Well, the Commerce Committee's Investigative Report is out and - no surprise - it is revealed that Chairman Martin's "Further Report" on mandatory cable a la carte pricing was cooked-up to reach a predetermined conclusion.

Indeed, when the staff author assigned to write the "Further Report" informed the Chairman's office that the new report would conclude, as the original report had, that mandatory a la carte would likely raise consumer cable prices and reduce programming choices, he was told in no uncertain terms that the "conclusion of the report is supposed to be that a la carte could be cheaper for consumers." In case that was not clear enough, the author was told "the report cannot conclude that a la carte would likely raise most cable bills, with fewer channels delivered."

This whole episode would be stunning from a procedural perspective if it were not so sad. Chairman Martin has been waging a four-year-long war on the cable industry in an attempt to compel cable operators to sell services on an a la carte basis. The whole time, we now learn, he knew that his own staff agreed that mandatory a la carte pricing would increase, rather than decrease, cable prices for most consumers and reduce programming choice and diversity. They were ordered, however, by the Chairman's office, to toe the line or shut up. There can be no more definitive indictment of mandatory cable a la carte.

Whatever the Chairman's motivation for his war on cable, he can no longer hide behind the façade that he is trying to protect consumers.

Wow, I am really blown away by CancelCable.com. Earlier today, I mentioned how I discovered it thanks to Mike Musgrove's Washington Post story about how more and more people are canceling their cable and satellite subscriptions altogether and using alternative video platforms -- Hulu, iTunes, Netflix, XBox, etc. -- to watch their favorite shows. Anyway, if you go to CancelCable.com's "Show Finder" site, you will find a complete inventory of all the major television programs you can find online right now. And that list just continues to grow and grow in both directions -- in terms of the number of shows and the number of platforms where you can get them.

OK, so why again do we need to mandate a la carte regulation for cable and satellite?

Although it is true that a foolish consistency is the hobgoblin of simple minds, a foolish inconsistency is worse. The FCC is guilty of the latter.

For years the cable industry has been subjected to regulatory assault in detail because it has steadfastly refused to adopt formal a la carte pricing models. As your correspondent has said before, one can argue about whether or not a la carte pricing might reduce cable rates for some class of customer (i.e., extremely light users or those who abstain from high cost services such as sports and movies), but there is no doubt that it would reduce programming diversity and diminish investment in programming services. Nonetheless, there is an appeal to the populist notion that consumers should not have to pay for programming channels they don't watch and don't want.

Why then, though, when the NFL Network -- another high cost sports programming service owned by the millionaires club known as the NFL -- asks the FCC to intervene in its carriage negotiations, would the FCC side with the programmer seeking to force itself onto the basic programming tier and thereby into the living rooms and onto the cable bills of millions of unwilling subscribers? What is it about the NFL Network that has the FCC spinning on its heels to add the cost of that service to the basic cable bill? Is it, like AIG, "too big to fail"? One might think that, so long as the FCC is interested in trading programming diversity for potentially lower cable prices, programmers seeking to use the regulatory machinery to compel basic tier carriage would be told to pound sand.

Oddly, the NFL Network probably is not even at risk should it not gain basic tier carriage. While many niche services no doubt would be unsustainable if sold on an a la carte basis - resulting in a thinner, less robust cable programming menu - services like the NFL Network with a large, dedicated viewer base likely will survive whether or not it is included within the basic tier. That is, this is not a case in which the FCC must trade off some loss in diversity to help control basic cable rates. Whatever the underlying rationale for the FCC's sympathy toward the NFL Network, it appears to be completely upside-down.

When the definitive history of Kevin Martin's regulatory reign of terror against the cable industry is finally written, I have a feeling that Ted Hearn of Multichannel News will be the man who pens it. There is no one who has been reporting on these issues longer or with more investigative vigor than Ted. In an absolutely scathing piece today about a former Martin staffer, Ted does a nice job summarizing the major elements of Martin's war on cable. It reads like the list of grievances against King George found in the Declaration. (Think: "He has erected a multitude of New Offices, and sent hither swarms of Officers to harrass our people, and eat out their substance.") Anyway, I just thought I'd throw Ted's list up here for those keeping score at home:

-- He secretly rewrote an FCC study issued in November 2004 that had concluded that cable a la carte was a bad idea.

-- He walked away from a handshake agreement with NCTA, Comcast and Time Warner that the rollout of family programming packages would end his a la carte jihad.

-- He stripped cable's control over critical wiring in apartment buildings, affirming the identical policy that a court had previously struck down.

-- He voided exclusive contracts between cable operators and apartment building owners just a few years after the FCC gave the green light to such deals.

-- He required cable operators to carry must carry TV stations in analog and digital for three years after voting against such a policy in February 2005.

-- He extended program access rules for five years, a gift to DirecTV and Dish Network even though the two satellite providers are larger than every cable company in the U.S. except Comcast and Time Warner.

-- He imposed expensive set-top box equipment mandates on cable, making it vastly more costly for Comcast and Time Warner to reach the goal of all-digital platforms.

-- He capped cable ownership at 30% of pay-TV subscribers nationally--the same limit that a federal court kicked back to the FCC as unlawful--while letting AT&T and Verizon basically divide the country's phone market.

-- He slashed cable leased access rates to zero in an act of bureaucratic malice that a federal appeals court has now blocked and that the Office of Management and Budget has rejected as a violation of the Paperwork Reduction Act.

-- He decided to brand Comcast an Internet outlaw when all the company did was occasionally frustrate a tiny minority of customers whose massive consumption of Web porn and pirated Hollywood films was destroying the service for others.

Jeff Eisenach, Chairman of Criterion Economics, and I have just released a new article about the perils of a la carte regulation in the Federalist Society's journal Engage. In "A La Carte Regulation of Pay TV: Good Intentions vs. Good Economics," we argue that: "From a policy perspective, a la carte regulation is worse than a solution in search of a problem; it is a problem waiting to happen." We show that the pay TV marketplace is functioning quite efficiently and that consumers have more choices and content diversity at their disposal than ever. A la carte mandates, we argue, would destroy that diversity and likely put pressure on prices to go up, contrary to the goals of the backers of a la carte.

We also discuss how a la carte is being proposed a tool of social regulation / speech control, with backers labeling it a way of "cleaning up cable." We explain why that is not going to work and why, even if it did, it would be a betrayal of the First Amendment.

This new article can be found online here and it is embedded down below as a Scribd file:

FCC Chairman Kevin Martin's desire to impose a la carte mandates on cable operators is well-known. But his advocacy has always lacked specifics regarding how such regulation of the multi-channel video world would work in practice.

Ted Hearn of Multichannel News points to this fact in his article today, "FCC Chairman Vague On Capping A La Carte Prices: Martin Has Yet To Spell Out How Mandate Would Work." Ted notes that, "At least in theory, programmers could set a la carte prices so high that the only rational option would be the purchase of the bundle." Thus, Ted wants to know "how so-called wholesale a la carte mandates would be effective if the FCC won’t police the per-channel rates being sought"?

Excellent question, Ted, and one that all analysts who follow this issue want the Chairman to answer. After all, almost all the serious economists and Wall Street analysts who have studied this issue have reached a consistent conclusion: Unless you only subscribe to a few channels, your bill will likely go UP, not down, under a la carte regulation. [Here's a concise explanation of why that will be the case.] So, what's the FCC going to do if those prices start going up once their plan backfires?

This week in National Review Online, Cesar Conda and Lawrence Spivak ran an editorial entitled “Kevin Martin’s Pro-Market FCC,” arguing that the current FCC has generally been deregulatory and free market-oriented. Today, James Gattuso of the Heritage Foundation and I have set the record straight regarding just how off-the-rails this current FCC has really gone…
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November 29, 2007

TV Train Wreck
Martin, markets, and the potential for regulatory disaster.

By James Gattuso & Adam Thierer

Like cops shooing away onlookers at the scene of an accident, Cesar Conda and Lawrence Spivak argue (“Kevin Martin’s Pro-Market FCC”) that there’s no reason for conservatives to be concerned about the Federal Communications Commission (FCC). Under Chairman Kevin Martin, they say, the FCC has been “characterized by a consistent pro-entry/pro-consumer welfare mandate, the very hallmark of economic conservatism.”

In other words: “Just move along. Nothing to see here.”

Despite Conda and Spivak’s exhortations, however, there is much for the curious crowd to see in the train wreck that is the FCC. The most recent derailment began earlier this month, when Martin leaked plans to invoke an obscure provision of the Communications Act, and to assert nearly unlimited powers to regulate cable television if more than 70 percent of households subscribe to cable.

New York Times business columnist Joe Nocera penned a lengthy column on the potential dangers of a la carte regulation over the weekend. He summarized why--as we have pointed out here before--despite the best of intentions, a la carte regulation is certain to backfire:

À la carte. It sounds so appealing, doesn’t it? Instead of having to accept — and pay for — all the channels bundled by your cable company, you could pick from a menu and pay for only the ones you watch. ... Yet as appealing as the idea might seem at first glance, there is a reason that Congress has not taken the bait and passed an à la carte law. À la carte would be a consumer disaster. For those of you who yearn for it, this is a classic case of “be careful what you wish for.”

Nocera goes on to show that, contrary to what a la carte regulatory advocates believe, prices for most customers would rise in the long-run:

I've written plenty here before about the potential pitfalls associated with a la carte regulation of cable and satellite television. What troubles me most about a la carte regulatory proposals is that proponents make grandiose claims about how it would offer consumers greater "choice" and lower prices without thinking about the long-term consequences of regulation. As I pointed out in a recent editorial in the Los Angeles Daily Journal, the problem with these regulatory activists is that "Their static view of things takes the 500-channel universe for granted; they assume it will always be with us and that it's just a question of dividing up the pie in different (and cheaper) ways." But as I go on to explain, a la carte regulation could bring all that to an end:

To understand why [it will harm consumers], we need to consider how it is that we have gained access to a 500-channel universe of diverse viewing options on cable and satellite. All of these channels didn't just fall like manna from heaven. Companies and investors took risks developing unique networks to suit diverse interests. Thirty years ago, few could have imagined a world of 24-hour channels devoted to cooking, home renovation, travel, weather, religion, women's issues, and golf. Yet, today we have The Food Channel, Home & Garden TV, The Travel Channel, The Weather Channel, EWTN, Oxygen, The Golf Channel, and countless other niche networks devoted to almost every conceivable human interest. How did this happen?

The answer is "bundling." Many niche-oriented cable networks only exist because they are bundled with stronger networks. On their own, the smaller channels can't survive; nor would anyone have risked launching them in the first place. "Bundling" is a means for firms to cover the enormous fixed costs associated with developing TV programming while also satisfying the wide diversity of audience tastes. Bundling channels together allows the niche, specialty networks to remain viable alongside popular networks such as CNN, ESPN and TBS. Bundles, therefore, are not anticonsumer but proconsumer.

If you're following the ongoing debate over efforts to mandate a la carte regulation for cable and satellite TV, there's an interesting piece in yesterday's Wall Street Journal entitled, "TV Channels Move to Web, Think Outside the Cable Box" [subscription only] that deserves your attention. Author Bobby White argues that "The Internet is offering a new outlet for voices -- including those of ethnic minorities -- that weren't heard from as much under old media." He highlights how the Black Family Channel and some other new networks that haven't found a home on the cable dial have decided to give it a go online instead:

Across the cable TV industry, other independent channels are also turning away from TV to the Internet. The Lime Channel, which focuses on healthy living, pulled out of cable last year and now offers its programming online and as video on demand. The Employment and Career Channel, which began streaming online in 2002, has junked its attempts to be a cable TV channel to be an online-only outlet. Others, like the Horror Channel and HorseTV (which revolves around equestrian events), have also opted to go online.

The shift illustrates how the Internet is offering a second chance to certain segments of old media. Web-based TV is now becoming a more viable business route, and Internet video is exploding. Running an online-only video channel, which doesn't require expensive cameras and broadcasting gear, is cheaper than operating a cable TV channel. While starting a new cable channel today takes an initial investment of $100 million to $200 million, a broadband channel needs just $5 million to $10 million to get going, says Boston-based research firm Broadband Directions.