FCC’s 70% Cable Proposal is 100% Unwarranted

by on November 15, 2007 · 2 comments

[James and Hance already commented on this issue, but here’s my take on the FCC opening another front in its ongoing “war on cable” … ]

Despite steadily increasing video competition and consumer programming choices, the Federal Communications Commission (FCC)–or at least current Chairman Kevin Martin–seems to be pursuing what many journalists and market analysts have described as a “war on cable.” As Craig Moffett, a senior analyst with Sanford Bernstein & Co, says, “Over the past year, the Chairman has adopted an almost uniformly anti-cable stance on issues ranging from set-top boxes (CableCards), digital must carry requirements, cable ownership caps, video franchising rules, and the abrogation of exclusive service contracts with [apartment owners].”

And Moffett is only summarizing the economic regulation that Martin’s FCC is currently pursuing against cable. Chairman Martin has also proposed the unprecedented step of imposing content controls on pay TV providers. He wants to extend broadcast industry “indecency” regulations to cable and satellite operators, even though the constitutionality of those rules is being questioned in court. And Chairman Martin has also suggested that “excessively violent” programming on pay TV should be regulated in some fashion. Finally, he has strong-armed cable operators into offering “family-friendly tiers” of programming even though there was no demand for them and consumers have shown little interest in them now that they have been offered.

And more cable regulation appears to be in the works. According to recent press reports, Chairman Martin is considering breathing new life into a little-known provision of the Cable Communications Act of 1984 known as the “70/70 rule.” Under the 70/70 rule, if the Commission finds that cable service is available to 70% of households and 70% of those homes subscribe, then the FCC can “promulgate any additional rule necessary to provide diversity of information sources.”

Chairman Martin apparently believes that cable has crossed both 70/70 thresholds and that comprehensive regulation of the cable industry is now warranted. What that means in practice remains to be seen, but it could include common carriage-like price controls on cable systems. The Wall Street Journal reports that a significant reduction (perhaps 75%) in the rates cable operators charge programmers for leased access might be the end result. In the long run, an FCC declaration that the 70/70 rule has been triggered could also lead to the imposition of some of the other regulatory proposals mentioned above.

But the FCC’s math in this case appears fuzzy. The first part of the 70/70 test is obviously satisfied since cable service has been available to almost all households for years. The second half of the test is trickier, however, and subject to competing interpretations and computations. By most accounts, including the FCC’s last formal review of the matter, the cable industry is well below the 70% threshold in terms of overall subscribership. Indeed, it seems that the only way the FCC could conclude that the industry is over the 70% mark is by including telecom providers in the count, since they now also provide wireline video services. But if the FCC did so, it would completely undercut the logic of the rule since the agency would be counting new competitors against cable in order to regulate them! Increased competition should lead to decreased regulation, not more. Moreover, in recent months, press and industry reports have been filled with news of declining cable subscribership as they lose customers to satellite and telco operators. For these reasons and others, it’s highly unlikely that the cable industry has crossed the second 70% threshold.

Importantly, even without taking those new competitors into account, consumer video programming choices have been increasing steadily over time. When the 70/70 rule was put on the books in 1984, those few consumers lucky enough to have cable service in their homes had a few dozen channels at most and could only dream of a “500-channel” future. Today, that dream is a reality. When the FCC last surveyed the state of the multichannel video marketplace in 2005, the agency found that an astonishing 531 networks were available, up from 388 in a 2004 survey. In 1990, by contrast, the FCC counted only 70 networks. Thus, the quantity of service provided cannot serve as a justification for regulation since it has expanded greatly.

Nor can vertical integration fears be cited in defense of regulation. Ownership of TV networks by cable operators has fallen relative to independently owned networks over the past two decades. According to FCC surveys, in 1990, cable operators owned 50% of the video networks they offered on their systems. By 2005, less than 22% of all video networks were owned by cable distributors. And the majority of the top 20 most popular networks on pay TV today (Discovery Channel, ESPN, MTV, Nickelodeon, USA, etc.) are not owned by a cable distributor.

Moreover, the argument that today’s multichannel pay TV universe lacks program diversity simply doesn’t pass the laugh test. The exhibit below illustrates the diversity of programming available currently on cable, satellite or telco-provided video networks.
The Expanding Video Programming Marketplace on Cable and Satellite TV

News : CNN, Fox News, MSNBC, C-Span, C-Span 2, C-Span 3, BBC America

Sports : ESPN, ESPN News, ESPN Classics, Fox Sports, TNT, NBA TV, NFL Network, Golf Channel, Tennis Channel, Speed Channel, Outdoor Life Network, Fuel

Weather : The Weather Channel, Weatherscan

Home Renovation: Home & Garden Television, The Learning Channel, DIY

Educational: The History Channel, The Biography Channel (A&E), The Learning Channel, Discovery Channel, National Geographic Channel, Animal Planet

Travel : The Travel Channel, National Geographic Channel

Financial: CNNfn, CNBC, Bloomberg Television

Shopping: The Shopping Channel, Home Shopping Network, QVC

: WE, Oxygen, Lifetime Television, Lifetime Real Women, Showtime Women

Family / Children-oriented
: Animal Planet, Anime Network, ABC Family, Black Family Channel, Boomerang, Cartoon Network, Discovery Kids, Disney Channel, Familyland Television Network, FUNimation, Hallmark Channel, Hallmark Movie Channel, HBO Family, KTV – Kids and Teens Television, Nickelodeon, Nick 2, Nick Toons, Noggin (2-5 years), The N Channel (9-14 years), PBS Kids Sprout, Showtime Family Zone, Starz! Kids & Family, Toon Disney, Varsity TV, WAM (movies for 8-16-year-olds)

African-American: BET, Black Starz! Black Family Channel

Foreign / Foreign Language : Telemundo (Spanish), Univision (Spanish), Deutsche Welle (German), BBC America (British), AIT: African Independent Television, TV Asia, ZEE-TV Asia (South Asia) ART: Arab Radio and Television, CCTV-4: China Central Television, The Filipino Channel (Philippines), Saigon Broadcasting Network (Vietnam), Channel One Russian Worldwide Network, The International Channel, HBO Latino, History Channel en Espanol

Religious: Trinity Broadcasting Network, The Church Channel (TBN), World Harvest Television, Eternal Word Television Network (EWTN), National Jewish Television, Worship Network

Music: MTV, MTV 2, MTV Jams, MTV Hits, VH1, VH1 Classic, VH1 Megahits, VH1 Soul, VH1 Country, Fuse, Country Music Television, Great American Country, Gospel Music Television Network

Movies: HBO, Showtime, Cinemax, Starz, Encore, The Movie Channel, Turner Classic Movies, AMC, IFC, Flix, Sundance, Bravo (Action, Westerns, Mystery, Love Stories, etc.)

Other or General Interest Programming: TBS, USA Network, TNT, FX, SciFi Channel, Spike TV

Source: Federal Communications Commission, various Annual Video Competition Reports

Clearly, the evidence suggests that plenty of independent voices and video programmers have access to existing cable platforms. As the FCC concluded in its 2003 Media Ownership Proceeding: “We are moving to a system served by literally hundreds of networks serving all conceivable interests.” And any cable operator foolish enough to refuse desirable new programming options will likely lose more customers to satellite or telco providers that will be happy to offer those channels.

But what about cable rates? Complaints about rising prices seem to be driving much of the push for regulation. But computing cable prices is also a tricky endeavor. While nominal rates have risen, it’s the “quality-adjusted price” of video programming that really counts. As shown above, in terms of program diversity and quality, consumers are getting a lot more for their viewing dollar today than they did in the past. If one takes quality factors into account, then overall cable rates are actually quite reasonable considering that per-channel programming costs have gone up over time.

Regardless, it’s unclear that 70/70 regulation would really have any effect on the pay TV pricing equation. A la carte regulation might (at least in the short term) reduce rates by abrogating the bundled contracts that likely drive up overall tiered rates. But the long-term costs of a la carte could be significant in terms of diminished quality and diversity (namely, lost programming options) and it might be the case that per-channel prices would simply go back up over the long haul anyway.

It’s important not to lose sight of the big picture. Chairman Martin’s crusade against cable represents a complete rejection of free markets, property rights, and pricing flexibility as the core engines of economic growth and technological innovation. The costs for the cable industry and its consumers could be significant. As media analyst Paul Gallant of the Stanford Group notes, “If adopted, the new leased access rules could strain cable’s bandwidth, particularly as cable looks to add HD channels to keep pace with satellite operators.”

Chairman Martin’s regulatory agenda in this case is also at odds with the generally deregulatory approach he has advocated for communications and broadband services. Why is he pursuing common carrier-like obligations for the video side of the cable business while rejecting similar rules (namely, net neutrality mandates) for the broadband portion of the business? There is no logical consistency to those positions.

Regardless, if the FCC ultimately adopts Chairman Martin’s preferred regulatory approach in this matter, it seems highly likely that the cable industry will litigate the rules, possibly on Fifth Amendment grounds. Cable will have a very good case. If the FCC significantly devalues cable networks through access regulation and rate controls, government would clearly be “taking” a significant property right away from cable owners by undermining the overall value of their distribution systems.

As always, the better way for the agency to achieve its goals of promoting more innovation and diversity is by encouraging more facilities-based competition, not more innovation-killing (and likely unconstitutional) forced access regulation.

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