Small Cable Ops' Winning Ways

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Sometimes the little guys do win.

In approving News Corp.'s takeover of DirecTV Inc., federal regulators slapped on conditions demanded by small cable companies, based on fears that News chairman Rupert Murdoch would use hardball tactics to squeeze them out of business.

The conditions imposed by the Federal Communications Commission represented a triumph for the tiny American Cable Association, its indefatigable president, Matthew Polka, and Chicago-based outside counsel Christopher Cinnamon.

It also showed that even the most politically connected corporate giant shouldn't always expect regulatory bodies to act as wholly owned subsidiaries.

ON A SHOESTRING

"I think [the FCC] did a really good job," said Polka, who is based in Pittsburgh. "They didn't cover everything, but they covered a great deal of the ground that we asked them to consider."

The ACA also pulled off its coup on a shoestring budget that wouldn't be large enough to pay half of the annual salary of the president of the National Cable & Telecommunications Association.

For nearly a decade, the ACA has pleaded with regulators to recognize the market power that big media companies — especially those that own TV stations and cable networks — exercise over cable companies that do not possess the scale of a Comcast Corp. or a Time Warner Cable.

Here and there, the ACA has worked the system to its advantage. It got Time Warner Inc. to publicly state it would not require small cable to launch a high-speed version of America Online as a condition of gaining access to Time Warner-owned cable networks.

When it needed approval to acquire AT&T Broadband, Comcast Corp. agreed to continue to offer small cable operators AT&T's Headend In The Sky (HITS) digital service.

But those were promises, not government mandates. The reality of News Corp. entering the pay-TV distribution market while owning TV stations and popular cable networks evidently caused FCC regulators to conclude that ACA needed more than vows of good behavior.

As a result, the FCC used the News-DirecTV merger to rewrite key provisions of communications law in an attempt to shield small cable from potential market abuses and to ensure that consumers would not become pawns in commercial disputes.

For example, when bargaining with cable companies with fewer than 5,000 subscribers, News Corp. must effectively give away its broadcast signals. Under the FCC's conditions, Murdoch cannot demand cash or cable-networks carriage in exchange for access to his 35 Fox Broadcasting Co. TV stations.

When bargaining with cable companies with fewer than 400,000 subscribers for retransmission consent and regional sports networks, Murdoch can't refuse to engage in collective bargaining, if so desired by the cable companies. Such bargaining is expected to cut down on transaction costs for small cable.

For example, the ACA's ally, the National Cable Television Cooperative, could secure lower costs by negotiating contracts en masse.

Under a condition that applies to every cable company, not just the small guys, for the next six years Murdoch is prohibited from pulling his TV stations or regional sports networks while contract extensions are negotiated in private. Cable companies that can't reach deals with News have the right to go arbitration, in a process policed by the FCC.

"Fox wanted that leverage," Polka said. "They didn't get it. That's a major victory. That will definitely limit Fox's leverage and what it will also do is encourage Fox to negotiate more appropriately on more reasonable terms."

Legg Mason analyst Blair Levin described the arbitration escape value for cable as a "mild negative" for News "as it lessens, albeit slightly, the leverage the company will have in such negotiations."

If arbitration serves to limit rises in retail cable rates, he added, "public officials may start to advocate similar mandatory arbitration requirements in retransmission-consent negotiations."

NBC'S NEXT

The ACA isn't resting on its laurels. The trade group has already paid at least one visit to the Federal Trade Commission to raise concerns about NBC's acquisition of Vivendi Universal Entertainment and the new entity's ability to force small cable to pay excessive rates for cable programming in exchange for access to NBC's 29 owned-and-operated TV stations.

"I can't comment on any ACA activity at the FTC and their review of the NBC-Vivendi transaction," ACA counsel Cinnamon said. "At the same time, there are significant parallels to that combination and News-Hughes and the potential for abuse."

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