The Appeal Of Court


Washington-- Normally, competition and regulation are inversely related: A rise in the former yields a decline in the latter.

But political theory isn’t holding up for the cable industry.

Cable providers are facing competition on a scale that hasn’t been seen before, from satellites circling the Earth to fiber-deploying telephone companies to all sorts of Internet-based video and telecommunications providers.

At the same time, cable operators must contend with Federal Communications Commission Chairman Kevin Martin’s unrelenting campaign to change the way they conduct business.

Republican Martin, who says rising cable rates are the result of insufficient competition, has taken operators to task for everything from their refusal to give consumers the chance to buy TV channels one at a time to the way they control what they consider excess traffic on their networks from some high-volume Internet users.

In some cases, Martin’s interest in scoring political victories over cable appears to have outweighed his interest in making sure the regulations have sharp teeth.

In one attempt to spur competition last fall, the FCC barred cable operators from signing exclusive service deals with apartment-building owners.

But even that ruling seemed to penalize cable operators without necessarily spurring competition. In that case, the rules did nothing to require landlords to grant entry to new providers.

Cable operators now are taking Martin to court.

So far, the National Cable & Telecommunications Association, cable operators or programmers have joined or initiated seven cases in federal appeals court, on issues ranging from contract abrogation to requiring the sale of programming to rival providers to mandating the carriage of lightly viewed over-the-air TV stations.

At least two more cases — dealing with cable-system ownership limits and rates charged to third-party programmers who lease channels — are close to being filed.

<p><br>The Case List: Cable vs. FCC<br><br> Cable providers and programmers are challenging the agency in several pending suits:<br>NCTA challenge to FCC rule giving cities 90 days to act on phone company video service applications</p>

Where: 6th U.S. Circuit Court of Appeals

NCTA challenge to FCC rule restricting use of information on digital phone customers

Where: U.S. Court of Appeals for the D.C. Circuit

NCTA challenge to FCC rule on access to cable wiring behind Sheetrock

Where: U.S. Court of Appeals for the D.C. Circuit

NCTA challenge to FCC rule abrogating contracts with multiple dwelling unit owners

Where: U.S. Court of Appeals for the D.C. Circuit

Comcast, Cablevision challenge to FCC program access rules

Where: U.S. Court of Appeals for the D.C. Circuit

Comcast challenge to FCC set-top box waiver denial

Where: U.S. Court of Appeals for the D.C. Circuit

C-SPAN, Discovery challenge to FCC’s dual must-carry Rules

Where: U.S. Court of Appeals for the D.C. Circuit

SOURCE: Multichannel News research


The number of cable lawsuits filed in response to FCC orders could easily double this year, depending on how Martin’s campaign proceeds and succeeds.

Most intensely watched may well be Martin-sponsored rules that would force programmers to license networks to cable and satellite-TV providers on an a la carte basis at the wholesale level.

Selling channels one at a time, even at wholesale, would be seen as undermining the health of the basic cable ecosystem, which thrives on the bundling of lots of channels for resale to customers in tiers.

“In my view, there’s almost nothing that comes out of the FCC that isn’t an opportunity for a court challenge at this point in time,” said NCTA president Kyle McSlarrow. “We have the resources to do it. It’s good news for lawyers.”

Some of cable’s lawsuits have a narrow focus. One appeal challenged the FCC’s decision to require digital-telephone service providers to obtain customer approval before they can reveal certain bits of subscriber information to joint venture partners and independent contractors.

A second involved the NCTA’s opposition to an FCC ruling that made it much easier for competitors to gain access to cable wiring located behind Sheetrock in apartment buildings. Under Martin, the FCC adopted the same Sheetrock rule in 2007 that a panel of the U.S. Court of Appeals for the D.C. Circuit rejected in 2004.

Several cable cases, however, raise hugely important questions for the industry.

In responding to cable regulations under Martin, the industry has accused the agency of intruding on its First and Fifth Amendment rights by forcing content onto their systems; favoring wealthy competitors who don’t need help, like telcos AT&T and Verizon Communications; and directly imposing unnecessary costs on the industry through such technology mandates as requiring the deployment of set-tops that use insertable CableCards, rather than built-in conditional access, to descramble pictures.

“Our first goal is to work things out at the FCC or, where appropriate, in Congress,” McSlarrow said. “But if there are significant constitutional issues at stake, I think the right thing to do on behalf of the industry is to protect those interests.”

Cable should have taken its medicine and stayed out of court, Martin said.

“I think it would be better if the incumbent operators had accepted the fact that we were changing some of the rules to facilitate additional competition,” Martin told reporters at FCC headquarters last month.

AT&T and Verizon like to remind cable that nothing happening at the FCC under Martin can compare to what happened a decade ago to telephone companies under Democratic FCC chairman Reed Hundt. He ordered phone incumbents to unbundle their networks at regulated rates, triggering litigation that dragged on for years.

“This notion that somehow the cable companies have been abused I think is just a notion that doesn’t stand up to close scrutiny,” said Verizon executive vice president of public affairs, policy and communications Tom Tauke.

Martin’s focus on cable looks excessive only because his recent predecessors gave cable a free ride, suggested Andrew Jay Schwartzman, president of the Media Access Project, a Washington, D.C., public-interest law firm.

“Cable has been getting away with murder, and cable has been getting away with anticompetitive practices for years,” Schwartzman said, citing the withholding of programming from competitors and discrimination against small independent cable networks as examples. “And the lack of speed with which competition has developed is really astonishing.”


In the months ahead, cable intends to ask the courts to reverse core Martin cable rulings.

Six national programmers, including C-SPAN and Discovery Communications, want to overturn rules that require cable operators to transmit “must-carry” local TV stations in both analog and digital formats for a period of three years, beginning in February 2009.

Comcast and Cablevision Systems want to reverse the FCC’s decision to extend federal program access rules for five years, through 2012. The rules require cable operators to sell their satellite-delivered networks to rival pay TV providers.

Comcast is just a few weeks away from filing a suit intended to overturn the FCC’s order last December that banned a cable operator from serving more than 30% of pay-TV subscribers nationally, effectively stopping Comcast from making a big cable acquisition.

A Comcast victory over the FCC on ownership would not be a surprise — an identical cap was overturned in 2001 by a federal court. While Comcast is eager to see the constraints removed, Wall Street might not be, said Craig Moffett, a cable analyst at Sanford C. Bernstein & Co.

“Wall Street doesn’t necessarily want to see big acquisitions and mergers from this group,” said Moffett of cable operators.

It’s possible the potency of Martin’s anti-cable agenda has been overstated because some policies have included huge loopholes that neither Martin nor his foes care to spotlight.

Take cable-franchising reform. In December 2006, the FCC gave local authorities 90 days to “act” on a cable service application of a phone company with facilities already embedded in area rights-of-way.

Martin claimed that the 90-day rule would speed phone-company entry into cable markets, ignoring the point that “acting” is not synonymous with “approving.” If a local government doesn’t like the outlines of a pending agreement, it can deny the application on day 89 and hit the reset button, almost positive that a phone company won’t initiate a lengthy and expensive law suit just because the city required an additional 60 days.

“We think it can be a factor in helping us in our negotiations with communities but we have not attempted to exercise the 90-day shot clock as of yet,” Verizon’s Tauke said.


Or take last September’s dual must-carry order. In endorsing the regulation, Martin said the FCC was ensuring that millions of cable homes without the equipment to translate digital broadcast signals would not lose access to some local TV signals. Cable providers would have to provide the signals in analog form, not just deliver them digitally.

“The digital transition should not be an opportunity for cable operators to disenfranchise consumers from the broadcast stations they receive today,” Martin told a House subcommittee last fall.

He neglected to mention a key point: The FCC’s order is moot relative to the country’s 386 taxpayer-assisted public TV stations because the stations’ trade group, the Association of Public Television Stations, bargained away their analog cable carriage rights in a 2005 agreement with the NCTA.

Cable operators are highly unlikely to deny their customers an analog copy of public stations’ digital signals. Still, they could do so in an emergency, perhaps to alleviate an unforeseen channel crunch triggered by surging demand for HD programming.

FCC Democrat Michael Copps said he wasn’t troubled about the NCTA-APTS deal.

“I don’t see that that arrangement should be in jeopardy,” said Copps, who supported Martin’s dual-carriage mandate. “I can’t imagine anyone is going to walk away from it.”

Or take the FCC’s decision last October to ban cable operators from signing exclusive contracts to serve apartment buildings and other so-called multiple-dwelling units. Promises of more competition and lower rates are just that — promises — because whether a condo tower remains a pay TV monopoly is up to the landlord, not the FCC.

“I would say the FCC’s regulation is better than nothing, because it prohibits a cable company from entering into exclusive agreements and enforcing those exclusive agreements,” Verizon’s Tauke said. “But it doesn’t have any teeth relating to landlords. Landlords have complete freedom.”

Landlords used exclusivity as bait to win a range of service concessions from cable operators, especially bulk discounts on prices.

“We think rates to residents are going to go up, not down, and that the [FCC] has not studied the market and doesn’t have any clue how it works,” said Jim Arbury, senior vice president of government affairs at the National Multi Housing Council.


Martin’s regulatory daggers hurled at cable, even if some missed their target, were totally justified, MAP’s Schwartzman said.

“Martin’s aim has not been perfect,” Schwartzman said. “[But] I think the meta-point is correct, that Martin has been taking severe action against cable, long overdue in my opinion.”

And Martin’s not finished.

Already this year, Martin sought support for a plan that would give mandatory cable carriage rights to more than 500 Class-A TV stations that never had it before.

He is expected to announce support for closing the “terrestrial loophole” in the program-access rules. It’s called a loophole by Dish Network and DirecTV because cable operators may withhold a programming network from unaffiliated distributors if that service is not delivered via satellite. Such a rule would force Comcast to sell its regional Comcast SportsNet Philadelphia network, delivered via fiber lines and microwave, to Dish and DirecTV.

“I’m concerned about the terrestrial loophole. I think the idea behind program access is that people who own programming and distribution, the incumbent providers of that, should be required to share that programming so that we can facilitate additional competition,” Martin said to reporters last Tuesday at FCC headquarters.

For years, Martin has tried to impose multicast must-carry, an obligation on cable to distribute the programming of DTV stations that use their bandwidth to transmit three or four separate programming services instead of one. He hasn’t given up on that one, either.

Less clear is the extent to which he intends to reprise last fall’s fight over whether cable subscriber penetration is sufficiently high to trigger extensive new federal regulation.

Not a mystery is Martin’s ongoing effort to introduce a la carte into the pay TV world. At any moment, Martin could call for a vote on his wholesale a la carte proposal. It would require such programming giants as The Walt Disney Co., Viacom, NBC Universal and Time Warner Inc. to sell their networks to pay TV distributors individually, rather than packaged together.

Martin believes such channel bundling inflates retail cable rates, because cable systems end up buying more programming than they want — and passing those costs along to consumers.

Martin isn’t saying when he wants to start that battle.

“I don’t have a particular time frame that I know of on what we are going to do on that one,” he said to reporters at FCC headquarters.