Three months ago, when the DC Circuit struck down the FCC’s “Cable Cap”—which prevented any one cable company from serving more than 30% of US households out of fear that he larger cable companies would use their “gatekeeper” power to restrict programming—the New York Times bemoaned the decision:

The problem with the cap is not that it is too onerous, but that it is not demanding enough. Even with the cap — and satellite television — there is a disturbing lack of price competition. The cable companies have resisted letting customers choose, a la carte, the channels they actually watch…. [The FCC] needs to ensure that customers have an array of choices among cable providers, and that there is real competition on price and program offerings.

Perhaps the Times‘ editors should have consulted with the Lead Technology Writer of their excellent BITS blog.  Nick Bilton might have told him the truth: “Cable Freedom Is a Click Away.”  That’s the title of his excellent survey of devices and services (Hulu, Boxee, iTunes, Joost, YouTube, etc.) that allow users to get cable television programming without a cable subscription.

Nick explains that consumers can “cut the video cord” and still find much, if not all, their favorite cable programming—as well as the vast offerings of online video—without a hefty monthly subscription.  (Adam recently described how Clicker.com is essentially TV guide for the increasing cornucopia of Internet video.)  This makes the 1992 Cable Act’s requirement that the FCC impose a cable cap nothing more than the vestige of a bygone era of platform scarcity, predating not just the Internet, but also competing subscription services offered by satellite and telcos over fiber.  That’s precisely what we argued in PFF’s amicus brief to the DC Circuit a year ago, and largely why the court ultimately struck down the cap.

Bilton notes that “this isn’t as easy as just plugging a computer into a monitor, sitting back and watching a movie. There’s definitely a slight learning curve.”  But, as he describes, cutting the cord isn’t rocket science.  If getting used to using a wireless mouse is the thing that most keeps consumers “enslaved” to the cable “gatekeepers” the FCC frets so much about, what’s the big deal?  Does government really need to set aside the property and free speech rights of cable operators to run their own networks just because some people may not be as quick to dump cable as Bilton?  Is the lag time between early adopters and mainstream really such a problem that we would risk maintaining outdated systems of architectural censorship (Chris Yoo’s brilliant term) that give government control over speech in countless subtle and indirect ways?

If we were talking about just another subscription video service like satellite and telco fiber, the demise of cable as a unique “bottleneck” for programming might not be so obvious to the layperson (although MVPD competition is quite stunning, and means that “subscription service freedom is just a phone call or click away”).  But in the case of Internet video, the programming is à la carte by show and often free  (i.e., ad-supported), so consumers have a huge incentive to switch or can simply “put their toe in the water” before finally taking the plunge altogether.  As Bilton notes, he’s saving a fortune ($1,600/year):

Although the initial investment was costly, totaling $550, it took only a few months to recoup the money. Back in the olden days of cable we were forced to shell out a relatively standard $140 a month, for television service alone. This cost gave us access to a digital video recorder and hundreds of unwatched TV channels. Contrast this with today, where our only expense is $9 a month to stream Netflix videos from the Web and the $30 a month that we always spent on an Internet connection. O.K., maybe that’s not completely accurate. When the wireless keyboard died a few weeks ago I was forced to spend another $4 for two new AA batteries. We’ve not yet recovered from that financial loss… Tunes can get expensive. If you watch premium-cable television shows, you can pay more than $40 for the season of a single show. But even that is less than one month of cable. Since there are so many other entertainment options online, we just skip “Dexter” and “Weeds.” Trust me, there is a lot of great free or ad-supported content out there.

The experience isn’t that different, but it is richer:

We still come home from work and watch any number of shows, just like the people who continue to pay for cable. We just do it a little differently, starting the computer and then using services like Hulu, Boxee, iTunes and Joost. Another interesting twist to this experience is that we’re no longer limited to consuming traditional programming. With these applications we can spend an entire evening flicking through videos from YouTube, CollegeHumor or Web-only programs.

Mark my words: stories like this one will become increasingly representative of the mainstream, just as huge numbers of consumers have “cut the landline cord” in favor of cell phones.  By the time the FCC gets around to coming up with a new cable cap—using some inventively”fresh approach,” as the Times suggests, no doubt—stories like this one will be passé, and today’s world of cable TV subscriptions will have gone the way of the landline, rabbit ears, the fax machine, the mimeograph and the stereoscope.  The FCC, the Times’ editorialists, and all the other media reformista groups that keep screaming for regulation to slay phantoms of a bygone era will look mighty foolish, indeed.

On a final note, savvy observers will notice the similarity between Bilton’s slogan (“Cable Freedom Is a Click Away”) and Google’s mantra about its various services (“Competition is just one click away“).  Both run contrary to the prevailing assumption behind so much communications/Internet policymaking that users are too lazy, ignorant, stupid and/or helpless to find, explore, try, or even understand new tools, products, services or models.  One could raise legitimate questions about how competition plays out on the other side of these two-sided markets (advertising in the case of search and programming in the case of cable television), but to deny that consumers are capable of “clicking away” is to assume that they are mindless sheep.

The New York Times, to their credit and despite their editorial position on cable regulation, certainly seems to have a higher opinion of our intelligence—or they wouldn’t have bothered with Bilton’s excellent do-it-yourself guide.  In the case of television programming, the “sheep”  have begun overrunning  whatever “gates” once contained them and flooding into the verdant pastures of Internet video programming abundance.  More will soon follow in droves, and cable operators will do everything they can to keep their “grass” (programming choices) as “green” (abundant and diverse) as possible, just to compete.  The FCC’s continued meddling is simply unnecessary, counterproductive and dangerous as a precedent for outdated regulatory controls.

Ken Ferree and I just filed an amicus brief with the D.C. Circuit in what could be among the most important First Amendment cases involving economic regulation in years:  Comcast’s challenge to the FCC’s cap on the maximum size of a cable operator’s nationwide subscriber-audience.  While few may feel righteous indignation at limitations targeted at large corporations such as Comcast or Time Warner, the larger principle at stake here is deeply important: Will the First Amendment provide a meaningful check on what USC law professor Chris Yoo has called “architectural censorship” (i.e., so-called “structural” regulations that “have the unintended consequence of reducing the quantity, quality, and diversity of media content”).

In a nutshell, we argue that that:

1. The provisions of the 1992 Cable Act authorizing the FCC to impose a “cable cap” are outdated in world of media abundance and vibrant platform competition.
2. Because cable is no longer the unique “bottleneck” or “gatekeeper” that it was in 1992, these statutory provisions (not just the FCC’s 30% rule) must be subject to strict scrutiny under the First Amendment as a limitation on free speech.
3. Because there are “less restrictive means” of ensuring cable operators do not impede the flow of video programming to consumers, the court should strike down these provisions.
4. Even if the court upholds the statute, it should nonetheless strike down the cap issued by the FCC in December 2007 (30% of all Multichannel Video Programming (MVPD)  subscribers as based on an outdated model of the video marketplace.

I encourage you to read our brief (below).  I’ve provided a summary below, along with some additional commentary we just couldn’t cover under our 3500 word limit.

Strict Scrutiny.  Yoo’s article Architectural Censorship and the FCC is essential reading for anyone who believes that government regulations on the size and shape of the “soapbox” can have huge effects on speech itself.   Yoo argues that the First Amendment should check this kind of regulation–however “content-neutral” it might seem–under “strict scrutiny”, which requires that the government show that a regulation is the “least restrictive means” available for advancing a “compelling government interest.”  But Yoo ultimately concludes (pp. 713-718, PDF pp. 45-50) that, under existing precedent, most “architectural censorship will be effectively insulated from meaningful judicial review.”  Yoo explains that the Supreme Court’s 1983 decision in Minneapolis Star & Tribune Co. v. Minnesota Commissioner of Revenue, “appeared to entertain the possibility of subjecting structural restrictions to strict scrutiny even in the absence of facial content discrimination or content-based motive.”  But in its 1991 Leathers v. Medlock decision, the Court “foreclose[d] any prospect that Minneapolis Star and its progeny would serve as a check on architectural censorship” by limiting the Minneapolis Star line of precedents to cases where “a statute of general application affects a small number of speakers.”  The Court reaffirmed this position in its 1994 Turner I decision, when it applied intermediate, rather than strict, scrutiny to the Cable Act’s “must-carry provisions,” which require nearly all cable operators to carry certain television broadcast signals.  Intermediate scrutiny requires only that important governmental interests that are furthered by “substantially related means.”

Unfortunate as the Leathers/Turner I line of cases is for those concerned about architectural censorship, the cable cap is exactly the sort of regulation that falls within the reduced scope of Minneapolis Star as “affect[ing] a small number of speakers” because, unlike the Cable Act’s must-carry provisions, the cap limits the speech of only the very largest cable operators.  So the question of whether the Court should default to intermediate scrutiny as it did in its 2000 Time Warner I decision (when the cap was first challenged) should turn entirely on the question of whether cable still has the “special characteristic” of “bottleneck” or “gateekeeper” power despite all the changes in the media marketplace since 1992 and even in just the last eight years.

The Modern Media Marketplace.  The subscriber limitation provisions of the Cable Act were intended to prevent cable operators from “unfairly impeding the flow of video programming.”  Yet each of the key premises behind these provisions has been disproven:

1. Increased horizontal concentration of the cable industry has, far from reducing media choices, been accompanied by an explosive growth in the amount and diversity of video content available to consumers.
2. The rate of “vertical integration” (i.e., ownership of cable programmers by cable operators), which Congress feared would cause cable operators to discriminate against unaffiliated programmers, has plummeted.
3. Cable’s share of the MVPD market has also plummeted dramatically, with the two DBS providers now sharing 1/3 of the MVPD market and representing the second and third largest MVPDs

Two charts say it all.  First, from Adam Thierer’s excellent book Media Metrics, the number of programming services (cable channels) has grown by nearly six-fold by 1992, while the rate of vertical integration has plummeted:

(That chart stops in 2006 (based on 2005 data) because the FCC still has not released the 2007 Video Competition Report, which it approved in December 2007.  Since then, Time Warner Cable has been spun off of Time Warner’s content empire, so the actual affiliation rate today is likely less than 10%.)

Second, cable’s share of the MVPD market has fallen from 95% in 1992 to ~64% today:

In 1992, when consumers had only a single MVPD option, cable might fairly have been considered a “bottleneck” or “gatekeeper.”  But today, every American has at least three MVPD choices (their local cable franchisee + two DBS operators), and can also subscribe to a Telco video service such as Verizon’s FiOS.  (“Over-building” where two cable operators serve the same area is rare.)

Internet Video.  We also describe how the availability of TV content online provides yet another distribution channel for programmers:

The last two years have seen growing numbers of Americans increasingly substituting consumption of online video for MVPD video and the Internet driving popularity of MVPD content, rather than vice versa.  But only in the last year, since the adoption of the [FCC’s December 2007 order issuing the 30% cap], has the large-scale delivery of television  content online become a reality, as large numbers of programmers have begun distributing increasing numbers of complete episodes and entire series through their own websites and/or through a new class of rapidly-growing Internet Video Programming Distributor (IVPD) websites such as Netflix, Hulu, Amazon Video on Demand, iTunes, Vuze, Sony Playstation Store, the Microsoft Xbox 360 Marketplace, Joost and Veoh.  These IVPDs already offer a staggering, and growing, library of currently-airing and archived content—as much as 90% of broadcast shows and 20% of cable shows.  These sites are supported by a growing number of set-top devices (e.g., Netflix Player by Roku, TiVo) and wildly popular game consoles (e.g., Microsoft Xbox 360, Sony PlayStation 3) that allow users to play IVPD content from broadcast and cable programmers on demand on their television, while TiVo allows users to seamlessly switch between IVPD, MVPD and OTA content.

The FCC’s decision to exclude Internet video from its analysis is hardly surprising when one considers that the economic model behind the new 30% cap comes from a 2005 study based on cable market data from 1984-2001 and that the last official data released by the agency about the video marketplace date to June 2005.  But nine months later, the agency waxed ecstatic about the promise of IVPDs when doing so supported Kevin Martin’s attempts to enforce the FCC’s non-binding 2005 “Net Neutrality” policy statement:

In August 2008, the FCC even cited [the rapid emergence of IVPDs] in support of its claim of jurisdiction over Comcast’s broadband network management practices (because of alleged harm to an IVPD that distributes content through peer-to-peer file sharing):  “consumers with [broadband] service will have available a source of video programming (much of it free) that could rapidly become an alternative to cable television.”  But the immediate competitive impact of IVPDs comes not from the fact that some IVPD users are already canceling their MVPD subscriptions, but in the ease with which IVPDs can supplement an MVPD subscription—because most IVPDs are free, while those that charge for content do so on a per-episode/show basis.  Furthermore, IVPDs have little—if any—incentive not to offer a particular program because they are not subject to the same capacity constraints as MVPDs.  Thus, even if IVPD video consumption remains relatively small in its early years, IVPDs already offer programmers a strong alternative distribution channel capable of reaching all broadband users.

Less Restrictive Means. Of course, the fact that cable no longer has a special characteristic of gateekeeper or bottleneck power does not automatically render the Cable Act’s subscriber limits provisions unconstitutional; this merely means that the government must show that no less restrictive means are available to satisfy a compelling government interest.  We suggest a variety less restrictive means that could ensure competitive video distribution and programming markets.  These include dispute resolution assisted by the FCC, enforcement of existing antitrust laws, and crafting “special obligations on cable operators with more than 30% of the MVPD market to ensure that they do not unfairly impede the flow of video programming.”

Challenging The FCC’s Rule. Besides attacking the statute, we argue that the 30% cap imposed by the FCC last year is even more obviously unconstitutional than when the D.C. Circuit struck down the same limit seven years ago in Time Warner II. To many lay observers, this argument may seem like a “no-brainer” given how much more competitive the video marketplace is than it was in 2001.  But one must understand that when the Court struck down the 30% cap the first time, it did so on the grounds that the FCC’s own rationale justified not a 30% cap but a 60% cap.  The FCC had decided that the average video programmer (network) needed an “open field” of 40% of the MVPD market to be viable.  The FCC leapt from that conclusion to a 30% cap so that even if the two largest cable companies denied carriage, the programmer would still have the required 40% “open field.”  The court found that there was no evidence that the leading two cable operators would collude to deny carriage and that the statute did not “protect programmers against the risk of completely independent rejections by two or more companies.”  In other words, the purpose of the statute was not to guarantee carriage even if, for example, a cable operator decided (exercising the same constitutionally-protected “editorial discretion” enjoyed by all media) spend part of its limited system capacity carrying a network with questionable appeal, or to raise subscription rates to cover the marginal cost of carrying the network.

But the FCC has since come up with a new “open field” model that the court must consider anew.  This time, the model more clearly supports a 30% cap–but only if one accepts the premises underlying the model and the accuracy of the data put into the model, which we do not.  We argue that their model is “based on flawed assumptions about the nature of competition for video programming” and is thus incapable of “accurately reflect[ing] cable’s present (or future) bottleneck power.”

Click the button at the top right of Scribd’s handy iPaper display to switch to full page display of the brief–or click on the top left to download the PDF itself.

PFF Amicus Brief – Cable Ownership Cap http://documents.scribd.com/ScribdViewer.swf?document_id=8630011&access_key=key-2obr4z2ohtozi1gabbay&page=1&version=1&viewMode=