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Is Comcast Too Big?

America Channel President Doron Gorshein says there's one major reason his network might face extinction: Comcast.

He claims that the largest cable operator in the U.S. has denied room for his new lifestyle network—all the while favoring networks in which it has a financial interest.

And without access to the 26.1 million subscribers that Comcast controls—more than a third of all cable homes in the U.S.—Gorshein contends that it's impossible for his network or others like it to survive. Comcast, he says, has “become big enough to unilaterally destroy any independent product.”

A Growing Chorus

Gorshein's claims against Comcast and its CEO Brian Roberts are part of a growing chorus among programmers and competitors decrying the cable giant's market power. Many in Congress and at the Federal Communications Commission and Federal Trade Commission are exploring a thorny question: Is Comcast too big?

What they decide could have an adverse impact on Comcast that could affect the larger cable industry at a time when Washington is seriously considering rewriting broad swaths of telecommunications policy.

Comcast is already expected to be one target in a new round of Senate hearings on media consolidation that antitrust staffers are quietly planning. Programmers and competitors will likely testify soon on the company's market power—and questions of abuse.

Meanwhile, the FCC is looking into market-power accusations from the Baltimore Orioles. The baseball team's Mid Atlantic Sports Network is armed with rights to the new and hot Washington Nationals but can't get carriage on Comcast, which dominates the Washington/Baltimore markets. The Orioles' network competes with Comcast's own sports network, which will lose rights to the team's games in 2007. The two sides are in the middle of a legal dispute over the games.

“Comcast is a monopoly that does not like competition,” says Orioles lawyer David Frederick, who has filed a complaint with the FCC.

Some Forceful Arguments

DBS rivals DirecTV and EchoStar are making forceful new arguments to the FCC about Comcast's national scale and its strategy of clustering cable systems. Comcast's local strength could thwart their access to important regional sports networks—or at least could increase their cost.

Comcast has long exploited a legal loophole and refused to sell its Philadelphia sports channel to satellite companies. One result: Just 8% of metro-Philly homes subscribe to DBS, the fourth-lowest penetration rate of the 212 Nielsen TV markets and half the average rate of the 10 largest.

Although the government is hardly likely to force Comcast to sell systems, the FCC or FTC could impose new rules on how the company deals with programmers.

The new scrutiny stems in large part from the planned $17.6 billion sale of Adelphia Communications. Comcast and Time Warner have teamed to buy the 5.2 million-subscriber operator out of Chapter 11. They plan to divide the systems, swap ones they already own, and extinguish Comcast's 21% stake in Time Warner Entertainment. Comcast will walk away with 2.2 million new subscribers; Time Warner, with 3 million.

Time Warner will face scrutiny as well, in part because it, too, is tough on programmers. One company advisor, seeking to distance the two operators, notes that Time Warner Cable will be half Comcast's size.

Even Comcast acknowledges that its size has made it an inevitable target. “Once we acquired AT&T Broadband and we were the No. 1 cable operator,” says Comcast Executive VP David Cohen, “you knew that, in anything else we did, we were going to have a large spotlight on us.”

Is Comcast too big? Says Cohen, “The answer to that, as a matter of law and as a matter of policy, is no.”

The inquiries in Washington will focus an unsympathetic public spotlight on the cable industry. Meanwhile, traditional big-media critics—such as the Media Access Project and Consumers Union, which have galvanized opposition that thwarted FCC attempts to loosen media-ownership rules—are expected to weigh in on the power of cable giants Comcast and Time Warner. Critics contend that Comcast's drive to buy Walt Disney Co. reflects Roberts' ambitions to grow even bigger.

Comcast wields more power than even the mighty Tele-Communications Inc. did at the height of its power. Throughout the 1990s, then-CEO John Malone, known as the all-powerful “Darth Vader” of cable, was the constant target of Congressional inquiries, as well as of competitors' and consumers' carping about the power of his cable empire.

Comcast Takeovers

At his peak—before selling out to AT&T in 1998—Malone controlled systems serving 18 million subscribers, about 27% of the cable industry, or 23% of all cable and DBS homes. Through its own takeovers, Comcast now owns Malone's old systems and more: 21.5 million subscribers and equity in partnerships serving another 4.6 million. If the Adelphia deal goes through, Comcast will have an interest in systems serving 28.3 million subscribers. That's 42.5% of all U.S. cable subscribers and 29% of combined cable and DBS homes.

“We were big enough that we could help something that was a good idea to get going, but we could never kill anybody,” Malone told B&C last April. “But there's no way on earth that you can be successful in the U.S. distributing a channel that Brian Roberts doesn't carry, particularly if he has one that competes with it.”

Starting a programming network is treacherous. Cable and DBS are already stuffed with 389 existing programming services, many of those relegated to digital tiers. The National Cable Television Association counts another 79 startups looking to get on. Most are unaffiliated with media giants and generally comprise a programming strategy and too little money, like The Africa Channel or the Puppy Channel.

With a startup costing at least $60 million, the most important sign of life to potential investors is distribution: signed carriage agreements with cable and DBS operators. Skating network The Ice Channel has melted; Reality 24/7 met harsh realities and has ceased trying to launch a cable network.

Feel-Good Fervor

The America Channel is trying to avoid that fate. The network had hoped to tap the feel-good fervor swelling up in the country. Gorshein, a lawyer who has worked at EchoStar and CNN, sees the network as celebrating “real people” who get little acclaim but make certain accomplishments in their communities. Think of it as A&E's Biography without the celebs: profiles of interesting entrepreneurs and everyday people with interesting lives.

The concept is not as easily grasped as, say, College Sports Television. But Gorshein attracted investment of what industry executives pegged at $3 million, plus support from former CNN news anchor Mary Alice Williams and the wife of former colleague Larry King.

He held extensive meetings with cable and DBS executives but struck out, he contends, because of his inability to secure carriage from Comcast or Time Warner. Gorshein maintains that other cable operators wait to follow the two biggest companies' lead. “If you don't get Comcast,” he says, “you're not going to get the rest.”

Gorshein says Comcast offered what it offers many new networks: video-on-demand carriage. The network will get not a conventional “linear” channel but space to offer an array of programming for the operator's digital on-demand subscribers. But neither subscribers nor Comcast pay the network. It's all free exposure, with the possibility that a network creating a VOD following might graduate to a real channel slot later. So far, that hasn't happened.

The Anime Network, a Japanese animation channel, was one of the first startups willing to settle for space on Comcast's free-VOD service, hoping for a real channel later. But talks stalled last fall after Comcast jumped into a programming venture with Sony Pictures, backing the Japanese studio's bid for MGM. If Comcast help brings Sony's own Asian anime service, Animax, to the U.S., will it also make room for Anime Network? Kevin McFeely, Anime Network's affiliate sales director, says the company is still working on a deal with Comcast, but would not say if it would go beyond VOD. Comcast's Cohen says the company hasn't finalized what networks it might launch with Sony.

Meanwhile, programmers have grown agitated watching Comcast systems clear the way for networks the company partly owns. TV One and G4, for example, are getting wide carriage on Comcast's best tiers. PBS Sprout is starting off as a VOD channel, but Comcast plans to launch it on more-lucrative digital basic next year.

While Comcast executives “sing the praises” of VOD for programmers, Gorshein says, “Comcast's adoption rate of its own networks is 100% linear carriage.”

Without commenting specifically on America Channel, Cohen says Comcast makes programming decisions based on the quality of the content: “You still have to generate compelling content that people want.” Protests to the FCC, he maintains, “are a tactic for programming negotiation rather than a substantive programming complaint.”

To be sure, new channels from major media companies generally offer stronger programming and marketing than inexperienced, thinly financed startups. Giants like Viacom or NBC Universal can leverage their relationships as suppliers of important existing networks.

More directly, Cohen says Comcast is far from the source of America Channel's problems. Gorshein has no deals with any major carrier, Cohen points out, including his former employer EchoStar.

“The notion that Comcast is the gatekeeper to the content world is not true,” Cohen says. “There are 70 million multichannel-video subscribers who are not Comcast subscribers; The America Channel has had no success in getting carriage on them either.”

20 million subscribers needed

America Channel's FCC filing, however, contends that, while Cohen's arithmetic is correct, that's not how it plays out. A basic network needs at least 20 million subscribers to draw much advertising.

Of 92 basic networks that have rolled out and secured more than 20 million subscribers, “not a single one had achieved the 20 million-household milestone without carriage by either Comcast or Time Warner or both,” the filing states. “Getting past 25 million has always required Comcast systems.”

Executives at other new cable networks would not discuss Comcast on the record for fear of retribution. When staffers at the Senate Antitrust subcommittee asked one such executive if she would testify about her experiences with Comcast in a hearing on competition in cable, she recalls, “I said, 'No way!' I have to deal with these people again.”

But Gorshein says he has little to lose by attacking Comcast: “The market needs to take a stand against these practices.”