News

Martin’s Fall Offensive

9/05/2008 8:00 PM Eastern

Federal Communications Commission chairman Kevin Martin isn’t expected to go gentle into that good night.

Many in the cable-TV industry expect Martin, a Republican — who could be gone as soon as January if Democratic presidential nominee Barack Obama wins — to make a final run at passing rules he has been passionate about, including an overhaul of the wholesale cable programming market.

Martin has not formally announced an agenda, and an FCC spokesman declined comment on upcoming issues, but according to cable-industry officials, lobbyists and lawyers monitioring action at the FCC, Martin has the agency poised to jump back into the a la carte imbroglio, make major changes to cable’s program-access and program-carriage rules and could also require cable operators to pay hundreds of millions of dollars more each year to attach their wires to telephone poles.

SOURCE: Multichannel News research
Wholesale a la carte: Require cable networks to allow distributors to purchase channels one at a time.
Program access: Close terrestrial loopholes.
Program carriage: Force Comcast to carry NFL Network.
Pole-attachment fees: Make cable pay more, telcos less.

The boyish-looking 41-year-old Martin, named FCC chairman by President Bush, has been slugging it out with the cable industry since taking office in March 2005. More often than not, Martin has come out ahead. And while the cable industry has cast him as a villain, he’s hailed as a hero to groups concerned about sex and violence on TV, and as the conductor of two important spectrum auctions that raised more than $30 billion for the U.S. Treasury.

As he plans his fall agenda, Martin’s biggest enemy is the clock. If Obama is elected president, Martin would likely surrender his gavel to FCC Democrats Jonathan Adelstein or Michael Copps in January. If Republican John McCain is the next president, Martin could be around late into next year, especially if McCain is preoccupied with more pressing political issues.

Historically, it takes three or four months — and in the case of the Clinton administration, 11 months before Reed Hundt was on board — to get an FCC chairman appointed and confirmed,” said Andrew Jay Schwartzman, president of public-interest law firm the Media Access Project.

With McCain in the White House, however, Martin might not have the political support to enact new cable regulations that he did under Bush. That’s one big reason cable executives are worried about Martin’s agenda — especially in terms of a la carte issues — between now and Inauguration Day.

When it comes to adopting new cable regulations, Martin has been quite adept at finding the votes. On at least three occasions, Martin has struck alliances with the agency’s two Democrats in order to punish cable, including the Aug. 1 ruling that Comcast had mismanaged its broadband network with regard to delaying heavy users of peer-to-peer applications.

Perhaps his greatest unfinished work lies in cable a la carte, which, he argues, gives consumers more choice by allowing them to pay only for the channels they want to watch, unleashed from packages.

Martin’s wholesale a la carte rules would force cable programmers to allow distributors to license channels one at a time instead of in packages, an unbundling mandate designed to lower retail cable rates. However, trying to force retail a la carte on cable in his final hours could produce the equivalent of political bloodbath.

“If it’s a Scarface finish, maybe he’ll say, 'Say hello to my little friend called a la carte’ and try to mow them down one last time,” said Progress & Freedom Foundation senior fellow Adam Thierer.

MAP’s Schwartzman agreed that Martin would like to pass some form of a la carte.

Soon after taking command at the FCC, Martin wanted the industry to break up its program packages and allow consumers to buy channels one by one at retail. But cable balked, claiming an a la carte business model would drive niche channels from the market and send per-channel rates through the roof, leading to higher monthly cable bills.

Martin responded by hammering the industry with regulation, a clash that has spawned 10 lawsuits, ranging from limits on how many pay TV subscribers a cable company may serve nationally to mandates that cable operators continue to sell their programming to DirecTV and Dish Network.

“A la carte has probably been his top policy goal as chairman. Despite the political and legal obstacles, I do expect him to try to push something through in the coming months. I don’t see him being dissuaded from that,” said Paul Gallant, senior vice president of telecommunications and media at the Stanford Group.

The wholesale a la carte fight isn’t solely between Martin and cable. Martin’s advocacy is exploiting divisions within cable’s own camp. Small cable operators, led by the American Cable Association, have called on the FCC to require The Walt Disney Co., Viacom, Time Warner Inc., News Corp. and NBC Universal to make their channels available on an a la carte basis.

The FCC has ample power to regulate program sale terms and conditions of cable networks owned by cable operators, but Martin is looking to expand that power to include independent networks for the first time. If that happens, “he may bring Hollywood under FCC regulation under the unbundling rules. That would be a very dubious achievement,” said James Gattuso, senior research fellow in regulatory policy at the Heritage Foundation.

Even though Martin has been willing to abandon Republican deregulatory principles to prevail over cable, he hasn’t won every clash.

In November 2007, Adelstein joined forces with FCC Republicans Robert McDowell and Deborah Taylor Tate in rejecting Martin’s so called 70/70 test. The Martin-endorsed report found that cable operators had met a test in federal law that could potentially trigger greater regulation of the industry by the FCC.

The provision in the 1992 Cable Act — called the 70/70 test —authorized the FCC to determine whether cable systems with at least 36 channels are available to 70% of U.S. households, and whether 70% of households with access to such systems are subscribers. Over cable’s strong objection, Martin insisted that subscriber penetration exceeded 70% and the test had been met.

Martin badly wanted the FCC to find that the 70/70 test had been met because it would have given the agency authority to, as the law says, “promulgate any additional rules necessary to provide diversity of information sources.”

Believing retail a la carte mandates were just around the corner, cable put up a huge fight and beat Martin after he couldn’t produce reliable statistical evidence that the test had been met.

Martin has talked with lobbyists about combining the wholesale a la carte issue with changes in the cable program-access regime. In general, cable operators that own satellite-delivered networks are required to sell them to other pay TV distributors. Regional sports networks and local news channels delivered terrestrially are currently exempted from the forced-sale rule. Satellite-TV companies say Comcast and other cable operators continue to deny them access to local sports under the so called “terrestrial loophole.”

DirecTV and Dish Network, the two main satellite carriers, have been urging the FCC to close the so-called terrestrial loophole for many years, and Martin is the first commission chairman to take them seriously. The cable industry has argued that because the two satellite companies are bigger than every U.S. cable company except Comcast and Time Warner Cable, DirecTV and Dish Network can survive without program access rules and should be investing to create their own channels.

“The FCC has the authority to close the loophole to ensure all consumers can watch their home town team without giving up their choice of video provider.” said Susan Eid, DirecTV’s vice president of government relations.

Verizon wants FCC action on a related program-access issue, stemming from a dispute with Cablevision Systems, the Bethpage, N.Y., MSO that owns the MSG Network regional sports channel. Verizon gets a standard-definition digital feed of MSG, but not the high-definition feed. Cablevision withholds the HD version, citing the terrestrial exemption.

“It’s pretty obvious Cablevision is trying to circumvent the FCC’s program-access rules by denying Verizon MSG in HD,” Verizon senior vice president of media relations Eric Rabe said in a posting on the company’s policy blog. Verizon and Cablevision are competing for voice, video and high-speed data subscribers in northern New Jersey and major New York counties outside Manhattan.

Another programming issue Martin wants to address is access to cable systems by independent programmers. Martin has proposed a process in which cable operators and programmers would be forced into arbitration without a finding of discrimination by the cable operator. From cable’s perspective, that’s a problem because the programmer has incentive to use arbitration, rather than bargain in good faith.

“The concern would be whether or not Martin tries to put his thumb on the scale of these negotiations and force arbitration,” a senior cable official said.

A stealth issue that could cost cable millions of dollars involves the fees MSOs pay to electric utilities and incumbent phone companies to attach lines to their telephone poles. Cable franchises generally ban cable operators from putting up their own poles, making cable dependent on existing plant.

“As far as I can tell, the attention is in the chairman’s office. I have no idea if anyone else wants to move that item,” said Paul Glist, a cable attorney at Davis Wright Tremaine in Washington, D.C.

The FCC’s proposal is to create a uniform formula for all pole attachments used for broadband Internet-access service. That would replace the current regime in which cable pays under one formula and telecommunications providers under another. Historically, the cable rate has been lower than the telecommunications rate.

The United States Telecom Association, the trade group that includes AT&T, Verizon, and hundreds of small phone incumbents, wants the FCC to establish pole-attachment fee parity, claiming its members pay on average about eight times more per attachment than cable operators.

“From a consumer-policy perspective, this is indefensible as it denies consumers the benefits of a level competitive playing field,” US Telecom told the FCC.

The National Cable & Telecommunications Association submitted a study showing that the FCC’s proposal would cost the industry up to $672 million annually, spread over 37 million high-speed data subscribers. Although 20 states have authority to set their own pole fees, none has opted to raise cable’s, Glist said.

Cable’s message to the FCC is that jacking up pole fees would amount to a tax on broadband access, undermining the agency’s goal of promoting broadband deployment.

“This is not an insignificant tax. This would be a big one,” a senior cable official said.

September