A La Carte Case For Higher Achievement Willkie Trip

CABLE “A LA CARTE” -- COMMON FACTS FOR ALL TEAMS Do you ever want television channels that aren’t available? Do you ever want to swap certain channels that you do have (but don’t watch) for channels that you want to watch? Read more to find out how it works!



Cable operators (like Comcast) pick out different “cable TV channels,” such as ESPN, CNN, and MTV, and place those channels in a “package”1 that they offer to subscribers for a monthly fee. Often, the contents of a package will differ in the various systems owned by the cable operator. That’s because the cable operator tries to make the package the most appealing to the local community that the cable system serves.



Subscribers can select and pay for a few “premium” cable TV channels, like HBO or Showtime, on an individual “a la carte” basis.2 But all other cable TV channels are placed in packages by the cable operator.



CONSUMER GROUP’S PERSPECTIVE: Several influential consumer organizations, such as the one represented today, have asked the Federal Communications Commission (“FCC”)3 to require cable operators to allow their subscribers to pick and choose the cable TV channels that come into their homes and to pay the cable operator only for those selected cable TV channels. They believe that this mandatory a la carte approach will give consumers more choice and lower their cable bills.



CABLE OPERATOR PERSPECTIVE: Cable operators oppose a la carte requirements. They say that packaging channels into a few packages is the easiest and cheapest way to offer diverse cable programming to a large population with a wide range of interests. They also say that packages help smaller channels that offer programs of interest to some, but not all, subscribers (Spanish-language channels, for example).



CABLE TV CHANNEL’S PERSPECTIVE: Most cable TV channels do not like a la carte. Cable TV channels make money in two ways: (1) by charging a “license fee” to the cable operator for each subscriber that can view the cable TV channel, and (2) by selling advertising that will air on the channel. 4 A cable TV channel that is included on a package that has many subscribers can charge higher fees to advertisers because more people will see the commercials. But a cable TV channel that is not placed on a package with many subscribers would probably have to charge higher license fees to the cable operator to make up for lower advertising sales because of the channel's smaller potential audience.



Cable operators must get permission to include a cable TV channel on their cable systems by signing a contract with the channel. Many of these contracts prohibit the cable operator from offering the cable TV channel on an a la carte basis to subscribers, because the channel wants to be offered as part of a package.



After hearing from those for and against a proposal, the FCC commissioners vote. A proposal becomes law if it receives the votes of a majority (3) of the commissioners.

1

Two common packages are: “Basic” (the local broadcast channels (ABC, CBS, NBC, FOX), PBS, and a few cable TV channels); and “Expanded Basic” (the “Basic” channels plus the most popular cable TV channels, such as Nickelodeon and ESPN). Approximately 90% of subscribers choose Expanded Basic which usually includes 60-70 channels. 2

The term “a la carte” is French and is used in restaurants to describe when a customer orders individual items from a menu and is charged separately for each one instead of ordering a meal that includes several courses for a single price. For instance, instead of buying a Happy Meal, a customer would buy a hamburger, fries, a soda, and a toy all “a la carte.” 3

The FCC is the government agency that makes the rules for cable TV and other communications companies. There are five FCC commissioners, one of whom is the Chairperson. Their duties include holding hearings on proposals for changes in communications rules that are suggested by companies and members of the public. 4

An example of TV advertising: Ford pays ESPN to play a car ad during Monday Night Football. Ford wants to make sure that as many people as possible see the car ad and buy the car. So, the larger the potential audience of people watching Monday night Football, the more Ford will pay ESPN to show their ad during the game.

THE “CHINCHILLA CHANNEL” -- A CABLE TV CHANNEL You are the owners of the “CHINCHILLA CHANNEL,” a cable TV channel geared towards owners of chinchillas. You strongly oppose adoption of any requirement by the FCC that cable operators provide all cable TV channels to subscribers on an a la carte basis. YOUR SPECIAL FACTS 

CHINCHILLA began operations just five months ago to provide information to the growing number of people raising chinchillas as pets.



Cable operators are distributing the CHINCHILLA Channel across 90% of the nation on various packages. Your contracts state that cable operators cannot offer CHINCHILLA to subscribers a la carte.



Audiences for CHINCHILLA’s programming were initially very small, but have grown larger over the past two months.



If any subscriber does not like the CHINCHILLA channel, he or she does not have to watch it and, if necessary, can easily program the digital cable box provided by the cable company to block it from showing up on his or her TV.



In order to meet your expenses, you need to collect $55,000 per month from your cable and/or advertising partners. Your channel is currently carried on packages with a combined 1 million subscribers nationwide. You currently are just breaking even each month -- You collect $5,000 from advertisers, and the current license fee you charge to cable operators is $.05 per subscriber per month, which produces the other $50,000 ($.05 times 1 million subscribers = $50,000).



If the FCC required CHINCHILLA to be offered a la carte by cable operators, you estimate that you would make little or no money on advertising and only about 1,000 subscribers would select and pay separately for CHINCHILLA each month. Therefore, to break even on your expenses, you would have to greatly increase your license fee charged to cable operators from $.05 to $5.50 per subscriber per month ($5.50 times 1,000 = $55,000). You are concerned that this enormous increase would cause many cable operators to stop carrying your channel going forward.



You also think your expenses will increase under an a la carte approach, particularly for marketing and promoting your service to consumers. When you were on a package, many new interested viewers would discover your channel simply as they were clicking their remote control through all the cable channels. As an a la carte offering, you will not have this benefit and will have to more aggressively seek out and persuade new viewers to pay over $5.50 per month to subscribe to your channel.



Because of the above new costs and the potential audience that would be lost if the CHINCHILLA CHANNEL is not part of a package, you are concerned that CHINCHILLA might not be able to survive.



There is no other cable TV channel that provides owners of the nation’s 6 million chinchillas with specialized information about how to care for their pets.

“CAPTAIN CABLE” -- A CABLE OPERATOR You are the owners of “CAPTAIN CABLE,” the country’s largest cable operator. CAPTAIN owns cable systems in big cities around the country like New York, Los Angeles, and Washington, D.C. CAPTAIN strongly opposes any laws that would require it to offer cable channels a la carte. YOUR SPECIAL FACTS 

CAPTAIN sells three packages of programming to customers. The basic package includes 15 channels of general interest and costs $12.00 per month. The expanded package includes all channels on the basic package, as well as 60 other channels, for a cost of $30.00. The super jumbo digital package includes 300 channels, including all channels on the basic and expanded packages, and costs $75.00 per month. (In comparison, it costs a family of 4 about $32 to go to a theater to see a single movie).



CAPTAIN picks all of the channels on each of its packages. Customers do not get to choose any of these channels themselves.



CAPTAIN does an annual survey of a representative sample of each of its system’s customers to find out their interests, hobbies, and professions. CAPTAIN uses the results of this survey to choose the channels that it puts on its packages.



Most of CAPTAIN’s agreements with cable programmers do not allow CAPTAIN to provide the channels on an a la carte basis. Every time a contract has to be renegotiated, it costs CAPTAIN tens of thousands of dollars in legal fees.



CAPTAIN keeps its prices low by promising channels that they will be able to reach tens of thousands of CAPTAIN customers at a time on one of CAPTAIN’s three programming packages. CAPTAIN worries that if a la carte is adopted, it will no longer be able to make this promise, since many of its customers may not choose to subscribe to particular channels. If this is the case, cable channel owners probably will raise their rates (called license fees) that they charge to CAPTAIN, and some may go out of business.



CAPTAIN also keeps prices low for customers by selling blocks of advertising time on some of the cable channels it carries on its systems. This way, an advertiser can pay one price to have an ad on several different channels. CAPTAIN is worried that fewer channels will survive under a la carte. If the number of cable channels is reduced, CAPTAIN will not be able to sell as many commercials and may have to charge customers more for cable service.



Every CAPTAIN customer can get a digital set-top box for a small monthly fee. This box includes technology that will allow customers to block out any channel that the customer does not want. Customers do not get a refund for any channels that they block.



CAPTAIN would not be able to offer channels a la carte unless it installed expensive software and equipment in each of its systems. CAPTAIN would have to pass these costs onto its customers by raising customers’ monthly fees.



CAPTAIN also would have to restructure its business operations. Currently, CAPTAIN can easily track its subscribers according to the service packages they’ve selected. Under a la carte, every customer’s bill would be different, individualized, and could change from month-to-month. CAPTAIN would need to install an entirely new billing system to handle these changes and would have to pass the costs for that system on to its customers.



In summary, CAPTAIN strongly feels that a la carte regulations would result in higher monthly prices and fewer program choices for its cable subscribers than under the current packaging model used by cable operators (as well as by satellite providers like DIRECTV and DISH Network). A recent report by the Government Accounting Office (“GAO”) supported these conclusions by CAPTAIN.

“THE NATIONAL INSTITUTE OF CABLE TV ENTHUSIASTS” (“NICE”) You represent an organization whose members are the numerous households (“consumers”) that subscribe to cable TV and want a choice about what cable TV channels they receive. NICE and other consumer organizations want the FCC to require a la carte cable service. YOUR SPECIAL FACTS 

Over 58% of U.S. households subscribe to cable TV.



The average household receives over 70 cable TV channels but watches only 17, either because of lack of interest or time, or the wish to avoid inappropriate content (violence, indecent language, or behavior).



Recent polling data shows that 78% of subscribers would like to buy cable TV channels individually, in combinations suited to their individual tastes.



Subscribers can use certain technology (the “V-chip”) to “block” channels they receive but don’t want, but they still have to pay for these channels.



The cost of expanded basic service averages around $43.00 per month. This is five percent higher than the average monthly cost during the previous year, and 93 percent higher than ten years ago. During the same period, the cost of living increased by around only 24 percent.



NICE believes that such price increases and the inability of consumers to choose their specific cable TV channels result from the current state of competition for cable operators which they feel should be greater. o

A recent consumer group study stated that around 30 percent of the top cable TV channels are owned all or partly by cable operators or other large entertainment companies.

o

Local governments, which control access to the streets under which cables are located, give the right to operate a cable system to only one or, at most, two cable companies in each area. (However, the two national satellite video providers -- DIRECTV and DISH Network -- serve millions of customers each and compete with cable operators across the country.)



NICE believes that, if subscribers could choose their own combination of channels, cable programmers would have to compete for subscriber business by appealing to subscribers directly -- in the “open marketplace,” as other sellers of goods must do – instead of doing business only with operators.



Consumer groups disagree with the cable industry about whether a la carte would result in lower subscriber costs. A recent study by a la carte supporters estimated a savings of 13 percent on monthly cable bills if consumers could buy only the cable TV channels they want. The FCC also recently released a report concluding that cable prices might not increase and program choices might not decrease under a la carte regulations.

“CAPITOL HILL POWER” You belong to an informal yet influential group of Senators and Members of the House of Representatives (“HILL POWER”)5 whose goal is to help parents protect their children from inappropriate television programming. As part of your strategy, you support consumer groups who want the FCC to require a la carte cable. YOUR SPECIAL FACTS 

Approximately 74% of children between the ages of 2 and 18 live in homes with cable TV service. Most are in households subscribing to expanded basic service.



Most children watch television for an average of more than three hours every day. About 81% of children ages 2 through 7 sometimes watch television without adult supervision, often when they are home alone after school and their parents are still at work.



Parents cannot subscribe to a “package” of cable programming geared only to children. Cable TV channels with kids’ programming are generally included in the same expanded basic package as those suited primarily for adults. Some adult programming includes cursing, offensive behavior, extreme violence, or nudity, and is often referred to as “indecent.”



Recent polling data shows that 66% of Americans say there is too much nudity on TV and 68% say there is too much violence.



Programs on the “broadcast” channels and their local stations are subject to FCC rules which prohibit indecent material at times when children are expected to be watching TV – from 6 a.m. to 10 p.m. 6 However, the indecency rules do not apply to cable programming. And, there are no rules – for either broadcast or cable – that restrict violent content.



Several kinds of technology are available to block certain programming or channels, but many households either do not have such technology or find it difficult to use.



Many parents have asked CAPITOL HILL POWER – as their elected officials – to help them by finding more effective ways to limit their children’s exposure to harmful content. One of the options they support is a la carte, so they can purchase “kid-friendly” channels and not have to have – or pay for – channels that are inappropriate for children.



Some of the parents we’ve talked to agree with consumer groups about the need for more competition. They believe being able to choose directly the channels they subscribe to will stimulate competition among at least some of the cable channels to provide better programming in order to “win” their business.

5

6

Congress is often referred to as the “Hill” by people in Washington, D.C.

“Broadcast channels” (NBC, CBS, and ABC) transmit their signals through the air and are licensed by the U.S. government. Cable channels transmit their signals through cables buried under the ground and connected to homes. They are not licensed by the government.

THE FEDERAL COMMUNICATIONS COMMISSION You are a Commissioner of the U.S. Federal Communications Commission (“FCC”). Today you will participate in the FCC hearing on the proposal by several national consumer organizations that cable operators be required to offer cable channels on an a la carte basis to cable subscribers. Although you may have your own personal opinion on this subject, your responsibility is to listen to the facts and arguments presented, ask questions, and use your best judgment to make a decision that you believe will be in the best interest of the parties involved and of the people of the United States. YOUR SPECIAL FACTS 

The FCC was established by a law called the Communications Act of 1934. The FCC has responsibility for establishing rules and regulations in the U.S. for communications by radio, television, telephone, satellite, and cable. It is directed by five Commissioners appointed by the President and confirmed by the Senate for five-year terms. The President designates one of the Commissioners to serve as Chairperson. The Chairperson gets to set the FCC’s agenda and decide when to bring rules or cases to a vote with the other four Commissioners. Only three Commissioners may be members of the same political party.



At today’s public hearing, you will hear arguments from four “parties” (groups) -- a cable operator, a cable TV program channel, a consumer group, and members of Congress -- on whether or not the FCC should create rules to require cable operators to offer their channels to subscribers on an a la carte basis.



One of you has been designated the Chairperson of the FCC. The Chairperson will “preside over” (manage) the hearing, calling on each group to speak in turn, calling on Commissioners who want to ask questions, and presenting the formal issue for a vote. The other four of you are Commissioners of the FCC. Each of you has an equal vote in making rules; the Chairperson’s vote has no extra weight.



Coming into the hearing, one Commissioner should be designated as in favor of a rule requiring a la carte carriage by cable operators and should ask probing questions of those opposing such a rule. A second Commissioner should be designated as the anti-a la carte Commissioner, who should ask probing questions of those groups arguing for a la carte regulation. The other three Commissioners are neutral at this point and have not indicated whether they are in favor of or against a la carte. They should ask tough questions to all four presenting groups. After the hearing, the pro- a la carte Commissioner can decide to change his/her mind and so can the anti-a la carte Commissioner.



After each of the four groups finishes its presentation, each Commissioner will be given a few minutes each to ask the members of that group questions to help you figure out whether you should vote to impose an a la carte rule on cable operators.



After all four groups have presented, you will then discuss the issue for a few minutes with your fellow Commissioners. At the end of this discussion, the Chairperson will formally ask you the question “Should the FCC require cable operators to offer their subscribers cable channels on an a la carte basis?” (A rule can be imposed only if three of you vote in favor of it.)

o As the Chairperson calls your name, you will answer “Yes” if you favor this rule or “No” if you oppose this rule. You should then briefly explain the reasons for your vote. You must vote yes or no; no ties and no abstentions are permitted (an “abstention” is when a Commissioner decides not to cast a vote). o

After all the Commissioners have voted, the Chairperson will announce the “tally” (the numbers voting for and against) and the outcome (the rule was either passed or defeated) and declare the meeting adjourned.