From: owner-cablereg-l@netcom.com Date: Sun, 12 Mar 1995 11:40:31 -0800 Subject: Cable Regulation Digest 3/13 Reply-To: higgins@netcom.com CABLE REGULATION DIGEST Summary of regulatory news from Multichannel News 3/13/1995. Vol.2, No.11 Copyright 1995 Multichannel News. Reproduction/distribution is permitted so long as this document is left fully intact. NO CHANGES are to be made to this document without the written consent of Multichannel News. Listserver, Gopher, FTP info attached at bottom. Refer questions to John Higgins (higgins@dorsai.dorsai.org or 212-887-8390) For Multichannel News subscription information: 800-247-8080. A bargain at $78/year. Multichannel e-mail contacts: Marianne Paskowski, editor: Mpcable@aol.com John M. Higgins, finance editor: higgins@dorsai.dorsai.org Kent Gibbons, new media editor: kentgibb@well.com Leslie Ellis, technology editor: Ellis299@aol.com QUOTE OF THE WEEK "I want to thank the Metropolitan Police for their work. And I want to thank the press for highlighting this item and causing the police to be just a little bit more diligent possibly in their search for the 1987 gray Buicks that otherwise crowd our streets." FCC Chairman Reed Hundt after his stolen car was recovered last week. TCI LOSES OUT IN SAMMONS BID In a surprising win, leveraged buyout firm Hicks Muse Tate & Furst and Marcus Cable Corp. combined to blow out a six-MSO consortium led by Tele- Communications Inc. in the pursuit for Sammons Communications. Sources involved in the discussions said that Sammons reached a handshake deal with Hicks Muse and Marcus late Thursday night and were drafting agreements Friday morning. Sammons employees were told Friday morning that a deal was close to being signed. The deal would give Hicks Muse and Marcus up to 1.1 million subscribers. However, one source familiar with the deal said that some of Sammons' northeastern systems were excluded from the deal. The TCI group had bid about $1.7 billion for the entire company, but the terms of the Hicks Muse offer could not be learned. The outcome stunned members of the consortium, which had locked up so many players that many financiers believed no one else would put up a serious bid. Assembled by Tele-Communications Inc. and InterMedia Partners, the group included Charter Communications Corp., Century Communications Corp., Post- Newsweek Cable Inc. and Knight-Ridder Inc. "I've never misread a deal so badly," said a participant in the consortium. Adelphia Communications Corp. had circled the auction for weeks, but failed to submit a formal offer when bids came due March 1, sources said. Marcus Cable will serve as the buyer for the properties, backed by Hicks Muse and existing partner Goldman Sachs & Co. In addition, Los Angeles LBO firm Freeman Spogloie has agreed to put in new equity, following its investment in Marcus' acquisition of part of Hallmark Corp.'s cable systems last year. If the Hicks Muse/Marcus bid succeeds, it will go completely against the drive toward clustering cable systems in local markets. Bulking up for sheer size is out. Targeted acquisitions are in. Sammons has concentrations in some appealing markets, including southern New Jersey and Fort Worth, Texas. But the company's systems are spread out over 19 states, largely in small towns, "from Moses Lake, Wash., to Pascagoula, Miss." as one financier put it. Marcus Cable itself has been among the loudest preachers of local clustering. The 550,000-subscriber MSO has moved aggressively to acquire systems in Wisconsin, although it has also recently added to its Maryland- Delaware region as well. But very little of Sammons' operation meshes with Marcus' existing systems. One MSO executive joked that the deal matches a new strategy to cluster "within the United States." BELL ATLANTIC TOUTS NEW VOD PROGRAMS If Bell Atlantic Corp.'s video-on-demand trial is no blockbuster, it won't be for lack of programming. The telco said last week it will offer consumers more than 700 video choices in its upcoming trial, in 1,000 homes in northern Virginia. Most major Hollywood studios, the three main broadcast networks, 18 cable networks and more than two dozen independent distributors will supply movies and TV shows. The test is strictly of video-on-demand -- no cable TV, no time-shifted programming and no interactive shopping. John Aronsohn, an analyst with the Yankee Group in Boston, noted that Frontier Corp. (formerly Rochester Telephone Corp.) recently cut off its VOD trial in Brighton, N.Y., after concluding that VOD was not economically viable as a stand-alone service. But Aronsohn added that Frontier's was a small trial, about 50 homes. Bell Atlantic's will be much bigger -- possibly ramping up to 20,000 homes -- with a broader programming mix. The telco should gain valuable information about pricing, packaging and marketing video, he said. "It's definitely a trial worth watching," Aronsohn said. Movies will be priced competitively with cable pay-per-view offerings and with video stores, he said. Other videos, such as selected TV shows, will cost subscribers 49 cents to 99 cents apiece, said Mitchell Praver, director of programming and content development at Bell Atlantic Video Services. Test homes also will be charged a $7.50 per month access fee (to Bell Atlantic Network Services) and will pay an undisclosed monthly charge for a decoder box and other in-home equipment, BVS spokesman Larry Plumb said. Bell Atlantic also will experiment with video "packages," such as "Jaws" or "Psycho," which include original movies and their sequels. Network programming will consist mainly of limited reruns-on-demand as chosen by the networks. CBS, for example, will provide the series premiere of Dr. Quinn, Medicine Woman along with a Thanksgiving show featuring Johnny Cash and June Carter Cash. Other CBS series include 60 Minutes, Dave's World and sports specials -- all programming owned by the network. For technical and other reasons, this portion of the Bell Atlantic trial will not feature time shifting, meaning viewers will not have the ability to watch the most recent episode of a show whenever they choose. That will be tested later. "That is something of real interest to us," said Mark Harrington, CBS Inc.'s senior vice president of new media. Participating in the trials also helps the telcos learn about "how we operate, the dynamics of the television business," said Martin Yudkovitz, head of NBC Multimedia and senior vice president of strategic development at the network. "We're not looking for extraordinary buy-rates," Yudkovitz added. "We're looking to use this for experimental value and to learn from it." Bell Atlantic will have 42,000 minutes of programming stored in an Oracle Corp. server, including about 200 movies, and hundreds of TV show episodes, special-interest videos and entertainment specials. One of the biggest hits from the telco's 284-employee technical trial will be on the menu: George of the Jungle, the old animated comedy. Others range from Alice to Wonder Woman. How-to titles include Plan Your Garden and Massaging Your Mate. Subscribers will be able to simulate VCR functions such as fast-forward and "fast-reverse," and can call up a bar graph on the TV screen to show how much time is remaining in the movie, according to Kenneth Van Meter, president of interactive multimedia platforms at BVS. Tests of the first version of the service will run for at least six months, Plumb said. In the next phase, programming will be provided by Bell Atlantic's joint venture with Nynex Corp. and Pacific Telesis Group, he said. SMITH BLASTS FCC ON VIDEO DIALTONE Washington -- Bell Atlantic Corp. chairman Raymond Smith last week called for a major overhaul of video dialtone rules in a bid for wider deregulation that angered some in the Federal Communications Commission. Bell Atlantic was the first Baby Bell to win approval for commercial VDT. It was also the first to be allowed to be a VDT programmer. Both actions were controversial steps taken by the FCC. Smith, in a five-page letter sent March 6 to FCC chairman Reed Hundt, said the FCC's VDT rules were delaying the rollout of competitive video services and needed to be streamlined. Keeping current VDT rules, he said, would harm his company's ability to compete with "incumbent cable operators, the phenomenally successful direct- broadcast satellite providers" and others. Smith's letter offended some senior FCC officials, who said the VDT rules had been carefully crafted and had not caused delays for Bell Atlantic. The National Cable Television Association is planning to respond to Smith's letter this week, an NCTA spokesman said. The cable industry, concerned the telcos would cross-subsidize their video services with telephone revenues, has been highly critical of the FCC's VDT policies. Under VDT rules, phone companies are required to offer sufficient capacity to allow various programmers to use the network on nondiscriminatory terms. The FCC is also considering capping Bell Atlantic's control of the network at either 25 percent or 50 percent. In his letter, Smith said the proposed FCC capacity cap was unreasonable and potentially costly. "If the Commission were to adopt rules that would allow large portions of the video dialtone network to lie fallow, Bell Atlantic could not afford to take the risk of deploying video dialtone service," Smith said. Smith's letter outlined several steps "that must be taken to make video dialtone an attractive platform." He said the FCC should "remove" the requirement that telcos obtain VDT construction permits, deregulate VDT services and permit the filing of "informational" rate cards. DOLE SLAMS CLINTON ON CABLE DEREG Washington -- Telecommunications reform debuted as a 1996 presidential election issue last week when Senate Majority Leader Bob Dole (R-Kan.) slammed the Clinton administration for strangling the cable industry with red tape and for rejecting Republican calls for the repeal of rate regulation. "Let's not fool ourselves, the White House's stance on cable TV is proof positive that it is only interested in making government the biggest player in the communications industry," said Dole, the GOP's apparent presidential front-runner. The administration staked out its position on cable early on. In January, Vice President Al Gore said he would support cable relief when direct-broadcast satellite and video dialtone were firmly rooted, but not before. And two weeks ago, Commerce Department Assistant Secretary Larry Irving told a Senate committee that the GOP plan to lift all cable rates was unacceptable. Dole said that if the White House was serious about competition in communications, it would liberate cable so the industry could vie for local phone customers. "The point is that if we strangle cable with regulation, we don't get local competition. That means government will be forced to continue regulating the communications industry," Dole said. Dole's partisan swipes came in remarks to the Republican-supported National Policy Forum on Wednesday. Dole called for cable deregulation and passage of pro-competitive telecommunications reform legislation. Given the nature of Dole's remarks, the GOP leaders seem willing to make telecom a partisan issue. "Politically, it will not be lost on people that the opponents of this will be Democrats who still believe in the regulatory regime," Republican National Committee chairman Haley Barbour said. Dole, leading in the polls a full year before the New Hampshire primary, scolded Gore for supporting the 1992 Cable Act. "Vice President Gore has always been a regulator. After all, he was one of the principal architects of the Cable TV Act. He and the president used it as a campaign issue -- something about consumer protection as I recall." But Dole said the law pushed cable rates higher rather than lower. "I still get letters from the consumers themselves complaining their rates are going up," Dole said. Dole said it was time to scrap the faulty rate rules, which FCC chairman Reed Hundt has said have saved consumers $3 billion. He said cable prices would be restrained in the future by DBS. "The recent success of direct-broadcast satellite has cable scared and it's one of the new competitors that will keep them on their toes," Dole said. A Gore aide who attended the Dole speech declined to comment. Business leaders and lobbyists from cable and other telecommunications sectors -- some of whom paid $25,000 to attend -- were on hand for the Dole speech. Also in attendance were Federal Communications Commission members Susan Ness and Rachelle Chong. "I certainly agree with Sen. Dole that cable regulation needs to be reversed," said Chong, a Republican appointee. "Not all of it. I think parts of the Cable Act have been very successful: must-carry, program access, for example." Ness, a Democrat, said cable rates have gone up because the FCC's going- forward rules allow operators to raise rates a maximum $1.50 over the next two years with the addition of six new channels. "The need to increase the opportunities for new programming is extraordinary," Ness said. Rates also climbed, she added, because of the pass- through of inflation and other external costs. Time Warner CEO Gerald Levin, who spoke on a panel prior to Dole's speech, said he was hopeful Congress would repeal some cable rules. "We believe we must have a bill this year. It's very important for the industry. As long as broadcast basic -- if that's regulated, I think that's okay. It's the upper tiers I don't think should be regulated," Levin said. Dole warned warring communications sectors to settle differences because he and Senate Commerce Committee chairman Larry Pressler (D-S.D.) were serious about passing a major bill not associated with the Contract with America. Dole said the "most contentious" issue was Baby Bell entry into long- distance phone markets. "It seems to me the players, not Congress, should resolve it," Dole said "If you are unwilling to resolve it, we will resolve it for you." Democrats have claimed that Republicans in the end won't vote for cable deregulation because it would mean an increase in cable bills. Dole, however, voiced his own theory for junking the regulations. "It seems to me that eliminating cable rate regulation does not necessarily mean that rates will go up. After all, the threat of competition could hold prices in check," Dole said. HUNDT WANTS MORE BASIC SERVICE Washington -- Federal Communications Commission chairman Reed Hundt last week said he favors development of low-priced basic cable service to help the industry achieve 90 percent penetration. Hundt called on local officials to craft policies that would enable cable to grow. "I encourage you to think about the goal of high penetration for a stripped- down basic cable package and tell me how you think that policy could be achieved, if you think it is wise," Hundt told the National Association of Counties on March 5. IS PRIMESTAR READY FOR PRIMETIME? Bala Cynwyd, Pa. -- The way PrimeStar president John Cusick figures it, there's really no reason to apologize because his direct-broadcast satellite service is controlled by a group of huge cable companies. "We've certainly taken our shares of arrows on that," Cusick said, reflecting a picked-on attitude shared by many in PrimeStar Partners L.P.'s hierarchy. PrimeStar executives feel people in the TV industry -- especially in the press -- give their company short shrift because of its owners. That lack of respect comes despite PrimeStar's signing up more than 300,000 subscribers to its digital television service, even with a number of competitive handicaps Cusick freely enumerates: "I sit back," Cusick continued, "and say, `We've got a service today that's got half the number of channels of our competitors, we've got a dish that's got four times the area and we are literally running neck and neck with them.' I think that speaks volumes for the effectiveness of our distributors." PrimeStar isn't exactly neck and neck with its competitors. GM Hughes Electronics Inc.'s DirecTv has more than 400,000 subscribers, while Hubbard Broadcasting Inc.'s United States Satellite Broadcasting or USSB has about 300,000 subscribers. Both use equipment sold by Thomson Consumer Electronics Inc. PrimeStar, using the cable model, factors its customer equipment costs (about $1,000) into the monthly bill. Analysts already take PrimeStar seriously. "I think they're for real," said Michael Alpert, who headed up Comsat Corp.'s early failed attempt at a DBS service and is now a consultant. But even PrimeStar supporters acknowledge the service needs to match DirecTv's two main advantages -- DirecTv subscribers get to use a much smaller backyard receiving dish and can only receive about half of DirecTv's 150 channels. Until then, DirecTv is likely to keep widening its lead. Wait until next year, Cusick and others at PrimeStar reply. That's when PrimeStar partner Tele-Communications Inc. expects to launch the first of two high-powered satellites that will ramp PrimeStar's service up to 200 channels and allow subscribers to use smaller dishes. In addition to the $400 million bet, which requires government approval of a TCI satellite license deal, PrimeStar has made a number of moves behind the scenes to prepare for its move into primetime. James Gray, a former Time Warner Cable vice chairman, came on in January as chairman, with, he said, a mandate to help the organization take stock and clearly state priorities for a business the partners plan to sink a cool billion dollars into. "I think all the pieces are there," Gray said. "It's a classic problem of taking a small business to something that we know is going to be at a much higher level, mapping the route to get there and making sure we have the resources to do it." TCI, the biggest PrimeStar distributor, having signed up about half of its subscriber base, last month set up a separate organization devoted to PrimeStar. Gary Howard, also TCI's head of mergers and acquisitions, is its president. PrimeStar also has put incentives in place, so that, for many cable system managers, "it should be one of the stronger areas of cash flow growth this year," Howard said. Cable distributors still don't make quite as much per head from PrimeStar subscribers as they do from wired cable customers, according to Dan O'Brien, president of Time Warner Satellite Services, Time Warner's PrimeStar division. Where wired-cable revenue generally has a 40 percent gross profit margin, PrimeStar is more like 25 percent, O'Brien said. Still, he said, "that's an excellent margin in most industries." And many cable systems have at least designated one manager whose primary responsibility is to generate PrimeStar subscribers. Those are the systems that have had best results, O'Brien said. LOAN SNAGS HIT WIRELESS OPERATOR PREFERRED Preferred Entertainment Inc. became the latest wireless operator to get hit by the industry's capital crunch, prompting the Chicago-based company to trim operations to conserve cash. Preferred is trying to recover from the failure of a planned loan deal with two lenders, Finnish bank Kansallis-Osake-Pankki and North Carolina's First Union Bank. The banks -- both of which have been dipping into wireless cable lending over the past two years -- had been offering to fund a $20 million subordinated credit package. But Preferred said that the deal stalled because of "a combination of factors," primarily blaming KOP's recent merger into another Finnish bank that prompted a re-evaluation of the bank's pending loans. First Union was not willing to step up and replace KOP as the lead agent on the deal. KOP and First Union executives did not return calls seeking comment. The company has switched gears and is now seeking just $5 million in new equity or subordinated debt to carry it through the year. At the same time, Preferred is under takeover pressure from major shareholder People's Choice TV Inc. The Shelton, Conn.-based wireless operator already owns 23 percent of Preferred and has been wrestling for control over the company for seven months. Preferred rejected a recent PCTV stock swap offer of about $14 in PCTV stock for each Preferred share. Preferred is suffering from a pinch affecting virtually all wireless operators. Operating snags, rising interest rates plus the threat of competition from telcos and direct-broadcast satellite services combined to crush wireless stocks last year shutting down the stock market as a source of expansion cash. Wireless operators were on a roll in 1993 and most of 1994 after lenders and investors turned their attention to the industry, pumping in an estimated $700 million in equity and loans. That gave wireless its first shot at becoming a solid competitor to cable. Operators suddenly needed money to install expensive hardware into the homes, fueling sharp increases in subscriber growth. Cash-flush companies seeking bargains rushed to take over ailing systems. However, wireless operators are capital intensive, startup businesses trying to grow quickly but can't yet generate expansion cash from operations. So any glitches in the flow of outside equity and loans can sharply disrupt operations. Many financiers believe the capital problem is temporary, but operators still have to work through the crunch. Los Angeles-based Cross Country Wireless, an early, strong player, has stalled out and is seeking new money. CableMaxx Inc. has scaled back installations following the failure of a $60 million junk bond sale. CEO Tommy Gleason said the company is close to securing new financing, and has several appealing options. "We've shown we can certainly make money in this business," said Gleason, who has built up a 33,000-subscriber portfolio in two years. "It's just getting the money to do what we need to do." "It's a tough market for everybody," said Arthur Newman, analyst for investment banker Gerard Klauer Mattison, which has focused heavily on raising money for wireless ops. Newman called Preferred's problem "a temporary setback It's not clear that this represents any inability to raise capital." To conserve cash, Preferred is pulling back a bit. Instead of marketing its TV package to all consumers, Preferred will concentrate solely on apartment and condo buildings. Such multiple dwelling units (MDUs) require less capital per subscriber than single-family homes because the company's pricey microwave receivers can serve more than one subscriber. "We believe with our existing cash position and some additional cash, we can concentrate on the MDU and commercial market and still achieve a 50 percent increase in subscribers for 1995," said Preferred CFO Randall Anderson. While the company and outsiders agreed that the snag is not life- threatening, it does leave Preferred short of cash. The company's year-end balance sheet has not been disclosed, but in September the company had about $8.6 million in cash. Anderson would not disclose the company's current cash position. The company has used up just $500,000 of an existing $20 million senior credit line with KOP. But Preferred has violated the covenants of the loan and KOP will not advance any additional cash. The company acknowledged that it needs to renegotiate the senior debt package. "They do have some cash available," Newman said. "They're not down to their last penny." -=-=-=-=-=-=-=-=-=-=-=-=-=-=And Finally...-=-=-=-=-=-=-=-=-=-=-=-=- David Palmer, an auditor fighting signal theft at Western Communications' Monterey, Calif. system, has his own version of the industry's on-time service guarantee: [``]Your illegal connection will be shut off within 4 hours or your cable is free!" Anti-piracy folks got pretty nervous in January when a General Instrument trailer containing a few thousand satellite descramblers was stolen from a South Florida trucking firm. Half the shipment was PrimeStar DBS receivers employing the DigiCipher encryption system that the pirates supposedly hadn't been able to crack yet. Was the theft a random hit or was the trailer targeted by pirates who had compromised DigiCipher? Well, there's good news from the underground. The VideoCipher C-band receivers also in the shipment have begun popping up on the streets of Miami for a couple hundred bucks each. But someone's still sitting on the PrimeStar units. "They're not worth anything if they haven't been cracked," said one cable security specialist. "Whoever's got 'em can't sell 'em." ------------------------------------------------------------------------- HOW TO GET THE CABLE REGULATION DIGEST: E-MAIL - To: listserv@netcom.com Subject: Ignored Body: subscribe cablereg-l FTP - ftp.vortex.com/tv-film-video/cable-reg GOPHER - gopher.vortex.com/*** TV/Film/Video*** WWW - http://www.cablelabs.com/NR/cable_tv.html *--30--*