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The Consequences of Content Pricing [Rural Telecommunications]
[June 28, 2014]

The Consequences of Content Pricing [Rural Telecommunications]

(Rural Telecommunications Via Acquire Media NewsEdge) It isn't even news anymore. Every Dime a video provider reneyobiades a conbracb with a coobenb provider-a broadcast] ababion or a cable nebuiorkconbenb prices go up. In bhe last fern years, prices have risen uiibh dizzying speed, and bhey likely will conbinue bheir upward brajecbory for bhe foreseeable fubure.

Small providers, including rural telcos, are hit hardest because they have little market power. Though they improve their leverage when they obtain programming through buying cooperatives, they still pay retransmission consent fees more than twice as high as larger providers for the same broadcast signals. In some cases, they pay as much as 20 times more, according to estimates made by the American Cable Association.

The FCC began examining the issue in the notice of inquiry for its "16th Video Competition Report," and in its March 2014 open meeting took a step toward solving the problem by prohibiting top-four television broadcast stations from negotiating retransmission consent jointly with other top-four stations serving the same geographic market. (Essentially, separately owned stations had been permitted to collude in ways that pay-TV operators thought unfair.) However, it is possible that the FCC's action will be overridden by Congress; even if the order is allowed to stand, it may not be sufficient to restore pay-TV operators' balance of power in dealing with the broadcast stations.

The crux of the problem is that the Cable Television Consumer Protection and Competition Act of 1992, which was intended to protect consumers, gave broadcasters the right to charge pay-TV providers to retransmit over-the-air content. But over the last two decades, the broadcast industry consolidated to the point where fewer than 10 companies now control nearly all the over-the-air and cable content, while at the same time the number of video providers in each market grew as cable companies lost their right to exclusive franchises and as satellite and IPTV services offered new options. With the number of content providers decreasing and the number of video providers increasing, the balance of market power shifted in favor of the content providers.

To make matters worse, the broadcasters' traditional advertising revenue model began to break down during the same period as audiences became increasingly fragmented. "New models have not been developed yet," said telecommunications attorney Howard Shapiro of Bennet & Bennet (Bethesda, Md.). Viewers have turned away from traditional broadcast models to services such as Netflix and YouTube, which are Q starting to develop original programming of their own. When viewers do watch TV in the traditional ways, they often tune in to sporting events, which are increasingly costly for broadcasters to obtain. "Retransmission consent is one stream of revenue they [broadcasters] have to make up for lost advertising revenue," Shapiro said.

As a result of their increased market power vis-à-vis distributors and their increased need for revenues, broadcast stations now can-and do-dictate retransmission consent fees and little or no "negotiating" actually goes on, according to the telcos interviewed for this article. They also dictate the bundling of their affiliated cable channels and the placement of those channels on favorable tiers. This makes constructing low-priced video tiers difficult for telcos.

The number of blackouts ( stations being withdrawn from video providers) also has grown. Blackouts are used mostly by larger operators that have more leverage with content providers, but in a few cases, rural telcos have been blacked out, too.

All this makes life difficult for small video providers. Unlike, say, Comcast, whose video offering is still highly profitable, smaller telcos and cable companies started with razor-thin margins on video and have seen those margins wiped out after absorbing programming price increases for several years.

Simply dropping video service isn't usually an option for companies that have physical infrastructure, ongoing programming contracts and, especially, demanding customers. "It's a must-have offering," said Gina Shuler, director of marketing at Home Telecom (Moncks Corner, S.C.), echoing a sentiment shared by many telcos. (In addition, dropping their video services might well lower telcos' take rates for their more profitable broadband offerings.) It is occasionally possible to drop an expensive, unpopular channel-which Home Telecom did this year for the first time-but in most cases, unpopular channels are tied by their owners to popular ones that can't be dropped.

Facing bhe Head Thus, many telcos now find that they have no choice but to raise video subscription rates-and face the heat from their customers.

And there will likely be heat. Though some telcos such as West Central Telephone Association (Sebeka, Minn.) said their customers are more likely to blame broadcasters, blaming the video provider appears to be the more common reaction.

"Every time there's a rate increase, customers get angry," said Missy Poje, director of marketing for Fidelity Communications in Sullivan, Mo. Fidelity trains its customer service representatives to be prepared for irate customers and to explain the background of the rate increases.

Beyond customer anger, there is a risk of having customers downgrade to lower video tiers-West Central Telephone has experienced a few such cases-or even cancel their subscriptions altogether. Poje said, "We believe that cord cutting is very real and will continue to increase. There will be a time when customers, no matter how much they love their channels, won't be able to afford them. We saw a pretty significant cable loss last year, directly due to raising rates. It's a tough business to be in." Educabing Guebomens Communicating with customers about rate increases is a challenge for marketing directors. Most telcos work hard to limit rate increases to once a year, though some have been forced to move the increases up to earlier dates. Poje said that Fidelity Communications, which usually revises its rates in the summer, planned to raise rates April 1 this year. "Because we got a massive increase January 1, we're losing hundreds of thousands of dollars for each month we delay," she explained.

When a rate increase is necessary, preparing customers for it is important. Susan Christian, vice president of marketing at Ritter Communications (Jonesboro, Ark.), includes detailed bill inserts for customers that explain why rates are rising and that assure customers that Ritter makes every effort to cut costs and provide good programming. She also posts explanations on Ritter's Facebook page. The company's vice president of external affairs, John Strode, speaks at meetings of civic groups and writes articles for local newspapers to help educate customers about increasing programming fees.

Craig Ottemess, general manager and chief executive officer of Spring Grove Communications (Spring Grove, Minn.), uses bill inserts and the company newsletter to warn customers of impending raises. In addition, he takes the opportunity to discuss the issue every year at the company's annual meeting. "I always remind attendees that video rates are not like phone rates," he said. "I tell them that video rates will go up every year, mostly because the contracts include percentage increases every year. I also remind them that we even have to pay for the off-air channels that they get for free with an antenna." Geri Salmela, marketing director at West Central Telephone, also directs customers to, a website developed by the National Cable Television Cooperative (NCTC) that explains the retransmission-fee issue in great detail. Any telco that buys programming through the NCTC can use a branded version of this website.

R Line Ibem on bhe Bill The strongest way to get the message across may be to include a line item on the customer's bill for programming increases. Shapiro warned that this approach requires caution. He said, "You have to be careful there's not a provision in the agreement [with the broadcaster] that prohibits you from disclosing its terms and conditions. ... Also, be careful that, where you're disclosing fees, you do it in a fair and objective way." For example, he said, even if you have to put in a new antenna to carry the broadcaster's channels, don't be tempted to include the amortization for the antenna in the retransmission line item.

Ritter Communications has passed its retransmission fees to customers as a separate "broadcast surcharge" since 2009. Because of the confidentiality requirements in its contracts with broadcasters, the company docs not itemize the fees by channel; rather, the surcharge includes the sum of all the retransmission fees.

Polibical Pcbion Another thing telcos can do is to help customers channel their frustration into positive action. For example, Shuler said that Home Telecom, in its social media and other informal communications, suggests that concerned customers contact local leaders and ask for help. In past years, she said, customers have felt that programming fees were Home Telecom's problem and not theirs, but that sentiment is beginning to shift.

Ritter Communications has taken an even stronger stance, issuing a press release in December 2013 endorsing the Video CHOICE Act introduced into Congress by Reps. Anna Eshoo (D-Calif.) and Zoe Lofgrcn (D-Calif.). The bill would tilt the balance of power back toward video providers (and their customers) by, among other things, prohibiting channel bundling. Strode explained, "I don't believe the Video CHOICE Act is perfect-or any other legislation is-but it is certainly a good platform for discussion of the issues. ... If it gets to the point where the legislation starts to move or be considered in committee, we will speak to civic clubs in our area and encourage them ... to contact members of Congress and express their support." Suueeben bhe Package Telcos often try to include good news in their messaging to balance out the video rate increases. For example, Salmela said West Central Telephone tries to add more value by keeping the cost of high-definition service low, offering HD at a fiat fee rather than per channel. It also added viewing options at no additional cost with its watchTVcvcrywhcre services, which allow TV subscribers to view live and prerecorded TV on a variety of connected devices. Salmela explained, "Essentially, this allows them to take their TV services with them wherever they go. This also creates a need for higher broadband speed in the home and gives us a great opportunity." Home Telecom is offering remote DVR scheduling, as well as a portal where customers can access all their online content, and the telco has plans to launch fullhome DVR. Ritter Communications helps customers craft triple-play bundles that are more appropriate for them and help them save money.

Cooperating with broadcasters also helps. Shapiro advised telcos to build positive relationships with local broadcast stations by working together on projects of common interest, such as public-service announcements or local newsgathering, or by offering low-cost concessions that are valuable to the local station (carrying an unrequired ancillary station, for example).

He said, "If you find a way to give them noncash things that work for you and them, then I the negotiation) becomes not just about money. You're in your best position to get a better rate." The tactic won't work for everyone, he warned-some station owners take a harder line than others-but in the cases where it does, it has the potential to save telcos some of those painful discussions with customers. 9 Many telcos now find that they have no choice but to raise video subscription rates-and face tbe head from their customers.

Masha Zager is a freelance writer. Contact her at masha@

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