Court Voids 30% Cable Cap

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WASHINGTON -In a major victory for big MSOs, a federal court here on Friday struck down a slew of cable-ownership rules in a case that could have broad impact on the structure of both the cable and broadcast industries.

The U.S. Court of Appeals for the District of Columbia Circuit handed down the unanimous decision in a challenge to Federal Communications Commission rules brought by the nation's two largest cable operators, AT&T Corp. and Time Warner Entertainment.

In summary, the court:

  • Struck down as unconstitutional the FCC rule that bars one cable operator from controlling more than 30 percent of the 85 million subscribers to cable, direct-broadcast satellite and other providers of multichannel video programming;
  • Struck down as unconstitutional an FCC rule that said cable operators may not occupy more than 40 percent of their first 75 channels with programming in which they have an attributable interest;
  • Struck down as arbitrary a rule that said a cable-system ownership interest would be attributable even if the company were controlled by single majority shareholder;
  • Struck down as arbitrary a rule which said that a minority stake in a cable limited partnership would be attributable if the minority stakeholder sells its programming services to the partnership.

But the court upheld a rule that said a 5-percent voting stake in a cable company triggered attribution, as did a 33-percent mix of debt and equity.

Regarding the cap, the court said: "Constitutional authority to impose some limit is not authority to impose any limit imaginable."

The court said the cap had to fall, especially due to an absence of evidence proffered by the FCC of collusion or anti-competitive behavior by cable MSOs.

"Such findings have not been made," the court said.

The 26-page opinion was written by Judge Stephen F. Williams and supported by Judges Douglas H. Ginsburg and David S. Tatel. The voided cable rules, first adopted in 1993 and modified in 1999, were remanded to the FCC, which has the discretion to try once again.

The court warned the FCC that any new cable-ownership cap that might be adopted had better take into account the galloping progress of the DBS industry.

With the cable-ownership cap voided, the decision appears to put some broadcast-ownership rules in jeopardy. Fox and NBC are asking the same court to void a rule that limits a broadcast-station owner to 35 percent of TV households.

The decision represented a substantial victory for AT&T Corp., which, after merging with MediaOne Group Inc. last June, was credited by the FCC with having 40 percent of the market. It was order to sell either subscribers or programming interests, or divest its 25 percent stake in Time Warner Entertainment.

The court's decision means that AT&T's interest in TWE-a limited partnership which houses the bulk of AOL Time Warner Inc.'s 12 million cable subscribers-is no longer attributable to AT&T.

It also likely means that AT&T's one-third interest in Cablevision Systems Corp. is no longer attributable-if the FCC determines that Cablevision chairman Charles F. Dolan and his family constitute a single majority shareholder.

AT&T general counsel Jim Cicconi said in a statement Friday: "We're pleased that the D.C. Circuit Court of Appeals agreed with the key arguments we presented in this case. We're continuing to review the opinion carefully, and plan no further comment at this time."

It was unclear Friday how the decision would affect AT&T with respect to the FCC's order approving the MediaOne deal. The agency approved that deal not only by relying on its ownership rules, but also its broad mandate to protect the public interest.

The FCC had no immediate reaction other than it was reviewing the decision.

In comments last week, FCC chairman Michael Powell said he was skeptical about retaining ownership rules that had outlived their usefulness, adding that the burden for retention should be shouldered by those who say the rules should stay, rather than those who say the rules should go.

A cable industry lawyer said that the FCC, as a legal matter, could try to craft new rules consistent with the opinion, which at one point said a 60 percent cap could be justified. But given Powell's apparent disagreement with ownership caps, the lawyer said: "As political matter, I can't say that [the FCC] will" try to craft new rules.

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