In Depth

Moving on to a New Round of Challenges

On March 1, 2005, when former Deputy Secretary of the U.S. Department of Energy Kyle McSlarrow began his tenure as president and CEO of the National Cable & Telecommunications Association, he could hardly have picked a more challenging time to enter the cable picture.

Lawmakers were threatening to extend their crackdown on broadcast indecency to cable television, and competition from telephone companies was on a precipitous climb.

As his term of service progressed, Mr. McSlarrow squared off against the George W. Bush administration’s Federal Communications Commission Chairman Kevin Martin over a la carte programming and even stepped up to the plate when progress of the long-aborning transition from analog to digital broadcast signals ran into the challenge of too many unprepared consumers.

Mr. McSlarrow recently sat down with TelevisionWeek Washington Bureau Chief Ira Teinowitz to reflect on these and other events that have transpired under his NCTA watch.

TelevisionWeek: Former Federal Communications Commission Chairman Kevin Martin is gone. Does that mean you are clear and everything is great?

Kyle McSlarrow: No. I have no doubt that we will have our challenges. There are too many issues and too many legitimately different perspectives that people can literally bring to bear on a particular policy issue. But do I fully expect that, as we have experienced over the last couple of months, we are going to be treated fairly and thoughtfully? Yes. What we had was not normal.

TVWeek: Kevin cost you a lot of time and pain and money, but did he actually cause you problems in the things he did?

Mr. McSlarrow: My view is I made my criticisms known when they were relevant. He’s gone. I’ve moved on. I don’t want to look back. I want to look forward. But he got his nicks in. There were a couple of bad decisions in our view. But either by virtue of other commissioners not going along or court cases working out in the right way, yeah, when you step back and look at what actually happened, we got through it fine.
We spent a lot of time and energy, and a lot of sturm und drang involved, but we did fine.

TVWeek: At the same time, cable has been losing subscribers. Is that the organization’s problem?

Mr. McSlarrow: It is a pretty steady trend. It’s actually slower than it used to be. The entry of satellite into the business was a completely game-changing experience. You had for the first time two, not just one, national competitors. And in the space of a decade they grabbed a third of the market share.

Now you have the telephone companies that have entered. So there’s a realignment of the marketplace that is taking shape right now.

Part of that realignment is there is a slowing, or an actual loss of some basic video subscribers, but also a huge grab or gain on the phone side, so the mix is changing. If we were the incumbent in video, you would expect we would lose some. If the Bells were the incumbent in phone, you would expect them to lose some. And that’s exactly how it’s playing out. Over time we are all going to be exactly a lot like each other. When you look at the total package of services going into the home, you still have growth. Broadband has clearly been a big driver, and phone has been a huge part of the broadband.

I think it’s everybody’s issues. I can’t pinpoint loss of video subscribers as a policy. I think competition is the right policy. Sometimes that makes it tough, but you have to adapt to it.

TVWeek: The differences between the industries are starting to lessen. It seems that some of the issues you are working on and the issues the phone and satellite broadcasters are working on are the same. Does there come a time when there should be a combination [trade organization]? Have you talked about that?

Mr. McSlarrow: Yes, we have talked about that. I’m not sure it would be within a five-year window, but at some point it is inevitable that trade associations will adjust to reflect a different marketplace reality. There are still some key differences among these businesses. Satellite is still functionally not a two-way provider, so it is very hard for them to get into the broadband side of the business. There is a little more of a matchup between us and the Bells because we do look the same, and we are all now engaged in the same three services and maybe over time even in wireless as well.

But if you look at the Bells, they still principally operate in a state [public utilities commission] model, the old regulatory system they had as phone companies. We still largely operate by franchise, so there are regulatory differences that still keep us not exactly on the same footing on how we view policy. But over time, there is no doubt in my mind that it diminishes.

TVWeek: Looking forward to the Julius Genachowski FCC administration, what do you see as the biggest issues?

Mr. McSlarrow: The FCC is going to have a lot of decisions to make and they are going to think about how the decisions they make aid in the economic recovery. Everybody in the Obama administration is focused on that.

It gives us an opportunity to make the case that if one is focused on jobs and a strong economy, you have to be focused on policies that drive innovation and investment and allow the broadband and media marketplace to be an agent of job creation. Up until last fall, when the bottom dropped out, we were one of the industries that was consistently generating jobs.

So when I think of things like multicasting and broadband, I don’t think of them as distinct issues. The way I look at this is over a decade and a half we invested in a two-way network. We carried into that a set of old rules focused on the cable industry as a provider of video services—and basically a provider of analog video services.

The vast majority of the cable is analog. Now we think of ourselves as a broadband industry.

Policy-makers are focused on broadband as an engine of broadband creation and productivity. How you use that pipe tells you a lot about how you roll out next-generation broadband. You’ve got a lot of government mandates that are legacies of the analog leased-access, PEG [public, educational or governmental] channels, must-carry, multicasting. They are all government mandates on how to use the pipe.

If policy-makers are really interested in moving us into a new world, where they talk about delivering 100 [megahertz] upstream and downstream, one has to connect the dots and realize that [in order] to deliver those kinds of service, we have to free up bandwidth.

Yes, there will be capacity upgrades, but the more we can clear out bandwidth uses from less efficient uses to more efficient uses, the more we can offer more definition and faster broadband, which is what our customers actually want.

TVWeek: PEG channels. They are one channel in a vast universe. How significant are they?

Mr. McSlarrow: It varies by market. I have Cox as a provider—they have 17 PEG channels. That’s an enormous amount of capacity. Does it basically work? Yes, but is that really the best use of that capacity?

I mean, we are all talking about 100 megahertz downstream. Now that is the stretch goal for broadband. In five years it will be something else. The point is that the world is moving really quickly in terms of what consumers are demanding.

As far as we can tell, consumers right now are demanding two things. They want more high-definition and faster broadband. These pipes are by and large full. So if you are going to roll out DOCSIS 3.0, which at a minimum requires four channels downstream, they have to come from somewhere.

It’s not that it is the end of the world. It’s that our ability to move to that future which policy-makers and customers seem to want may be slowed down if we don’t take a second look at the legacy rules that impose burdens on the fight.

TVWeek: Are you worried about new rules—indecency, violence—coming? Do you see any possibility they could be coming?

Mr. McSlarrow: I think it is always going to be a challenge. I think it would be foolish to just assume that what would today be a very good story about providing parents tools is going to be the last word on the subject.

I do think that as we move into the digital age, the kinds of parental control technology become more sophisticated and do a better job, but I just don’t believe for a moment that there won’t be the impulse to go directly at indecency and violence.

Something will happen. There will be another Janet Jackson. There will be outrage. You can’t really control it, but it’s almost predictable.

TVWeek: How about content on broadband?

Mr. McSlarrow: There is a raging debate on this. My view is we should embrace all of this. There is a fundamental question, which is you have a continuum from user-generated video to the highest-value studio content. There are different models along that continuum that work, from user-generated that you don’t need anything, because you and I create it and just post it on YouTube, to a model that apparently works pretty well—some combination of subscription fees and payment and ad-supported.

The content that people are focused on is at the higher end of this continuum. It’s not just going to appear on broadband without an economic model to support it. And I don’t believe, based on what I’ve seen, that they are just going to give away the content for free without a return on investment.

So the model we have today works pretty well. If it changes, there is going to be a model that supports it. Either way, for the cable industry, we are going to be well placed to support it. So my view is, embrace it.

TVWeek: You don’t think they will fight?

Mr. McSlarrow: Of course they will fight. What I react to is this notion that over-the-top video and broadband sites are going to destroy this model. I just think it’s nonsense. It’s going to complement. People are going to experiment. I think there is going to be a role for getting content online, but it will be additive that works today in a multichannel universe. If it starts to cannibalize it, people are going to react accordingly. These companies are not just going to give away their content for free and die.

How they figure it out, and what the marketplace drives them toward as a new model, yes, I fully expect there will be lots of catfights. But that’s OK. This is change.

TVWeek: One of the original reasons for cable was poor signals. You have a situation with people getting a better signal from DTV. Is there any danger cable could be in trouble from the availability of free channels?

Mr. McSlarrow: I don’t know if there is a danger, but there is an opportunity for broadcasters. If they are smart, they will play it that way. I think there is still a case to be made that some subset of the population will continue to want free over-the-air TV. And I think the digital transition will be very good for that. There is an issue of how far they reach, but where it does the signals are great and beautiful.

I think what has happened in our society is that more people have decided that they want to have even more choice than that. There also has to be room for both those models.

TVWeek: Cable pricing. People say phone bills are going down—do you expect that issue to continue? Do you expect any moderation in pricing?

Mr. McSlarrow: I do expect the issue to continue. I think it’ll continue because it is an interesting conundrum that in a competitive marketplace, where one would expect pricing to come down, pricing continues to go up. At least that is the perception, and that is the reality, too. There are a lot of good reasons for that. One of the good reasons is you have a lot of good people investing in the quality of the content.

You and I are old enough to remember just how crappy content used to be, not just on the cable networks, but on the broadcast networks. I describe the shows I used to watch to my kids and they just laugh. They get better quality in their cartoon networks today.

There is a point at which consumers are going to say, “OK, this is enough. I don’t want it to get better. I don’t need more choice.” I don’t think we have reached that yet, but I don’t think cable pricing goes away as an issue.

The other way I think about it is we have to think about how consumers actually consume the services they get. Increasingly consumers are buying packages—not just video, but video, broadband and phone. You look at the quality and kinds of offerings they are getting today … they are clearly getting better content, more quality, choice and better value, because that package is less than the same package was 30 years ago, so prices have actually gone down and you are getting a lot more for it.

TVWeek: The push by broadcasters for compensation—is that going to push up cable pricing?

Mr. McSlarrow: Yes, that’s one reason retransmission is a difficult issue. In the aftermath of retransmission consent becoming law [in 1992], people basically worked it out so you ended up with more choice. They solved it with additional networks [which cable systems agreed to air in return for getting the right to carry broadcast channels].

Now that string seems to have run out. So now for a lot of reasons, including the economy and advertising, you are going to have a lot of pressure on retrans rates, and that inevitably leads to upward pressure on the price that consumers pay.

TVWeek: How worried are you that this will erupt into a battle this year as Congress moves to reauthorize the 1992 Satellite Home Viewer Act?

Mr. McSlarrow: I can’t tell. I testified to the House Judiciary [Committee] recently and my point was that if they want to just reauthorize and make a couple of modest fixes—everybody wants a couple of modest fixes—we’d be fine.

But my point was that if they do want to open it up, then you can’t ignore retransmission consent. You have two regimes that are supposed to work in tandem—the compulsory license regime [which requires cable operators to carry local stations] and the retrans regime. They are not “kind of” in conflict. They are in conflict. They have different origins and a different history, and if you are going to do a broader look, you have to look at all of this together. But if they start a straight authorization, that’s fine as well.

TVWeek: Are you hopeful they will get into those issues, or is it that if they get into the issues, you are ready?

Mr. McSlarrow: The latter.

TVWeek: When cable providers don’t reach agreement with broadcasters on retrans, should the government step in?

Mr. McSlarrow: We don’t have a good answer for that. What bothers me about the retrans regime is we put the consumer in a bad place. Either they work it out or you get the treat or reality of a withheld signal. And a withheld signal for something that we supposedly resolved decades ago with a compact with broadcasters that they agreed, in return for free spectrum, that they would supply TV over the air for free to everybody. The idea that a cable customer or a telephone customer should be uniquely disadvantaged, just by seeing their signal on a multichannel platform, strikes me as an odd policy result. It can’t be the right answer for the consumer.

I don’t have a great answer for that. But I think we should all be thinking it through. I don’t think it is a sustainable model.

A lot of us thought there would be more fights last year than actually transpired. I don’t know when it happens. But at some point you are going to have signals with network programming get pulled and people are going to go ballistic and they are going to wonder why policy-makers allowed this to happen.

We are willing to be at the table to have a conversation to try to figure out a better way to do it. But right now I’m not in a position to say it has to be this way or we are going to jam everybody. There has to be a conversation. And by the way, it has to be something that’s not just good for cable operators or satellite and cable. It’s got to be fair to everybody, or it’s not going to work, and that means broadcasters, too. The world we inherited from the 1992 act no longer really legitimately applies today. This is the time, as they have gone digital and we are going digital, there is a lot of change. This is the right time over the next couple of years to step back and figure out a better way that those people who create content are compensated fairly and the consumers get the choice of the programming they want when they want it.

TVWeek: Just hand out antennas?

Mr. McSlarrow: It’s not a practical choice. You have to come up with a choice that isn’t clunky for consumers. If a household chooses to be an antenna household, that’s fine. But for everyone else, they expect this to be seamlessly dealt with by the time it comes to their TV.