News

Cable-Own Rules Lost in Shuffle

4/06/2003 8:00 PM Eastern

Washington— Federal Communications Commission officials promised new cable-ownership rules by the end of 2002. Much to the surprise of practically no one in the cable industry, the promise wasn't kept.

"I think the commission is blowing them off for now," a cable industry lawyer said recently.

The lawyer was merely stating the obvious. For the next few months, FCC chairman Michael Powell has made clear he wants the agency to plow forward with new broadcast ownership and broadband-access rules, each of which is a highly charged matter.

As a result, cable ownership has run into a scheduling problem — and not for the first time.

"There are certainly a lot bigger fish to fry than cable-ownership caps," quipped Yankee Group senior analyst Michael Goodman.

Honored in breach

For a decade, the FCC has tried with very little success to impose enforceable limits on cable-system ownership. In fact, over the entire 10-year span, the agency has been able to enforce its chief ownership limit for only a few months, as a direct result of court defeats.

The decision to cap the size of cable operators in today's 90-million-subscriber pay TV world is derived from the industry's dominant position in the pay TV market in the late 1980s and early 1990s, and from fears then that large cable firms would exercise too much power over cable networks looking to hold or attain channel space.

In 1992, Congress ordered the FCC to limit the size of cable companies, but one year later a federal court held that the law violated cable operators' First Amendment free-speech rights.

A month later, the FCC adopted a ruling limiting a single cable company to reaching no more than 30 percent of U.S. households. In response to the court ruling, the FCC refused to enforce the 30 percent cap.

Due to a procedural tug-of-war between the FCC and the U.S. Court of Appeals for the District of Columbia Circuit, the FCC's cable-ownership rules sat dormant for six years.

Finally, in October 1999, then-FCC chairman William Kennard revived the issue and pushed through new rules, which pegged the cable cap at 30 percent of all pay TV subscribers, instead of households.

Still, the FCC refused to enforce the rule with the constitutionality of the statute still on appeal.

But Kennard's action cleared the way for the D.C. Circuit to hear the government's appeal of the 1993 case.

In May 2000, a panel of the D.C. Circuit upheld the cable-ownership law as consistent with the First Amendment. Kennard immediately lifted the FCC's stay on the 30 percent cap.

AT&T catalyst

The story didn't end there. AT&T Corp. — whose controversial merger with MediaOne Group Inc. was pending before the FCC — and Time Warner Entertainment LP both promptly challenged Kennard's modified 30-percent cap.

In March 2001, a D.C. Circuit panel agreed the 30 percent rule violated the First Amendment. The rule was remanded to the FCC.

Since that decision, the FCC underwent a regime change — with Powell replacing Kennard — and has been trying to craft new cable ownership rules that can withstand court review.

At bottom, the court demanded that the FCC substantiate as rigorously as possible how a firm ownership limit meets the objectives of the law — to ensure large cable operators do not impede the flow of video programming through unfair competition — without treading on the First Amendment.

The court indicated that at best the FCC had defended a cap of no higher than 60 percent of pay-TV subscribers.

Delay at the FCC on this issue has not been solely due to scheduling. After collecting comments and evaluating academic research, agency officials have said they do not see the substantial evidence wanted by the court for a strict numerical cap.

A few months ago, the FCC staff proposed a floating cap that would vary according to a cable operator's financial interest in cable networks.

In theory, cable operators with no programming interests could control more subscribers than a cable operator that owned one or more cable networks.

The idea was that a cable operator without programming, even a very large one, did not have the same incentive to discriminate against programmers as did a vertically integrated cable company, large or small.

"The notion that it [could] go up to 45 percent … we object to. Because even at 30 percent, we thought there was substantial evidence that a cable company that doesn't own programming was in the driver seat in influencing the programming market," said Gene Kimmelman, senior director of public policy and advocacy for Consumers Union.

Kimmelman also protested that a floating cap based on vertical integration suffered from the defect of treating all cable networks equally, which he called implausible.

"Not all programming is equal. You can't compare CNN and the Puppy Channel and give them equal weight," Kimmelman said.

Merger-specific test

At least one cable attorney speculated that if a floating cap could not secure a majority under Powell, there was an outside shot the agency would simply adopt a rule calling for enforcement of cable ownership limits on a case-by-case basis as mergers arose.

However, the lawyer acknowledged, such an approach might not be acceptable to the courts.

"Clearly in 1992, the expectation of the drafters was that there be some rules. If the rule is no rule, can the absence of a rule be a rule?" the lawyer said.

Comcast, with a 24 percent pay-TV market share based on 21.6 million wholly owned cable subscribers, has been lobbying the FCC for a flexible ownership rule. It wants a rule that reflects the surge in the number of cable networks and the competitive threat from the direct-broadcast satellite industry, which did not exist when the ownership law was written in 1992.

"The record provides no support for a strict ownership limit. Nor is there record support for an approach that would impose an especially stringent limit on the basis of a cable operator's vertical integration or its ownership of clustered systems," Comcast said in a Jan. 14 FCC filing.

In the past, AT&T (which eventually sold its systems to Comcast) found the cable ownership rules to be a frustration and an impediment to industry consolidation.

Today, with Comcast still digesting the AT&T properties — and with Adelphia Communications Corp. and Charter Communications Inc. both under a financial cloud — the cable industry is not seeing a wave of mergers held back by regulatory uncertainty, one analyst said.

"Comcast is not ready to purchase at this point in time. Two [cable companies] I don't think anybody would touch right now because of their financial status. I don't think in any way FCC rulings are preventing that at this point at time," said Bruce Leichtman, president and principal analyst of Bruce Leichtman Research Group Inc.

The Yankee Group's Goodman said only AOL Time Warner was positioned to buy cable subscribers, but not until after the planned spin-off of Time Warner Cable.

No NCTA urgency

National Cable & Telecommunications Association president Robert Sachs told an audience here in February that because he did not foresee any big cable mergers, he was not pressuring the FCC to complete action on the 30 percent cap issue.

"No other merger of that size [between Comcast and AT&T] is likely this year, especially in light of current market conditions. So there's perhaps less urgency from the industry's standpoint with respect to the issues in that proceeding being resolved," Sachs said.

Past focus on a numerical cap has shrouded what some in the cable industry consider a far more important issue: attribution rules.

Attribution rules are tools that regulators use to earmark financial relationships that indicate whether a minority owner has substantial influence — perhaps even control — over management, other shareholders or both.

Under FCC rules, an investor (perhaps a cable company) has an attributable interest in a cable company if it owns at least 5 percent of the voting stock.

Thus, a cable company with 1 million subscribers with an attributable interest in a second cable company with 10 million subscribers is considered an owner of 11 million subscribers, for the purpose of calculating compliance with an ownership cap, be it a 30 percent hard cap or some floating cap.

'Attributions' hit

Although the court that struck down the 30-percent cap upheld the 5-percent attribution rule, the NCTA and Comcast have called upon the FCC to eliminate attribution rules that cannot clearly demonstrate control or influence by a minority cable company investor.

"Horizontal rules [limits on cable company size] are a lot less meaningful because small minority stakes can reduce whatever the effective thresholds are that the commission might set. The court of appeals left the existing attribution rules intact, but we raised this issue at the commission last year and the commission has put some questions on attribution out for comment and they cry out for revision," Sachs said.

Yankee Group's Goodman agreed:

"Five percent is kind of silly. Five percent doesn't give you any kind of control."

Consumer groups want the FCC to retain and firmly defend not only the 30 percent cap, but also the 5 percent attribution threshold.

"[Liberty Media Corp. chairman] John Malone taught a lesson that if you have a large enough string of minority ownerships and you cobble those together, you have enormous power in the marketplace. So the 5 percent matters a lot," CU's Kimmelman said.

FCC Media Bureau chief Kenneth Ferree told reporters the agency would not address attribution rules at the same time it resolved the issue of the 30 percent cap.

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