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The Virginian-Pilot

By Carolyn Shapiro, The Virginian-Pilot, Norfolk, Va.

May 8--Imagine buying The Virginian-Pilot a la carte.

Readers could subscribe to only The Daily Break feature pages or choose both the front news section and the Business section or Hampton Roads and Sports.

They would pay for each section separately. While the entire newspaper costs 50 cents on weekdays, the individual sections wouldn't necessarily cost less than that on their own.

Now, The Pilot spreads its operational costs -- such as billing, customer service, production and delivery -- over all of its subscribers. With a la carte sections, it would likely lose money from advertisers that would balk at paying the same rates to reach fewer readers than the entire paper does, requiring a boost in subscriber prices to make up for the loss.

That's how the cable television industry envisions an a la carte pricing structure would work if it replaced the current method of selling groups of TV programming in so-called tiers.

With the most popular standard package of service from Cox Communications Inc., the largest cable provider in Hampton Roads, customers receive the Limited tier of mostly local broadcasters and the Expanded tier of multiple networks, a total of about 70 channels, for $43.35 a month, not including taxes and fees. Cox's 415,000 customers can order Limited alone, about 20 channels, for about $11 a month, but they cannot break up the Expanded tier. They must take the Food Network along with ESPN, The History Channel as well as BET, and CNN in addition to MTV.

The Federal Communications Commission released a report in February that said the pay-television industry can offer an a la carte pricing structure that would allow consumers to select each channel and, in some cases, save them money. The agency determined that subscribers who buy 11 cable channels of their choice could cut their bills by as much as 13 percent but might see an increase of as much as 4 percent.

"Cable bills are so high," said Jennifer Fuson, a spokeswoman for Consumers Union, the nonprofit publisher of Consumer Reports magazine and a Web site on telecommunications issues, HearUsNow.org. "If you want only a few channels, there's no option. There's no option to pick and choose. Maybe I just want sports and CNN."

The cable TV industry -- including providers such as Cox and network owners such as The Walt Disney Co., parent company of ESPN and Disney Channel -- has opposed a la carte pricing for years. The companies argue that, under an a la carte structure, consumers would trade a broad array of viewing options for a select few and probably pay more for them.

Smaller, niche networks such as Home & Garden Television and The Learning Channel would risk going out of business, the industry contends, because they would depend on too few viewers to cover their costs and lose advertising revenue as a result of that shrunken audience. Even the larger networks would have to spend more on marketing to retain subscribers, boosting the overall cost per channel, cable operators have said.

A la carte "would have a chilling effect on investment, on programming choice and on diversity, " said Thom Prevette, Cox's spokesman based at its local offices in Chesapeake. "The valid concern is that there would be an erosion of audience 
 All of that would drive increased pressure on subscriber rates to go up."

The FCC suggested, in its recent report, that the per-channel price of cable programs sold a la carte would range from about $2.50 to $5, depending on the calculations used. The agency derived those rates by taking the typical cost of a standard cable package, subtracting the price for the basic tier of broadcast channels (such as Cox's Limited tier) and dividing that total by 10, the estimated number of non broadcast channels that the average consumer regularly watches.

"However, the final effect on revenues for providers and subscription fees for consumers is unclear, because it would depend on pricing and demand data that are unavailable," the FCC wrote in its report.

Neither the networks nor the cable operators have calculated a fee structure for offering the channels individually, they say.

Under the current pricing structure, a cable company negotiates a fee per subscriber -- from a few cents to more than $2 -- that it pays to carry each network's content. In late 2003, during contentious negotiations over a new contract between Cox and ESPN, Cox was paying $2.61 per subscriber each month for the sports network, the most expensive of all its channels.

ESPN and other networks make money through a combination of these subscriber fees and advertising. With the current setup, the fees are spread across every subscriber of the package, likely more than the number of viewers that would choose that specific network on its own. The network seeks to attract advertisers based on the ability to reach that larger potential audience.

Let's say, as an a la carte channel, ESPN kept half of the viewers it reaches through the standard cable package. It would have to double the $2.61 rate, which is likely higher today, to $5.22 per subscriber to make the same money it does on the tier.

T hat doesn't account for any price increase that ESPN might seek to compensate for lost revenue from advertisers that backed out or demanded lower rates because of a smaller audience.

HBO and other premium channels represent the only a la carte options on cable and satellite TV today. They have no advertisers and rely entirely on subscriptions separate from any programming tier. HBO, for example, costs $12 a month on Cox's system.

"That really is a harbinger, if you will, of what the cost would be in an a la carte environment, in the absence of any advertising," Prevette said.

Some estimates put the potential a la carte price of ESPN at $15 to $20, said Catherine Brett, a spokeswoman for ESPN Inc., but the network itself has not come up with a specific figure.

Disney Channel originally launched as a premium selection costing $12 to $14 a month but moved in the late '90s to the standard package on most cable systems after failing to attract enough subscribers, Brett said.

"We tried it," she said. "It didn't work ."

Under an a la carte structure, cable operators say, they still would have to recoup their costs for billing, infrastructure maintenance and other operations, perhaps through a basic connection charge, in addition to customers' per-channel payments. Currently, Cox customers must order at least the Limited tier to receive any other programming.

A la carte service also would require a set-top box so the cable company could electronically control each household's access to the specific channels it purchases. More than half of Cox customers don't use a converter box, and they would incur an additional $5.50 per month for each TV set to receive a la carte programming.

Using current prices, a Hampton Roads customer would pay $15 to $18 a month just to get service. Assuming a per-channel cost of $3 or so on the low end of an a la carte lineup, a selection of 10 channels would amount to $30, bringing the total monthly charge to a minimum of $45, before taxes and fees. That's about the same price as the standard package of 70 channels.

Customers who choose just a few channels might save money from the current standard package, depending on the price of those channels.

Consumers Union has looked at studies that show customers would generally save money from a la carte, Fuson said, because prices would then reflect the true value of individual channels. "Right now, a few select channels are subsidizing the other channels," she said.

That's precisely the greater good of the current package system, countered Steve Effros, a cable industry consultant and adjunct professor at George Mason University. Channels demanded by the most viewers help support those of limited appeal -- Hispanic channels or children's programming, for example -- so they are available for the viewers who do watch them.

"You're paying taxes for the library" and its entire collection, Effros said. "There are books in the library you don't like. You don't have to take them out."

Cox once tested an a la carte pricing plan. Prevette said he has no information about that trial, though he acknowledged it took place and wasn't financially beneficial to customers.

Competitors to cable have found the traditional tier system tough to buck. Verizon Communications Inc., in offering its new Fios TV service over a fiber-optic network in certain markets, developed a package of programming similar to the structure of Cox and satellite services.

"The market ought to decide these things," Verizon spokesman Harry Mitchell said of a la carte. "If there's a true demand, someone's going to package it and market it."

U.S. Digital Television LLC, which plans to launch its TV service over the airwaves in Hampton Roads soon, sees its streamlined package of about 20 channels for $19.95 per month as the closest answer to a la carte. The company had to stop short of pricing purely per channel, said Steven Lindsley, USDTV's chairman and chief executive.

The cable networks push operators to bundle channels in a group, Lindsley explained, in exchange for granting the rights to carry the programming.

Network owners do prefer that cable operators carry their ancillary channels, such as ESPN Classic, along with their more popular channels, ESPN's Brett said. However, t he network cannot require cable operators to take certain channels or dictate their pricing structure.

"When we go to the operators, we definitely try to sell our package, and we give them a better rate if they will take more" channels, she said. "We want to be on the basic package, in front of the most eyeballs as possible."

Reach Carolyn Shapiro at (757) 446-2270 or carolyn.shapiro@pilotonline.com .

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Copyright (c) 2006, The Virginian-Pilot, Norfolk, Va.

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