarks, guidelines
that wipes out the rate rules the FCC established last May.
The initial assessment from cable and Wall Street executives was that the
benchmark formula favored large MSOs with many systems and operators in
high-income areas. At the same time, "going-forward" rules may penalize large
operators who have invested heavily in their operations, one cable CEO said.
Further, the rules appear to penalize large systems substantially.
The new benchmarks bear little resemblance to the ones issued last May. The
old per-channel benchmarks could be calculated from tables based on three
factors: system size, the number of total channels offered and the number of
non-broadcast channels offered.
The new formula has 10 different variables, including rates and system size,
plus factors like the penetration of additional outlets and remote control
rentals. All the data were taken as of September 1992, before operators began
raising rates in anticipation of regulation.
Arriving at the benchmark requires three logarithmic equations. "It's been 25
years since I've used trigonometry," said one analyst.
After the benchmark is calculated, a system must subtract 17 percent. The
system can then add back in inflation plus increases in "external" costs such as
taxes and incremental programming expenses.
One surprising element is that the formula gives credit for being a large MSO
with many different systems. Tom Wolzien, analyst for Sanford Bernstein & Co.,
said that a system owned by 800-system giant Tele-Communications Inc. would have
a 4.3 percent higher rate than if it were owned by a 10-system operator.
Systems in affluent areas can charge more as well. Wolzien estimated that a
system in a town with a median household income of $40,000 would have a
benchmark 3.3 percent higher than a system in a town with $25,000 in median
income.
Capacity counts too, with a 56-channel system getting a 3.5 percent higher
benchmark than a 36-channel system.
Systems with few subscribers seemed to benefit. A system with 75,000
subscribers would have a benchmark 37 percent lower than one with 15,000
subscribers.
"The ideal system is Aspen," Wolzien said. "It's owned by TCI, has extremely
high income and it's not very big."
FCC chief economist Michael Katz said he expected some elements to be
controversial, particularly ones favoring larger MSOs and systems in more
affluent towns, because they conflict with the commission's attempts to offer
relief to small, rural operators.
He explained that the factors in the benchmark formula were dictated not by
policy goals, but statistical correlation to price survey data. "The fact is
systems owned by large MSOs tended have higher rates before," Katz said, so that
factor was weighed in.
Those beneficial elements won't affect the reduction, Katz noted, because the
benchmark is based on pre-regulation cable rates then rolled back 17 percent.
"We decided to bring everybody down by the same percentage rather than bring
everybody down to the same level," he said.
The FCC clarified the a la carte rules somewhat, but failed to detail specific
standards. The commission said that operators would be seen as merely attempting
to evade rate rules if their a la carte tiers let them avoid a basic rate cut,
stripped too many channels out of basic, merely converted entire basic tiers
into a la carte channels or were such a bargain compared to actually buying
channels individually that few subscribers would buy single channels.
Confusion was the most tangible product. Crucial forms needed to calculate
price and cost components were not immediately issued. Some FCC documents
trickled out of another federal agency, but commission staffers later
"retracted" them, saying they were preliminary drafts and contained errors.
Operators will have a little more time to cope with the rules than expected,
which industry executives found as a clever way to freeze rates without formally
extending the controversial yearlong freeze now set to expire May 15. The
official compliance date remains May 15. But operators will not be liable for
any refunds to customers before July 14 provided they do not change rates in the
interim.
Cable executives overwhelmed by the complexity of the new process called May
15 an impossible deadline to meet, since subscribers would have to be notified
of any changes 30 days in advance, that is, by next Friday.
"What you've done is frozen the industry in place until July 15," said
PaineWebber analyst Christopher Dixon.
COMCAST ACTS TO BLOCK REFUND ORDER
WASHINGTON -- Comcast Cable Communications Inc. said last week that it has
asked the Federal Communications Commission to block the city of Tallahassee,
Fla., from ordering refunds and rate reductions that could cost the cable
operator more than $1.5 million in the first year alone.
In a March 25 filing
the company described as one of the first of its kind under the 1992 Cable Act,
Comcast asked the FCC to issue a stay to shield it from complying with the
city's March 9 rate order, which is scheduled to take effect April 15.
Comcast
spokeswoman Barbara Lukens said the company was not challenging the city's
authority to regulate basic service. Rather, it was objecting to the work of an
outside consultant the city hired to evaluate cable rates charged to about
44,000 subscribers.
"Our problem is with the way it was done," Lukens said,
adding that the FCC also was asked to issue uniform guidelines in rate
proceedings undertaken by cities. "There has to be a way to prevent
abuses."
Lukens said the consultant relied on faulty data and statistical
estimates to Comcast's detriment. He said the consultant either ignored data
supplied by Comcast or substituted other data for them.
In the absence of FCC
action, the city's rate order would mean Comcast would have to pay an estimated
$400,000 in refunds and lose between $600,000 and $1 million to rate rollbacks
in 1994, she said.
Tallahassee cable administrator Claudette Harrell was
unavailable for comment at press time Thursday.
In a statement, Comcast
president Thomas Baxter said he believes Tallahassee's rates comply with FCC
regulations.
CABLE LOSES NEGATIVE-OPTION SUIT
MADISON, WIS. -- A federal district court judge dealt a blow to cable
operators last week by ruling that federal policy does not pre-empt action by
states against operators who use negative-option marketing tactics.
Judge Barbara Crabb of the Western District for Wisconsin in Madison, denied
Time Warner Cable's request for summary judgment in a case brought by the
Wisconsin attorney general. In the ruling, Crabb also said that state review of
negative-option complaints did not stray into the area of rate regulation, an
area specifically denied to states.
The ruling could mean bad news in other states for cable operators. Attorneys
for state and local regulators said the Wisconsin decision encourages them to
pursue two main areas of dispute on service packaging: unbundling of formerly
basic services and internal wiring contracts. Such charges appeared on bills
after re-regulatory pricing changes went into effect last September.
Regulators assert that the charges were added unless consumers had them
deleted. Negative options are banned under many states' unfair trade practices
regulations. Attorneys general of 27 other states filed briefs supporting
Wisconsin's case.
Cable attorneys said the final impact of this precedent won't be known until
the Federal Communications Commission rules on acceptable a la carte packaging,
but they added that the Wisconsin decision "doesn't look good."
BELL ATLANTIC TO OPEN DIGITAL VOD CENTER
ALEXANDRIA, VA. Bell Atlantic Corp. will open a multimillion-dollar Digital
Production Center in suburban Washington, D.C., in July. Having leased the site
for the next seven years, Bell Atlantic Video Services will move approximately
100 of its own staffers, plus 50 to 90 subcontractors, into the Reston, Va.,
facility over the next several months.
BVS will use the center to digitize, store and provision content, to produce
promotional programming and to control authorization and billing. Ultimately it
will house 350 employees.
BVS will open the center to other video information providers (VIP) on a fee
basis, rather than have each VIP "incur these tremendous upfront costs," said
Stuart Johnson, Bell Atlantic group president for Large Business and Video
Services. "We know many of them don't have the capital." Servers alone are said
to run about $20 million.
For BVS, he added, "we've proved this capability works in a 200- or 4,000-home
trial. Scaling up to 20,000 or 2 million users represents the most significant
technical challenge."
Functionally, the center will include a Digital Production Studio for in-house
promos related to BVS's Stargazer brand name; a Digital Service Bureau to
digitize and store programming; an Operations Center to house digital video
servers and multimedia software from Oracle Corp. and nCUBE, as well as encoding
hardware; and, finally, a Demonstration Center to test applications off-line.
SOUTHWESTERN BELL APPLIES FOR NCTA MEMBERSHIP
WASHINGTON -- Following its
purchase of two Washington, D.C.-area cable systems, Southwestern Bell is
applying for membership in the National Cable Television Association, sources
said last week.
NCTA sources acknowledged that SW Bell was seeking membership, but as a rule
the organization does not divulge its membership list or its criteria for
selecting regular or associate members.
However, cable industry sources said SW Bell should have no problem becoming
an NCTA member after its January purchase of Hauser Communications Inc.'s top-50
cable systems in Arlington County, Va., and Montgomery County, Md.
Through its wholly owned subsidiary SBC-Media Ventures, SW Bell paid $675
million for the 232,000 subscriber systems, sources said. SW Bell spokesman Bob
Ferguson said SBC-Media Ventures is applying for the NCTA membership.
SW Bell would not be the first telco to join the NCTA, but it would be the
largest in terms of revenue and phone access lines.
Sources said Centel Corp., a $900 million phone company based in Chicago and
recently absorbed by long-distance phone operator Sprint Corp., was once an NCTA
member.
TENN. SENATE LETS BELL-CABLE DEAL SLIDE
NASHVILLE, TENN. -- A state Senate committee passed over an opportunity to
question members of the Tennessee Public Service Commission about the
commission's knowledge of a secret deal between Bell and the Tennessee Cable
Television Association while in session last week.
Two weeks ago, it was revealed that Bell and the TCTA had entered into an
agreement whereby cable companies would pay Bell a fixed, lower rate for pole
attachments in return for not opposing Bell objectives in Tennessee. Some
legislators saw that agreement as a way to expedite a bill to hire a public
advocate to represent consumers in the PSC, a bill the PSC opposed.
Some Senate committee members had wanted to know if the PSC had prior
knowledge of the agreement and had said they would use the next hearing to ask
several hard questions of the PSC and Bell.
The entire process was anti-climactic, however, as the committee's questions
never materialized. No PSC members were called to testify, nor were other
individuals, including South Central Bell president DeWitt Ezell.
A spokesman said advocates of the consumer bill wanted a healing process to
begin between the legislature and the PSC, since the commissioners had dropped
their opposition to the consumer bill. After the committee had finished its
work, the legislation to establish a consumer advocate division gained unanimous
passage and was moving toward the General Assembly. The senator sponsoring the
bill, Jerry Cooper, called for an immediate vote when the session opened.
One government source said the measure won approval in the meeting, with no
debate, because the bill is apparently heading toward passage and its supporters
wanted to lower the heat on the PSC.
ROCHESTER TEL GETS FFC NOD FOR VIDEO TRIAL
Rochester Telephone Corp. won permission from the Federal Communications
Commission to start its video dial tone market trial, which will offer movies on
demand to apartment dwellers and homeowners in that upstate New York city.
Unlike other such requests languishing at the FCC, the Rochester Tel petition
was a snap. The trial involves only about 120 customers and no one opposed it.
The decision was made under authority given to a commission staff member and was
released March 25.
In contrast, U S West Inc. has asked to perform a market trial in Omaha, Neb.,
with 60,000 homes and Bell Atlantic Corp. wants to expand a current technical
trial with 280 people in northern Virginia into a market trial involving 1,000
homes. U S West, Bell Atlantic, Ameritech Corp. and Pacific Bell Corp. also want
permission to start commercial video dial tone services. Those requests and
others are still pending. Rochester Tel's was the fifth market trial
application.
USA Video Corp., the only company rounding up video programming to run during
the Rochester trial, said the trial, though small, should teach some valuable
lessons. For one thing, customers will be charged for the programming they
order. The Bell Atlantic test in Virginia, for example, involves Bell employees
who don't pay for the movies they watch.
COURT SAYS S.C. CITIES CAN'T DO CABLE
South Carolina cities cannot construct or run cable systems, according to a
ruling by the state's Supreme Court.
The three-judge panel ruled that supplying cable TV is not necessary for the
security, general welfare and convenience of a municipality or for the
preservation of peace, order and good government.
The ruling appeared to dash the hopes of the city of Orangeburg, which had
hoped to add cable to the list of services it already supplies residents. Three
years ago, the city installed a 15-mile fiber optic system to monitor and
control its utilities system and some regulators had thought a video delivery
system could be piggybacked onto that infrastructure. The municipal plant would
overbuild the current cable operator, Jones Intercable Inc.
Local sources said there are no specific complaints against Jones on signal
quality or pricing.
"The thinking of the mayor and City Council [who have regulatory authority
over the local utilities] is that the city could provide some enhanced services
at a lower price," said city manager John Yow.
