Booz Allen Study Shows that A La Carte Pricing Would Increase
Cost and Reduce Programming Diversity for Most Cable Consumers
Legal experts conclude a la carte and themed tier requirements
would violate the First Amendment
WASHINGTON, D.C. – Government regulation requiring cable and satellite providers to offer networks on an “a la carte” basis would dramatically raise prices for most consumers, even those who continue to purchase one of the current tier packages, according to a major economic study submitted today to the Federal Communications Commission (FCC) by the National Cable & Telecommunications Association (NCTA).
The study, conducted by the worldwide consulting firm of Booz Allen Hamilton, is included in NCTA comments filed with the FCC as it examines a la carte and themed programming tier business models.
In addition to the economic and programming choice and diversity concerns raised by pay-per-channel regulation, NCTA also argues that both a la carte and themed-tier requirements would violate the First Amendment, based upon an analysis by two University of Chicago constitutional law experts.
The related costs of implementing a government-mandated a la carte pricing system, the Booz Allen study concludes, mean that even if no consumers were to choose the a la carte option, consumer prices for current tiers would increase between 7 percent and 15 percent. The study also concludes that the number of cable networks, and the quality and diversity of cable programming, would be severely diminished under an a la carte regime. Smaller niche and independent non-vertically integrated networks would be most likely to disappear, the report says.
The Booz Allen report, “ The A La Carte Paradox: Higher Consumer Costs and Reduced Programming Diversity ,” confirms findings of last fall's General Accounting Office (GAO) study, which concluded that a la carte could “result in higher per channel rates” and “cable rates could actually increase for some consumers.”
“The a la carte and themed tiers scenarios evaluated would reverse recent benefits of programming diversity, while increasing prices for the vast majority of consumers,” the Booz Allen study says. “ Even consumers staying with current tiers would face a substantial increase in their monthly bill due to the higher costs operators would incur to establish a la carte or themed tier options.”
Negative Impact of Potential Scenarios
The study found that there would be negative impact on consumers from each of three potential a la carte scenarios:
• A pure a la carte regime in which all programming except broadcast channels would be available only on an a la carte basis and not as part of a tier;
• An optional a la carte regime in which all currently tiered programming except broadcast channels would be available on an a la carte basis or as part of a tier;
• A specific themed tier approach in which consumers could purchase a smaller content-based tier of services which are also available as part of a larger existing tier.
“In each of the scenarios, the model shows that the average consumer – indeed, almost all consumers – would be significantly worse off,” NCTA said in its filing. “Consumers would pay significantly more to receive only those program networks that they currently watch with any regularity (or to watch a themed tier) than they now pay to receive all the channels on their basic and enhanced basic tiers. And even if they still had the option of purchasing the currently existing tiers instead of opting for a la carte, the price of those tiers would be significantly higher” than it is today, NCTA said.
Higher Prices, Less Diversity
According to the Booz Allen study, a la carte would drive up consumer prices by increasing the cost of delivering such a system, borne by both cable networks and operators:
• Cable networks. “A la carte and themed tier options would … adversely impact program networks. Their household distribution would decline dramatically, diminishing their advertising revenues. Moreover, networks' marketing costs would sharply increase: even if only a small percentage of consumers selected a la carte or themed tier options, networks would need to spend more on marketing given the risk of lost subscriber levels. Networks would respond by either raising license fees to operators or cutting programming expenses,” Booz Allen says.
• Cable operators. “Making services available on an a la carte or themed tier basis would raise the costs incurred by cable operators. Services offered on such a basis would need to be offered as digital services. Operators would need to incur fixed costs of using bandwidth to duplicate analog service on digital, and would incur higher costs for customer care due to increased call center volumes and more complex billing. Consumers would incur variable costs of adding digital set-top boxes,” says Booz Allen.
Booz Allen concludes that consumers who opted for a la carte would face significantly higher cable bills unless they were to choose a very limited number of channels. Analog customers would be limited to six or fewer channels, and digital customers nine channels, in order to restrict their monthly service charge to the same or less than they pay today, Booz Allen said.
The introduction of a la carte or themed tiers would lead to a reduction in the diversity of programming available to consumers, as well as greater concentration of media ownership, according to Booz Allen.
“As many as half to three-quarters of emerging networks could fail under each of the scenarios, including a growing number of targeted niche and ethnic program networks, and new network launches would become extremely unlikely,” Booz Allen says. “Moreover, even the most established networks would likely have to reduce expenditures on programming, leading to lower viewing and lost advertising. This would likely lead to further industry consolidation into fewer network groups.”
First Amendment Violation
In analyzing the impact of government-mandated a la carte on the First Amendment, University of Chicago Professors Geoffrey Stone and David Strauss conclude that, under standards established by the Supreme Court, a la carte and themed-tier regulation would impermissibly intrude on cable operators' editorial discretion and protected speech.
To survive even “intermediate” First Amendment scrutiny, a regulation that restricts protected speech must advance an important government interest without imposing an undue burden. According to Professors Stone and Strauss, the reasons for a la carte regulation – supposedly lower rates and more choice – are not sufficient to justify the substantial burdens they impose. Even if they were, such regulation fails to advance the purpose of providing more choice at lower prices, they said. As the Booz Allen report confirms, it would have precisely the opposite effect. And the professors say there are less restrictive means of avoiding unwanted channels, such as blocking devices, which are available from cable operators.
Professors Stone and Strauss conclude that f orcing cable operators to assemble and offer packages that exclude content that is deemed objectionable would, “constitute a content-based invasion by the government into the very heart of the editorial process.”
NCTA is the principal trade association of the cable television industry in the United States . NCTA represents cable operators serving more than 90 percent of the nation's cable television households and more than 200 cable program networks, as well as equipment suppliers and providers of other services to the cable industry.
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