FCC Voids Exclusives

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Cable operators can’t enforce exclusive contracts with apartment building owners or sign new ones under a sweeping prohibition unanimously adopted by the Federal Communications Commission last Wednesday.

FCC chairman Kevin Martin promoted the ruling as an effort to ensure that the 90 million Americans who reside in multiple-dwelling units (MDUs) were not entirely locked out by contract from sampling pay-video services provided by AT&T and Verizon Communications.

“Trying to remove any barriers to those cable overbuilders is really critical if you want to hold down cable prices,” Martin said.

Not for the first time, Martin complained that cable rates had risen 93% from 1995 to 2005; and not for the first time, Martin failed to mention that he was referring to nominal cable rates, which are not adjusted for inflation, programming quality improvements or channel additions.

Past FCC reports have shown that per-channel cable rates adjusted for inflation actually declined during the periods in which Martin said they effectively doubled. Meanwhile, Martin bars FCC staff from analyzing cable rates on a per-channel basis.

THOUSANDS AFFECTED

The MDU ruling affects probably thousands of cable contracts. Comcast CEO Brian Roberts recently told Wall Street analysts that less than 10% of his company’s 24.2 million subscribers were covered by MDU service agreements. Even where a cable operator has an exclusive MDU deal, tenants have existing rights under FCC rules to install satellite-TV reception dishes on the balcony and other areas under a renter’s exclusive control.

The FCC ruling applies to AT&T and Verizon just as it does to Comcast and Time Warner Cable. But it does not place any contracting restrictions on satellite providers DirecTV and EchoStar. Nor does it impact private cable operators, which are multichannel-TV providers that do not need local franchises because they don’t occupy public rights of way.

Although the FCC promised to examine exclusive deals by cable competitors, the National Cable & Telecommunications Association was upset the agency didn’t deal with them now.

“If eliminating exclusive contracts for some video providers is good for consumers, then it should have been applied to all providers,” said Dan Brenner, NCTA’s senior vice president for law and regulatory policy.

Brenner also complained that the FCC had no justification for voiding existing contracts. The NCTA had argued that the agency should have let current deals expire.

“The FCC’s action to terminate existing contracts is an unprecedented, legally suspect step that could harm consumers and jeopardize the delivery of advanced services to low-income neighborhoods where other video providers have chosen not to offer service,” Brenner said.

The full impact of the FCC’s action will be determined by landlords.

As one FCC member made clear, the fact that the agency banned exclusive contracts involving cable operators did not mean that the agency had ordered landlords to sign deals with a second provider to compete with the cable incumbent.

It does “not give any video provider the right to enter an MDU over the objection of the property owner,” FCC Democrat Michael Copps warned.

Craig E. Moffett, vice president and senior analyst of U.S. telecommunications, cable and satellite at Sanford C. Bernstein & Co., said that although the FCC ruling was a victory for AT&T and Verizon, “the impact is likely to be smaller than many investors seem to believe.”

NO MANDATE FOR RIVALS

Among other things, Moffett agreed with Copps that the absence of exclusivity is not a legal mandate on landlords to reach deals with alternative providers.

“It remains legal even for buildings to bar competitors from offering services in the building, as long as the reason for barring the competitor is not 'exclusivity,’ ” Moffett said.

In 2003, the FCC examined video competition in the apartment building market.

According to FCC Republican Robert McDowell — who, unlike Martin, was not an FCC member in 2003 — the FCC invited cable to seek exclusive deals, especially if the building was to receive service for the first time or was to be upgraded for digital service.

“I am concerned about the legal sustainability of the order, should it be appealed,” McDowell said. “To flash cut to a new regulatory regime without a sensible transition period only begs for an appeal that could result in a court throwing out all of our order, the good with the bad,” said McDowell, who only concurred with the decision.

Since 2003, Martin said, the market had changed because four years ago AT&T and Verizon were not eager participants in the pay TV distribution business.

In 2003, we were not seeing a widespread practice of competition by wired cable services,” Martin said. “It’s a very different landscape. The impact of exclusive provisions are very different today than it would have been in 2003 when there weren’t significant cable overbuilders.”

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