Kennard Muses Over Full Digital Must-Carry

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After one year in office, Federal Communications Commission chairman William Kennard is
overseeing two matters of great importance to the cable industry: AT&T Corp.'s $48
billion merger with Tele-Communications Inc., and the broadcast-TV industry's bid to get
the FCC to force cable carriage of its digital-TV signals. In an interview with
Multichannel
News Washington editor Ted Hearn, Kennard evinced enthusiasm for the AT&T-TCI deal.
There was more good news on digital must-carry: Kennard has tentatively concluded that FCC
rules mandating full and immediate digital must-carry would encounter serious legal
difficulty. An edited transcript follows:

MCN: Are you opposed to digital must-carry, or am I at least correct in saying that you
have made comments suggesting that you are?

Kennard: It would not be accurate to say that I'm opposed. We are in the midst of a
proceeding on digital must-carry. It's a comprehensive proceeding. We have a lot of issues
on the table, and I'm very much in a listening mode right now.

However, I have indicated publicly that it's important that no one jump to conclusions
on digital must-carry. I have been a communications lawyer long enough to know that
whatever we do on digital must-carry is going to be hotly contested in the courts. I have
told the broadcast industry quite publicly not to assume that an order by the commission
on full digital must-carry -- meaning carriage of both the analog and the digital signals
-- is one that will not be challenged, and it has serious First Amendment implications.

We learned this in the Turner [Broadcasting System Inc.] cases, Turner I and Turner II,
in the Supreme Court. And fundamentally, I think that it's not appropriate for the
industry to expect the FCC to basically write the business plan for digital must-carry, or
for the digital conversion generally. I spend a lot of time in this office and around the
country talking to the leaders of the broadcast, cable, computer and consumer-electronics
industries, and nobody has the blueprint for the digital conversion.

And that's not a bad thing: It's a good thing. It's an exciting technological
innovation, and no one exactly has it figured out. So my message is: Don't expect the FCC
to pre-emptively dictate how this technology should be rolled out.

MCN: The cable industry is emphasizing Fifth Amendment issues now, saying that the
double dose of digital must-carry would represent a taking of private property without
just compensation. Have you had a chance to review that argument, and what you think of
it?

Kennard: Not in detail.

MCN: What impact will the Gore Commission have with some sort of digital must-carry
recommendation?

Kennard: Well, it's a little bit early. As we speak, the Gore Commission is
meeting, and it's unclear where they will come out in the final analysis. I am very
anxious to get their recommendations, and hopefully, they will be fruitful for us.

MCN: Last question on digital must-carry: I gather then, from your comments, that you
are not persuaded by the National Association of Broadcasters' comments that the 1992
Cable Act is unambiguous on this point -- that cable operators must carry all signals, and
there's no distinction between digital and analog?

Kennard: I do not read the 1992 Cable Act as requiring full must-carry -- that is,
carriage of the digital and the analog signal. Now that's my preliminary view. We're going
to look through the comments. I need to talk to a lot more people before coming to that
conclusion.

But if the statute were unambiguous and clear, we wouldn't be having this discussion.
We wouldn't be having a comprehensive proceeding.

MCN: Is the AT&T-TCI merger still, as you once put it, "eminently
thinkable?"

Kennard: It is an exciting proposal because it does represent a breakthrough of
sorts, in that you have a company proposing to make a serious commitment to offering
residential consumers a bundled package of local, long distance, video and Internet
access. And that's really the vision of the [Telecommunications Act of 1996], which was to
provide residential consumers with facilities-based alternatives to the incumbent
telephone company.

Clearly, there are a lot of issues involved in that merger, but fundamentally, I think
that it offers an exciting breakthrough on the competition side.

MCN: Have you got some idea when the commission might release a decision on the merger?

Kennard: Not specifically. I know that it'll be sometime next year, probably early
in the year. We have a lot of work to do in developing the record. In December, we're
going to have an en banc hearing on this merger, along with other mergers. You might
recall [that in October], we gave the proponents of the mergers an opportunity to come
before us and present their cases.

And we're going to have an opportunity for other interested parties -- not necessarily
opponents, but other interested parties -- to come forward. People who have a stake in
this -- first and foremost, consumer advocates.

I want to hear from them. We want to hear from our colleagues at the state commissions.
We want to hear from other industry folks, competitors and other stakeholders.

MCN: Would it be appropriate for the FCC to condition merger approval on some
demonstration by AT&T and TCI that they will roll out advanced telecommunications
services to all Americans?

Kennard: It would be premature for me to say that, but let me say generally what my
goal, my personal goals are, as chairman, and that is to make sure that all Americans
participate in the communications revolution. We marvel at these wonderful technologies
that are arriving on the scene, and I think that we will have failed as a nation if we
don't ensure that all Americans have access to the technology that is increasingly
defining how people learn in the society and how they are competitive in their businesses.

So I'm not prepared to say whether those conditions would be appropriate in the context
of this particular transaction, because we're not finished looking at the record yet.

But, as a general matter, yes, it's an important goal.

MCN: Do you support America Online Inc.'s demand that the FCC ought to pry open
cable-broadband facilities to replicate the Internet-access model that exists in the
context of phone lines?

Kennard: I'm not prepared to say at this point that I support it, but I am prepared
to say that I think it is a serious issue that warrants further study.

MCN: But is this issue even ripe, with cable having 300,000 modem subscribers and AOL
having 13.5 million narrowband subscribers?

Kennard: Those figures are unique to AOL. I mean, this is not just an issue
involving AOL. It's an issue involving other Internet-access providers that would seek to
get access to the broadband network. And that's why I think that the issue particularly
warrants some further analysis by the commission.

MCN: Do you see a disconnect between AT&T chairman C. Michael Armstrong's boasting
of a "open broadband platform" on the one hand, while insisting on an @Home
Network buy-through requirement on the other?

Kennard: Well, I think it does raise the question of what "open" means,
and we have heard various interpretations of what an open platform means, not only in this
context, but also in the set-top-box context, more generally. So I think that what this
proposal does tee up quite starkly is the issue of what is an open platform and how
important is it to promote competition in these emerging broadband networks.

MCN: It was interesting to see you raise the matter of video streaming at the Oct. 22
en banc hearing. Are you concerned that @Home's 10-minute cap on video streaming is a
possible attempt by cable to restrict video competition from the Internet?

Kennard: Well, that was my concern, and I still haven't gotten a complete answer to
that question that I posed to [TCI president and chief operating officer] Leo [J.] Hindery
[Jr.].

Fundamentally, this commission is about promoting competition. That was the vision of
the 1996 Telecommunications Act -- to allow new entrants into the marketplace to offer
consumers choice and all of the benefits of competition: lower rates, more innovation and,
fundamentally, choice.

So I'm concerned whenever I hear allegations by competitors -- particularly new
entrants, like RealNetworks [Inc.] -- that there are restrictions on their ability to
deliver their product to consumers.

Now that's not to say that every one of these concerns warrants a regulatory response,
but it's something that we've got to understand and be able to articulate -- whether this
is consistent with the pro-competitive aims of the act or not.

MCN: Are you hopeful that the Internet can become a source of video competition to
cable?

Kennard: Absolutely. I think that the Internet will be a source of competition in a
lot of different venues.

MCN: Turning to cable-rate issues, you've studied top MSOs' programming costs and
rates. What are the results? Any evidence of gouging?

Kennard: Well, I can't tell you the results, because the study hasn't been released
yet, but we're very close. It should be released in a matter of days. We have studied the
relationship between programming costs and rates, and I think that when the study is
released, it'll be a useful body of evidence to understand why these rates have been going
up.

MCN: What's your posture as March 31, 1999, approaches? Are consumers in for a shock?
What cards can you play?

Kennard: Well, I certainly hope that consumers are not in for a shock, because if
consumers are in for a shock, then I think Congress will act. I think that they made that
very clear in the last session of Congress -- that the cable industry will have to show
some restraint, or they will certainly revisit the sunset on the cable-rate regulation.

MCN: Even with the Republicans in command of Capitol Hill?

Kennard: Well, if I recall correctly, it was Republicans and the Republican
leadership that sent a message very clearly to the cable industry that they expected
restraint on rates, or there would be a legislative response. [Senate Majority Leader]
Trent Lott [R-Miss.] said this very clearly in the last session of Congress.

MCN: Are cable rates effectively deregulated now? My point is, after all, what good
would it do to issue a refund order after March 31 on a rate violation perhaps occurring
today?

Kennard: That's an issue that we're still working through, but while the rate rules
are in effect, the cable industry has an obligation to comply with them. And we will be
processing complaints that relate to conduct prior to the sunset. That's our legal
obligation.

MCN: Do you think, though, that you could issue a refund order after March 31 to a
cable operator based on an illegal rate prior to that date? Does it make practical sense
to do it?

Kennard: If rules were violated, it always makes practical sense to enforce them.
And remember, not all of the cable-rate regulation is sunsetting. The local franchising
authorities will still have a role. So, you know, we're not talking about the sunsetting
of all of our legal authority there.

MCN: Is there a need for a Cable Services Bureau after March 31? Do you have any plans
to change the mission of the bureau?

Kennard: Certainly, the mission of the bureau needs to change, and it is changing.
But it's important to recognize that the Cable Services Bureau is somewhat of a misnomer.
I mean, just like your magazine, Multichannel News, the cable industry deals with a
lot of issues that arise in the multichannel business broadly.

And I think that it's important to have a cadre of people in the agency that really
understand the cable business and how it operates. There are a lot of issues that the
Cable Services Bureau is dealing with that go beyond cable rates, per se. They are
handling the AT&T-TCI transaction. They are dealing with over-the-air-reception-device
issues, navigation-device issues, program-access rules.

They are always consulted when issues arise on must-carry. They are handling the
[digital] must-carry proceeding, in fact. Issues involving DBS [direct-broadcast
satellite], although many of them are handled by the International Bureau, the Cable
Bureau has the technical, policy and legal expertise on multichannel issues, and that's
not going to change.

MCN: When do you expect the FCC to make some decision on whether cable systems and TV
stations can be commonly owned in the same market? Is a decision near on that?

Kennard: Well, that was an issue that was teed up in the so-called biennial review
of all of the commission's mass-media-ownership rules. We're working to have that
proceeding decided by the end of the year, although procedurally, that was an NOI [notice
of inquiry], and so, the decision that we make on the NOI proceeding will not necessarily
be a dispositive new rule -- either a relaxation or a modification.

MCN: Do you have any message to the cable industry?

Kennard: I think that one of the most exciting things that is happening in the
communications marketplace today is the competition that's developing between the
telephone industry and the cable industry to deliver high-speed Internet access to
American homes. As you know, I speak about this issue often. I think that it will bring
the American public to a whole other level in the way that they use the Internet and the
way that they use technology at home.

And for a lot of years, we heard a lot of talk about cable modems and high-speed
Internet access via cable, and I think that we're really moving into a period now where it
is really happening. Orders are being shipped. Companies are rolling out technology.

And we did something very interesting. We plotted the rollout of DSL
[digital-subscriber-line] technology by telephone companies around the country, and we
found that oftentimes, a cable system would roll out high-speed cable modems, and then a
few months later, the telephone company would roll out DSL.

This is competition in the marketplace. You know, it's happening. It's real. And we
want to do everything that we can possibly do at the FCC to promote this competition.

MCN: Do you think that DSL and cable-modem services really are going head-to-head in
terms of speed and price? Have you looked at price?

Kennard: I've seen some data on this. It's close. The cable modems have a slight
advantage, based on the data that I've seen, but it's very comparable. I don't want to say
too much, because I don't want to look like I'm picking winners and losers here.

They're both good products, and it appears that in many markets, they're starting to
compete head-to-head, which is really great. Because ideally, from our perspective, we
would love to see two wires in the home offering high-speed Internet access and a bundled
package of video, local and long-distance telephone service.

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