At a time when the balance of power in the program-distribution market could tip in favor of direct-broadcast satellite, the Federal Communications Commission is examining whether to continue to force cable operators to sell programming to DBS rivals.
On Thursday, the FCC voted 4-0 to launch a rulemaking on whether to sunset so-called program-access rules. Under the rules, satellite-delivered cable networks are banned from signing exclusive deals with cable operators — even those MSOs that have no ownership interest in the programmers.
As a result, those cable networks must be sold to DBS providers. The rules have been widely credited with giving birth to the rapidly growing satellite industry.
Although Congress imposed the rules in 1992 as part of a broad reregulation of cable operators, it permitted the FCC to lift the exclusivity ban on Oct. 5, 2002.
"What we will be looking at is whether, in fact, there are still opportunities for vertically integrated programmers and cable operators to skew the market with exclusive contracts," said W. Kenneth Ferree, chief of the FCC's Cable Service Bureau.
Ferree, whose staff members will make recommendations to the agency's four commissioners, added: "The idea in this notice is to find out whether that is still a threat and if it is, then we would still presumably need to maintain the prohibition on exclusivity. If it's not, then we would have to reexamine that."
At the meeting, FCC chairman Michael Powell withheld comment. But earlier this year, Powell indicated that the program-access rules had slightly more merit than other mass-media rules that he views as no longer necessary to enforce.
The other FCC members urged interested parties to file comments on a range of topics related to the exclusivity provision's effect on the cable and DBS industries. None of them made statements indicative of their position.
"We need solid information on what effect this prohibition has had on competition and diversity," said FCC member Kathleen Abernathy.
The FCC could come under heavy pressure not to sunset the exclusivity provision from the member of Congress who was instrumental in enacting the program-access law — House Energy and Commerce Committee chairman Billy Tauzin (R-La.).
Tauzin spokesman Ken Johnson said the FCC can expect to hear from Tauzin on the rulemaking.
"You can count on it," Johnson said. "We have not seen any developments in the marketplace today to suggest that the program-access rules are no longer necessary."
Over the last decade, the program-ownership market has undergone substantial change. Although AOL Time Warner Inc. and other MSOs own a large stable of networks, vertical integration in the cable industry has declined sharply, according to FCC data.
In 1994 — two years after the program-access law was passed — cable operators had an ownership stake in 53 percent of national cable networks. Last year, that percentage dropped to 35 percent of 285 national programming networks.
With AT&T's recent spinoff of programming giant Liberty Media Corp., the level of vertical integration within the cable industry has dropped even further.
But consumer groups want the program-access rules extended despite the decline in vertical integration, mainly because the cable operators still retain control over the some of the most widely viewed cable networks — services DBS cannot afford to lose.
Let's Get Vertical
The FCC's rulemaking could come alongside the acquisition of DirecTV Inc. — the No. 1 DBS carrier, with 10 million subscribers — by News Corp. and Liberty. If the long- delayed deal were to happen, DirecTV would emerge as the most vertically integrated multichannel video-programming distributor in the U.S. — a distributor under no obligation to sell its programming to cable operators.
None of the FCC officials addressed whether the program-access rules should be applied to vertically integrated DBS carriers in the event the agency decided to extend the cable rules beyond next October.
Historically, the cable industry's position has been that the program-access rules should sunset because DBS is a vibrant competitor that's capable of reaching privately negotiated deals and large enough to invest in its own programming networks.
"Market conditions have changed significantly since the rules were adopted 10 years ago. We support their being sunsetted now," said David Beckwith, a spokesman for the National Cable & Telecommunications Association.
The DBS industry has stuck to its position that the rules should be extended, but the industry is not saying if it will urge the FCC to adopt a 10-year extension.
"We haven't specified a time. We'll certainly include that in the comments," said Andy Wright, acting president of the Satellite Broadcasting & Communications Association, the Washington lobbying arm of the DBS industry.
SBCA also wants the rules broadened to include all vertically integrated cable networks, regardless of distribution technology. That change would force Comcast Corp. to sell its Philadelphia-area regional sports network, Comcast SportsNet, to DirecTV and EchoStar Communications Corp.
"We would like to close the Comcast loophole and we will certainly be advocating that," Wright added.
Comcast officials declined to comment. But in a Sept. 3 FCC filing, Comcast said the exclusivity prohibition should sunset next October. It also said expanding the rules to include terrestrially delivered cable networks was both unnecessary and beyond the scope of the agency's jurisdiction.
"Congress specifically and consciously omitted terrestrially delivered signals from the exclusivity prohibition," Comcast said.
In the rulemaking, the agency did not endorse a specific particular extension period, whether 10 years, five years or two years, an FCC source said. Nor did the agency invite comment on whether the rule should cover networks that aren't satellite delivered.
The Carmel Group subscription-TV analyst Jimmy Schaeffler said he supports extension of the rules, as he doesn't believe the DBS carriers are big enough to bargain with cable or invest in their own programming.
"At what point is [DBS] big enough so that it can compete head-to-head with cable regardless of whether it gets special programming breaks from cable?" Schaeffler said. "That's the real question. A year from now, those rules should be in place. If it ain't broke, don't fix it."
The FCC did not release the text of the rulemaking at the Oct. 11 meeting. Ferree said he didn't expect the agency to postpone a decision until next October.