Cable Pleads Its Case
Dereg Push Hinges on DBS Growth
By TED HEARN -- Multichannel News, 9/9/2001 8:00:00 PM
Washington — Washington— In a low-key but persistent manner, the cable industry is urging federal regulators to free cable operators from all programming and equipment regulation in 40 states — including big ones such as Florida, Texas and California — where direct-broadcast satellite providers have chalked up some of their biggest gains.
The opening move to overhaul key Federal Communications Commission cable rules was made last month by the National Cable & Telecommunications Association, in comments filed in connection with the agency's annual report to Congress on the state of cable competition.
Last Wednesday, the NCTA filed a new round of comments, repeating its view that the FCC needs to fundamentally alter the manner in which cable systems are regulated in 80 percent of the states.
The NCTA's proposal — which might require action not just by the FCC but by Congress — drew criticism from a consumer advocate and the DBS industry. Both alleged that cable's lingering dominance of the pay-TV market justified retention of the current regulatory regime.
Consumer Federation of America research director Mark Cooper said cable's proposal was without merit, and appeared to be aimed at testing how far FCC chairman Michael Powell would go in pushing his deregulatory agenda.
"Mike Powell told them he was a friendly regulator, so they are going to see how friendly he is going to be," Cooper said.
But NCTA senior vice president of law and regulatory policy Daniel Brenner said the cable industry is seeking a new approach from the FCC, because current rules are clearly out of step with a present-day market characterized by head-to-head competition between cable and DBS.
"I think all [the proposal] does is reflect what has changed in the marketplace with respect to choice for customers," Brenner said last week.
Andy Wright, acting president of the Satellite Broadcasting & Communications Association — the DBS industry's Washington lobby — called the NCTA's proposal "disingenuous" because it glosses over cable's long-standing market presence and large market share.
"While the gains made by satellite television may have reduced cable from an 800-pound to a 799-pound gorilla, they still control approximately 80 percent of the market, an unarguable position of market dominance," Wright said.
Though mentioned briefly and a bit short on details, the NCTA's proposal would nevertheless represent a 180-degree shift in FCC policies first adopted in 1993 with the implementation of the Cable Act of 1992.
In early 1999, the FCC lost its authority to regulate expanded basic rates under the Telecommunications Act of 1996. But in that law, Congress allowed local governments to regulate basic rates, as well as the prices for set-top boxes and remote controls, as had been the practice since 1993.
Under current FCC rules, cable operators are presumed to be monopolies subject to local price regulation. A cable operator can't escape local regulation unless its video competitor is a telephone company, or unless it can demonstrate to the FCC that all its competitors combined serve more than 15 percent of households in its franchise area. Only a few hundred of the nearly 33,000 franchise areas have been deregulated.
With respect to the 15-percent test, NCTA wants the FCC both to flip-flop the legal presumption and to crop cities out of the picture.
The NCTA's plan calls for the FCC to administer the 15-percent test with respect to DBS on a statewide basis, rather than a franchise-wide one. In states where DBS carriers have breached the 15-percent threshold, NCTA said the agency should presume that all cable operators in that state are no longer considered monopolies not subject to effective competition.
The trade group's proposal would have broad national implications.
The NCTA, relying on data supplied by SkyTRENDS, told the FCC that 40 states throughout the U.S. have DBS penetration rates of at least 15 percent. That calculation did not factor in additional subscribers controlled by cable overbuilders, multichannel multipoint distribution system (MMDS) operators, satellite master antenna TV (SMATV) operators, and open video system operators.
Thirty states have DBS penetration rates of at least 20 percent; 13 states have at least 25 percent; five states have at least 30 percent; and one state — Vermont — has at least 40 percent, the NCTA said.
"In the end, it seems to me that rules that should be in place are rules that should reflect what's happening in the market. And that's why we think we are on relatively safe ground in saying that states with significant DBS penetration are a sensible geographic territory to define effective competition," Brenner said.
Brenner pointed to DBS's rapid growth curve as justification for a new FCC policy.
Since 1994, the DBS industry has grown from zero subscribers to 16 million, and today it represents 18 percent of the pay TV market. When combined, all cable competitors control 23 percent of the market.
DirecTV Inc., the No. 1 DBS carrier with 10 million subscribers — and exclusive rights holder to the National Football League's "NFL Sunday Ticket" out-of-market game package — is the third-largest video distributor in the U.S., trailing only cable operators AT&T Broadband and Time Warner Cable.
EchoStar Communications Corp., the No. 2 DBS firm with 6 million subscribers and the seventh largest video distributor overall, last month bid $32 billion to acquire DirecTV.
EchoStar recently launched "I like $9," a new promotion that allows subscribers who pay $199 for the equipment to receive free installation and 100 channels of programming for $9 a month if they sign a 12-month contract. Meanwhile, the FCC's most recent cable price survey showed cable operators on average offer about 52 channels and charge about $32.00 a month for programming, a set-top and remote.
That's clear evidence that cable operators are facing robust competition from DBS that FCC regulators can no longer ignore, Brenner said.
"When you have more than 20 percent of the [pay TV] market spoken for by satellite, and when you have one satellite company larger than all but two of the cable companies, you are really not talking about a competitor who is just starting out," he said.
Despite the gains by DBS, the cable industry controls 77 percent of the pay TV market, with 68 million subscribers and annual basic-tier growth roughly proportional to overall household growth in the U.S. Over the last few years, cable operators have signed up 12.2 million subscribers for the digital programming tier.
Cable operators still possess the market power to raise rates unchecked by DBS, the CFA's Cooper said. Control over basic rates should remain under the purview of local governments, he said.
Cooper and other consumer advocates have been unimpressed with cable's argument that according to federal government data, nominal cable rates have climbed only slightly higher than inflation in recent years — despite large increases in programming costs — and that per-channel cable rates have actually declined when adjusted for inflation.
"We don't think the 15-percent test makes sense on a franchise-by-franchise [basis] because satellite doesn't discipline cable prices," Cooper said.
Denying local governments the right to regulate cable in states where DBS has 15-percent penetration was also flawed, Cooper explained, because it assumes that cable-DBS competition is robust throughout a given state. It might be that DBS penetration is quite high in some communities but quite low in others, he said.
"The statewide approach has been a disaster in telecom. Why you then would want to extend it to cable is absurd," he said.
Cable might have some high legal hurdles to clear for its proposal to succeed.
An FCC source said the presumption that cable operators are to be regulated by local governments until operators can demonstrate 15-percent penetration was crafted by the agency, not Congress. The FCC, then, would have the power to change the rule.
But the 1992 Cable Act speaks of the "franchise area" in connection with determining 15 percent penetration and the presence of effective competition, and not the state.
Although that seems a complication only Congress can fix, Brenner said the FCC could have regulatory flexibility if it decided to support the NCTA.
"We think that there is some room in the statute to provide this kind of a test," Brenner said. "The statute doesn't ask the commission to come up with a nonsensical test. In a state like Vermont or others like that, the current test really doesn't make much sense."
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