Target: Pay TV's Wild Side

Cable and satellite operators watched from the sidelines last year while
broadcast TV was roasted in Washington for Janet Jackson's and Bono's
crimes against public taste. Now it is pay TV's turn in the government's
line of fire—and the result could cost the industry a lot more than an FCC
fine and public scoldings on Capitol Hill. With newly appointed Attorney
General Alberto Gonzales making the prosecution of obscenity cases a priority
for the Justice Department, cable and satellite operators face a looming threat
to their estimated $800 million in revenues from adult entertainment. But the
landscape of cable and satellite programming itself—from the bawdy humor on
Comedy Central to the softcore fare on late-night HBO and Cinemax—is also
subject to attack as Congress contemplates revising the rules that have
essentially given pay TV carte blanche to show anything, at any time.

For social conservatives, who have been emboldened by their role in the
reelection of President Bush, the rhetoric coming out of D.C. could not be more
welcome. For the pay-TV industry, the coming confrontations present the
formidable task of lobbying to protect its interests, avoiding the radioactive
PR of seeming to defend pornography, and preparing to fend off legal barrages
from federal prosecutors.

Broadcast television suffered Washington's wrath last year for the
infamous transgressions of Bono and Janet Jackson. Now it looks like cable and
satellite programmers' turn on the hot seat as Congress and the Justice
Department contemplate steps that could terminate pay TV's free pass to show
anything, anytime.

The industry's wide latitude is threatened on two fronts. First, many
in Congress want to impose on cable the same type of restrictions that limit
when broadcasters may air their sexiest and edgiest mainstream shows. The other
worry for the cable industry is a rising sentiment to eliminate an extremely
lucrative line of programming that no broadcaster would dare provide:
pay-per-view porn.

If proponents fully realized their goals of restricting indecency and
obscenity (the distinction is basically indecency = dirty words, obscenity =
dirty pictures), it would have major implications not just for the economics of
cable and satellite TV but for their programming itself. For instance, Comedy
Central might have to move the profanity-laced South
out of prime time, and HBO, Cinemax and Showtime likely would
find it wise to abandon their late-night softcore programming. The Spice
channel might survive only as the name of a cooking network.

But even though the current move to police cable programming appears to
have more momentum than past clean-up threats, considerable obstacles remain to
be overcome before cable and satellite operators could be forced to rethink
their business plans.

Two weeks ago, new Attorney General Alberto Gonzales vowed to pursue
“aggressive prosecution” of obscenity cases, an announcement many social
conservatives interpreted as a sign the Justice Department is set to expand its
anti-obscenity enforcement into increasingly prevalent forms of adult
entertainment, such as pay-per-view on cable and DVDs. And indeed, Justice
Department spokesman Brian Sierra cautions, “Anybody trafficking in obscenity
does so at their own risk.”

Gonzales, a former White House lawyer, placed an obscenity crackdown on
the same list of priorities as the war on terror, deterring violent crime,
lobbying for victims'-rights legislation, reforming immigration laws and
eliminating human trafficking.


Combating obscenity, Gonzales says, is critical to advancing “the
cause of justice and human dignity.”

The campaign comes at a time when social conservatives, having helped
President Bush to victory in the past two presidential elections, feel
emboldened to press for action on their agenda. On the obscenity front, their
concerns arise from what they see as media providers' “whatever sells”
attitude toward sexually oriented and explicit content. In fact, groups such as
the National Coalition for the Protection of Children and Families, as well as
Concerned Women for America, have criticized the Bush administration for not
doing more during the past four years.

Dan Panetti, the National Coalition's vice president for legal and
public policy, believes that the Justice Department during the tenure of former
Attorney General John Ashcroft would have pursued obscenity prosecutions if not
for the unexpected demands of the war on terror. “9/11 changed everything,”
he says.

Now that the Bush White House has revived its social agenda, Panetti is
encouraged that obscenity will be attacked on many fronts: “We'd like for
dozens of cases to be brought at one time in federal circuits across the

Although Sen. Hillary Clinton has not come out in support of the most
wide-ranging proposals to rein in indecency and obscenity, she last week
sharply attacked the entertainment industry for the exposure of children to sex
and violence on television and in videogames. She joined a bipartisan call for
a government study of the media's impact on young children and urged a
uniform ratings system across various entertainment platforms so parents can
better gauge what their children see.

The sight of the Democrat from New York alongside Republican Sen. Sam
Brownback—who is at the forefront of an anti-obscenity movement in the
Senate—touting legislation to require the media-impact study, indicated the
new tenor on Capitol Hill that could greatly complicate life for the cable

For the past decade, both the Clinton and Bush Justice Departments
focused narrowly on anti-obscenity enforcement, primarily on the trafficking of
child pornography. But during his confirmation hearing in January, Gonzales
pledged to prosecute more-prevalent types of pornography, as the Reagan
administration did in the 1980s.

Including adult pay-per-view channels in a government anti-obscenity
campaign would threaten what is by far cable and satellite operators' most
profitable product line. Satellite and cable operators, according to Kagan
Research, are pulling in revenue of just under $800 million a year from adult
movie subscriptions and pay-per-view orders, roughly 40% of pay-TV on-demand
revenue. That may not sound like much for an industry expected to tally $62
billion in revenues this year, but the take from adult pay-per-view is almost
pure profit. Cable and satellite operators' margins for sex channels,
according to several analysts' estimates, run between 70% and 90%. By
comparison, cable and satellite operators get to keep only 40% of the retail
price of theatrical movies.


Even for the strongest operators, profits from adult pay-per-view are
essential to quickly recapturing the costs of building out their systems'
digital capacity, an effort on which the industry as a whole has spent $95
billion since 1996. As more systems go digital and add video-on-demand
services, according to Jupiter Research, cable and satellite providers will
grow their adult channel revenue by 120% through 2009. (Kagan Research is more
cautious, as shown in the graph on page 14.)

Jupiter's Todd Chanko says add-on services such as pay-per-view adult
channels will be essential drivers of growth, now that 85% of Americans already
subscribe to cable or satellite and new customers will be hard to come by.
“All operators have to rely on other ways to generate incremental revenue,”
he says.

Fighting a crackdown on porn would present an awkward challenge for
cable. Despite the profits, adult entertainment is to the media business what
nuclear waste is to energy producers: Nobody rushes to defend it in public.
Indeed, last month, news reports about Adelphia Communications' intention to
offer the most graphic form of hardcore porn (XXX, in the adult-entertainment
business's calibration of the sex acts depicted) on its cable system in
Southern California prompted so much criticism that the company quickly
abandoned the plans.

Comcast, the country's largest cable company, referred
B&C to the National Cable &
Telecommunications Association for comment on the obscenity issue. Dealing with
the hot-button topic is one of the first tasks faced by new NCTA President Kyle
McSlarrow, a Republican with strong ties to party leadership. He says he is
“comfortable” with the industry's decision to rely on channel-blocking
technology, which he describes as a powerful tool that allows parents to shield
their children from adult channels and other edgy fare without hindering
anybody's viewing choices. “I don't want to start making decisions about
what other people watch,” he says.

Playboy Entertainment Group, which provides 75% of adult pay-TV content
though the Playboy, Spice and Hot Network channels, also declined to comment on
the Justice Department's efforts. (The other top adult-channel producer is
New Frontier, which sells The Erotic Network channels; the company did not
respond to a request for an interview. Larry Flynt's Hustler TV is just
getting into the business.)

Because porn is radioactive as a PR issue, cable operators and big hotel
chains that carry in-room pay-per-view porn channels have largely left the job
of defending the business in public to the adult-entertainment industry's
trade group, the Free Speech Coalition. Executive Director Michelle Freridge
won't identify members but says her group's efforts have the support of the
cable and hotel industries. The coalition's more public allies include the
ACLU, the Association of Club Executives (which represents strip clubs) and the
First Amendment Lawyers Association.

“A lot of organizations and specific companies don't want to attract
the attention of their attackers,” Freridge says.

Behind the scenes in Washington, however, cable and satellite operators
are scrambling to use whatever influence they can to shield the pay-TV
business. Brian Roberts, the CEO of Comcast, will have the opportunity to
capitalize on ties he made as co-chair of Philadelphia 2000, the host committee
for the Republican National Convention. But that is hardly Comcast's only
useful Washington connection; the company's Washington office is led by Kerry
Knott, ex-chief of staff for former House Majority Leader Richard Armey.


Although the general public may only be vaguely aware of the amount of
money their local cable franchises can pull in from adult channels,
conservative activists already are zeroing in on the major corporations' porn
profits. “Everything is in place to bring prosecutions against mainstream
companies,” says Panetti.

In the past four years, the Justice Department has added 17 attorneys to
its Child Exploitation and Obscenity Section and doubled the section's budget
to $42 million. Among the new prosecutors is Bruce Taylor, who returned to the
department after working as an anti-porn activist. As a Reagan-era Justice
attorney, he unsuccessfully prosecuted Hustler's Larry Flynt but won a string
of lower-profile obscenity cases.

Gonzales' pledge to pursue anti-porn cases came the same week two top
lawmakers vowed to bring pay TV under the same “indecency” restrictions as
broadcasters. Sen. Ted Stevens, chairman of the Senate Commerce Committee,
promised a showdown with the cable industry if operators continue to insist
they are constitutionally exempt from FCC indecency restrictions on
broadcasters' allowing objectionable—but not obscene—programming only
between 10 p.m. and 6 a.m., when children are least likely to encounter it.

“I think we can put restrictions on cable,” he told the National
Association of Broadcasters last week. Stevens predicted that cable operators
will lose in court if they challenge indecency restrictions on First Amendment

Rep. Joe Barton, Stevens' counterpart in the House, seconded the call
for cable indecency restrictions. Rank-and-file lawmakers have voiced support
for the idea, too. Last year, Rep. Nathan Deal appeared to have enough votes
among fellow House Commerce Committee members to amend broadcast-indecency
legislation with a provision that would make cable operators sell channels
individually (or à la carte, as it's known in the industry), rather
than in bundles containing channels some parents might not want their kids to
see. Only after committee leaders convinced their members that restrictions on
cable might not survive the court challenge did they back off.

Shedding their public shyness about defending their porn operations, the
cable executives quickly responded to Stevens' and Barton's comments about
indecency restrictions. Operators say channel-blocking technology and the fact
that subscribers “invite” cable television into their homes are sufficient
protection from new limits on pay-TV programming. “The subscription nature of
cable service, and the ability of cable customers to block unwanted
programming, strongly differentiates cable from broadcasting,” says NCTA
spokesman Brian Dietz.

Because of well-established court rulings, Stevens' saber-rattling
about imposing indecency restrictions seems less likely to threaten the pay-TV
business as it exists today than would a Justice Department anti-obscenity
campaign. Years of court rulings have spelled out at least modest First
Amendment protections for programming that would legally be classified as
indecent, incorporating such elements as profanity, bathroom humor and explicit
references to sex. Cable and satellite-TV operators simply have to make
channel-blocking technology available to subscribers who don't want networks
that provide content they find objectionable. Indecency is not even banned from
broadcast television, after all; it is just corralled by the FCC into those
eight overnight hours.

Obscenity, on the other hand, has no First Amendment protections and may
be outlawed under local or federal statutes no matter what the venue. The
age-old problem, of course, is defining exactly what constitutes obscenity. In
1973, the Supreme Court found that, in order to be considered obscene, content
must depict or describe sexual conduct in a way a local community would find
patently offensive.


Recent cases have put serious roadblocks in the Bush administration's
plans on this front. Congressional attempts to restrict online pornography have
been rejected by the Supreme Court on First Amendment grounds. Most recently, a
federal district court threw out charges against a distributor of movies
simulating rapes and murder. The Justice Department is appealing.

But Justice spokesman Sierra predicts cases will go to trial as they are
brought before judges in other districts. “It's up to local officials and
juries to decide whether there's been a violation of the law.”

Tailoring its approach to the Supreme Court's concerns, Justice will
leave the decisions about pursuing prosecutions to local federal district
attorneys—to ensure that local community standards are taken into
account—and brought before local juries. The local prosecutions will be
assisted by Justice officials in Washington.

The Justice Department has found support on Capitol Hill, from both
Senate Judiciary Committee Chairman Orrin Hatch and committee member Sam
Brownback. The senators have taken the lead in sponsoring anti-obscenity
legislation in the first session of 2005, and both have called on the Justice
Department to step up obscenity prosecutions. Brownback has sponsored
legislation that would call for federally funded research into the possibly
addictive effects of pornography (he maintains that pornography is indeed
addictive and contributes to crimes such as child sexual abuse.)

The Free Speech Coalition's Freridge says Brownback is laying the
groundwork for a broad attack on adult entertainment. She insists that
porn-addiction theories have little credence among most researchers.

“In order for the government to infringe upon free speech, there has
to be a compelling reason,” she says. “We believe they are trying to create
a record for legislation that would make adult entertainment illegal.”

As far as the National Coalition's Panetti is concerned, however, most
pornography is already illegal—and it is time the government said so. “The
government can censor this material,” he says. “All we're asking is that
the government brings these cases and asks juries whether this content should
be protected by the First Amendment. Local communities are going to say no.”

If that happens, cable accountants are likely to look at their ledgers
and say Oh, no.

Additional reporting by John M.