THE CABLE PIPELINE

With the recent battle between Cablevision and Disney over Retransmission Consent in New York regarding WABC-TV carriage on Cablevisions 3.1 million subscribers, and thereby producing a coalition of Cable Providers to petition the FCC to intervene in negotiations, is akin to the saying: (be careful what you ask for).

It seems to me, this is a business market negotiation best handled through competitive market forces rather than asking the FCC to get involved in a dispute between two companies. The (ax can cut both ways) when it comes to oversight of the pipeline distribution and broadcasting industries. Yes, consumers are caught in the middle, wanting pertinent and relevant programming for a reasonable price, while public negotiations and threats of signal cuts dominate the headlines; see (Cable firms seek FCC help in fee disputes).

The issue remains, how much is WABC-TV worth to Cablevision for carriage and distribution of their signal. Retransmission Consent was formulated years ago when broadcast stations wanted assurance that cable companies would carry their local signals, and be compensated for their original programming.  In the beginning most broadcasters just asked for Must-Carry, or assurance their signals would be distributed by pipeline providers for 3 years, see (Moody’s expects to see more retrans battles).

Fast-Forward to today and times have changed. Providers are paying substantial sums per month to distribute most of their programming to consumers. Cable Programmers have reaped the benefits of these carriage agreements in producing top-quality programs through carriage fees along with ad supported revenues; a dual revenue model. Broadcasters are struggling to stay afloat with the single, Ad Revenue Model . Therefore, Retransmission Consent has become a battleground for demanding monthly carriage fees, just as most Cable Programmers ask for, and receive. Broadcasters have seen a significant drop in Ad Revenues in recent years along with a lose network subsidies. Without additional revenue streams, broadcasters are looking to lucrative distribution agreements to make up the short-fall.

This is a market demand negotiation, not a regulation matter for the FCC to consider. If Cable Providers want to lessen the impact of these carriage fees, they should consider (Tiering) Broadcast signals to accommodate and moderate fee increases. Yes, if negotiations demand an unreasonable price for most customers, negotiate for the signal to be on a Tier where consumers can pay an extra cost if they value the programming. Some consumers will lose in this scenario, but overall consumer rates would be adjusted for those who can afford the additional cost.

This is not a regulatory issue, but one of market demand and supply. In my opinion the coalition of cable providers should think twice before asking the FCC to intervene in their business negotiations, or risk having regulations that regulate them into non-existence. This is a Free Market System, let it work as intended.

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• Time Warner Cable to ask FCC for new rules on negotiating programming deals (latimesblogs.latimes.com)
• Cable and satellite operators take their case to Congress (latimesblogs.latimes.com)
• Cable Companies Petition FCC (online.wsj.com)
• Washington weighs in on Disney – Cablevision fight (latimesblogs.latimes.com)

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Would it not seem logical that Cable Operators lose of customers should have a negative affect on the bottom line? Not so, with the latest financial reports indicating that operators are experiencing gains in significant “Free Cash flow”.

 Defined as:

 “A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base.”

 The industry as a whole lost an estimated 1.4 million subscribers in the past 18 months which is larger than some of its smaller cable companies. Yet cash-flow has increased significantly

• (Free Cash flow) Report (in millions):

 Cable Operators have historically found it difficult to keep and add customers during the seasonal summer months and with the Telco’s becoming more in trenched within their business model, and the economy “limping along in idle”; it has been a difficult year in both keeping and growing subscribers.

 The reason for all that cash coming in during this difficult time is three fold. With fewer customers to manage, operators are not spending as much to maintain those customers, and with most infrastructures built out, capital expenditures have declined significantly, and it parallels that operators are taking advantage of that previous capital spending on new services to upgrade existing customers to higher paying packages. Thus, “free cash flow” is now “king” in financial reporting.

 Although capital expenditures have been significant in the past, they do not seem to match what Verizon’s Fios is implementing with its model. This is a FTTH technology that has some believing the flexibility and enhancements of this service will be a force to be dealt with in the future. Cable Operators continue to sit in the “cat bird’s seat’ with their customer clout and advanced service penetrations, but they should never believe in short-term cash flow as the answer to all ills. It will continue to be the best innovators that are able to manage both the short and long-term intricacies of customer demands.

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