Cable Must-Carry Decision Gets a Mixed Reception

The Supreme Court made Barry Diller’s day Monday. A high court ruling upholding the so-called “must carry” laws swiftly reversed the pessimism building on Wall Street for months against his vision of a seventh broadcast network.

Diller, credited with building the Fox network for News Corp., bought a dozen low-powered UHF stations in 1995, hoping to use must-carry rules to expand their reach. But uncertainty over the rules, which require cable systems to retransmit the signals of local broadcast stations, had put those plans on hold.

“While it’s great to shout about how worthy your programming is and how deserving of carriage by the great cable industry, it’s far better to have it guaranteed by the Supreme Court,” Diller said Monday. His UHF stations, with cable fill-in, reach nearly 40% of the country--about as much as Fox.

Diller, who says he will replace home shopping programming that currently airs on his stations with local programming that will be the basis of his new network, is one of the clearest winners of the Supreme Court’s ruling. The cable industry, to varying degrees, is the biggest loser.

Some cable operators were so convinced that the rules would be reversed that they had already devised lists of cable services to replace the religious broadcasts and home shopping channels they would be allowed to drop. For the most part, cable systems can make more money from cable channels that pay them fees for carriage.

“It’s absolutely shocking,” said Lee Masters, president and chief executive of E! Entertainment Television, an expanding cable service controlled by Comcast Corp. and Walt Disney Co. “It mandates that higher-quality information and more entertaining programming be sacrificed to programming from ab rollers, evangelists, zirconium hawkers and cheesy, fourth-rate TV stations with little or no viewer interest. This is an outrageous disservice to consumers.”

Monday’s decision is also a setback for cable programmers such as E! that had been counting on a reversal of the rules to free up space on overcrowded cable systems. But the ruling is likely to hurt upstarts such as Outdoor Life more than established channels like ESPN that already reach virtually all cable households in the United States.

“No channel capacity will open up as soon as cable networks had hoped,” said Derek Baine, an analyst at Paul Kagan & Associates, a market research group in Carmel. “The decision makes shelf space more valuable, making existing cable channels worth more and upstarts more likely to buy established networks to survive.”

While the stocks of the largest cable operators, including Tele-Communications Inc., Time Warner Inc., US West Media Group and Comcast, tumbled Monday, those with UHF strategies rose against a negative tide on Wall Street.

Most notably, stocks of HSN Inc., the parent of Home Shopping Network and the Silver King station group that is controlled by Diller, rose $2.44 a share, to close at $25.375. Paxson Communications Corp., which owns 49 low-power broadcast stations, gained $1.75 to close at $10.75. Like Silver King, Paxson has accumulated low-power UHF stations in the hopes of using must-carry rules to vastly increase viewership.

Company founder Lowell “Bud” Paxson claims his 49 stations will reach 60% of the nation’s TV viewers once cable operators pick up his signal, as required by the Supreme Court decision. The stations now air infomercials, although Paxson says he has held discussions with a dozen prospective programming partners, including the major broadcast networks, studios and syndicators. He says just as the fledgling WB and UPN networks have slowly added new nights to their network schedules, he could replace infomercials with special-interest niche programming supplied by a partner under a conventional affiliate agreement.

“This is a great day for free, over-the-air TV,” said Paxson, a co-founder of Home Shopping Network. Paxson said the ruling not only firms up the value of existing broadcast stations, but also “assures that the 300 construction permits for new stations will break ground.” He said he will buy additional UHF stations.

Paxson said he hopes to have a programming partnership within three months, although some critics say such negotiations could prove difficult because his stations are weak.

Diller also faces a challenge: He must convince cable operators to carry his Home Shopping Network in markets where the service runs on broadcast stations. Though he will now be asking for one channel rather than two, cable operators may be happy to take HSN because they receive a piece of all sales.

Broadcasters in general applauded the decision, and some cable companies were surprisingly optimistic about it.

“It’s not as sad a day as it would have been seven years ago,” said Marc Nathanson, chairman and chief executive of Falcon Communications, a cable operator based in Los Angeles. “Maybe we’re better off.”

Nathanson said the television landscape has drastically changed since Turner Broadcasting System Inc. brought the original lawsuit against the Federal Communications Commission, hoping to relieve the shortage of capacity on cable systems that was delaying the programmer’s expansion.

Most cable companies are in the process of upgrading their cable networks to be able to carry additional channels. And digital set-top boxes that allow eight channels to be squeezed into the space filled by one are quickly being rolled out by cable in an effort to compete against fast-emerging satellite services. Still, some analysts warn that most of the new capacity created by digital compression will be dedicated to pay-per-view movies.

What is more, new channels have been successfully launched during the capacity crunch of the 1990s, although many of them have benefited from the clout that comes from being part of a family of channels, like those owned by Viacom Inc. and Turner. While the Supreme Court ruling could slow the roll-out of new services from powerhouses like ESPN and MTV, it could spell the death of upstarts like Ovation, which is jointly owned by Time Warner and the New York Times and is dedicated to the arts.

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Who’s Affected and How?

Monday’s Supreme Court decision upholding rules requiring cable operators to carry the signals of local broadcast stations has powerful implications, generally benefiting the stations and hurting cable channels and operators.

Winners

* Home Shopping Network Inc, the holding company controlled by Barry Diller, has ambitious plans to launch a seventh network using low-powered UHF stations across the country. Under the laws upheld by the court, cable systems are required to carry such UHF signals, ensuring Diller access to viewership in local markets.

* Paxson Communications Corp., a station group controlled by Bud Paxson, hopes to form an aliance with a major programmer that could use his 49 stations to build a new type of network. His stations now carry infomercials.

Losers

* TV Food Network, owned by A.H. Belo, US West and Tribune co., is available to about 20.5 million cable subscribers but has struggled to find viewership. Most cable networks need 35 million subscribers or more to break even.

* ESPN, the sports network owned by Disney, is the most profitable cable channel, reaching virtually every cable home in the country. But its ability to launch new channels, such as ESP-News, will be impaired.

* Tele-Communications Inc., the largest cable operators, will not be able to push off broadcast stations to make room or more lucrative cable services.