FCC re-establishes CATV market share cap at 30 percent

A rule limiting the total amount of the market a CATV provider can address, was restored yesterday after having been ruled unviable by a federal court seven years ago. But since that time, the market has changed drastically.

Almost seven years ago, the US Court of Appeals for the Federal Circuit set aside a rule that had, up to that time, been enforced by the Federal Communications Commission. That rule established a limit with regard to how many American subscribers any cable TV service operator, or any other provider of cable programming, could serve.

That cap had been set at 30% of the total assessed US market for cable subscribers, although the DC circuit tossed out that cap for lack of substantiation. In short, it found that 30% seemed like an arbitrary number.

Fast-forward to yesterday, when the FCC announced it had found a viable formula for determining the limit it can set on any cable service provider's market share. In a report and order issued yesterday, it explained the formula -- and, lo and behold, it produced a new and arguably viable "horizontal cap:" 30 percent.

"It reminds me of the movie Groundhog Day," wrote an exasperated yet supportive Commissioner Kevin Copps yesterday. "I keep re-living the same scene over and over again. But maybe this time we will get it right and finally adopt a rule that provides the breathing room for independent programming that Congress intended."

So seven years later, the FCC has found itself where it started, with the old market cap of 30% re-established. The cap is especially important to the Internet and telecommunications industries, for two reasons: First, a huge chunk of broadband service in America is provided by way of CATV cables. Any cap on how far CATV's cables can reach, affects broadband's reach as well.

Second, since the Circuit Court issued its decision in the matter of Time Warner v. FCC in March 2001, phone carriers AT&T and Verizon have surged onto the scene as major fiberoptic service providers. Their triple- and quadruple-play bundles include not only TV and Internet service, but landline phones as well; and any cap on the extent to which they can provide cable programming may impact when and where they may roll out U-verse and FiOS service in the future.

But from the FCC's perspective, the reason for establishing the cap in the first place actually has little to do with curbing the domination prospects of market giants like Comcast and AT&T, and more to do with ensuring that viewers get access to a diversity of independent programming, to which Comm. Copps referred. With only one or two suppliers of CATV service for any given area, the FCC has historically warned, the probability that a channel or network may be precluded from being carried increases.

Even with two suppliers, the old FCC rule stated, there would be a likelihood of collusion, where both would agree to carry only certain channels and lock out others. The Commission's earlier logic seemed to indicate that, if collusion were not expressly forbidden, it would happen almost by nature.

"The legislative assumption...is not unreasonable," read the FCC's arguments at the time, "given an environment in which all the larger operators in the industry are vertically integrated so that all are both buyers and sellers of programming and have mutual incentives to reach carriage decisions beneficial to each other. Operators have incentives to agree to buy their programming from one another. Moreover, they have incentives to encourage one another to carry the same non-vertically integrated programming in order to share the costs of such programming."

The Circuit Court didn't see the logic in that. "The Commission never explains why the vertical integration of MSOs [multiple service operators, such as Comcast] gives them 'mutual incentive to reach carriage decisions beneficial to each other,' what may be the firms' 'incentives to buy...from one another,' or what the probabilities are that firms would engage in reciprocal buying (presumably to reduce each other's average programming costs)," reads its March 2001 decision overturning the original 30% horizontal cap.

"After all, the economy is filled with firms that, like MSOs, display partial upstream vertical integration," the ruling continued. "If that phenomenon implies the sort of collusion the Commission infers, one would expect the Commission to be able to point to examples. Yet it names none. Further, even if one accepts the proposition that an MSO could benefit from sharing the services of specific programmers, programming is not more attractive for this purpose merely because it originates with another MSO's affiliate rather than with an independent."

In its report and order yesterday, instead of providing examples, the FCC unveiled a mathematical formula for determining the fairest market share cap. Today, even the abbreviations have changed: Instead of MSOs, the FCC now refers to multichannel video program distributors (MVPD).

"The basic building block of the calculation is the minimum viable scale of a program network," the Commission states in its explanation. "This value represents the minimum number of subscribers a programming network requires in order to be viable. Because not all of an MVPD's subscribers receive access to all of the networks carried by the MVPD, the minimum viable scale must be modified to determine how many of an MVPD's subscribers will also be subscribers to the program network. The subscriber penetration rate is used to make this determination.

"The resulting value is the total number of subscribers, to MVPDs that carry the network, necessary in order for the program network to serve the minimum viable scale," the FCC continues. "This value is then expressed as a percentage of the total number of MVPD subscribers to determine the fraction of the MVPD market that must agree to carry the program network so that it can serve the minimum viable scale. If there is no coordinated denial of carriage by MVPDs, this value would represent the open field necessary to give a program network a reasonable chance of serving the minimum viable scale."

Again, the Commission alludes to the possibility of a "coordinated denial of coverage," which was the type of possibility the DC court had wanted some examples of. The lack of such examples this time around, argued Commissioner Robert McDowell in his dissent yesterday, would leave the new order open to the same possible fate as the old one.

"What we have before today us may be the 'Ghost of Christmas Past," Comm. McDowell wrote. "Almost seven years ago, the court rejected the FCC's attempt to impose a 30 percent cable ownership cap. So what is the majority doing today? I t's sending back up to the very same court the very same 30 percent cap. Maybe this is really the 'Ghost of Christmas Present' then. In Charles Dickens' tale, 'A Christmas Carol,' that ghost carried the specters of 'Ignorance' and 'Want.' Today's order does the same. This order goes out of its way to remain ignorant of current market conditions which obviate a need for a cap.

"Certainly, the ghost of the future will foretell an inescapable fate for this order," he continued grimly. "Its dark, cold epitaph is all but carved on its tomb. This order will be overturned by the D.C. Circuit. Even Ebeneezer Scrooge would pry a few coins from his miserly hands to place that bet."

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