When Sen. John McCain recently introduced legislation to reshape how consumers watch cable television, he knew he was picking a fight with some of the most influential companies in town.
“Today, we’re putting up a stop sign,” the Arizona Republican said in a May 9 floor speech. “And we’re going to find out how powerful these companies are.”
McCain’s bill would encourage cable providers to offer consumers the option of purchasing channels individually, rather than being forced to subscribe to a package of channels, or bundle. He blames the practice of bundling for the steady increase in the cost of basic cable, from $22 a month in 1995 to $54 in 2010. That’s an average annual rate increase of 6.1 percent, according to the Federal Communications Commission.
The battle is not a new one for McCain, who has railed against the bundling of cable channels for 15 years. He specifically points to the rapid increase in the cost of sports programming, noting that ESPN is by far the most expensive cable channel, costing four times that of second-place TNT. At a Senate Commerce, Science and Transportation Committee hearing on the future of the video industry last week, McCain called it unfair that consumers with little interest in sports must still spend almost $80 a year for ESPN and ESPN2.
“Do consumers want bundles? The answer is obviously no,” he said.
While McCain’s bill (S 912) is not the first attempt by policymakers to tackle cable bundling, it comes at a precarious moment for the television industry. The rising cost of cable, combined with the increasing availability of video content online, has given rise to fears of “cord-cutting” — consumers choosing to go without cable and relying on the Web for video content. That threat is only increased by the emergence of companies like Aereo, which offers users a cheap way to stream live programming from broadcast channels such as NBC and CBS over the Internet.
The legislation wouldn’t require that cable and satellite operators offer channels a la carte, but if they fail to do so, they could lose privileges like their compulsory license for broadcast television. Delara Derakhshani, policy counsel for Consumers Union, said the bill should put downward pressure on cable prices while generally increasing choice for consumers.
“Right now, cable companies decide exactly what programming is bundled with what other programming and at what price it’s offered. Those sorts of decisions would be best left to consumers themselves,” Derakhshani said.
But cable and satellite companies, especially the independent providers represented by the American Cable Association, argue it’s the programmers driving the practice of bundling, not them. ACA President Matthew Polka said his member companies have no way to offer a la carte options to consumers without the cooperation of the six major media conglomerates that control roughly 90 percent of the TV market: Comcast/NBCUniversal, The Walt Disney Co., News Corp., Time Warner, Viacom Inc. and CBS Corp.
“What they’re selling is their big bundle of programming. In many cases, it comes down to take it or leave it,” Polka said. “Not one of these [cable and satellite] providers wants to be without [channels] carried by their competitors. Consequently, because of the competitive threat we face, we all agree to pay for the bundle.”
Polka agreed that sports programming has helped propel the cost increase but hesitated to place all the blame with ESPN. He acknowledged Disney has been especially successful at bundling ESPN along with other channels but said other major media companies such as Fox and NBC are planning to follow suit by creating national sports networks, which would only exacerbate the problem.
“The model that’s been created by ESPN is now being replicated by other programmers. Meaning the problem is only going to get worse as each one of these companies compete for sports right to carry programming,” Polka said. “I see price of sports skyrocketing with Fox and NBC competitors to ESPN.”
While advocacy groups including Consumers Union and Public Knowledge have thrown their support behind McCain’s bill, they see it as a first step rather than a panacea for the problems facing the TV industry.
Public Knowledge Senior Vice President Harold Feld said the TV market has been distorted by consolidation, which has resulted in companies like Comcast and Time Warner that have significant interests in both programming and transmission. He said those companies only negotiate with other huge players like DISH Network, and have little incentive to break up their products for smaller competitors.
“It’s a dysfunctional market,” Feld said. “You have a few very large players on content side and cable side that negotiate contracts. The way that these things work, with most-favored nation clauses, there’s no room for any variation by anybody else.”
Whether a la carte programming would actually result in lower prices for basic cable customers also remains in doubt. Michael Powell, president of the National Cable and Telecommunications Association and a former FCC chairman, was skeptical at the Senate hearing that eliminating bundling would reduce costs for consumers, arguing that high-demand programming such as ESPN often subsidizes the cost of less-popular offerings that are expensive to produce.
“It’s not a good deal for consumers if you pay $10 for 10 channels, and you were paying $10 for 100, and I think that there’s been some quite serious academic work that that’s a possibly, a very likely possibility,” Powell told lawmakers. “And so while the concern is respectable and noble, and one that we should continue to work on, I think we have our profound doubts that a la carte would actually deliver a lower-cost product to the American consumer.”
Powell said his member companies, which include most of the major cable and broadband providers, would favor small changes to existing laws rather than a sweeping overhaul. That stance could prove appealing on Capitol Hill, where lawmakers are wary of interfering with a fast-changing market only to have their regulations quickly rendered irrelevant by new technology.
“The bill would have a long road to passage, but what’s important now is for discussion to begin in earnest,” Polka said. “There really is a role for Congress. Even though the marketplace is changing, it’s likely not going to change fast enough as content companies continue to get bigger and demand higher fees, bundle more programming and sports becomes a bigger part of their offerings.”
That conversation has already begun in Congress, but appears unlikely to result in legislative action anytime soon. Given the partisan divide in Congress and the generally hands-off attitude toward new or emerging technologies, an overhaul of the cable laws would appear to be a tough sell. However, all sides of the issue acknowledged that cable prices are reaching the point where consumers may force action.
“The government may be forced into this simply because the price reaches a point where it becomes untenable,” Polka said. “Where that is, I can’t predict, but I’ve seen articles that regular monthly cable could be $200 a month. Consumers, I think, would revolt sometime before then.”
Feld suggested that “without some kind of change in the market incentives, we’re going to continue to see the industry in the same cycle its been in for a number of years.”
“The most powerful content providers will continue to jack up the prices, the most powerful [cable and satellite] operators set terms for offering the stuff online and consumers continue to lose out on potential innovation,” he added.