On a Roll: Small Cable Ops Show Clout in Washington

Matthew Polka, president & CEO, American Cable Association

Matthew Polka, president & CEO, American Cable Association

January 21, 2013 – Representing some 850 smaller independent cable companies serving about seven and half million subscribers nationwide, the American Cable Association appears to be packing a much bigger punch than its numbers would suggest. Not only has ACA won dispensation for members on some of the more arcane but potentially nettlesome regulatory issues affecting cable and other service providers; it has been stirring the pot on some of the major issues as well, including costs of bundled programming and broadcast retransmission fees.
 
As president and CEO of Pittsburgh-based ACA since 1997, Matthew Polka has a perspective on what’s happening in the lower tier markets that sheds light on key areas of divergence between the business and regulatory agendas of independent versus top-rung cable companies. In this interview with ScreenPlays Editor Fred Dawson, Polka shares his thoughts on how ACA and its members hope to encourage regulatory policies that will allow them to exploit rapid changes in technology and consumer behavior to maximum advantage.

ScreenPlays – How does your membership break out in terms of the size range of companies?

Matthew Polka – Out of that 850 companies our largest member has a little over one million subscribers, and our smallest members, and we have a number of them, have less than 100. In terms of the breakdown of our membership, it’s along the lines of the old 80/20 rule where 20 percent of our member companies are the larger midsize cable companies that account for about 80 percent of the subscriber base, and 80 percent of the companies that are smaller account for about 20 percent. When you look at our numbers overall, of the 850 about 700 of our member companies have 5,000 subscribers or less.

I’d also add as kind of an overarching comment, because we as smaller companies are in markets that have fewer customers per mile our costs to provide the same amount of service in that mile per subscriber are higher. It costs the same to provide cable, voice or broadband no matter where you are. If you have fewer customers per mile, you have a higher cost per subscriber and consequently a longer return on investment. That’s a fact that runs through about everything we do in our work and our advocacy in describing who our members are and differentiating them as opposed to the larger companies.

ScreenPlays – While there are points of great struggle out there for smaller cable operators what we’re also seeing are points of opportunity and development that are somewhat innovative and intriguing to follow. On the one hand earlier this year you petitioned the FCC to take a deeper look at what’s behind the decline of the number of smaller systems. You cited some statistics that were pretty dramatic with respect to the loss of cable systems – about 26 percent overall since 2005. But on the other hand we’re seeing new money come in with smaller operators successfully expanding through acquisition of others – companies like Wave Broadband, Shentel and even smaller ones like James Cable out there with new money and growth. So it’s kind of a mixed picture. What is your sense of what’s going on?

Polka – I think you’re right. There’s some good and some bad news there. The bad news is, unfortunately, some of our smallest companies are finding it increasingly difficult in the current market environment to survive. These are companies that are very, very small, probably under 1,000 subs or less, that may not have had the ability to fully upgrade their systems as some of the larger companies have, may still be providing analog instead of digital signals or even a voice product or an Internet product.

That’s a very tough place to be in. Consequently small companies, unless they can find a way to upgrade their plant to provide a so-called triple play of services, it’s going to be more difficult for them to succeed in long term.

Now you transpose that with what the majority of our members are doing in terms of fully embracing Internet deployment, increasing bandwidth and speed, robust phone service based on their broadband plant, high definition video, transitioning to all-digital system that allow them to reclaim bandwidth which they can use for advanced applications as well as higher speed broadband. For those companies the future is bright, particularly as you look ahead at, say, what the business is going to be like in five to ten years.

Along that timeframe you’ll see our companies and really anyone in the cable business becoming more known for their broadband plant than for their video plant, because their services will be largely broadband based and less linear video based. Given that our members control the biggest, fastest, highest capacity pipes in their markets, it puts our members in a pretty good position for the future.

SP – That emphasis on broadband and its consequences for growth leads naturally to some exploration of where opportunities are starting to emerge that represent growth. Is it simply the higher speed that’s driving customers to take the cable service? Or are you beginning to see revenue-additive applications on the broadband network, possibly on the business side as well as consumer, that these operators are starting to take advantage of?

Polka – I see it as a function of, one, our technology getting better and faster and our members focused on making that happen in their markets and, number two, really the desire of our customers to find new choices for existing video services. When a typical cable customer looks at their cable or for that matter satellite bill, they see it bloated in terms of the cost by a number of very, very high-cost regional or national sports channels which most of our customers, if given the choice, say they wouldn’t take and pay for. But because of the strength of the five to six media conglomerates that control 90 percent of the programming, our members are forced to take all the sports and related bundled programming, too.

No matter who you are as a cable operator or even a satellite provider, you’re pretty much required by the major media conglomerates to sell the bundle of their services tied together with the services of their competitors. They have provisions that say if our competitor’s channel is in this one tier than our channel has to be in this tier and so on and so forth. And so consumers are saying, holy heck, I’m paying a lot of money on a monthly basis now, and it’s tough times out there. So I may want to find ways I can reduce my costs, whether I choose to watch more free video online or subscribe to iTunes or Hulu or something like that. So consumers are looking themselves for the kind of relief that the media conglomerates are not willing to give either our members or consumers.

SP – This is an interesting perspective, because obviously from the larger operators’ perspectives, even though they, too, are complaining about this wholesale bundling issue, they nonetheless are bound and determined to do everything they can to retain the subscribers on the premium subscription TV service. What I’m hearing you suggest is that maybe the smaller operators leveraging broadband and really building that to higher capacity are actually looking at giving their subscribers an alternative kind of service that includes some of this OTT stuff.

Polka – We think it’s a natural progression. We don’t see OTT necessarily as a threat but maybe as an opportunity for our customers. And, again, it comes back to the point that we’ve got the broadband pipe and we want to maximize, because we know our customers want more of it going forward. If they get greater choices and are happier, we’re happier, too, because we can begin to offload what is the very high expense of programming that’s forced on us.

And to your point as well about differentiation between ACA and its member companies and the large cable companies, when you ask yourself why this difference of opinion exists, from the large company perspective, yes, they may complain about some of the same things and, frankly, we work with them on a number of these issues. But at the end of the day they’re big enough to be able to use issues like this for leverage in their own negotiations.

We don’t have the kind of size and leverage they do when they approach negotiations. So that’s one reason they advocate keeping the existing subscriber model. And, number two, in other cases they own programming that they, too, want to sell, and they want to sell it on a bundled basis, because if you can make everybody pay for it whether they watch it or not as opposed to just asking those people to pay for it that actually want it, you’re a heck of a lot better off. You don’t really care if people watch it, because you’re getting paid on a monthly basis month in and month out whether anybody watches it or not.

From our perspective we’d like to break that up a little bit. We’d like to get a little bit more leverage back on our side of the table and in our consumers’ hands to be able to try to give them some more choices.

SP – Very interesting. And, of course, you’ve made some key points lately with regard not just to the wholesale bundling issue but this matter of the sunset on exclusivity and the ability of these large programmers to force you to pay higher rates on exclusive, must-have sports programming even as they are benefitting from the fact that it’s one hand paying the other inside for the same programming.

Polka – That’s exactly right.

SP – Expanding on this theme, as far as how your members might go about taking advantage of lowering the costs through delivery of compelling video services that might be available over the top versus paying some of these outrageous fees, are you seeing some efforts and some innovative approaches to monetizing beyond just the basic broadband access fee on these services in cooperation with some of the providers, or is it just a sell through that they don’t benefit from when it comes to the likes of Netflix, Hulu and the rest of them?

Polka – It’s a little early to tell, because the business cases haven’t been fully developed. When you look at what the analysts will report about the industry, whether Bernstein Research or Laura Martin at Needham & Co. and some of the other analysts, Craig Moffett with Bernstein, for example, has said that the existing programming subscriber model over the next several years is unsustainable largely because of the increase in sports rights and sports fees that are being forced on consumers. The realization is dawning on everyone, hey. it’s not just us as smaller operators that have complained about the cost of programming, but now people that actually analyze the business and are looking at the economics of it are saying this is unsustainable.

There’s a breaking point at some point in the future where consumers just give up because of the costs. And so as a result of that our members and our board are beginning to look very carefully at what the future may hold and how our members may be able to interplay in that environment where we’re more broadband-based companies than we are linear video.

At the outset, with other potential business cases and partnerships and joint ventures to be determined, clearly our members’ use of the broadband pipe is essential to them, and, when I say that, that means for them the ability to really manage their broadband pipe. People are going to want to use more of it, higher capacity, more speed, more bits, and our members are going to want to be able to essentially charge consumers for their usage, not terribly unlike what we see in any kind of utility aspect today.

If it’s a cold month of January in Pittsburgh where I live I’m going to pay more for natural gas because it’s colder outside. Basically my increased cost pays for upkeep of the infrastructure to give me as a consumer what I want. And so when we look at policy issues going forward, the ability to charge on a usage basis or to impose reasonable data caps is very important simply because our customers are going to want more, they’re going to be looking for more choice of video in other ways beyond linear video, and we have to build and pay for the broadband infrastructure they want to use.

SP – As things stand from a regulatory standpoint, do you feel that enough latitude has been accorded at this point to allow this sort of process to go forward with charging and setting up pay models around broadband access, or would you like to see a more liberalized policy in that regard?

Polka – Well, right now there is no restriction. Most recently in the FCC’s Net Neutrality Order, which was a year or so ago, the FCC expressly permitted usage-based billing and imposition of data caps. Now, in some cases some of the larger operators have made some missteps which have brought some consumer groups to the fore where they have been challenged, But what our members have experienced generally is a very good response.

Our members in some cases have imposed, if not direct usage-based billing at this point, data caps. But they’re very high level and reasonable, and 98 percent of their users never even come close. So they have a lot of capacity still left to be used within the data cap. And they’re charging extra to those people that are, really, in many cases, for lack of a better term, the abusive users. They’re on it all the time, gaming, downloading, all sorts of things like that. It would be expected that people that use it like that should actually pay a little bit more because they’re impacting the quality of the plant.

So our response and history so far has been very good. From a regulatory and legislative perspective we are concerned about any efforts down the pike that would try to limit the ability of our members to try to manage their network. And this isn’t a case where our members want essentially the right to gouge their customers with outrageous usage fees. It’s an infrastructure cost. If we were ever forced to provide kind of a one price all-you-can-eat by regulation, we wouldn’t be able to cover enough to pay for the infrastructure.

The FCC chairman hasn’t backed away from the Net Neutrality Order he approved a year or so ago. He has raised a question from time to time about maybe the commission needs to study usage-based billing and data caps a little bit more, although no FCC action has been taken. And more recently, Senator Ron Wyden from Oregon, a Democrat who, by the way, is not a member of the Commerce Committee, which has jurisdiction over these issues, introduced a bill to limit data caps and usage-based billing, but it’s highly unlikely that either the Senate or the House would ever approve such a bill.

So I don’t see anything on the horizon here. I think most that are involved in this issue from a regulatory or legislative perspective, and really from a business perspective, think that less regulation is better. Because consumers are getting what they want, it’s not unreasonable today, and they have very high speed and capacity to use.

SP – As you point out, right now 98 percent of your users are well under the caps that might be set out there, but, of course, we’re in very early days with respect to consumption of high-bandwidth consuming content, especially if your members increasingly promote or envision the need to support video consumption over broadband as a potential alternative to these high-priced subscription services.

And we have the phenomenon of smart TVs coming into the market at a very rapid rate of penetration. Now we’re seeing significant increases in the number of hours, the percentage of smart TV owners that are consuming Web-delivered video on these televisions.

So there appears to be a growing acculturation around viewing Internet video on the TV, which I would posit, if it continues along these lines, is going to change that broadband consumption level to where maybe whatever the cap is today that only two percent are exceeding, if that same number applies a few years out, maybe 50 percent of the people are exceeding that. And then maybe that becomes a revenue generator of some significant proportions as an alternative to the subscription revenues from an operator perspective.

Polka – I think you’re right. This past weekend I went out and bought a Blu-ray with Internet capabilities so that I can hook up a number of different online services, Netflix and other things like that. There are Apple TV, Google TV, Roku boxes out there, Boxee – lots of choices. As I said before, we tend to look at these things not as competitors that want to cannibalize our video services but as partners, add-on services our customer might want that we’d be happy to support.

Still going through the court system is this new technology service called Aereo. They just announced expansion into 22 cities, including Pittsburgh where I live. I’d love to be able to try that. And, frankly, I’d love for our members with their broadband systems to give their customers additional choices that they could use that could help our members reduce very high and expensive retransmission consent fees from the broadcasters and/or higher programming fees, whether sports or cable programming, from the media conglomerates.

Our view is technological innovation is not a bad thing, it’s a good thing. Technological innovation coupled with usage of our broadband plant will be more than likely the means that actually give our customers and give us greater leverage and control over programming and really help to answer some of questions that it just takes a long time to answer, if you even can, from a political and regulatory perspective.

SP – That’s an ambitious goal and a very interesting one coming from the smaller sector. It will be interesting to see what kind of cooperation you find among some of these providers. And I would guess we’ll see some experimentation along these lines where maybe different players might work with some of your members to see what sorts of mixes of services and pricing might benefit all concerned that could be ported into the larger marketplace over time.

Polka – I think that’s exactly the case. As I said also, this is all so relatively new. I wouldn’t say that anybody has really figured out the best business cases, and there might be multiple business cases that are appropriate for our members as they look at their future from a broadband perspective, potential business ventures, or selling of other services that might complement their existing services. The one thing we don’t want to do is approach these issues with a closed mind. We’d rather be open-minded about it because that gives us opportunities to address problems we’ve had for a long time in the current video subscription linear programming model.

SP – Let’s take a moment to discuss a couple of the top issues that are of concern to your members as expressed in your recent statements and petitions to the FCC. We’ve touched on these already, but what is your sense of receptivity to the questions you’ve raised around things like wholesale bundling and the concerns you’ve raised around MVPD-provided sports programming.

Polka – Let me come back to that question but first tick off what I see as the top three, four or five things we’re working on and we see for 2013. Not in any particular order, but they’re all very important.

I did mention sports, the continuing high costs of sports rights fees that are being paid by sports programmers that are in competition with each other now for programming from the leagues. This is out of control. And these programmers are willing to pay these outrageous fees because they just turn around and send it back down to the consumer. We’ve raised questions of the increasing costs of sports that impact rates to consumers and how the antitrust exemptions enjoyed by the leagues play into this and whether or not Congress should look at this to see if it is contributing, as we believe it is, to the higher costs of sports to consumers.

Second, we have focused on technological choice for our member companies, as we’ve discussed previously, to address the tying and bundling of the programmers and encouraging new technology that helps provide that choice and gets away from the bundle of bundles of programming services.

Third, we continue in our efforts to seek reform of outdated laws and regulations from the 1996 Telecommunications Act, the 1992 Cable Act and prior FCC regulations that have imposed retransmission consent and other outdated regulations which in 2013 are far beyond their original purpose and really are doing nothing other than to give very large broadcast companies and networks the ability to essentially charge monopoly rates for exclusive content. So these old rules are not providing any kind of competition or marketplace development of pricing. It’s just basically a monopoly price.

Number four is efforts at the FCC to reform the current telecom Universal Service Fund into a broadband Connect America Fund, and there we’re talking about the FCC taking four or five billion dollars a year, if not more – it actually might be more like $8 billion a year ultimately – and giving that to a very small segment of phone companies to deploy broadband in areas where broadband already exists provided by our member companies. We want to make sure that reform does not allow the use of taxpayer funds to build broadband where broadband already exists as provided by our members. We haven’t asked for any taxpayer funds to do so.

And fifth and last – I’ll stop at five – is our ongoing efforts at the FCC primarily but also at Congress and other agencies in Washington that deal with communications issues to continue to recognize the disproportionate impact of regulation on our member companies, compared to the larger companies that have more subscribers, more resources, more staff, more ability to absorb regulatory changes. We always advocate for a sensitive touch related to laws and regulations that affect our members, and we’ll continue to do so.

Now, back to the receptivity. I’ll be honest with you, I think our points are hitting home in every one of those categories. From the standpoint of cable sports programming and cable programming there has been national press over the last six months – in Washington, The New York Times, the New York Post, USA Today – talking about the high cost of content on consumers, driven largely by sports but raising the specter of the fact that policy makers, consumer groups and consumers themselves really get it now that they’re forced to take a bundle of services they really have no choice but to take.

That’s created a lot of scrutiny of the issue. We’ve certainly had a lot more discussions with lawmakers. There were hearings in 2012 on this. I think there will be more in 2013. And every time there’s further scrutiny it calls into question the behavior of the large content companies and whether or not policymakers should step in on behalf of consumers.

That’s an issue I think is settling in. The programmers don’t like it, but they’re the ones who caused it. If their current model craters, the one they love so much, they’ll have no one to blame but themselves.

Looking at retransmission consent and reform of video rules and regulations, again, I think we’re also at a very good place there. Congress in both the House and Senate Commerce Committees in 2012 held numerous hearings on review of current laws and regulations and underscored the need for reform beginning in 2013. I think that as the committees get organized and move forward, reform of the ’92 and ’96 acts will be part of their agenda over the next couple of years.

As it relates to the universal service reform, we’ve had a very constructive and open dialog with the FCC. We’ve raised significant issues in a very credible economic way to show that the amounts of money demanded by certain telephone companies are unnecessary.

For instance, if a telephone company already provides some level of broadband service in a particular area, they don’t need to receive the amount of funds that would allow them to build a new broadband system from scratch. They would only need money to help them upgrade their existing plant to provide higher and faster speeds. We’ve pointed out things like that, and the FCC has been very receptive, because, after all, they’re giving away taxpayer funds that are collected every mlonth through universal service line items.

SP – I notice that as part of this Universal Service Fund discussion that [FCC chairman Julius] Genachowski had referenced maybe there would be interest in your members’ participating in reverse auctions to get some of this funding for expansion outside their territories. Does that represent a possibility, and does that represent a possible change in thinking about access to these funds on the part of your members?

Polka – Yes, absolutely. Now, the one change is, that wasn’t how the rules were initially written. There was talk about an open wide reverse auction, and the telephone companies beat that back to some degree to reserve for themselves the right of first refusal before it could then be subject to a reverse auction. As the process of distributing the money goes forward, the way the system will be set up is that the telephone companies will have a right of first refusal to use money. If they don’t use it, or if they fail to meet certain standards, then that money will be available to all bidders essentially on a reverse auction basis, which can include our members. That’s good. That’s actually the first time we’ve really seen federal policy be more inclusive from a technology-neutral basis than in previous broadband deployment programs.

We’re still, as I was saying, fighting to keep the amount of the money to a reasonable level that the telephone companies would have to use with its right of first refusal. But there’s some opportunity there for our members, without question. So that’s an important change of thinking and one that we do support and endorse.

And finally, there have been a number of rulemakings in 2012 where the FCC has implemented regulations with different regulatory treatment of smaller companies because of the disproportionate impact of regulation. And there we’re talking about things like CALM (Commercial Advertisement Loudness Mitigation) Act, the set-top waivers for HD-enabled low-cost boxes and a number of other things like that where our members have received some benefit in regulations compared to larger companies that are more able to comply right away.

SP – I guess one of those, and it preceded this past year, but I would think it was quite significant, is the dispensation on the cable card for the analog transition to digital.

Polka – Huge. You know, if you’re a small cable operator and you’re looking at as a result of imposition of FCC regulation buying set-top boxes for the home that you were buying at $50 and you now have to buy at $300 plus, that’s a lot of money. That’s an enormous amount of capital for our members to absorb and basically change out without any ability or very little ability to recover that cost.

The cable card exemptions that now allow the use of lower cost set-top boxes that do have integrated security and that do allow for HD signals is really a huge win for our members and actually allows them to transition more quickly to what is a truly all-digital platform, which is what they want to do anyway. Again, business and technology is often a phase-in process. It takes some time depending on who you are, resources, return on investment, etc. It takes you some time to phase in that technology before you can fully develop and deploy it.

And that’s really where our members are. If they were made to flash cut to the expensive boxes that support all the HD-enabled DVR functionality, they couldn’t do it. But if they can transition by using the lower cost boxes, they will be able to achieve it. Maybe it will take them a little bit longer, but that’s nothing new for a smaller company versus a large company. The FCC has been very good in that regard. They’ve been very responsive. And we’ve really appreciated their efforts to look at our members’ unique circumstances.

SP – I’d like to move to another side of this coin that I alluded to early on to get your sense of what’s happening, which is the business services side, the opportunities around broadband that go with economic development. Certainly that’s been a huge driver behind a lot of this broadband funding to help resuscitate rural communities by government funding of a telecom infrastructure that supports state-of-the-art business communications. Your members with their broadband networks are well situated to capitalize on these new opportunities. What are you seeing with regard to their interest in moving into business services and what kinds, if any, benefits are you seeing as far as local impact on economic development?

Polka – It’s a huge opportunity for our members. Our members want to transition to provide more business services in their communities as quickly as they can. At this point it’s really an untapped market, but it’s one that’s available to them because of who they are as the primary high-speed broadband providers in their communities.

It really ties with federal policy goals to encourage the same levels of broadband connectivity in smaller markets and rural areas as we have today in New York, Los Angeles, Chicago, Pittsburgh, Denver, wherever. Our members are in a prime position to do this. For them it really becomes an operational and technical challenge to deploy more of the services, to obtain the staff they need, whether sales or technical, to be more proactive in their communities. But they’re definitely moving in that direction.

Without question it’s going to help economic development in smaller markets. Let’s face it. We live in a high-speed broadband economy today, and if you don’t have it you’re not going to be able to literally connect with the world at the speed of business. This is a tremendous opportunity for our members, and we’ll see business services continue to take a higher profile every day, week, month and year.

SP – I thank you very much for that answer and for your time today. It’s been a great educational opportunity for me, and I’m sure it will be for our readership as well.

Polka – Happy to help. I enjoyed it.