The Federal Communications Commission has warned the nation’s two leading cable TV companies that unwanted conditions could be imposed on their proposed acquisition of a rival if they do not agree to curb the proliferation of sexually explicit programming, according to company sources.
Faced with what some are describing as an ultimatum, Time Warner Inc. and Comcast Corp. have sought to satisfy FCC Chairman Kevin J. Martin’s demands by pressuring the rest of the industry to come to a consensus on how to respond, said these sources, who requested anonymity because of the sensitivity of the regulatory approval process.
Martin has made clear in closed-door meetings that he would like Time Warner and Comcast to help advance his anti-indecency agenda. The companies are seeking to acquire Adelphia Communications Corp. for $17.6 billion.
Through a spokesman, Martin declined to comment. So did representatives of Time Warner and Comcast.
Cable operators are not eager to pick a fight with the FCC. Although the agency lacks the authority to make new rules, it does have the power to rein in the industry on several fronts. For example, it will determine the speed at which phone carriers can enter the pay-TV business.
Phone companies, seeing this as an opportunity to build political capital in Washington, have seized on the indecency issue by agreeing to allow customers to subscribe only to channels they want.
“There are a lot of places Martin can squeeze cable operators and indecency is a pet peeve of his that’s not going away,” said one cable executive. “We have to live and work with him until his term ends in 2009.”
Although reluctant to anger Martin, many cable programmers quietly complain that he is trying to extract concessions from an entire industry using leverage from a single transaction -- the Adelphia deal -- that stands to benefit only two companies.
So why would they go along? The cable industry fears that if it doesn’t agree to a voluntary solution, policymakers could soon force an alternative on them that would be far more restrictive.
Martin publicly called last week for all cable operators to offer channels a la carte instead of in bundled packages, reversing the agency’s position under Martin’s predecessor, Michael K. Powell. A la carte pricing would allow subscribers to have only the channels they wanted.
Meanwhile, Senate Commerce Committee Chairman Ted Stevens (R-Alaska), who is contemplating legislation on the issue, held hearings last week to debate solutions for protecting children from objectionable TV content.
One option discussed is a la carte pricing, which the industry says would wreak havoc with its current delivery systems, driving up rates. Eager to avoid such a radical overhaul, Comcast and Time Warner have been lobbying their programming suppliers in recent weeks to adopt the indecency standard that now applies to broadcasters.
Several suppliers, however, object to the broadcast standard, which restricts such programming between 6 a.m. and 10 p.m. They argue that imposing the same rules on cable and satellite that apply to networks that use the public airwaves is logistically impossible and would be particularly disruptive to any channels that air uncut theatrical movies or racy shows.
Comcast and Time Warner are now actively promoting the creation of a family-friendly tier of channels, despite resistance from some of their suppliers and the limitations posed by existing contracts.
“If there’s a need for a family tier and it could be accommodated with programming contracts, we can meet those concerns,” John Alchin, Comcast’s co-chief financial officer, told investors Thursday at a conference in New York.
Even voluntary measures, however, could face court challenges. A voluntary “family viewing hour” that the FCC tried to impose on broadcasters in the 1970s was found by courts to amount to coercion and to violate the 1st Amendment.
Congress also would face a legal challenge if it forced an indecency standard or a family tier on the industry. The Supreme Court in 2000 upheld the cable industry’s right to air sexually explicit content, noting that technology allowed subscribers to block unwanted shows.
Even so, Time Warner is now reviewing its contracts to determine what channels it could offer in a family tier without running afoul of its contracts with programmers, according to company sources. The nation’s second-largest cable operator, which would become the largest provider in Southern California if the Adelphia acquisition is approved, has determined that 30 to 40 channels could be part of a family package.
On the list are obscure digital channels such as Boomerang and Toon Disney. Some of the most popular children’s channels, such as Nickelodeon, may not be included because of contracts that prevent such tiered delivery and adult-themed shows in the evening.
And cable executives say families wanting the tier would have to use a digital cable box. That could add $7 or $8 to monthly cable bills.
That still could be cheaper than an a la carte pricing plan, which several government and industry studies over the last few years have concluded would be more expensive for cable customers than the current bundled approach.
For example, HBO, which already is sold separately, charges about $15 a month or more for a subscription. Other channels with high programming expenses such as ESPN probably would cost a comparable price. Ten channels could quickly run up a monthly bill of $40, cable industry executives say -- about the same that subscribers now pay for, say, 100 channels.
Also, channels with narrow audiences could disappear because too few people would order them, the industry warns.
Consumer advocates, however, say that might not be such a tragedy.
“Maybe you won’t have 100 channels, maybe you’ll only have 20,” said L. Brent Bozell, the president of the Parents Television Council, which floods the FCC with indecency complaints every year. “But good programming is going to survive, and you will get rid of some waste.”
At the indecency hearings last week, Martin denounced as flawed an FCC study last year that concluded that a la carte pricing was economically unfeasible. He said the results of a new FCC study on a la carte pricing would be released in the coming weeks, showing that cable subscribers would benefit.
But many industry executives believe that Martin is using the threat of a la carte pricing to try to scare the industry into accepting the broadcast standard or a family tier.
“Martin and Stevens have been very effective in communicating to the cable industry that their lives would be better if they agreed to a family tier,” said Blair Levin, an analyst at Stifel Nicolaus in Washington.
Washington insiders say the indecency debate has highlighted the political savvy and hardball tactics that are characteristic of the baby-faced 38-year-old FCC chairman. As a commissioner, for example, Martin, a Republican, shot down Powell’s attempts to deregulate the regional phone companies by allying with two Democrats on the panel. A conservative from North Carolina, Martin was a chief lieutenant in President Bush’s 2000 presidential campaign. Bush appointed him to the FCC in 2001, and named him chairman in March. His wife, Catherine, is the chief public affairs strategist for Vice President Dick Cheney.
The last time the FCC attempted to hold an entire industry’s feet to the fire using a single transaction was in 1995, when then-FCC Chairman Reed Hundt used Westinghouse Corp.'s acquisition of CBS to force all the broadcasters to agree to air three hours of children’s programming per week on their TV stations.
This time around, the cable and satellite industries are divided on how to satisfy Martin’s demands. For instance, Walt Disney Co., which owns ABC, ESPN and the Disney Channel, has for about a year urged the industry to go along with the broadcast indecency standard arguing that it is the least disruptive option.
Under that standard, indecency is defined as material that depicts “sexual or excretory organs or activities” or that is “patently offensive as measured by contemporary community standards.” Because their programs are not sent into homes over the public airways, cable and satellite providers are not currently held to this standard.