CABLE REGULATION DIGEST A summary of regulatory news from Multichannel News 4/04/1994. Vol.1, No.14 Copyright 1994 Multichannel News. NO CHANGES are to be made to this document without the written consent of Multichannel News. Reproduction/distribution is permitted so long as this document is left fully intact. The best way to obtain CABLE REGULATION DIGEST each week is subscribing to the TELECOMREG mailing list (listserver@relay.adp.wisc.edu, SUBSCRIBE TELCOMREG). You may also finger higgins@dorsai.dorsai.org. Anonymous FTP and Gopher archives are now graciously made available at Vortex Technology. To FTP, head for ftp.vortex.com, change directories to "/tv-film-video/cable-reg". By Gopher, head for gopher.vortex.com and select the "*** TV/Film/Video ***" menu item. For questions, contact John Higgins (higgins@dorsai.dorsai.org or (212-887-8390) For Multichannel News subscription information: 800-247-8080. A bargain at $65/year. CONTEST ANNOUNCEMENT: I'm announcing the first Cable Regulation Digest contest, for applying the new FCC rate formula. The winner will be the first person to e-mail me the monthly rate benchmark for ANY regulated U.S. cable system. To keep it simple (!!) I will accept an accurate calculation of the benchmark, BEFORE adding back inflation or "external" cost increases to get the final rate actually charged to subscribers. This is for an enhanced basic subscribe I will hold on to the entries and verify them for accuracy when subscriber bills go out. All entries should be sent to higgins@dorsai.dorsai.org. First prize is the winner's choice of "Master of the Game" the new biography of late cable baron and Time Warner chairman Steve Ross, or "Re-Engineering Government", or "Listening to Prozac". It depends on which book the winner find more appropriate. Cable Digest Soundtrack: Oh, the FCC has absolutely made this a Nine Inch Nails week, "The Downward Spiral". Grinding, screeching, industrial music to soothe the soul. QUOTES OF THE WEEK "The ideal system is Aspen. It's owned by TCI, has extremely high income and it's not very big." Sandford Bernstien & Co. analyst Tom Wolzien, describing how the FCC rate formula will affect different systems. "At $200 an hour, I'm the most expensive Xerox clerk you've ever seen" Cable lobbyist scrambling simply to get FCC documents into his clients' hands. IS THIS THE MAGIC CABLE FORMULA? One thing the FCC did not "release" last week was the actual formula by which a cable system can determine its rate. However, one formula did emerge in documents the commission filed with the Office of Management and Budget. FCC staffers said those documents were drafts and contain errors. They would not say, however, whether the formula is inaccurate. Other netizens have formulas slightly different from this one. Here it is, but we warn you that it may not be accurate. We also warn you that it is not simple. 2.04 +(0.07*MSO) {MSO=1 if an indy, 0 if an MSO. +(0.0097*Nlog # of systems) +(8.14/# of subs) -(1.45/# of total channels) +(0.253*non-satellite channel/total channels) +(0.103*Additional Outlets/Total Subs) +(0.172*Remotes/Total Hookups) +(0.057*#tier2 subs/total subs) +(0.353*Tier Charges/Total Charges) +(0.069*Nlog of median household income) ---------------------------------------- Nlog of Benchmark All of this is based on Sept. 1992 data. Take the resulting benchmark, reduce by 17%, add back 3% for inflation plus another amount for external costs and voila, your per subscriber rate. Have fun! FCC'S NEW MATH: AS EASY AS TRIG WASHINGTON -- The Federal Communications Commission's new cable rules hit the streets last week, but the process of determining rates is so wickedly difficult it will likely take weeks to assess the precise effects on subscribers. As the commission began issuing hundreds of pages of rules, forms and directions last Wednesday, operators struggled to grasp the issues and details and, most important, divine the new formula to set rate benchmarks, guidelines that wipes out the rate rules the FCC established last May. The initial assessment from cable and Wall Street executives was that the benchmark formula favored large MSOs with many systems and operators in high-income areas. At the same time, "going-forward" rules may penalize large operators who have invested heavily in their operations, one cable CEO said. Further, the rules appear to penalize large systems substantially. The new benchmarks bear little resemblance to the ones issued last May. The old per-channel benchmarks could be calculated from tables based on three factors: system size, the number of total channels offered and the number of non-broadcast channels offered. The new formula has 10 different variables, including rates and system size, plus factors like the penetration of additional outlets and remote control rentals. All the data were taken as of September 1992, before operators began raising rates in anticipation of regulation. Arriving at the benchmark requires three logarithmic equations. "It's been 25 years since I've used trigonometry," said one analyst. After the benchmark is calculated, a system must subtract 17 percent. The system can then add back in inflation plus increases in "external" costs such as taxes and incremental programming expenses. One surprising element is that the formula gives credit for being a large MSO with many different systems. Tom Wolzien, analyst for Sanford Bernstein & Co., said that a system owned by 800-system giant Tele-Communications Inc. would have a 4.3 percent higher rate than if it were owned by a 10-system operator. Systems in affluent areas can charge more as well. Wolzien estimated that a system in a town with a median household income of $40,000 would have a benchmark 3.3 percent higher than a system in a town with $25,000 in median income. Capacity counts too, with a 56-channel system getting a 3.5 percent higher benchmark than a 36-channel system. Systems with few subscribers seemed to benefit. A system with 75,000 subscribers would have a benchmark 37 percent lower than one with 15,000 subscribers. "The ideal system is Aspen," Wolzien said. "It's owned by TCI, has extremely high income and it's not very big." FCC chief economist Michael Katz said he expected some elements to be controversial, particularly ones favoring larger MSOs and systems in more affluent towns, because they conflict with the commission's attempts to offer relief to small, rural operators. He explained that the factors in the benchmark formula were dictated not by policy goals, but statistical correlation to price survey data. "The fact is systems owned by large MSOs tended have higher rates before," Katz said, so that factor was weighed in. Those beneficial elements won't affect the reduction, Katz noted, because the benchmark is based on pre-regulation cable rates then rolled back 17 percent. "We decided to bring everybody down by the same percentage rather than bring everybody down to the same level," he said. The FCC clarified the a la carte rules somewhat, but failed to detail specific standards. The commission said that operators would be seen as merely attempting to evade rate rules if their a la carte tiers let them avoid a basic rate cut, stripped too many channels out of basic, merely converted entire basic tiers into a la carte channels or were such a bargain compared to actually buying channels individually that few subscribers would buy single channels. Confusion was the most tangible product. Crucial forms needed to calculate price and cost components were not immediately issued. Some FCC documents trickled out of another federal agency, but commission staffers later "retracted" them, saying they were preliminary drafts and contained errors. Operators will have a little more time to cope with the rules than expected, which industry executives found as a clever way to freeze rates without formally extending the controversial yearlong freeze now set to expire May 15. The official compliance date remains May 15. But operators will not be liable for any refunds to customers before July 14 provided they do not change rates in the interim. Cable executives overwhelmed by the complexity of the new process called May 15 an impossible deadline to meet, since subscribers would have to be notified of any changes 30 days in advance, that is, by next Friday. "What you've done is frozen the industry in place until July 15," said PaineWebber analyst Christopher Dixon. COMCAST ACTS TO BLOCK REFUND ORDER WASHINGTON -- Comcast Cable Communications Inc. said last week that it has asked the Federal Communications Commission to block the city of Tallahassee, Fla., from ordering refunds and rate reductions that could cost the cable operator more than $1.5 million in the first year alone. In a March 25 filing the company described as one of the first of its kind under the 1992 Cable Act, Comcast asked the FCC to issue a stay to shield it from complying with the city's March 9 rate order, which is scheduled to take effect April 15. Comcast spokeswoman Barbara Lukens said the company was not challenging the city's authority to regulate basic service. Rather, it was objecting to the work of an outside consultant the city hired to evaluate cable rates charged to about 44,000 subscribers. "Our problem is with the way it was done," Lukens said, adding that the FCC also was asked to issue uniform guidelines in rate proceedings undertaken by cities. "There has to be a way to prevent abuses." Lukens said the consultant relied on faulty data and statistical estimates to Comcast's detriment. He said the consultant either ignored data supplied by Comcast or substituted other data for them. In the absence of FCC action, the city's rate order would mean Comcast would have to pay an estimated $400,000 in refunds and lose between $600,000 and $1 million to rate rollbacks in 1994, she said. Tallahassee cable administrator Claudette Harrell was unavailable for comment at press time Thursday. In a statement, Comcast president Thomas Baxter said he believes Tallahassee's rates comply with FCC regulations. CABLE LOSES NEGATIVE-OPTION SUIT MADISON, WIS. -- A federal district court judge dealt a blow to cable operators last week by ruling that federal policy does not pre-empt action by states against operators who use negative-option marketing tactics. Judge Barbara Crabb of the Western District for Wisconsin in Madison, denied Time Warner Cable's request for summary judgment in a case brought by the Wisconsin attorney general. In the ruling, Crabb also said that state review of negative-option complaints did not stray into the area of rate regulation, an area specifically denied to states. The ruling could mean bad news in other states for cable operators. Attorneys for state and local regulators said the Wisconsin decision encourages them to pursue two main areas of dispute on service packaging: unbundling of formerly basic services and internal wiring contracts. Such charges appeared on bills after re-regulatory pricing changes went into effect last September. Regulators assert that the charges were added unless consumers had them deleted. Negative options are banned under many states' unfair trade practices regulations. Attorneys general of 27 other states filed briefs supporting Wisconsin's case. Cable attorneys said the final impact of this precedent won't be known until the Federal Communications Commission rules on acceptable a la carte packaging, but they added that the Wisconsin decision "doesn't look good." BELL ATLANTIC TO OPEN DIGITAL VOD CENTER ALEXANDRIA, VA. Bell Atlantic Corp. will open a multimillion-dollar Digital Production Center in suburban Washington, D.C., in July. Having leased the site for the next seven years, Bell Atlantic Video Services will move approximately 100 of its own staffers, plus 50 to 90 subcontractors, into the Reston, Va., facility over the next several months. BVS will use the center to digitize, store and provision content, to produce promotional programming and to control authorization and billing. Ultimately it will house 350 employees. BVS will open the center to other video information providers (VIP) on a fee basis, rather than have each VIP "incur these tremendous upfront costs," said Stuart Johnson, Bell Atlantic group president for Large Business and Video Services. "We know many of them don't have the capital." Servers alone are said to run about $20 million. For BVS, he added, "we've proved this capability works in a 200- or 4,000-home trial. Scaling up to 20,000 or 2 million users represents the most significant technical challenge." Functionally, the center will include a Digital Production Studio for in-house promos related to BVS's Stargazer brand name; a Digital Service Bureau to digitize and store programming; an Operations Center to house digital video servers and multimedia software from Oracle Corp. and nCUBE, as well as encoding hardware; and, finally, a Demonstration Center to test applications off-line. SOUTHWESTERN BELL APPLIES FOR NCTA MEMBERSHIP WASHINGTON -- Following its purchase of two Washington, D.C.-area cable systems, Southwestern Bell is applying for membership in the National Cable Television Association, sources said last week. NCTA sources acknowledged that SW Bell was seeking membership, but as a rule the organization does not divulge its membership list or its criteria for selecting regular or associate members. However, cable industry sources said SW Bell should have no problem becoming an NCTA member after its January purchase of Hauser Communications Inc.'s top-50 cable systems in Arlington County, Va., and Montgomery County, Md. Through its wholly owned subsidiary SBC-Media Ventures, SW Bell paid $675 million for the 232,000 subscriber systems, sources said. SW Bell spokesman Bob Ferguson said SBC-Media Ventures is applying for the NCTA membership. SW Bell would not be the first telco to join the NCTA, but it would be the largest in terms of revenue and phone access lines. Sources said Centel Corp., a $900 million phone company based in Chicago and recently absorbed by long-distance phone operator Sprint Corp., was once an NCTA member. TENN. SENATE LETS BELL-CABLE DEAL SLIDE NASHVILLE, TENN. -- A state Senate committee passed over an opportunity to question members of the Tennessee Public Service Commission about the commission's knowledge of a secret deal between Bell and the Tennessee Cable Television Association while in session last week. Two weeks ago, it was revealed that Bell and the TCTA had entered into an agreement whereby cable companies would pay Bell a fixed, lower rate for pole attachments in return for not opposing Bell objectives in Tennessee. Some legislators saw that agreement as a way to expedite a bill to hire a public advocate to represent consumers in the PSC, a bill the PSC opposed. Some Senate committee members had wanted to know if the PSC had prior knowledge of the agreement and had said they would use the next hearing to ask several hard questions of the PSC and Bell. The entire process was anti-climactic, however, as the committee's questions never materialized. No PSC members were called to testify, nor were other individuals, including South Central Bell president DeWitt Ezell. A spokesman said advocates of the consumer bill wanted a healing process to begin between the legislature and the PSC, since the commissioners had dropped their opposition to the consumer bill. After the committee had finished its work, the legislation to establish a consumer advocate division gained unanimous passage and was moving toward the General Assembly. The senator sponsoring the bill, Jerry Cooper, called for an immediate vote when the session opened. One government source said the measure won approval in the meeting, with no debate, because the bill is apparently heading toward passage and its supporters wanted to lower the heat on the PSC. ROCHESTER TEL GETS FFC NOD FOR VIDEO TRIAL Rochester Telephone Corp. won permission from the Federal Communications Commission to start its video dial tone market trial, which will offer movies on demand to apartment dwellers and homeowners in that upstate New York city. Unlike other such requests languishing at the FCC, the Rochester Tel petition was a snap. The trial involves only about 120 customers and no one opposed it. The decision was made under authority given to a commission staff member and was released March 25. In contrast, U S West Inc. has asked to perform a market trial in Omaha, Neb., with 60,000 homes and Bell Atlantic Corp. wants to expand a current technical trial with 280 people in northern Virginia into a market trial involving 1,000 homes. U S West, Bell Atlantic, Ameritech Corp. and Pacific Bell Corp. also want permission to start commercial video dial tone services. Those requests and others are still pending. Rochester Tel's was the fifth market trial application. USA Video Corp., the only company rounding up video programming to run during the Rochester trial, said the trial, though small, should teach some valuable lessons. For one thing, customers will be charged for the programming they order. The Bell Atlantic test in Virginia, for example, involves Bell employees who don't pay for the movies they watch. COURT SAYS S.C. CITIES CAN'T DO CABLE South Carolina cities cannot construct or run cable systems, according to a ruling by the state's Supreme Court. The three-judge panel ruled that supplying cable TV is not necessary for the security, general welfare and convenience of a municipality or for the preservation of peace, order and good government. The ruling appeared to dash the hopes of the city of Orangeburg, which had hoped to add cable to the list of services it already supplies residents. Three years ago, the city installed a 15-mile fiber optic system to monitor and control its utilities system and some regulators had thought a video delivery system could be piggybacked onto that infrastructure. The municipal plant would overbuild the current cable operator, Jones Intercable Inc. Local sources said there are no specific complaints against Jones on signal quality or pricing. "The thinking of the mayor and City Council [who have regulatory authority over the local utilities] is that the city could provide some enhanced services at a lower price," said city manager John Yow.