Martin Digs for Legal Leverage

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Washington— Kevin Martin not only thinks that cable systems should sell programming by the channel, in a menu of a la carte choices — he’s also looking for legal grounds that could force the issue on cable.

The Federal Communications Commission staff is now looking into whether existing law provides any opening that could compel cable systems to adopt some form of a la carte pricing, according to an aide to chairman Martin.

Martin’s staff — in a preliminary way, the aide stressed — is focused on a provision of the 1984 Cable Act that gives the agency discretion to “promulgate any additional rules that may be necessary to promote diversity of information sources.”

The FCC’s authority to adopt rules is tied to the penetration of high-capacity cable systems — specifically, when operators with 36 or more channels pass 70% of U.S. households, and 70% of households passed by those systems are subscribers.

“If you hit 70/70, other options become available,” the Martin aide suggested.

The FCC’s look at the 21-year-old provision was an effort partly designed to debunk the widely reported view that the agency has no legal authority to impose a la carte on cable, the Martin aide said.

News that Martin’s staff is scouring telecommunications statutes for possible new leverage over cable came in the same week that Martin announced at a Senate hearing on indecent television programming that a year-old FCC report on a la carte pricing was flawed — a statement that caught D.C. cable lobbyists by surprise.

Martin ordered his staff to revise the first study, approved by former chairman Michael Powell in November 2004, to show that unbundling tiers of cable programming could save consumers money without losing access to their favorite channels.

The first FCC report said a la carte was a loser for consumers and industry, claiming subscribers would pay the same monthly amount or more than they do now to receive far fewer channels.

The agency’s new study is expected to include findings that run counter to conclusions of a U.S. Government Accountability Office study in October 2004 that fell short of endorsing a la carte as an across-the-board panacea for cable subscribers.

GAO REPORT DEBATED

A Martin aide said the GAO’s report has been mischaracterized. “The GAO doesn’t say that a la carte would be bad for consumers — that’s what the FCC said, and everyone just picked that up,” the Martin aide said. “I don’t feel like we need to refute the GAO report because the GAO report does not say it’s likely that [prices] could go up for some. It says it may not even change the economics.”

Martin’s office is expected to release the new 60-page study, largely the work of new chief economist Leslie Marx, this week.

The issue of a la carte pricing is tied to the question of sex, profanity and other offensive programming on cable. Family and religious groups that backed Martin for FCC chairman claim that cable’s bundling of indecent channels with family and educational programming is wrong.

A la carte pricing would allow customers to better regulate what they or their families see on pay TV, the groups and chairman Martin contend. But mandating such pricing could upset the economics of cable and satellite programming, which until now have built their businesses on selling programming in packages of dozens of channels.

Operators such as Comcast Corp. and Time Warner Cable argue such bundles provide consumers with the most choice at the lowest per-channel cost.

Last Thursday, Cablevision Systems Corp. chairman Charles Dolan applauded Martin’s view that a la carte “would be in the best interest of consumers.” Cablevision, though, does not sell the national networks owned by its Rainbow Media Holdings subsidiary — AMC, Independent Film Channel and WE: Women’s Entertainment — on an a la carte basis.

At one time, it sold the regional Yankees Entertainment & Sports Network a la carte because Cablevision insisted that unaffiliated YES was demanding an excessive license fee.

A Cablevision spokesman said the company would implement a la carte if the entire industry did.

PRYOR LIKES A LA CARTE

Martin already has the support of some in Congress for mandating a la carte pricing, especially if it helps block indecent networks at the door.

“More often than not, we’re forced to take MTV,” Sen. Mark Pryor (D-Ark.) said at the same Senate Commerce Committee forum where Martin revealed his new a la carte report.

“We don’t want it in our household because there’s so many images on there, especially at certain times of the day, and so many messages on there that we just don’t want our children exposed to.”

But Senate Commerce Committee chairman Ted Stevens (R-Alaska) said last week that he hoped pay TV providers would act voluntarily, because he’s worried that a federal law regulating indecent cable content would get struck down in court on First Amendment grounds.

The cable industry might react by coming to a consensus on how to deliver a family tier of programming that includes no offensive programming.

A cable lobbyist in Washington, D.C., who spoke on condition of anonymity, predicted that before Christmas, Comcast and Time Warner would volunteer to establish a family tier to appease Martin.

Those two companies have agreed to acquire the assets of operator Adelphia Communications Corp. But that merger review is moving slowly at the FCC. Last Thursday, the agency’s self-imposed 180-day merger review period expired.

A Comcast official, who asked not to be identified, denied the company had a family tier initiative in the offing.

The National Cable & Telecommunications Association remains steadfastly opposed to indecency regulation based on economic and First Amendment concerns, even though the industry’s main lobbying group has been shopping a plan that would allow regulation of basic and expanded basic tiers of programming for indecent programming, subject to court approval.

A REVEALING DECEMBER

Before Christmas, the FCC is expected to reveal in its annual video competition report whether the 70/70 test has been met.

In prior years, the agency has concluded that the first, but not the second, prong of the test had been met. In last year’s competition report, the FCC concluded that “subscribers to systems with 36 or more channels as a percent of the homes passed by such systems is 58.8%.”

In the past, the NCTA has said that when both prongs of the 70% test have been met, FCC authority is restricted to regulating the rights of third parties to rent channels, also called leased access. The agency has not addressed its authority under section 621(g), said a Washington, D.C., cable attorney who asked not to be indentified.

A Martin aide cautioned that a review of the 70/70 test was just starting. “Every year, we look at the 70/70 provision, and every year the conclusion has been that we are not there yet,” the aide said.

“It is difficult to find direct legal authority” anywhere in federal law to impose a la carte on cable, said Blair Levin, a cable and telecommunications analyst with Stifel Nicolaus, though he conceded that the 70/70 test just might be expansive enough to get the job done.

“That is a rule that is so broad, but you could argue that it is appropriate authority,” said Levin, a former FCC chief of staff under chairman Reed Hundt.

Martin dropped his a la carte bombshell — first reported by The Wall Street Journal — at the front end of the Senate panel’s day-long indecency forum.

Because the FCC withheld the new report, it was impossible to vet what Martin said were flaws with the analysis in the agency’s 2004 study, which relied in part on an NCTA-funded study conducted by Booz Allen Hamilton, a consulting firm.

MARTIN KEPT QUIET

Until last week, Martin had not said a negative thing in public about the first report.

“I had some concerns, but I wanted to have some help trying to look through the rest of it to make sure that I understood completely the methodology and I didn’t have time to do that before the report was released by the chairman,” Martin told reporters last Tuesday.

NCTA president Kyle McSlarrow said Martin beefed about the first study in private.

“He said it to me in the past that he did not agree with the staff report,” McSlarrow said.

Still, the Beltway’s cable lobbyists were surprised when they found out that Martin had commissioned a secret report.

“It was sneaky,” said a Washington-based lobbyist for a major cable operator. “He was a sitting commissioner. He had plenty of chances to do things. He chose not to.”

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