Cable changing its game plan; vertical integration wreaking havoc with cable nets.

John Malone's now memorable speech at the Western Cable Show last December in which he criticized the current license fee model sent shock-waves through the industry. Malone said that if cable networks can't prove their worth, c'est la vie. Either the cable channel brings cash to the carrier, or bye-bye. Well, by the New Year, Tele-Communications Inc. decided that several networks on its system weren't proving their worth and it dropped the lagging channels, which included Comedy Central, Lifetime, The Travel Channel and E! Entertainment. TCI claimed that the move was prompted by the need to make room for sew channels such as The Discovery Channel spinoff Animal Planet, the Cartoon Network, ESPN2, Home and Garden TV, the Sci-Fi Channel and The History Channel. Wall Street watchers, however, only had to look at TCI's dismal stock performance to realize the real reason. Even popular cable offerings such as MTV and VH1 were not immune. Business Week reported: "several of TCI's cable systems pulled the plug on VH1 and MTV. A week later TCI reinstated the Viacom channels." This, according to Business Week, indicated that TCI is under intense pressure to improve its financial performance and that it's not afraid to "toss popular cable networks off its systems unless programmers cut a break on price."

With this move, TCI opened the U.S. pay-for-carriage debate. (In Europe, most cable networks already pay for carriage (see sidebar).) Will new cable nets have a chance to form without having to pay for carriage? And if existing channels don't become part of a friendly conglomerate, will they be dropped from cable systems? According to cable consultant Louise Torres-Bohl, president of Castalia Communications Corp., TCI's stunt was obviously a cost-cutting measure and a short-term cure for its sagging revenues. "They needed to pare down costs and increase revenues. You pare down costs by eliminating what costs you a lot of money. The long-term implications of TCI's move [are] that as long as there is a constriction in the system there will be a force in place to demand payment for carriage. If compression lifts the gate and more channels become available, we won't have the bottleneck in the system," Torres-Bohl commented. "Today, cable operators are saying to programmers, 'You are killing me,' regarding the 30 percent they now pay to programmers."

Of course, TCI's move could be viewed as a reaction to the growing competition cable operators face from digital and satellite TV. (Although the matter is hush-hush, some networks already pay satellite systems for carriage.) Nowadays the MSOs are a little greedy because they know that when they can afford to upgrade to digital they could never go to a cable network like E! Entertainment and ask for cash, taking the risk of leaving the channel unfilled.

One could look at this trend as a matter of economics. But what about the new players that don't have sister networks with which they can be packaged? What about the new networks that lack the financial strength of a parent company or the leverage of a studio? They will have to pay millions just to get on the air. One also has to consider the situation at a vertically integrated company like Warner Bros. Why should it have to carry a duplicate news service like Rupert Murdoch's Fox News? To be sure, with Murdoch's recent investment in EchoStar, Fox News could automatically get some 430,000 subscribers for free. TBS recently announced its impending transformation from a superstation into a basic cable network; this could bring the channel almost $100 million a year by the end of 1998.

Linda Stuchell, vp of programming at MSO Harron Communications, said that at first glance this pay-for-carriage option is very attractive but that down the line it will increase prices for new services. "For example, Fox News has a higher start-out rate. You have to hope that it will perform to your expectations," she said. Stuchell believes that, in the end, content will determine which services will survive. "Customers are interested in content. We need to keep our rates in check. It all depends on the strength of the product. If it [the cable net] has some way to cross-promote itself, it can get carried."

It seems that Cablevision magazine's 1997 predictions regarding programming could be on the mark: more networks will pay for carriage; those that don't will be dumped or banished to remote tiers; and new networks that don't come from big integrated companies won't exist.