WASHINGTON -Alarmed by rapid media consolidation in the wake of the deregulatory Telecommunications Act of 1996, the Federal Communications Commission last year declined to use its discretion to accelerate the process by relaxing or eliminating various media-ownership rules.
As a result, some of the nation's media giants have given up on the agency and are turning to the federal courts in search of relief. They claim FCC policies violate the First Amendment, legal procedure mandates and congressional directives that call for rules inconsistent with a competitive market to be abolished.
AT&T Corp. and Time Warner Entertainment L.P. scored a big victory March 2 when the U.S. Court of Appeals for the District of Columbia Circuit struck down a host of FCC cable-ownership rules, including one that limited one MSO to 30 percent of the pay TV subscriber universe.
Relying heavily on that decision, which voided the 30-percent cap on First Amendment grounds, TWE has asked the same court to overturn a more than 30-year-old FCC rule that effectively bans the common ownership of a cable system and a TV station in the same market.
TWE's challenge to the cable-TV/broadcast co-ownership ban has been consolidated with Fox, NBC and CBS' challenge to the FCC rule that limits a TV station owner's reach to 35 percent of television households. No date for oral arguments has been scheduled.
"I think [TWE has] a good claim based on the case a few weeks ago," an FCC source said last week, noting that phone companies had an easy time in court prior to 1996 in striking down a federal law barring them from providing cable service to local phone customers.
Democratic FCC chairman William Kennard led the agency that refused to budge on the two rules now awaiting judicial review. He left in January and was replaced by Republican Michael Powell, who wrote critically when the Kennard FCC voted 3-2 for the status quo last May.
Schwab Washington Research media analyst Paul Glenchur declined to predict whether the court would back TWE. But he said it's possible that a Powell-led FCC could make the case moot by deciding to abolish the cable-TV ban.
"There are some real, legitimate issues about whether competition and diversity are really served by retaining the rule," Glenchur said. "It would not be a surprise to see the FCC at some point take up a rulemaking on this issue."
Moody's Investors Service released a recent report which indicated that the GOP-controlled FCC would relax the newspaper-TV station cross-ownership ban and relax the 35-percent cap. But the rating agency said it did not expect any relaxation of the cable TV/station co-ownership ban.
"With regard to distribution, we think cable is still monopolistic from a local and regional standpoint," said Neil Begley, a Moody's senior credit officer who helped prepare the eight-page report. "I think the level of competition is not that strong."
Should Powell move to lift the ban, he would likely encounter heavy opposition from the same interests that had urged Kennard to keep it. That side of the debate includes the National Association of Broadcasters, The Walt Disney Co., hundreds of network affiliates and the consumer-oriented Center for Media Education.
In its court brief filed March 22, TWE called the cable-TV/station ban a regulatory fossil that violated free-speech protections and ran counter to congressional wishes for the FCC to modify or repeal rules that can't be justified in a period of robust competition.
The rule "bans protected speech and prevents competition," said TWE said, which added that the court should review it under the most exacting test used when the government imposes a content-based restriction, called "strict scrutiny."
In the 1996 law, TWE noted that Congress ordered the FCC to "determine whether any of such rules are necessary in the public interest as a result of competition" and to "repeal or modify" those that no longer serve the public interest.
TWE said the FCC defaulted on its obligation to survey the competitive landscape. The agency failed to highlight the fact that that since 1970, the number of TV networks has risen from three to seven; the number of cable networks has multiplied; VCRs are nearly universal in TV households' and the direct-broadcast satellite industry has about 15 million subscribers after about seven years in existence, TWE argued.
TWE also stressed that the court that voided the 30-percent cap made it clear FCC ownership rules that restrict speech won't survive First Amendment review unless the agency can, with substantial evidence, pinpoint that its rules address competitive harms that are real and not conjectural.
MSO WANTS O&O'S
TWE said the ban no longer serves the public interest because it prevents rather than promotes competition.
By way of example, TWE said the company's local cable news channels would like to merge with local TV stations. The company would also like to own TV stations to promote distribution of The WB Television Network, instead of relying on affiliates.
"While [CBS, NBC, ABC, Fox and UPN] are allowed to maintain 'owned-and-operated' stations in key television markets, the WB must rely on non-owned 'affiliates' to distribute network programming in places where Time Warner owns cable systems," TWE said.
Adopted in 1970, the cable-TV station ban was originally intended to protect the cable industry from domination by broadcasters. Thirty-one years ago, cable operators had 4.5 million subscribers and such services as Cable News Network, Discovery Channel and MTV: Music Television did not even exist.
Meanwhile, the Big Three networks-CBS, NBC, and ABC-reigned supreme, capturing about 90 percent of the primetime TV audience.
Congress codified the ban in the 1984 Cable Act. Eight years later, the FCC moved in the direction of relaxing the restriction, but decided it did not have that authority under the 1984 law. In 1996, Congress removed the statutory ban and ordered the agency to review the need for the rule's continuation.
Schwab's Glenchur said Congress, in eliminating the legal barrier, was not automatically telling the FCC do the same thing with its rule.
"I think the Congress indicated that it wasn't prejudging the FCC's retention of that rule," he said.
Calling the FCC's rule an "ownership ban" is a bit of a misnomer. The rule states that if a cable system owns one TV station, it is barred from carrying any local TV station.
The rule, then, is an indirect ban on ownership in that a cable system would not realistically give up its right to offer local TV signals by owning just a single local TV station.
In deciding to keep the ban, the FCC determined that retention of the rule was necessary to promote competition and media diversity at the local level.
Making a claim that the market facts had flip-flopped since 1970-and that cable operators now dominate broadcasters-the FCC said cable has "gatekeeper" power to discriminate against unaffiliated local TV stations in terms of carriage and channel placement.
The FCC said a cable/TV station combination could result in joint advertising and promotional benefits unavailable to other broadcasters in the market and would reduce the number of independent media voices providing diverse local news and public-affairs programming.
Lastly, the FCC said it was best not to lift the ban so soon after the agency agreed to allow one company to own two TV stations in a market under certain conditions.
"Prudence dictates that we monitor and ascertain the impact of these changes on diversity and competition before relaxing the cable/TV cross-ownership rule," the FCC said.
In the court brief, TWE said the carriage and channel placement concerns were baseless because the 1992 Cable Act required the carriage of local TV stations on their FCC-assigned channels if the stations choose "must carry" instead of retransmission consent.