From Business Week
Big Cable's Package-Pricing Ploy
Consumers could be saving money by selecting their premium channels a la carte, but don't expect to hear it from your cable outfit
Many cable-TV operators reported strong earnings in the third quarter, a triumph in an otherwise lackluster earnings season. Cable leaders Comcast (CMCSK ), Cox Communications (COX ), and Time Warner Cable (AOL ) each succeeded in persuading customers to sign up for lucrative new services, such as digital cable, high-speed Internet access, and local-phone service.
Even as the fortunes of these companies improve, however, a federal rule took effect in early October, 2002, that could let savvy cable customers cut their monthly bills in half. And if enough penny-pinching viewers act, cable operators could see margins slashed and their quest to deliver greater free cash flow prolonged. The rule, a provision of the 1992 Cable Act, says cable operators can no longer require subscribers to buy multitier packages of programming to get pay-per-view events and premium channels, such as as HBO, Starz, and Showtime.
PICK AND CHOOSE. New York City fans of HBO's Sex & The City who could care less about the 20 or more channels that must be bought to get that particular premium service could slash their monthly cable bill from $56 to about $31. The smaller fee would get HBO and the major TV networks. In Orlando, fans who want Showtime's The Chris Isaac Show but not the assorted channels that come with it, could cut their monthly cable costs from about $51 to just $29.
Yet hardly any customers know about the rule, despite the claims of some cable operators that they began offering the option long ago. It's hard to find any company that publicized it. And in interviews with financial analysts who cover cable, not a single one was aware of the option -- though many expressed an interest as a way to cut their own cable bills.
It's no mystery why cable operators haven't made a big push to publicize this option. While most of their growth now comes from new services such as high-speed Internet access, television still accounts for the bulk of revenues. In the third quarter, 44% of cable behemoth Comcast's $2.75 billion in revenues came from traditional TV customers, while Cox relied on TV service for 68% of its $1.67 billion in revenues.
MONEY-SAVING OPTION. Moreover, cable operators frequently use their programming packages to pressure customers into expensive services, such as digital cable. Last year, Time Warner Cable told analog cable subscribers in New York City that they would no longer receive various channels, including HBO 2 and HBO Family, unless they upgraded to digital service -- at the cost of an additional $9.95 a month. "This fits their M.O.," says David Butler, media director for Consumer's Union. "Cable operators know that if customers have the option of paying less and getting fewer, better channels, many would scale back and save money."
A spokeswoman for the Federal Communications Commission says the agency can't require cable operators to advertise the new option because that would violate the constitutional right to free speech.
One group, however, would especially like to get the word out: The companies that produce programs for premium cable channels. They figure they might draw more eyeballs if viewers could buy just their shows. But they won't publicize the new rule, out of fear that they'll alienate the channels that buy their programming. Both HBO and Showtime are owned by media conglomerates that don't want to see their other, less sexy channels lose viewers. HBO parent AOL Time Warner also owns CNN, TNT, TBS, and CourtTV -- all of which HBO-hungry consumers have to buy unless they know enough to ask only for HBO.
BUYER BEWARE. Showtime parent Viacom (VIA ) owns MTV, VH1, and Nickelodeon -- which are must-buys for those who want to see movies on Showtime. "It's up to our clients [the cable operators] to decide how they offer our services," demurs Jeff Wade, executive vice-president for sales and affiliate marketing at Showtime Networks. "It's our hope that our affiliates would use whatever tactics are available to increase their premium penetration."
The only network coming clean with consumers is Starz. The Denver-based company, a wholly owned subsidiary of Liberty Media, which also owns Discovery Network, could theoretically be hurt if more cable viewers were to opt for only premium channels. But Starz sees the new rule as a huge opportunity to add subscribers to its movie offering.
"Movie channels are the crown jewel in video programming," says Que Spaulding, president for distribution at Starz Encore. "Yet, through marketing, cable companies have created a situation where you have to buy basic, expanded basic, digital access, and digital service before you can buy the things you really want -- which are movies from Starz and innovative programming from HBO and Showtime."
PEOPLE'S CHOICE. "This wouldn't work in any business but a monopoly," points out Spaulding. "Imagine if grocery stores tried to stop customers from buying what they wanted -- milk, juice, eggs, and bread -- until they purchased $50 or more of other groceries they didn't want." Starz and satellite provider EchoStar (DISH ) are now offering satellite customers a package of basic local channels plus eight movie channels for just $39.99.
The new rule doesn't have cable operators running scared. According to the National Cable & Telecommunications Assn., 97% of cable subscribers choose to buy expanded cable programming. And spokespeople for both Cox and Time Warner Cable say they have offered customers a choice for years -- long before the 1992 act required them to do so -- though viewers had to know to ask for such an arrangement. "The value of cable programming stands on its own," declares the NCTA's Marc Smith. "People don't want to give up CNN, MTV, and Lifetime for HBO."
As the word gets out, though, that might change. According to the Bureau of Labor Statistics, consumer cable bills have skyrocketed 45% since 1996. And Starz reports that since it began its promotion with EchoStar in August, the number of new satellite customers who also sign up for Starz channels is up by 50%. Consumer demand for lower-price cable service may rise even more once viewers realize that, more than ever, the choice is theirs.
Provided by Hugh Campbell