# Appendix — Federal Communications Commission v. Home Box Office, Inc. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385004_1959%3A2 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 1977 - **Citation:** 434 U.S. 829 ## Text — Supre ne Court, U. 8. FILED | JUN 4 No. | 1977 — ̃ —k—̃—̃— In the Supreme Court of the United States 8 Ooroser TRRN, 1976 7671724 FeperaL CoMMUNICATIONS COMMISSION, PETITIONER v. Home Box Orion, Ino., ET At. PETITIONER’S APPENDIX WEENEER EK. HARTENBERGER, General Counsel, DANIEL M ARMSTRONG, Associate General Counsel, JACEK DAVID SMITH, KEITH H. FAGAN, Counsel, Federal Communvcations Commission, Washington, D.C. 20564. INDEX TO APPENDICES Appendix A: Opinion of the United States Court of Appeals for the District of Columbia Circuit .................... Appendix B: Special Concurring Opinion of Circuit Judge e Appendix C: First Report and Order of the Federal Com- ee eee Appendix D: Memorandum Opinion and Order Upon Recon- sideration of the Federal Communications Commission Appendix E: Second Report and Order of the Federal Com- r ³ k 4 Appendix F: Memorandum Opinion and Order Ta Re Home r ͤ h.. „bb Appendix G: Judgment of the United States Court of Ap- peals for the District of Columbia Circuit Appendix H: Opinion of the United States Court of Appeals for the District of Columbia Circuit on Motion for Stay , 1. ee Appendix I: Communications Act of 1934, as amended, 47 U.S.C. 151, 152(a), 153(a), 153(b), 307(b), 326 and r ˙²˙ rũĩ! been estes ese 219 247 Appendix A United States Court of Appeals FOR THE DISTRICT OF COLUMBIA CIRCUIT No. 75-1280 et al. HoME Box OFFICE, INC., PETITIONER v. FEDERAL COMMUNICATIONS COMMISSION and UNITED STATES OF AMERICA, RESPONDENTS PROFESSIONAL BASEBALL et al., INTERVENORS Petitions for Review of Orders of the Federal Communications Commission Argued April 20, 1976 Decided March 25, 1977 SYLLABUS These 15 consolidated cases challenge four orders of the Federal Communications Commission which, taken together, regulate and limit the program fare cablecast- ers and subscription broadcast television stations may offer to the public for a fee set on a per-program or per- channel basis. Acting under its rulemaking authority, the Commission in 1975 issued rules which prohibited pay exhibition of: (1) feature films more than three, but less than 10, years old; (2) specific sports events (e. g., the World Series) shown on broadcast television 1 2 ce within the previous five years; (3) more than the mini- mum number of non-specific (i. e., regular season) sports events which had not been broadcast in any of the five preceding years, and in some cases only half that num- ber; and (4) all series programs (i. e., programs with in- terconnected plot or substantially the same cast of prin- cipal characters). In addition, the Commission prohibited commercial advertising in conjunction with pay exhibi- tion of programming and limited the overall number of hours of pay operation which could be devoted to sports and feature films to 90% of total pay operations. See 47 C. F. R. §§ 73.643, 76.225 (1975). By subsequent or- ders in the same rulemaking, the series programming restriction was removed and recordkeeping requirements were imposed on feature film programming. The stated purpose of these rules was to prevent competitive bidding away of popular program material from the free televi- sion service to a service in which the audience would have to pay a fee to see the same material. Such com- petitive bidding, or “siphoning,” is said to be possible because the money received from pay viewers is signifi- cantly more for some programs than money received from advertisers to attach their messages to the same material. For this reason, even a relatively small number of pay viewers could cause a program to be siphoned re- gardless of the wishes of a majority of its free viewers. Held: 1. Review of the rulemaking record indicates that the pay cable television regulations must be considered sepa- rately from those regulating subscription broadcast tele- vision. Because the Commission has exceeded its author- ity over cable television in promulgating the pay cable rules and because there is no evidence to support the need for regulation of pay cable television, these rules must be vacated. Pp. 29-67. a. The Communications Act of 1934, 47 U.S.C. § 151 et seg., contains no provision expressly author- izing the Commission to regulate cable television. 3 The Supreme Court has nonetheless sanctioned regu- lation of cable television under § 2(a) of the Act, 47 U.S.C. 8 152 (a), but only where the ends to be achieved were “long established” in the field of broad- cast television or were “congressionally approved.” See United States v. Midwest Video Corp., 406 U.S. 649, 667-668 (1972) ; United States v. Southwestern Cable Co., 392 U.S. 157, 173-176 (1968). These cases and considerations of administrative consist- ency further indicate that in most instances the proper test for Commission jurisdiction over pay cable television is whether the ends proposed to be achieved by Commission regulations are also well understood and consistently held ends for which broadcast television could be regulated. See United States v. Midwest Video Corp., supra, 406 U.S. at 667-668 ; cf. Greater Boston Television Corp. v. FCC, 143 U.S.App.D.C. 383, 394, 444 F.2d 841, 852 (1970), cert. denied, 403 U.S. 923 (1971). See also Hampton v. Mow Sun Wong, 426 U.S. 88, 116 (1976). Pp. 30-34. b. Under the standard set out above, the Com- mission has exceeded its jurisdiction and its rules must be vacated as unauthorized by law insofar as they regulate cable television. Pp. 34-48. e. Even if the Commission had jurisdiction to promulgate its anti-siphoning rules, there is no evi- dence in the record supporting the need for regula- tion. Consequently, the rules must be vacated since a “regulation perfectly reasonable and appropriate in the face of a given problem [is] highly capricious if that problem does not exist.” City of Chicago v. FPC, 147 U.S.App.D.C. 312, 323, 458 F.2d 731, 742 (1971), cert. denied, 405 U.S. 1074 (1972). Pp. 48- 60. d. Moreover, although the Commission properly recognized the need to balance the benefits of regu- 4 lation against the detriment to unfettered competi- tion, it proceeded incorrectly. Contrary to the Com- mission’s position, United States v. Southwestern Cable Co., supra, does not sanction regulation of cable television to prevent “unfair competition,” but even if it did, the “unfairness” recognized in South- western Cable is not present here. Moreover, the balance between regulation and competition is not to be resolved on the basis of legal precedent, but by a considered decision uron the record in each rulemaking. Pp. 60-67. 2. The cable television rules are inconsistent with the First Amendment. Even though substantially similar rules which applied to broadcast television were upheld by this court in National Ass’n of Theatre Owners (NATO) v. FCC, 136 U.S.App.D.C. 352, 420 F.2d 194 (1969), cert. denied, 397 U.S. 922 (1970), that case is not controlling since “differences in the characteristics of new media justify differences in the First Amendment standards applied to them.” Red Lion Broadcasting Co. v. FCC, 395 U.S. 367, 386 (1969). Pp. 67-83. a. The constitutional question in NATO was straightforward: whether a grant of a broadcast license could be conditioned on terms which made reference to the kind and content of programs being offered to the public. Phrased this way, the question was identical to that resolved in the affirmative over 25 years before NATO in National Broadcasting Co. v. United States, 319 U.S. 190, 212-217, 226- 227 (1943). Although NATO did not itself cite National Broadcasting Co., there was no need for it to break new First Amendment ground and a read- ing of NATO shows that it did not do so. The con- flict among speakers using the electromagnetic spec- trum which justified Commission regulation in NATO and National Broadcasting Co. is absent — . — 5 from cable television, however. For this reason, the conventional justification for Commission regulation of broadcast speakers cannot be applied to regulation of cable television. Pp. 67-72. b. The absence in cable television of the physical limitations of the electromagnetic spectrum does not automatically lead to the conclusion that no regula- tion of cable television is valid under the First Amendment. Because “the right of free speech * * * does not embrace a right to snuff out the free speech of others,” Red Lion Broadcasting Co. v. FCC, supra, 395 U.S. at 387, government may adopt reasonable regulations separating broadcasters competing and juterfering with each other for the same audience. In determining whether such regulations comport with the First Amendment, the proper test is that set out in United States v. O’Brien, 391 U.S. 367, 377 (1968). Pp. 73-77. e. Analysis of the Commission’s stated reasons for promulgating the anti-siphoning rules indicates that the rules are intended to remove a conflict between those with and those without access to pay cable television. This purpose is unrelated to the suppres- sion of free expression as required by O’Brien. None- theless, the rules are invalid because the record here will not support the conclusion that there is in fact conflict between these groups. Moreover, the re- straints imposed by the rules are greater than neces- sary to further any legitimate government interest, and this overbreadth is not cured by the waiver pro- visions associated with the rules since the procedures established for obtaining a waiver are fundamentally at odds with the standards set out in Freedman v. Maryland, 380 U.S. 51 (1965). Pp. 77-83. 8. During the pendency of the rulemaking proceeding before the Commission, and even after the rulemaking record was supposed to be closed while the Commission 6 deliberated, there were numerous ex parte contacts made between the parties to the rulemaking and various com- missioners and Commission employees. Although this court sua sponte ordered the Commission to prepare and submit a list of all “ex parte presentations together with the details of each,” it is still not possible to determine the effect of such communications on the integrity of the rulemaking. As a result, the elaborate public discussion in the dockets here under review may be a sham and a fiction. Our fundamental notions of judicial review re- quire that reviewing courts have access to “the full ad- ministrative record” that was presumably before an agency when it exercised its discretion and promulgated rules. See Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 415-420 (1971). Where there have been frequent ex parte contacts, it is simply not possible to know the contents of the “full administrative record.” Moreover, ex parte contacts violate fundamental notions of fairness implicit in due process. Sangamon Valley Television Corp. v. United States, 106 U.S.App.D.C. 30, 269 F.2d 221 (1959). For these reasons, it is impera- tive that agency officials involved in the decisional proc- ess of a rulemaking shun ex parte contacts on the sub- ject matter of the rulemaking from the time a notice of proposed rulemaking issues until a final decision in the proceeding. If ex parte contacts nonetheless occur, the substance of the contacts must be reduced to writing and put in a public file. Pp. 84-101. 4. Rules substantially similar to the subscription broadcast television rules were affirmed by this court over six years ago in NATO v. FCC, supra. At that time the Commission acted on an elaborate rulemaking record containing data generated in trial operations of a sub- scription broadcast station at Hartford, Connecticut. It appears that few, if any, subscription stations have begun operation in the interim. Accordingly, the best informa- — — — 7 tion available with respect to subscription broadcast tele- vision is that reviewed in NATO, which has not been called into question in the instant rulemaking. For this reason, NATO requires affirmance of the rules promul- gated in the dockets here under review to the extent that such rules apply to subscription broadcast television, subject, however, to further review upon completion of additional hearings regarding e parte contacts as or- dered herein. Pp. 101-104. Remanded. — — 9 Notice: This opinion is subject to formal revision before publication in the Federal Reporter or U.S. App. D.C. Reports. Users are requested to notify the Clerk of any formal errors in order that corrections may be made before the bound volumes go to press. United States Court of Appeals FOR THE DISTRICT OF COLUMBIA CIRCUIT No. 75-1280 HoME Box OFFICE, INC., PETITIONER v. FEDERAL COMMUNICATIONS COMMISSION AND UNITED STATES OF AMERICA, RESPONDENTS PROFESSIONAL BASEBALL, et al., INTERVENORS No. 75-1284 METROMEDIA, INC., PETITIONER v. FEDERAL COMMUNICATIONS COMMISSION AND UNITED STATES OF AMERICA, RESPONDENTS PROFESSIONAL BASEBALL, et al., INTERVENORS 10 11 No. 75-1342 No. 75-1496 UNITED ARTISTS CORPORATION AND HOME Box OFFICE, INC., PETITIONER METRO-GOLDWYN-MAYER INC., PETITIONERS V. V. FEDERAL COMMUNICATIONS COMMISSION AND UNITED STATES OF AMERICA, RESPONDENTS AMERICAN BROADCASTING COMPANIES, INC., et al., INTERVENORS FEDERAL COMMUNICATIONS COMMISSION AND UNITED STATES OF AMERICA, RESPONDENTS PROFESSIONAL BASEBALL, et al., INTERVENORS No. 75-1358 No. 75-1555 8 MOTION PICTURE ASSOCIATION OF AMERICA, INC., ME FFICE, INC., P IONER HOME Box OFFICE, , PETIT 1 — V. V. FEDERAL COMMUNICATIONS COMMISSION AND | FEDERAL COMMUNICATIONS COMMISSION AND UNITED STATES OF AMERICA, RESPONDENTS | UNITED STATES OF AMERICA, RESPONDENTS CBS, INC., et al., INTERVENORS AMERICAN BROADCASTING COMPANIES, INC, et al., INTERVENORS No. 75-1430 CoLUMBIA PICTURES INDUSTRIES, INC., et al., PETITIONERS No. 75-1785 0 NATIONAL ASSOCIATION OF BROADCASTERS, PETITIONER v. FEDERAL COMMUNICATIONS COMMISSION AND UNITED STATES OF AMERICA, RESPONDENTS FEDERAL COMMUNICATIONS COMMISSION AND PROFESSIONAL BASEBALL, et al., INTERVENORS UNITED STATES OF AMERICA, RESPONDENTS 12 No. 75-1788 AMERICAN BROADCASTING COMPANIES, INC., PETITIONER V. FEDERAL COMMUNICATIONS COMMISSION AND UNITED STATES OF AMERICA, RESPONDENTS No. 75-1807 CBS INC., PETITIONER Ve FEDERAL COMMUNICATIONS COMMISSION AND UNITED STATES OF AMERICA, RESPONDENTS NATIONAL CITIZENS COMMITTEE FOR BROADCASTING, INTERVENOR No. 75-1869 NATIONAL BROADCASTING COMPANY, INC., PETITIONER V. FEDERAL COMMUNICATIONS COMMISSION AND UNITED STATES OF AMERICA, RESPONDENTS — ere. 8 we SES 13 No. 75-2129 CBS INC., PETITIONER V. FEDERAL COMMUNICATIONS COMMISSION AND UNITED STATES OF AMERICA, RESPONDENTS No. 75-2130 AMERICAN BROADCASTING COMPANIES, INC., PETITIONER V. FEDERAL COMMUNICATIONS COMMISSION AND UNITED STATES OF AMERICA, RESPONDENTS No. 75-2131 NATIONAL ASSOCIATION OF BROADCASTERS, PETITIONER V. FEDERAL COMMUNICATIONS COMMISSION AND UNITED STATES OF AMERICA, RESPONDENTS 14 No. 75-2172 NATIONAL BROADCASTING COMPANY, INC., PETITIONER V. FEDERAL COMMUNICATIONS COMMISSION AND UNITED STATES OF AMERICA, RESPONDENTS Petitions for Review of Orders of the Federal Communications Commission Argued April 20, 1976 Decided March 25, 1977 Simon H. Rifkind, of the bar of the Court of Appeals of New York, pro hac vice, by special leave of court, with whom Stuart Robinowitz, Bruce S. Kaplan, Harry M. Plotkin, George H. Shapiro, Linda A. Cinciotta, Ronald A. Cass, Susan P. Carr, and Moses Silverman were on the brief, for petitioner in Nos. 75-1280, 75-1342, and 75-1358. Robert W. Coll, with whom James A. McKenna, Jr. and Steven A. Lerman were on the brief, for petitioner in Nos. 75-1788 and 75-2130 and for intervenor American Broadcasting Companies, Inc. in Nos. 75-1280, 75-1284, 75-1342, 75-1430, 75-1496, 75-1555, and 75-1358; also argued for all broadcasters. Arthur Scheiner, with whom Richard A. Solomon, Robert D. Hadl, and Richard A. Moore were on the brief, for petitioners in No. 75-1430. 15 Gerald Meyer, of the bar of the Court of Appeals of New York, pro hac vice, by special leave of court, with whom Lawrence S. Lesser was on the brief, for peti- tioners in No. 75-1496. Barry Gressman, Attorney, Deparment of Justice, with whom Samuel R. Simon, Attorney, Department of Jus- tice, was on the brief, for respondent United States of America. Robert B. Nicholson, Attorney, Department of Justice, entered an appearance for respondent United States of America in No. 75-1785. Lee I. Weintraub, Attorney, Department of Justice, entered an appearance for respondent United States of America in No. 75-2172. Carl D. Lawson, Attorney, Department of Justice, en- tered an appearance for respondent United States of America. Daniel M. Armstrong, Associate General Counsel, Fed- eral Communications Commission, with whom Ashton R. Hardy, General Counsel, and Jack David Smith, Coun- sel, Federal Communications Commission, and Frederick W. Finn, Counsel, Cable Television Bureau, were on the brief, for respondent Federal Communications Commis- sion. Joseph A. Marino, Associate General Counsel, Fed- eral Communications Commission, at the time the record was filed, also entered an appearance for respondent Federal Communications Commission. Curtis T. White, with whom Frank W. Lloyd, III was on the brief, for intervenor National Citizens Committee for Broadcasting. Thomas J. Dougherty and Preston R. Padden were on the brief for petitioner in No. 75-1284. John B. Summers and James J. Popham were on the brief for petitioner in Nos. 75-1785 and 75-2131. 16 Sidney Schreiber and James Bouras were on the brief for petitioner in No. 75-1555. Joel Rosenbloom, Peter D. Bewley, Stephen A. Weis- wasser, and Lowell B. Miller were on the brief for peti- tioner in Nos. 75-1807 and 75-2129 and for intervenor CBS Ine. in Nos. 75-1280, 75-1284, and 75-1358. J. Roger Wollenberg entered an appearance for petitioner in No. 75-1807. Bernard G. Segal, Corydon B. Dunham, and Howard Monderer were on the brief for petitioner in Nos. 75- 1869 and 75-2171. Henry Geller filed a brief as amicus curiae urging reversal in Nos. 75-1280, 75-1284, 75-1342, 75-1358, 75- 1430, 75-1470, 75-1496, and 75-1555. Kenneth A. Cox, William J. Byrnes, and Raymond C. Fay filed a brief on behalf of American Mothers Com- mittee, Inc., et al., as amici curiae. James F. Fitzpatrick and Frank G. Washington were on the brief for intervenor Professional Baseball in Nos. 75-1280, 75-1284, 75-1358, 75-1430, and 75-1496. James A. McKenna, Jr., Robert W. Coll, and Steven A. Lerman entered appearances for intervenors Forward Communications Corporation, et al., in Nos. 75-1280, 75- 1284, 75-1358, 75-1430, 75-1496, and 75-1555. Arthur Scheiner entered an appearance for intervenor Twentieth Century-Fox Film Corporation. Before WRIGHT and MACKINNON, Circuit Judges, and WEIGEL,” District Judge. Ri. 1 —.— States District Court for the Northern istrict o ifornia, sitting by designation U.S.C. § 292(d) (1970). 2 — — — — — — A¶—ũ4ever1!1!ͤůłñĩũj— 17 PER CuURIAM:’ In these 15 cases, consolidated for pur- poses of argument and decision, petitioners challenge various facets of four orders of the Federal Communica- tions Commission which, taken together, regulate and limit the program fare “cablecasters” and “subscription broadcast television stations“ may offer to the public for a fee set on a per-program or per-channel basis.‘ The opinion in this case is issued as a per curiam, not be- cause it has received less than full consideration by the court, but because the complexity of the issues raised on appeal made it useful to share the effort required to draft this opinion among the members of the panel. 2 “Cablecasting” refers to the origination of programming on a cable television system, in contradistinction to the re- transmission of signals that have been received over the air from conventional broadcast television stations. See 47 C. F. R. 88 76.5(v)-(x) (1975). The rules challenged here apply to both “access” cablecasters, who lease (or are given) channel time from cable system operators, id. § 76.5(x), and “origina- tion” cablecasters, who are system operators, id. § 76.5(w). Id. § 76.225. The rules challenged here apply only to cable- casting on systems which also carry broadcast signals. See id. §§ 76.5(a), 76.225. Although some petitioners have argued that the rules should be extended to all cablecasters, we think the Commission has given a rational basis for this distinction. See First Report and Order, 52 FCC 2d 1, 47-48 (1975), JA 71-72. * Subscription broadcast television stations are those with the technical capability to broadcast programs “intended to be received in intelligible form by members of the public only for a fee or charge.” 47 C.F.R. § 73.641 (b) (1975). ¢ Jurisdiction over these petitions for review is based on 47 U.S.C. § 402 (1970) and 28 U.S.C. § 2342 (1970). In addition to the four orders promulgating, modifying, or refusing to waive the anti-siphoning“ rules, petitioner Home Box Office, Inc. and amicus Henry Geller request that we order the Commission to complete its “program exclusivity” proceedings. “Program exclusivity” refers to an alleged broadcast network practice of obtaining exclusive exhibition 18 Technically, the orders reviewed here amend previous, more stringent, Commission rules.“ While this proce- rights against cablecasters. This problem was apparent! first brought to the attention of the Commission in 1971 pom it issued a notice of proposed rulemaking at that time. See Notice of Proposed Rule Making, 27 FCC 2d 18 (1971) (Docket 18179). No further action appears to have been taken in this docket. The issue was raised again in the pro- ceeding here under review, Docket 19554. The issue was not decided in the First Report and Order, supra note 2. Instead, a “Notice of Inquiry” was issued, 52 FCC 2d 87 (1975), JA 111, establishing Docket 20402, a proceeding in which the issue was to be resolved. Almost 18 months have passed since issuance of this notice and over a year since the close of the comment period. Yet we are unaware that any action has been taken by the Commission. We agree with the Commission in Docket 19554 that the use of exclusivity clauses “raise[s] anti-trust questions,” Further Notice of Proposed Rule Making and Order for Oral Argument, 48 FCC 2d 453, 462 n.16 (1974), JA 18. In view of this, and in view of the potentially deleterious effect of exclusivity on the interest of viewers in having the greatest possible access to diverse sources of in- formation, we think the Commission should by now have — ian ae Therefore, we today enter an order “‘com ing] agency action * * * un layed.” 5 U.S.C. 5 706 (1) (1970). Een In FCC Docket 18397 rules originally develo for appli- cation to subscription broadcast television were 5 * cablecasting. 20 FCC 2d 201 (1969). Petitions for reconsid- eration of this order were filed with the Commission by many of the parties here. See Notice of Proposed Rule Making and Memorandum Opinion and Order, 35 FCC 2d 893, 894 n.5 (1972), JA 2. These petitions were denied. Id. at 899, JA 7. At the same time, however, the Commission instituted further rulemaking with regard to pay cablecasting under new Docket 19554. In In re Home Bor Office, Inc., 51 FCC 2d 317 ( 1975) JA 141, which is also on review here, the Commission took the view that the rules adopted as a result of the rulemaking in Docket 18397 were final and binding and would not be waived. See 51 FCC 2d at 321, JA 145. We disagree with this interpretation, however. See note 27 infra. 3 [continued] — —— — 19 dural nicety has not gone unnoticed by those petitioners who attack only the amendments to the rules on the theory that they represent a major, but unexplained and hence arbitrary, change of prior Commission policy,’ it The subscription broadcast television rules were adopted by the Commission in Docket 11279, see Fourth Report and Order, 15 FCC 2d 466 (1968). These rules were affirmed by this court in National Ass’n of Theatre Owners (NATO) v. FCC, 186 U.S.App.D.C. 352, 420 F.2d 194 (1969), cert. denied, 397 U.S. 922 (1970). Subsequently the Commission enter- tained petitions for amendment of its subscription television and pay cable rules as they related to sports. Notice of Pro- posed Rule Making, 35 Fep. REG. 11040 (1970) (Docket 18893). One order was entered in this docket, Report and Order, 34 FCC 2d 271 (1972), which amended the subscription television sports rule. Petitions for reconsideration were filed in this proceeding, and consideration of these petitions was granted and consolidated with the further consideration of pay cable rules announced in Docket 19554. See Notice of Proposed Rule Making and Memorandum Opinion and Order, supra, 35 FCC 2d at 898, JA 6. The rules promulgated in the First Re- port and Order, supra note 2, constitute the Commission’s de- cision on reconsideration of its earlier Report and Order in Docket 18893. The First Report and Order terminated Docket 18893. See 52 FCC 2d at 68, JA 92. Subsequently, however, the Commission issued its Second Report and Order in Docket 19554, —— FCC 2d ——, 35 P & F RADO REG. 2p 767 (1975), JA 131, which repealed 47 C.F.R. § 76.225 (e), and the Com- mission took the view in that Order that it could repeal the equivalent subscription broadcast television section of its regulations, 47 C.F.R. § 73.643 (g), as well. See FCC 2d ——, JA 139. Such an extension is technically in violation of the Administrative Procedure Act, 5 U.S.C. 8 553 (b) (1970), because the broadcast inquiry was terminated and the Second Further Notice of Proposed Rule Making, 52 FCC 2d 83 (1975), JA 197, entered after the First Report, supra, made no reference to broadcast television. No party has raised an objection to this procedure, and we think that, given the similarity of the issues and parties involved, this was harmless error. Sec 5 U.S.C. § 706 (1970). ¢This group includes the major broadcast networks, the National Association of Broadcasters, and one group of amici. 20 has largely escaped those who take the o ing vi that any regulation exceeds the authority ‘of the — mission.’ We accept neither view in full but instead up- hold the orders challenged here insofar as they relate to subscription broadcast television and vacate the orders as arbitrary, capricious, and unauthori i 3 uthorized by law in all I. THE FACTUAL BACKGROUND At the heart of these cases are the Commission’s “pay cable” rules, set out in the margin for convenience.“ This view is taken by the Justice De ‘his vi partment, th — — producers of programs suitable — — — er e or broadeast television, and a group of * Cable television system o essee le te perators or channel | 1 in origination or access cablecasting pectic - ome — which a per- program or per channel charge is made shall comply with the following requirements: (a) Feature films shall : >t be cablecas * * 2 g t b — — —— to the mandatory * —— é ents of Su D of thi 9 — of this Part 76, except as pro- (1) A feature film may be cablecast if— (i) The film has been in general release i in th anywhere in the United States for three (3) years — — prior to its proposed cablecast; (ii) A conventional television broadcast ion licensed station | in the marke b b at g. te bald apres ual rig ibit the film. F of this subdivision, a television station affiliated "with a ae 3 be deemed to hold a present con- t rig ibit a film i ich i 2 San if the network to which it (iii) The film has been in general rel i ease anywhere in the United States for more 1 years prior to its proposed cablecast and the film has not 21 been exhibited in the market of the cable television system over conventional television for three (3) years prior to its proposed cablecast. Once a film has been cablecast in the market pursuant to this subdivision, or broadcast on a subscription basis pursuant to § 73.643 (a) (1) (iii), such film may thereafter be cablecast in the market without regard to its subsequent exhibition over conventional television ; (iv) The film is in a foreign language; (2) Feature films otherwise excluded by this para- gIrlaph may be cablecast upon a convincing showing to the Commission that they are not desired for exhibition over conventional television in the market of the cable television system, or that the owners of the broadcast rights to the films, even absent the existence of sub- scription television, would not make the films available to conventional television. (3) Every cable television system operator or channel lessee engaging in origination or access cablecasting pur- suant to this paragraph shall maintain, or cause to be maintained, for public inspection a file listing the title of the film, the date on which it was cablecast and the provision of this paragraph pursuant to which it was cablecast. When a feature film is cablecast pursuant to paragraph (a) (1) (ii) of this section, the station or network serving the market and holding a present con- tractual right to exhibit the film shall be specified. These files shall be retained for a period of two years. (b) Sports events shall not be cablecast live by a cable television system subject to the mandatory signal car- riage requirements of Subpart D of Part 76, except as provided in this paragraph. (1) A specific event may be cablecast if the event has not been broadcast live over conventional television in the market of the cable television system during any one of the five (5) seasons preceding the proposed cablecast. If a regularly recurring event takes place at intervals of more than one year (e.g., summer Olympic games), the event shall not be cablecast if it has been broadcast live over conventional television in the market during 22 any one of the ten (10) years preceding the proposed cablecast. (2) New specific sports events that result from the restructuring of existing sports shall not be cablecast until five (5) seasons after their first occurrence. There- after, subscription cablecasts shall be governed by para- graph (b) (1) of this section. (3) The number of non-specific events which may be cablecast in any given season shall be determined as follows: (i) If less than twenty-five (25) percent of the events in a category of non-specific events were broadcast live over conventional television in the market of the cable television system during each of the five (5) seasons pre- ceding the proposed cablecast, the number of events in the category cablecast shall not exceed the number of events in the category not broadcast in that season among the preceding five (5) seasons when the largest number of events in the category were broadcast. (ii) If twenty-five (25) percent or more of the events in a category of non-specific events were broadcast live over conventional television in the market of the cable television system during any one of the five (5) seasons preceding the proposed cablecast, the number of events in the category cablecast shall not exceed fifty (50) per- cent of the number of events in the category not broad- cast in that season among the preceding five (5) seasons when the largest number of events in the category were broadcast. However, if the number of events in the cate- gory to be broadcast in the current season is a reduction from the number of events broadcast in that season among the preceding five (5) seasons when the largest number of events in the category were broadcast, the number of events in the category which may be cablecast pursuant to this subparagraph shall be reduced in pro- portion to the reduction in events broadcast. (c) Not more than ninety (90) percent of the total cablecast programming hours shall consist of feature films and sports events combined. The percentage calculations may be made on a yearly basis, but absent a showing of good cause, the percentage of such programming hours — ene ae 23 The effect of these rules is to restrict sharply the ability of cablecasters to present feature film and sports pro- grams if a separate program or channel charge is made for this material. In addition, the rules prohibit cable- casters from devoting more than 90 percent of their cablecast hours to movie and sports programs and fur- ther bar cablecasters from showing commercial advertis- ing on cable channels on which programs are presented for a direct charge to the viewer.’ Virtually identical restrictions apply to subscription broadcast television.“ may not exceed ninety-five (95) percent of the total cable- cast programming hours in any calendar month. (d) No commercial advertising announcements shail be carried on subscription channels during such opera- tions except before and after such programs for promo- tion of other programs for which a per-program or per- char nel charge is made. 47 C.F.R. § 76.225 (1975), as amended by Second Report and Order, supra note 5. * Commercial advertising on I — 1 — f bscription cablecasting was also, at one time, restric by the —— See 47 C. F. R. § 74.1117 (1969), deleted, 39 FED. REG. 43310 (1974). 1% Subscription television broadcast programming shall comply with the following requirements: (a) Feature films shall not be broadcast except as pro- vided in this paragraph. (i) A feature film may be broadcast if — (i) The film has been in general release in theaters anywhere in the United States for three (3) years or less prior to its proposed broadcast; (ii) A conventional television broadcast . station li- censed in the market of the subscription television broad- cast station holds a present contractual right to exhibit the film. For purposes of this subdivision, a television station affiliated with a television network will be deemed 24 to hold a present contractual right to exhibit a film if the network to which it is affiliated holds such a right; (iii) The film has been in general release in theaters anywhere in the United States for more than ten (10) years prior to its proposed subscription broadcast and the film has not been exhibited over conventional tele- vision in the market of the subscription television broad- cast station for three (3) years prior to its proposed subscription broadcast. Once a film has been broadcast in the market pursuant to this subdivision or cablecast on a subscription basis pursuant to 8 76.225 (a) (1) (iii), such film may thereafter be broadcast on a subscription basis in the market without regard to its subsequent exhibition over conventional! television; (iv) The film is in a foreign language; (2) Feature films otherwise excluded by this para- graph may be broadcast upon a convincing showing to the Commission that they are not desired for exhibition over conventional television in the market or that the owners of the broadcast rights to the films, even absent the existence of subscription television, would not make the films available to conventional television. (3) Every subscription television broadcast station over which a feature film is broadcast pursuant to this paragraph shall maintain for public inspection a file list- ing the title of the film, the date on which it was broad- cast and the provision of this paragraph pursuant to which it was broadcast. When a feature film is broadcast pursuant to subparagraph (1) (ii) of this paragraph, the station or network, serving the market and holding a present contractual right to exhibit the film shall be specified. These files shall be retained for a period of two years. ( b) Sports events shall not be broadcast live except as provided in this paragraph. (1) A specific event may be broadcast if the event has not been broadcast live over conventional television in the market of the subscription television broadcast sta- tion during any one of the five (5) seasons preceding the proposed subscription broadcast. If a regularly recurring event takes place at intervals of more than one year (e. g., 25 summer Olympic games), the event shall not be broad- cast on a subscription basis if it has been broadcast live over conventional television in the market of the sub- scription television broadcast station during any one of the ten (10) years preceding the proposed subscription broadcast. (2) New specific sports events that result from the restructuring of existing sports shall not be broadcast on a subscription basis until five (5) seasons after their first occurrence. Thereafter, subscription broadcasts shall be governed by paragraph (b) (1) of this section. (3) The number of non-specific events which may be broadcast on a subscription basis in any given season shall be determined as follows: (i) If less than twenty-five (25) percent of the events in a category of non-specific events were broadcast live over conventional television in the market of the sub- scription television broadcast station during each of the five (5) seasons preceding the proposed subscription broadcast, the number of events in the category broadcast on a subscription basis shall not exceed the number of events in the category not conventionally broadcast in that season among the preceding five (5) seasons when the largest number of events in the category were broad- cast over conventional television. (ii) If twenty-five (25) percent or more of the events in a category of non-specific events were broadcast live over conventional television in the market of the subscrip- tion television broadcast station during any one of the five (5) seasons preceding the proposed subscription broadcast, the number of events in the category broadcast on a subscription basis shall not exceed fifty (50) percent of the number of events in the category not broadcast in that season among the preceding five (5) seasons when the largest number of events in the category were broad- cast over conventional television. However, if the number of events in the category to be broadcast over conventional television in the current season is a reduction from the number of events broadcast in that season among the preceding five (5) seasons when the largest number of events in the category were broadcast, the number of events in the category which may be broadcast on a sub- 26 To understand the function of these rules, it is useful to trace their origins. The first application to establish a subscription broad- cast television service was filed with the Commission in 1952. After a series of administrative proceedings and hearings before Congress,“ the Commission announced in 1959 that it would license a number of trial systems in order to gather information about the technical and scription basis pursuant to this subparagraph shall be reduced in proportion to the reduction in events broadcast over conventional television. (c) Nocommercial advertising announcements shall be carried during subscription television operations except for promotion of subscription television broadcast pro- grams before and after such programs. (d) Not more than 90 percent of the total subscription programming hours shall consist of feature films and sports events combined. The percentage calculations may be made on a yearly basis, but, absent a showing of good cause, ti e percentage of such programming hours may not exceed 90 percent of the total subscription program- ing hours in any calendar month. (e) Any television broadcast station licensee or per- mittee authorized to broadcast subscription programs shall broadcast in addition to its subscription broadcasts, at least the minimum hours of nonsubscription pro- gramming required by § 73.651. (f) Except as they may be otherwise waived by the Commission in authorizations issued hereunder, the rules and policies applicable to regular television broadcast sta- tions are applicable to subscription television operations. 47 C. F. R. § 73.643 (1975), as amended by Second Report ard Order, supra note 5. ‘ ™ See 20 FED. REG. 988 n.1 (1955). See generally NATO v. FCC, supra note 5, 136 U.S. App. D.C. at 354, 420 F.2d at 196. 27 economic aspects of subscription television.“ In its Fourth Report and Order, 15 FCC 2d 466, issued in 1968, the Cormmission analyzed in detail results achieved in the Hartford, Connecticut trial system and concluded that permanent subscription operations should be authorized with certain limitations. For present purposes, the relevant limitations included restrictions on feature films, sports events, and series programs that could be shown for a fee, and prohibited commercial advertising during subscription operations.“ The purpose of these limitations was twofold. First, the Commission had agonized over both its authority to dedi- cate one or more channels from the electronic spectrum to subscription operations and the desirability of doing so. Such channels are scarce, and opponents of subscrip- tion television had argued that they should be used for conventional programming which would, of course, be free to all viewers.“ The Commission ultimately concluded that it had the required authority,“ a position sustained by this Court in National Ass’n of Theatre Owners (NATO) v. FCC, 136 U.S.App.D.C. 352, 420 F.2d 194 (1969), cert. denied, 397 U.S. 922 (1970), but that sub- scription service would not be desirable unless the pro- gramming presented was distinct from that on conven- tional advertiser-supported television.“ As a result, the Commission placed restrictions on the number of hours of feature films and sports programs, both readily avail- Third Report, 26 FCC 265 (1959), aff'd, Connecticut Committee Against Pay TV v. FCC, 112 U.S.App.D.C. 248, 301 F.2d 835, cert. denied, 371 U.S. 816 (1962). See 15 FCC 2d at 597-598. 18 See generally Fourth Report and Order, supra note 5, 15 FCC 2d at 466-488. % See First Report, 23 FCC 532, 536-540 (1957). * See Fourth Report, supra note 5, 15 FCC 2d at 483-488. 1 28 able on conventional television, that could be shown and prohibited commercial advertising in an effort to remove any economic pressure to appeal to a mass audience, a pressure to which the Commission attributed the same- ness of conventional television fare.“ A second reason for restricting the feature films, sports events, and series programs that could be shown on subscription television was the Commission’s fear that the revenue derived from subscription operations would be sufficient to allow sub- scription operators to bid away the best programs in these categories, thus reducing the quality of conventional tele- vision.“ By limiting the subscription operator to material that would not otherwise be shown on television, the Com- mission hoped both to prevent such “siphoning” “ and to enhance the diversity of program offerings on broadcast television as a whole. The cable television industry has a similarly lengthy technical and regulatory history. Starting in the 1940’s as community antenna television systems (CATV) de- signed to bring better or more distant broadcast signals into the home, cable systems developed through the 1960’s into media with enough channels to accommodate both retransmission of broadcast television programs and origi- nation of special services such as weather or stock ex- change reports.“ More recently, cable companies began eablecasting their own programs on channels not used 18 See id. at 474-488, 564-566. See also First Report and Order, supra note 2, 52 FCC 2d at 43, JA 67; Report and Order, 23 FCC 2d 382, 391-392 (1970) (Docket 12782). 1% See Fourth Report, supra note 5, 15 FCC 2d at 554-573. 20 In these proceedings the Commission has changed its vocabulary from the pejorative “siphoning” to the more neu- tral term “migration.” See Transcript of Oral Argument at 56, 57, 59. 22 See CABINET COMM. ON CABLE COMMUNICATIONS, REPORT TO THE PRESIDENT 10-11 (1974). 29 for retransmission services, and the abundance of chan- nels on modern systems (presently 35 or more) * promises that program origination will remain an important part of cable programming. The Commission’s regulation of cable television reflects its technological development. At first the Commission ‘eschewed regulation altogether.” However, as CATV sys- tems with multiple channels developed, the Commission asserted jurisdiction over cable operations to prevent fragmentation of audiences and revenues between local broadcasters and competing cable systems which were bringing distant broadcast signals into local markets.“ In 1968 the Commission launched a further, broad- ranging inquiry into the uses to which cable television might be put in the national communications network.” The outcome of these proceedings was a series of regula- tions which, among other things, required cable systems in major markets to provide cablecasting services, to set aside “access channels” on which members of the public could rent time to produce and transmit their own shows, and to furnish channels for government and educational use. The Commission specifically declined, however, to promulgate rules for cable television similar to those 22 See Transcript of Oral Argument at 43; br. for petitioner Home Box Office at 9. 23 See CABINET COMM. ON CABLE COMMUNICATIONS, supra note 21, at 10. ** See generally United States v. Southwestern Cable Co., 392 U.S. 157, 161-168 (1968). 0 Notice of Proposed Rulemaking and Notice of Inquiry, 15 FCC 2d 417 (1968). 20 First Report and Order, 20 FCC 2d 201, 223-225 (1969). The Commission also extended the equal time, sponsorship me py and fairness doctrines to cable television in this 30 adopted for subscription broadcast television. See First Report and Order, 20 FCC 2d 201, 204 (1969). The reasons given were that the Commission had no informa- tion which would indicate that pay cable television could penetrate any television market to the extent needed to “siphon” programming, see id. at 204 & n.4, and that the Commission would in any event be able to act in time to correct any adverse effects on conventional broad- casting, see id. at 204. Nine months later the Commission reversed its course and applied the rules developed in the subscription broad- east field to cable television. See Memorandum Opinion and Order, 23 FCC 2d 825 (1970): The reasons for such a quick reversal are not clear in the Order, and a number of the petitioners here filed petitions to reconsider im- position of the subscription broadcast rules on the ground that the Commission’s abrupt change of course was ar- bitrary and not adequately explained. See Notice of Proposed Rule Making and Memorandum Opinion and Order, 35 FCC 2d 893, 894 n.5 (1972), JA 2. These petitions for reconsideration were denied. See id. at 899, JA 7. In this same order Docket 19554, which spawned the orders reviewed here, was established. In its First Many parties to this proceeding, see, e.g., br. for respond- ent United States; br. for petitioner Home Box Office, = in- cluding the Commission itself, see br. for respondent FCC, have preseated arguments predicated on an assumption that it is appropriate for this court to review the validity of the pay cablecasting rules de novo, although other parties, see, e. g., br. of petitioner American Broadcasting Companies, Inc., appear to take the position that only the rather limited question of the validity of the relaxation of prior Commission rules is before this court. No party has addressed this problem expressly although the Commission, in In re Home Bor Office, Inc., supra note 5, 51 FCC 2d at 321, JA 145, takes the position that the rules promulgated in its Memorandum Opinion and Order in 31 Docket 18397, 23 FCC 2d 825 (1970), are final. Upon review of the record, we hold today that, as to pay cablecasting, the rules are before us for de novo consideration. The critical question is the effect of the Commission’s Notice of Proposed Rule Making and Memorandum Opinion and Order, 35 FCC 2d 893 (1972), JA 1. In that Order the Com- mission, after surveying points raised by the petitions for reconsideration before it (some of which were addressed to procedural infirmities and others to the substance of the Memorandum Opinion and Order in Docket 18397, supra), stated: 8. * * * [I]n view of the importance of the issue as against the paucity of prior comment and the indication that additional opportunity for comment will elicit useful new material, we have decided to issue a further Notice of Proposed Rule Making so that we may hear from all parties concerned and to reconsider the rules. 10. In light of our decision to allow for further com- ment on the pay-cablecasting rules, we think it unneces- sary to comment at length on the [substantive] issues raised in the reconsideration pleadings. * * * 35 FCC 2d at 896, 897-898, JA 4, 5-6 (emphasis added). Nonetheless, the Commission, [iln accordance with” the above quoted paragraphs, denied the petitions for reconsider- ation of its Memorandum Opinion and Order in Docket 18397. Id. at 899, JA 7. We think such a disp sition is fundamentally at odds with the purpose of reconsider. ‘ion as envisioned by $ 405 of the Communications Act, 47 J.S.C. § 405 (1970), and is also contrary to the Commission’s own rules, 47 C.F.R. § 1.106 (1975). Section 405 of the Communications Act provides in relevant part: * * * The filing of a petition for rehearing shall not be a condition precedent to judicial review of any * * * order, decision, report, or action, except where the party seeking such review (1) was not a party to the proceed- ings resulting in such order, decision, report, or action, or (2) relies on questions of fact or law upon which the Commission * * * has been afforded no opportunity to pass. The Commission * * * shall enter an order, with a concise statement of the reasons therefor, denying a 32 petition for rehearing or granting such petition, in whole or in part, and ordering such further proceedings as may be appropriate. * * * The obvious purpose of § 405 is to afford the Commission an opportunity to consider and pass upon matters prior to their presentation to the court. Joseph v. FCC, 131 U.S. App. D.C. 207, 210, 404 F.2d 207, 210 (1968) ; Gerico Investment Co. v. FCC, 99 U.S.App.D.C. 379, 380, 240 F.2d 410, 411 (1957) ; see Saginaw Broadcasting Co. v. FCC, 68 App.D.C. 282, 286, 96 F.2d 554, 558, cert. denied, 305 U.S. 613 (1938). To hold, as the Commission has done here, that further consideration of its order is needed but that the order is nonetheless final for purposes of judicial review is to thwart this fundamental! pur- pose of § 405. Moreover, had a party taken an immediate appeal from the Notice of Proposed Rule Making and Memo- randum Opinion and Order, supra, this court would in all likelihood have deferred consideration of that appeal until the Commission had finished its reconsideration of the rules in order to have the benefit of the further proceedings. See Wrather-Alvarez Broadcasting, Inc. v. FCC, 101 U.S.App.D.C. 324, 327, 248 F.2d 646, 649 (1957). Finally, the “concise statement of reasons” given by the Commission here is tan- tamount to the statement: We have denied your petitions for reconsideration because you have raisea such serious issues that we think the rules need to be reconsidered.” Surely, denial on these grounds is arbitrary, capricious, and in clear contravention of the purposes of § 405. We need not rely on § 405 alone, however, because the Com- mission’s own procedural rules disallow the disposition of the petitions for reconsideration made here. As we read § 1.106 of those rules, the Commission may dispose of petitions for reconsideration in only three ways. First, it may deny the petitions. 47 C.F.R. § 1.106(j) (1975). Second, it may grant? petition and make a ruling on its merits in the same order. /d. § 1.106(k) (1). Third, it may grant a petition but defer its ruling on the merits until after further proceedings. Id. § 1.106(k) (2). Here, however, the Commission has taken a fourth course—instituting further proceedings in order to rule on the merits of the petitions for reconsideration, but also denying the petitions. In contrast, in the same Notice of Pro- posed Rule Making and Memorandum Opinion and Order the Commission adopted the procedure set out in § 1.106(k) (2) with regard to its proceedings on subscription broadcast tele- 33 Report and Order in this docket, 52 FCC 2d 1 (1975), JA 25, the Commission re-adopted, with minor modifica- tions, the pay cable rules originally announced. Peti- tions for reconsideration of this Report and Order were denied, except to the extent that some petitioners sought to establish reporting requirements designed to enhance enforcement of the rules. Memorandum Opinion and Order, 54 FCC 2d 797 (1975), JA 117. Contemporane- ously the Commission issued a Second Further Notice of Proposed Rule Making, 52 FCC 2d 83 (1975), JA 107, eliciting additional information on the rules relating to vision. See 35 FCC 2d at 899, JA 7. We think the proper procedure here too would have been that set out in § 1.106(k) (2), and we therefore hold that the Commission’s order with respect to pay cablecasting must be read to be con- sistent with that section. In accordance with § 1.106(k) (2), therefore, we further hold that the orders entered in Docket 19554 are the rulings on the merits of the petitions for recon- sideration. Although we would normally be hesitant to decide the merits of an appeal where the briefs of the parties indicate a funda- mental confusion over the issues open on appeal, we do not think that our disposition of the procedural posture of this case is prejudicial to any of the parties before us. Although we do not have the benefit of a record of the proceedings in Docket 18397, which would normally be part of the record on an appeal from the grant of a motion to reconsider, the Com- mission has itself commented on the “paucity” of information in that record. See 35 FCC 2d at 896, JA 7. Moreover, many of the parties who took the position that the issue here was relaxation of prior rules in fact made arguments that were relevant only if the issue was de novo reconsideration. Fur- thermore, the Commission itself adequately represented those who would defend the rules on de novo review. For all foregoing reasons, we hold that the effect of our ruling today is to remove in toto all regulations of the Com- mission—now codified at 47 C. F. R. § 76.225 (1975)—regulat- ing program formats on pay cable television. 34 series programming.” On the basis of that information the Commission deleted any restriction on subscription use of series programs. Second Report and Order, —— FCC 2d ——, 35 P & F RADIO Rec, 2d 767 (1975), JA 131.” To understand the postulated “siphoning” phenomenon and its potential harm, it is useful to consider the struc- ture of the television industry today. In 1975 there were 70.1 million American homes with television sets, of which 9.8 million had access to some cable system.“ Al- though the number of cable subscribers is large, in- dividual cable systems are quite small, with the largest having only 101,000 customers and with only 224 of approximately 3,405 systems having more than 10,000 subscribers. The number of homes that presently have access to pay cable facilities is about a half million and is growing rapidly.“ Most of these homes are located outside major television markets, with the exception of the New York City area and parts of California.“ Ex- tension of service to other urban areas might be ac- complished at a capital cost of some $8 billion, but lay- 28 Series programs are those “with interconnected plot or substantially the same cast of principal characters.” 47 C. F. R. § 76.225(c), deleted by Second Report and Order, supra note 5. 2° See also note 5 supra. 0 STAFF OF SUBCOMM. ON COMMUNICATIONS OF HOUSE COMM. ON INTERSTATE AND FOREIGN COMMERCE, CABLE TELE- VISION: PROMISE VERSUS REGULATORY PERFORMANCE 11 (1976) (Subcomm. Print) (hereinafter cited as PROMISE VERSUS PERFORMANCE). Id. at 19. Id. at 17. Transcript of Oral Argument at 4, 27. Id. at 77. 35 ing cable to reach that half of the American popula- tion which lives in rural areas would by any estimate be extremely expensive, perhaps requiring an additional $240 billion.“ Because of these capital requirements, ex- tension of cable service with cablecasting capability to the country as a whole does not seem possible in the immediate future. Similarly, access of all Americans to cable seems fore- closed by the cost of cable service. Cable service charges are generally separated into two distinct fees, one basic fee entitling the viewer to receive only broadcast signals, the other entitling the viewer to see cablecast programs as well. The basic fee is approximately $5-$6 monthly.“ Technical capability exists today to distribute and bill for cablecast programs on a program-by-program basis, but this is not currently done. Instead a single fee of $5-$7 monthly, in addition to the basic fee, is charged for access to the cablecasting channels.“ Nonetheless, as the name of one petitioner suggests, it is quite literally possible to turn the home receiver into a “Home Box Office,” thereby marketing television features in much the same way that movies are marketed in theaters to- day. As with other box offices, however, only those with enough money to buy a ticket can get in to see the show. Siphoning is said to occur when an event or program currently shown on conventional free television is pur- chased by a cable operator for showing on a subscription cable channel. If such a transfer occurs, the Commission believes, the program or event will become unavailable for showing on the free television system or its showing on free television will be delayed (since the commercial Id. at 26. % PROMISE VERSUS PERFORMANCE, supra note 30, at 17. ** First Report and Order, supra note 2, 52 FCC 2d at 2, JA 26. 36 appeal of the cable showing is the assurance of earlier access to program material, an assurance that might it- self be brought about by agreement between the seller of the program or event and the subscription cable- caster).** In either case a segment of the American people—those in areas not served by cable or those too poor to afford subscription cable service—could receive delayed access to the program or could be denied access altogether. The ability of the half-million cable sub- scribers thus to preempt the other 70 million television homes is said to arise from the fact that subscribers are willing to pay more to see certain types of features than are advertisers to spread their messages by attaching them to those same features. For example, according to Commissioner Robinson,“ subscribers may be willing to pay 15 to 30 cents per viewing hour for the privilege of viewing a recent feature film, while advertisers are will- ing to pay only three cents per viewer. As a result a pay audience of one million could routinely buy a film away from a nonpaying audience of five to ten million. Whether such a siphoning scenario is in fact likely to oceur and, if so, whether the result of siphoning would be to lower the quality of free television programming available to certain areas of the country or to certain economic strata of the population are matters of great dispute among the Commission and the various petition- The position of the Commission is not clear. The concern in the subscription television proceeding was that material shown on subscription television would simply become un- available for conventional viewing. See Fourth Report and Order, supra note 5, 15 FCC 2d at 494-509. Here, at least with regard to feature films, the Commission seems to have identified the evil to be avoided as delay in showing a film on conventional television. See First Report and Order, supra note 5, 52 FCC 2d at 49-50 (162), JA 73-74. „First Report and Order, supra note 5, 52 FCC 2d at 77 (dissenting opinion), JA 101. 37 ers and intervenors seeking review of the Coimmission’s regulations in this case. Other petitioners both here and before the Commission argue that the rules which ostensi- bly place cable in a subordinate role in order to increase program diversity—a goal which has been basic to a number of Commission regulations “—in fact diminish diversity by prohibiting subscription cable operators from showing the programs that are most likely to be the fi- nancial backbone of a successful cable operation. As a result, it is claimed, cultural and minority programming that could otherwise “piggyback” on a cable system sup- ported by more broadly popular fare is precluded. In- deed, some petitioners argue that the subscription broad- cast television rules had the effect of killing that medium in its infancy by denying it access to necessary program- ming—a charge supported by the apparent lack of any viable commercial applications of subscription broadcast television today and left unrefuted by the Commission— and urge us not to let the Commission similarly snuff out pay cable. Finally, other petitioners take the position that the threat of siphoning is very real and that the Commission’s rules do not adequately cope with this threat to conventional television service. II. Pay CABLE RULES A. Statutory Authority In determining the Commission’s authorit, to promul- gate the pay cable rules, we by no means write on a clean slate. This court has recognized that the Communi- cations Act of 1934, 47 U.S.C. § 151 et seg., must be construed at least in some circumstances to allow the Commission to regulate cable television system opera- F. g., 47 C. F. R. § 76.201 (1974) (origination require- ments), removed, 39 FED. REG. 43310 (1974); 47 C. F. R. $ 73.658 (prime time access regulations). N 38 tions. See Carter Mountain Transmission Corp. v. FCC, 116 U.S.App.D.C. 93, 321 F.2d 359, cert. denied, 375 U.S. 951 (1963) ; Buckeye Cablevision, Inc. v. FCC, 128 U.S. App. D.C. 262, 387 F.2d 220 (1967). This view has been adopted by other Courts of Appeals, see, e.g., Amer- ican Civil Liberties Union v. FCC, 523 F.2d 1344, 1351 (9th Cir. 1975), and confirmed by the Supreme Court, see United States v. Midwest Video Corp., 406 U.S. 649 (1972); United States v. Southwestern Cable Co., 392 U.S. 157 (1968). As the Supreme Court explained in Southwestern Cable, supra, to construe the Communica- tions Act narrowly would be to defeat the purpose of Congress “ ‘to maintain, through appropriate administra- tive control, a grip on the dynamic aspects of radio trans- mission.’” 392 U.S. at 172, quoting FCC v. Pottsville Broadcasting Co., 309 U.S. 184, 188 (1940). Yet, de- spite the latitude which must be given the Commission to deal with evolving technology, its regulatory authority over cable television is not a carte blanche. Unless these regulations are “justified by reasons which are properly the concern of [the Commission], Hampton v. Mow Sun Wong, 426 U.S. 88, 116 (1976), they must be set aside. 1. The Standard for Determining Statutory Authority Midwest Video Corp. and Southwestern Cable Co. hold that the Commission may only exercise authority over cable television to the extent “reasonably ancillary” to the Commission’s jurisdiction over broadcast television. United States v. Southwestern Cable Co., supra, 392 U.S. at 178; United States v. Midwest Video Corp., supra, 406 U.S. at 670. See generally National Ass’n of Regulatory Utility Comm’rs v. FCC, 174 U.S.App.D.C. 374, 379. 380, 394-395, 401-406, 533 F.2d 601, 606-607, 621- 622, 628-633 (1976). This standard was first enunciated in Southwestern Cable Co., in which the Supreme Court was asked to pass on the Commission’s authority to pro- mulgate rules prohibiting importation of “distant sig- 39 nals” into the San Diego television market. 392 U.S. at 159-160. The purpose of these rules was to prevent division of audiences and revenues between cable televi- sion and fledgling UHF and educational television sta- tions. Competition by cable operators, the Commission feared, would make these new ventures unprofitable, thereby frustrating the Commission’s long-standing * and congressionally approved“ policy of attempting to pro- vide locally controlled broadcast television service. See 392 U.S. at 173-177. In finding that the Commission was authorized to pro- mulgate the challenged rules, the Southwestern Court first held that cable television was an instrument of “in- terstate and foreign communication by wire or radio” within the meaning of Section 2(a) of the Communica- tions Act of 1934, 47 U.S.C. § 152(a) (1970). 392 U.S. at 167-169. For this reason the Commission was held to have “regulatory authority” over cable television. /d. at 178. However, the Court chose not “to determine in de- tail the limits of the Commission’s authority to regulate „Distant signals are those which a viewer would not or- dinarily be able to receive without the assistance of a com- munity antenna television system. See United States v. Southwestern Cable Co., supra note 24, 392 U.S. at 174-176 & n.43. See generally R. NolL, M. Peck & J. MCGOWAN, ECONOMIC ASPECTS OF TELEVISION REGULATION 99-108 (1973). „The Southwestern Court referred a number of times to instances of congressional approval of the Commission’s policy of local control of broadcasting. See 392 U.S. at 173 & n.38; id. at 174 & n.39; ef. id. at 175-176 n.43. The Court also referred to congressional support for the Commission’s policy of encouraging UHF development, and read legisla- tion requiring television receivers shipped in interstate com- merce to have UHF capability, Pub. L. No. 87-529, 76 Stat. 150 (1962), as support for the Commission’s restrictions on cable. See 392 U.S. at 175 & nn.41 & 42. 40 [cable television!“ under Section 2(a). Id. at 178. In- stead, stressing that “ the achievement of an agency’s ultimate purposes’” was at stake, id. at 177, quoting Permian Basin Area Rate Cases, 390 U.S. 747, 780 (1968), the Court noted that the rules were “reasonably ancillary to the effective performance of the Commission’s various responsibilities for the regulation of television broadcasting,” id. at 178, and that to carry out such re- sponsibilities the Commission could issue ‘such rules and regulations and prescribe such restrictions and condi- tions, not inconsistent with law’ as ‘public convenience, intevest, or necessity requires.’” Id., quoting 47 U.S.C. § 303(r) (1970). In United States v. Midwest Video Corp., supra, a decision which affirmed the Commission’s jurisdiction by a narrow margin, a four-judge plurality of the Supreme Court again applied the “reasonably ancillary” standard to determine the scope of the Commission’s jurisdiction over cable television operations. Upholding the Commis- sion’s rules requiring operators of large cable systems to cablecast programs on some channels, the plurality reiter- ated that Section 2(a) conferred regulatory power on the Commission, but that “§ 2 (a) does not in and of itself prescribe any objectives for which the Comm. ssion's regu- latory power over [cable television] might properly be exercised.” 406 U.S. at 661. The plurality then stated that the test for determining whether a rule reflected a proper objective was whether it would “ ‘further the achievement of long-established regulatory goals in the field of television broadcasting.’” Id. at 667-668, quoting United States v. Southwestern Cable Co., supra, 392 U.S. at 654. Under this standard the Commission was held to be authorized to require cable program origination since such a requirement furthered Commission policies with respect to both enhancement of local service and diversification of control of available television and cable programming. See 406 U.S. at 668-670. 41 The deciding vote in Midwest Video Corp. was cast by Chief Justice Burger, who wrote: Candor requires acknowledgment, for me at least, that the Comm‘ssion’s position strains the outer lim- its of even the C n-ended and pervasive jurisdiction that has evolved by decisions of the Commission and the courts. * * * 406 U.S. at 676. Nonetheless, the Chief Justice was will- ing to uphold the challenged regulations on the ground that “when [cable system operators] interrupt the signal and put it to their own use for profit, they take on bur- dens, one of which is regulation by the Commission.” Id.“ Justice Douglas, writing for four dissenting Jus- tices, took yet a third position, apparently agreeing that the appropriate test for Commission jurisdiction was ex- pressed by the “reasonably ancillary” standard, but find- ing that to uphold the regulations challenged in Midwest would “make the Commission’s authority over activities ‘ancillary’ to its responsibilities greater than its author- ity over any broadcast licensee.” /d. at 681. The Supreme Court’s opinions in Southwestern Cable Co. and Midwest Video Corp. thus look in two directions. First, they recognize an expansive jurisdiction for the Commission based on Section 2(a) of the Communications Act and the need to give the Commission sufficient lati- tude to cope with technological developments in a rapidly changing field. But the opinions are also narrow. Even the broadest opinion, that of the plurality in Midwest Video Corp., recognizes that the Commission can act only for ends for which it could also regulate broadcast tele- „Were one to accept the Chief Justice’s theory of jurisdic- tion, the Commission’s rules wou:d have to be set aside with respect to access cablecasters, sce note 2 supra, who rent time from those who “interrupt the signal,” since there is no evidence in this record that these independent entrepreneurs are in any way subsidized by cable system owners who are the only legal entities offering retransmission services. 42 vision. Indeed, even this standard will be too commodious in certain cases, since as we discuss in Part III infra the scope of the Commission’s constitutionally permitted au- thority over broadcast television in areas impinging on the First Amendment is broader than its authority over cable television, Finally, the opinions in both cases go no far- ther than to allow the Commission to regulate to achieve “long-established” goals or to protect its “ultimate pur- poses.” That these cases establish an outer boundary to the Commission’s authority we have no doubt, cf. Na- tional Ass’n of Regulatory Utility Comm' rs v. FCC, supra; STAFF OF SUBCOMM. ON COMMUNICATIONS, COMM. ON INTERSTATE AND FOREIGN COMMERCE, CABLE TELEVI- SION: PROMISE VERSUS REGULATORY PERFORMANCE 80-83 (1976) (Subcomm. Print), and if judicial review is to be effective in keeping the Commission within that boun- dary, we think the Commission must either demonstrate specific support for its actions in the language of the Communications Act or at least be able to ground them in a well-understood and consistently held policy devel- oped in the Commission’s regulation of broadcast televi- sion, cf. Greater Boston Television Corp. v. FCC, 143 U.S. App. D.C. 383, 394, 444 F.2d 841, 852 (1970), cert. denied, 403 U.S. 923 (1971).* 2. Applying the Jurisdictional Standard The purpose of the Commission’s pay cable rules is to prevent “siphoning” of feature film and sports material from conventional broadcast television to pay cable.“ Al- Judge MacKinnon is of the view that the FCC's jurisdic- tion to regulate cablecasting in the interests of the broad- casting industry is restricted to instances where the cable stations substantially rely on broadcast signals or their activi- ties amount to unfair competition. As promulgated in the First Report and Order, supra note 2, the rules also applied to series programming. Since the rules have subsequently been amended to delete series programming restrictions, sec note 28 supra, we do not deal with this aspect of the rules here. 43 though there is dispute over the effectiveness of the rules, it is clear that their thrust is to prevent any competition by pay cable entrepreneurs for film or sports material that either has been shown on conventional television or is likely to be shown there.“ How such an effect furthers any legitimate goal of the Communications Act is not clear. The Commission states only that its “mandate to act in the public interest requires that [it] strive to maintain the public’s ability to receive the informational and entertainment programming now provided by con- ventional television at no direct cost,” First Report and Order, supra, 52 FCC 2d at 43, JA 67, and that its ac- tion “is designed to enhance the integrity of broadcast signals and is a proper execution of our responsibility under Section 2(b) [sic] of the Communications Act , id. at 45, JA 69. Insofar as the Commission places reliance on such con- clusory phrases as “enhance the integrity of broadcast signals,” we think it has crossed “the line from the tolerably terse to the intolerably mute.” Greater Boston Television Corp. v. FCC, supra, 143 U.S. App. D.C. at 394, 444 F.2d at 852. Beneath such generalities, however, the Commission seems to be making two more specific arguments which relate the public interest to retention of the conventional television structure. First, the Com- mission appears to take the position that it has both the See, e.g., First Report and Order, supra note 2, 52 FCC 2d at 51-55, JA 75-79. This position is most clearly ex- pressed in the Commission’s standard for waiving its film rules: [Waivers will be granted upon a convincing showing to the Commission that a film desired for subscription ex- hibition is not desired for exhibition over conventional television in the market, or that the owner of the film, even absent the existence of subscription television, would not make the film available to conventional tele- vision, Id. at 55, JA 79. 44 obligation and the authority to regulate program format content to maintain present levels of public enjoyment. For this reason, and because the Commission also seems to assert that the overall level of public enjoyment of television entertainment would be reduced if films or sports events were shown only on pay cable or shown on conventional television only after some delay, it con- cludes that anti-siphoning rules are both needed and au- thorized. Second, and closely related, is the argument pressed here by counsel for the Commission that Section 1 of the Communications Act, 47 U.S.C. § 151 (1970), man- dates the Commission to promulgate anti-siphoning rules since cable television cannot now and will not in the near future provide a nationwide communications service. See Transcript of Oral Argument at 57-58. Before con- sidering each of these arguments in turn, we note that we do not understand the Commission to be asserting that subscription cable television will divide audiences and revenues available to broadcast stations in such a manner as to put the very existence of these stations in doubt. See Memorandum Opinion and Order, supra, 54 FCC 2d at 800-802 (M 10, 11, 18), JA 120-122; Second Report and Order, supra, —— FCC 2d at ——, 35 P&F RADIO REG. 2p at 772, JA 136 (“[wle possess no evi- dence which indicates that the advertising revenues gen- erated by conventional television will be diminished as a result of subscription operations”). See also First Re- port and Order, 20 FCC 2d 201, 216-217 (1969). The Supreme Court’s opinion in Southwestern Cable Co. is not, therefore, directly applicable. The question of the Commission’s obligation or au- thority to regulate television to maintain public enjoy- ment is one whose analysis takes us into a thicket of disagreement between this court and the Commission. See Citizens Committee to Save WEFM v. FCC, 165 U.S. App. D.C. 185, 191-207, 506 F.2d 246, 252-268 (1974) (en banc). Although this controversy has taken place in the context of the Commission’s obligation to regulate 45 changes in radio broadcast formats, much of what has been said is directly relevant here.“ The traditional view of the Commission is well summarized by its then chairman, Dean Burch: It would be a simple matter for the Commission to dictate to each licensee of the 62 stations in the Chicago area which entertainment format each should use. Such an approach might maximize—at least in the short run—the diversity of formats and types of programming available to the public. But it would not be the approach contemplated by Con- gress when it created the Commission in 1934. Broad- cast stations are, of course, licensed to serve the public interest, but as the Supreme Court observed back in 1940, the Communications Act also “recog- nizes that the field of broadcasting is one of free competition.” In short, “(t]he regulatory responsi- bility of the Commission in the broadcast field essen- tially involves the maintenance of a balance between the preservation of a free competitive broadcast sys- tem, on the one hand, and the reasonable restriction of that freedom inherent in the public interest stand- ard provided in the Communications Act, on the other.” The Commission has struck this balance by re- quiring licensees to conduct formal surveys to as- certain the need for certain types of non-entertain- ment programming, while allowing licensees wide discretion in the area of entertainment program- ming. Thus with respect to the provision of news, public affairs, and other informational services to the community, we have required that broadcasters conduct thorough surveys designed to assure famili- arity with community problems and then develop „* The Communications Act does not expressly regulate television. Title III of the Act, which covers radio broad- casting, has been construed to cover television because § 3 (b) of the Act, 47 U.S.C. § 153 (b) (1970), defines “radio com- munication” to include transmission of pictures. 46 programming responsive to those identified needs. In contrast, we have generally left entertainment pro- gramming decisions to the licensee or applicant’s judgment and competitive marketplace forces. As the Commission stated in its Programming Policy Statement, 25 Fed. Reg. 7293 (1960), „ol ur view has been that the station’s [entertainment] program format is a matter best left to the discretion of the licensee or applicants, since as a matter of public acceptance and of economic necessity he will tend to program to meet the prefererves of his area and fill whatever void is left by the ; other stations.” * programming of Zenith Radio Corp., 40 FCC 2d 223, 230 (1973) (foot- notes omitted) .“ In addition, in many other proceedings the Commission has taken the position that the First Amendment and the anti-censorship provision of the Communications Act, 47 U.S.C. § 326 (1970), strip it of any authority to require or to prohibit broadcast of any particular material. See, e.g., Ad Hoc Comm. on the Sugar Bowl, 29 P & F RADIO REG. 2p 70 (1973) ; Broad- cast of Elections Projections, 38 FCC 2d 378 (1972): Washington Women’s Strike for Peace, 6 P & F Rapio REG. 2p 307, 308 (1965). As we understand the tradi- tional position of the Commission, therefore, it is that regulation of entertainment program format is incon- sistent with the Communications Act and is also un- necessary, but for reasons inapposite here. In WEFM this court en banc rejected the laissez faire approach of the Commission, holaing: ) There is a public interest in a diversity of broadcast entertainment formats. The disappearance of a dis- tinctive format may deprive a significant segment These views were not those of the Commission as a whole, but of only six commissioners. Nonetheless, the Commission as a whole has cited approvingly the argument quoted in text. See Notice of Inquiry, 57 FCC 2d 580, 580-581 (1976). 47 of the public of the benefits of radio, at least at their first-preference level. When faced with a pro- license assignment encompassing a format change, the FCC is obliged to determine whether the format to be lost is unique or otherwise serves a specialized audience that would feel its loss. If the endangered format is of this variety, then the FCC must affirmatively consider whether the public in- terest would be served by approving the proposed assignment, which may, if there are substantial questions of fact or inadequate data in the applica- tion or other officially noticeable materials, necessi- tate conducting a public hearing in order to resolve the factual issues or assist the Commission in dis- cerning the public interest. Finally, it is not suffi- cient justification for approving the application that the assignor has asserted financial losses in provid- ing the special format; those losses must be at- tributable to the format itself in order logically to support an assignment that occasions a loss of the format. 165 U.S.App.D.C. at 201, 506 F.2d at 262. Our position is thus unmistakable: The Communications Act not only allows, but in some instances requires, the Commission to consider the preferences of the public, and the Commis- sion in discharging this authority must regulate the entertainment programming which station owners can present whenever a significant segment of the public is threatened with the loss of a preferred broadcast format.* Were WEFM the last word, it is at least possible that the Commission could promulgate the anti-siphoning rules under the theory of jurisdiction recognized by the plurality in Midwest Video Corp., since the end to be achieved—protection of preferred television service for * Judge MacKinnon is of the view that Citizens Committee to Save WEFM v. FCC, 165 U.S.App.D.C. 185, 506 F.2d 246 (1974), constitutes a binding decision of this court, but he continues to adhere to the views he expressed in dissent when that decision issued. 165 U.S.App.D.C. at 224, 506 F.2d at 285. 48 those not served by cable television—would also justify regulation of the broadcast media.” The Commission has not, however, acquiesced in WEFM. Instead, it recently launched and concluded a proceeding on “Changes in the Entertainment Formats of Broadcast Stations.” See Notice of Inquiry, 57 FCC 2d 580 (1976); Memorandum Opinion and Order, 60 FCC 2d 858 (1976). Its conclusions there bear repeating in some detail. First, the Commission has reiterated its conclusion that it has no statutory authority to dictate entertainment formats. Format regulation, it is argued, is analogous to imposing common carrier responsibilities on broadcasters. Since Section 3(h) of the Communica- tions Act, 47 U.S.C. § 153(h) (1970), specifically ex- cludes broadcasters from the category of “common car- riers,” “Congress intentionally refrained from extending the full range of regulatory tools deemed appropriate for While WEFM offers some support for the Commission’s authority to promulgate anti-siphoning rules, the application of WEFM to cable television requires thought and argument going beyond anything said in that case. The facts of WEFM made it a particularly appropriate case for Commission in- tervention. At stake was a classical music format provided by only one other station in WEFM's service area. 165 U.S. App.D.C. at 193, 506 F.2d at 254. On the other hand, the “contemporary music” format proposed for WEFM was al- ready supplied in whole or in part by 13 of the Chicago area’s 61 radio broadcast stations. d. at 193 n.4, 506 V. 2d «> 254 n.4. In these circumstances, retentien <2 WEFM’s classical format raised no serious question of depriving other viewers of their favored formats and the proposed format change would only have added to an apparent surfeit of contempo- rary and rock music. Certainly a different case would have been presented were fewer stations involved (raising an issue of conflicts among the first preferences of viewers) or had WEFM proposed to offer another format in scarce supply. In addition, even if WEFM did provide statutory authority to the Commission to act as it has here, the constitutionality of the jurisdiction thus conferred is a wholly separate issue, to be analyzed under the principals set out in Part III infra. ——äͤ 2 ↄ 49 common carrier regulation to the field of broadcast regu- lation.” Memorandum Opinion and Order, supra, 60 FCC 2d at 859. In particular, “Congress did not enact [a] requirement that broadcasters receive Commission au- thority to commence or discontinue programming, in- cluding program format services, offered to the public. Id. This conclusion is further supported, in the Com- mission’s view, by Columbia Broadcasting System, Inc. v. Democratic National Committee, 412 U.S. 94 (1973), and FCC v. Sanders Brothers Radio Station, 309 US. 470 (1940). See 60 FCC 2d at 860-861. A second point relevant here is the Commission’s professed inability to determine the boundaries of a “particular entertainment format.” Id. at 862. “The Commission does not know, as a matter of indwelling administrative expertise, whether a particular format is ‘unique’ or, indeed, assuming that it is, whether it has been deviated from by a licensee.’ Id. In any case, concludes the Commission, “|ijt is im- possible to determine whether consumers would be better off [with any particular format] without reference to the actual preferences of real people.” Id. at 864. If the Commission’s own recently announced standards are applied to the rules challenged here, it seems clear that the rules cannot stand. The very essence of the feature film and sports rules is to require the permis- sion of the Commission “to commence * * * program- ming, including program format services, offered to the public.” However, it has been the consistent position of the Commission itself that cablecasters, like broadcasters, are not to be regulated as common carriers, a view sus- tained by a number of courts. See, e. g., American Civil Liberties Union v. FCC, supra, 528 F.2d at 1344; Phila- delphia Television Broadcasting Co. v. FCC, 123 US. App.D.C. 298, 359 F.2d 282 (1966). Moreover, given the similarities between cablecasting operations and broad- casting, we seriously doubt that the Communications Act could be construed to give the Commission “regulatory tools” over cablecasting that it did not have over broad- 50 In analyzing the feature film and sports rules under the standards announced by the Commission in its broad- cast format change proceeding, we do not wish to imply that we have reconsidered the position of this court in WEFM. The sole purpose of undertaking this analysis is to demonstrate that the Commission has, in this pro- ceeding, seemingly backed into an area of regulation in which it would not assert jurisdiction were it to face the issues directly. Indeed, in this very proceeding, and despite the Commission’s definition of current quantity and quality levels of films and sports events as the minimum level consistent with adequate television serv- ice, there is no indication that the Commission is pre- pared to require broadcasters to continue to present ma- terial presently on conventional television. See br. for respondent United States at 23; reply br. for petitioner Motion Picture Association of America at 3-4. In the absence of this court’s opinion in WEFM, these unex- plained inconsistencies in agency policy would require us to set aside the Commission’s rules and remand the case to the agency to allow it to “supply a reasoned analysis indicating that prior policies and standards are being deliberately changed, not casually ignored.” Greater Boston Television Corp. v. FCC, supra, 143 U.S.App. D.C. at 394, 444 F.2d at 852; accord, New Castle County Airport Comm’n v. CAB, 125 U.S.App.D.C. 268, 270, 371 F.2d 733, 735 (1966), cert. denied, 387 U.S. 930 (1967). Because we understand the Commission’s Memorandum Opinion and Order in the format change proceeding to constitute a request to this court to reconsider its posi- tion in WEFM, see 60 FCC 2d at 865-866, and because As we have already indicated, see note 49 supra, WEFM only lends support to Commission jurisdiction and does not control it. Accordingly, there is no need for us to reconsider WEFM. Moreover, we decline to consider whether WEFM should be extended into the cable television context since the Commission itself has argued that WEFM should be confined rather than extended. 51 casting. See pages 33-34 supra. Thus, even if the siphon- ing rules might in some sense increase the public good, this consideration alone cannot justify the Commission’s regulations. See generally Hampton v. Mow Sun Wong, supra. In addition, the record before us is devoid of any “reference to the actual preferences of real people.” While we would be willing to concede that certain for- mats, such as the World Series, are sufficiently unique and popular that a factual inquiry into actual preferences might not be required, this would not seem to be the case with either feature films or “non-specific” sports events.” Moreover, there is not even speculation in the record about what material would replace that which might be “siphoned” to cable television. Without such a comparative inquiry, we do not understand how the Com- mission could define the current level of programming as a baseline for adequate service. Finally, with regard to feature films we question how the Commission, which has stated that it has no criteria by which to distinguish among formats, could have determined that feature films are a sufficiently unique format to warrant protection. The record demonstrates that broadcasters are increas- ingly substituting made-for-television movies—for which “siphoning” is not a problem since the broadcasters own the copyrights—for feature films. See, e.g., First Report and Order, supra, 52 FCC 2d at 26, JA 50. The in- ference from this would seem to be that the Commis- sion has drawn its categories too narrowly and that a feature film rule may not really be necessary to en- sure broadcast presentation of popular movie material. Whether or not this is the case, the inference is cer- tainl, oo strong to be dismissed, as the Commission has done heve, without discussion. % Non-specific sports events are essentially those that occur during regular season play. See First Report and Order, supra note 2, 52 FCC 2d at 59, JA 33. 52 we are hesitant to approve rules which seem incon- sistent with the Commission’s best thinking in a closely analogous area, we think we should not affirm the feature film and sports regulations on the basis of WEFM. Before reaching a conclusion on whether remand is necessary, however, we must consider the Commission’s second theory of jurisdiction.” Our analysis is hampered by the failure of the Commission to make clear its argu- ment that Section 1 of the Communications Act,” as interpreted by this court in NATO v. FCC, supra, re- quires rules against “siphoning” of material away from free television. In the subscription broadcast proceeding the petitioning theater owners sought to block that part of the Commission’s subscription television rules which permitted subscription television by arguing that Section 1 of the Act prohibited the Commission from withdraw- ing one channel from the broadcast spectrum for use by only the few who might be willing to pay for the privi- lege of receiving broadcast signals. See First Report, 23 FCC 582, 536-540 (1957). The Commission, in dis- missing such an interpretation of the Act, stated: [Section 1 has] been relied on in support of an argu- ment to the effect that the Act did not contemplate or permit, and in fact bars authorization by the In large part this argument appears to be a post hoc ra- tionalization of counsel which, of course, could not provide a basis for sustaining the Commission. See Burlington Truck Lines, Inc. v. United States, 371 U.S. 156, 168-169 (1962). Section 1 provides in relevant part: For the purpose of regulating interstate and foreign commerce in communication by wire and radio so as to make available, so far as possible, to all the people of the United States a rapid, efficient, Nation-wide, and world-wide wire and radio communication service with adequate facilities at reasonable charges, * * * there is created a commission to be known as the “Federal Com- munications Commission” * * *, 47 U.S.C. § 151 (1970). 53 Commission of a program service, by broadcast sta- tions, which would be available only to such mem- bers of the public as were able and willing to pay a charge. We believe, however, that such a construc- tion cannot reasonably be made of these excerpts. Section 1 states the general purposes of the Act in broad terms. The reference to “all the people of the United States” does not, for example, preclude licensing the use of radio frequencies for the safety and special radio services. Frequencies so allocated are not available to all the people of the United States. While the words “at reasonable charges” evidently refer to the Commission’s regulation of rates charged by common carriers for message com- munications, and does not, presumably, refer to charges for programs disseminated over broadcast stations, it may be noted that this express reference to charges is unaccompanied by any prohibitive lan- guage concerning charges for programs transmitted by broadcast stations. Id. at 588. In NATO this court, after reviewing the legislative history of the Communications Act, 136 U.S. App. D.C. at 358-360, 420 F.2d at 200-202, agreed, find- ing that the Act did not prohibit licensing of subscrip- tion television services, but was indeed “designed to foster diversity in the financial organization and modus operandi of broadcasting stations as well as in the content of programs * * *.” 136 U.S.App.D.C. at 360, 420 F.2d at 202. Thus, as interpreted by both this court and the Commission, Section 1 does not itself compel the Com- mission to protect conventional advertiser-supported tele- vision broadcasting. However, counsel for the Commission at oral argu- ment appeared to be making a second argument about the meaning of Section 1. Stressing that Section 1 also mentions that the Commission is to foster “Nation-wide” eT 54 service, counsel argued that cable could not be a nation- wide service in the reasonably foreseeable future and that “siphoning” would, therefore (the logic behind this “therefore” is by no means clear), destroy nationwide service in contravention of the policy of Section 1. See Transcript of Oral Argument at 57-58. We need not consider whether Section 1 can be so construed since counsel’s argument is nothing more than a naked allega- tion, unsupported in the record. Indeed, the Commis- sion has nowhere spelled out even a theory of the dy- namic which could result in loss of broadcast television service to regions not served by cable. Nor is such a dynamic readily apparent. For example, cablecasters are unlikely to withhold feature film and sports material from markets they do not serve since broadcast of this material in such markets could not reduce the potentia! cable audience and because exhibition rights to this ma- terial would undoubtedly have substantial value. In these circumstances, the postulated loss of regional service is too speculative to support jurisdiction. See City of Chi- cago v. FPC, 147 U.S.App.D.C. 312, 328, 458 F.2d 731, 742 (1971), cert. denied, 405 U.S. 1074 (1972). Finally, none of the suggested bases for Commission jurisdiction justifies imposition of the no- advertising“ See note 53 supra. * No commereial advertising announcements shall be carried on subscription channels during such operations except before and after such programs for promotion of other programs for which a per-program or per-channel charge is made. 47 C.F.R. § 76.225(e) (1975), as amended by Second Report and Order, —— FCC 2d ——, 35 P & F RADIO REc. 2D 767 (1975). 55 and 90-percent “ rules on cable television. These rules evolved out of the subscription broadcast television pro- ceeding, see Fourth Report and Order, supra, 15 FCC 2d at 484, and were retained here apparently because they raised “little dissent.“ See First Report and Order, supra, 52 FCC 2d at 66, JA 90. The reasons for which these rules were adopted in the subscription television pro- ceeding are not applicable here, however. In the sub- scription proceeding the Commission determined that the public interest would not be served if one of very few available broadcast channels was allocated to subscription television unless subscription television offered services distinct from conventional advertiser-supported broadcast- ing. See 15 FCC 2d at 484. To ensure such a “supple- mental” role for subscription television, advertising was prohibited and the broadcast time that could be allocated to sports and feature films—which were already avail- able on conventional television—was limited to 90 per- cent of subscription broadcast time. When these rules were reviewed by this court, it was again in the context of a need to allocate scarce spectrum resources. See NATO v. FCC, supra, 136 U.S. App. D. C. at 365-366, 420 F.2d at 207-208. Such an allocation problem is clearly not involved in this case. Moreover, given the abundance of channels that cable systems can carry, plus the Com- mission’s rules requiring governmental, educational, and public access channels on every cable system carrying broadcast signals, we do not understand the need to Not more than ninety (90) percent of the total cable- cast programming hours shall consist of feature films and sports events combined, * * * 47 C. F. R. § 76.225 (d) (1975), os amended by Second Re- port and Order, ——— FCC 2d , 35 P & F Rapio REG. 2D 767 (1975). * 47 C. F. R. §§ 76.251, 76.253 (1975). 56 restrict feature film and sports programming time to create the technical conditions for diversity. Without further explanation of the function these rules are meant to serve, we cannot affirm the Commission’s authority to promulgate them, Although we hold today that the Commission has not established its jurisdiction on the record evidence be- fore it, we think it important to note the limits of our holding. We do not hold that the Commission must find express statutory authority for its cable television regu- lations. Such a holding would be inconsistent with the nature of the FCC’s organic Act and the flexibility needed to regulate a rapidly changing industry. How- ever, we do require that at a minimum the Commission, in developing its cable television regulations, demonstrate that the objectives to be achieved by regulating cable television are also objectives for which the Commission could legitimately regulate the broadcast media. Where the First Amendment is involved, more will be required. See Part III infra. Further, we require that the Com- mission state clearly the harm which its regulations seek to remedy and its reasons for supposing that this harm exists. Because our holding is so limited, it is possible that the Commission will, after remand, be able to satisfy the jurisdictional prerequisites for regulating pay cable television. In order to avoid multiple remands, therefore, we will now consider other objections raised against these rules. B. The Evidence 1. Standard of Review With the exception of the Commission’s ruling in /n re Home Box Office, Inc., 51 FCC 2d 317 (1975), JA 141, each of the orders challenged here is the product of rule- making under Section 303 of the Communications Act, 57 47 U.S.C. § 303 (1970). Because the statute does not otherwise indicate, this rulemaking is also informal rule- making governed by Section 4 of the Administrative Pro- cedure Act (APA), 5 U.S.C. § 553 (1970), see id. § 553 (a); Ethly Corp. „. EPA, —— U.S. App. D. C. . ——, 541 F.2d 1, 33-34 (1976) (en banc), and the ap- propriate standard of review is that set out in Section 10 of the APA, 5 U.S.C. § 706 (2) (A)-(D) (1970), see Ethyl Corp. v. EPA, supra, —— U.S. App. D. C. at ——~—, 541 F.2d at 33-34; National Ass’n of Food Chains, Inc. „. ICC, —— U.S. App. D.C. , 535 F. 2d 1308, 1313-1314 (1976). See generally Pedersen, Formal Records and Informal Rulemaking, 85 YALE L. J. 38 (1975); Wright, The Courts and the Rulemaking Process: The Limits of Judicial Review, 59 CORNELL L. Rev. 375 (1974). We have recently had occasion to review at length our obligation to set aside agency action which is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law * *,.” 5 U.S.C. § 706 (2) (A), see Ethyl Corp. v. EPA, supra, —— U.S.App.D.C. at ——, 541 F.2d at 33-37, and for this reason we need not labor our aanlysis here. It is axiomatic that we may not substitute our judgment for that of the agency. Citi- zens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 416 (1971). Yet our review must be “searching and careful,” id., and we must ensure both that the Com- mission has adequately considered all relevant factors, see id., and that it has demonstrated a “rational con- nection between the facts found and the choice made,“ Burlington Truck Lines, Inc. v. United States, 371 U.S. 156, 168 (1962). Equally important, an agency must comply with the procedures set out in Section 4 of the APA. Citizens to 58 Preserve Overton Park, Inc. v. Volpe, supra, 401 US. at 417. The APA sets out three procedural require- ments: notice of the proposed rulemaking, an opportunity for interested persons to comment, and “a concise general statement of (the] basis and purpose” of the rules ulti- mately adopted. 5 U.S.C. § 553(b)-(c). As interpreted by recent decisions of this court, these procedural re- quirements are intended to assist judicial review as well as to provide fair treatment for persons affected by a rule. See Portland Cement Ass’n v. Ruckelshaus, 158 U.S. App. D.C. 308, 326-327, 486 F.2d 375, 393-394 (1973), cert. denied, 417 U.S. 921 (1974) ; Inter iational Harvester Co. v. Ruckelshaus, 155 U.S. App. D. C. 411, 445, 478 F.2d 615, 649 (1973); Automotive Parts & Accessories Ass’n v. Boyd, 132 U.S. App. D.C. 200, 208, 407 F.2d 330, 338 (1968). See also Wright, supra, 59 CORNELL L. REV. at 380-381. To this end there must be an exchange of views, information, and criticism between interested per- sons and the agency. See Portland Cement Ass'n v. Ruckelshaus, supra, 158 U.S.App.D.C. at 326-327, 486 F.2d at 393-394; ef. National Nutritional Foods Ass'n v. Weinberger, 512 F.2d 688, 701 (2d Cir.), cert. denied, 423 U.S. 827 (1975). Consequently, the notice required by the APA, or information subsequently supplied to the public, must disclose in detail the thinking that has animated the form of a proposed rule and the data upon which that rule is based. Portland Cement Ass’n v. Ruckelshaus, supra, 158 U.S. App. D.C. at 325-327, 486 F.2d at 392-394; International Harvester C.. v. ?uckel- shaus, supra, 155 U.S.App.D.C. at 445, 47° ¥.2! 649. Moreover, a dialogue is a two-way sty.%: th por- tunity to comment is meaningless unless the agency re- sponds to significant points“ raised by the public. Port- „ In determining what points are significant, the “arbi- trary and capricious” standard of review must be kept in mind. Thus only comments which, if true, raise points rele- vant to the agency’s decision and which, if adopted, would 59 land Cement Ass’n v. Ruckelshaus, supra, 158 U.S.App. D.C. at 326-327, 486 F.2d at 393-394. A response is also mandated by Overton Park, which requires a reviewing court to assure itself that all relevant factors have been considered by the agency. See 401 U.S. at 416; accord, Duquesne Light Co. v. EPA, 522 F.2d 1186, 1196 (3d Cir. 1975), vacated on other grounds, —— U.S. —~—, 96 S.Ct. 3185 (June 28, 1976). From this survey of the case law emerge two dominant principles. First, an agency proposing informal rule- making has an obligation to make its views known to the public in a concrete and focused form so as to make criticism or formulation of alternatives possible. Second, the “concise and general” statement that must accompany the rules finally promulgated must be accommodated to the realities of judicial scrutiny, which do not contemplate that the court itself will, by a laborious examination of the record, formulate in the first instance the significant issues faced by the agency and articulate the rationale of their resolution. * * * [The record must] enable us to see what major issues of policy were ventilated by the informal proceedings and why the agency reacted to them as it did. Automotive Parts & Accessories Ass’n v. Boyd, supra, 132 U.S.App.D.C. at 208, 407 F.2d at 388; accord, National Nutritional Foods Ass’n v. Weinberger, supra, 512 F.2d at 701; Pillai v. CAB, 158 U.S. App. D.C. 239, 244-252, 485 F.2d 1018, 1023-1031 (1973); National Air require a change in an agency’s proposed rule cast doubt on the reasonableness of a position taken by the agency. Moreover, comments which themselves are purely speculative and do not disclose the factual or policy basis on which they rest require no response. There must be some basis for thinking a position taken in opposition to the agency is true. See Portland Cement Ass’n v. Ruckelshaus, 158 U.S. App. D.C. 308, 326-327, 486 F.2d 375, 393-394 (1973). 60 Carriers Ass’n v. CAB, 141 1 me 2d 185, 198-199 (1970); cf. Camp v. 0 . a 142-143 (1973) ; Citizens to Preserve Overton Park, Inc. v. Volpe, supra, 401 U.S. at 420. 2. Applying the Standard (a) The Need for Regulation At the outset, we must consider whether the a. sion has made out a case for undertaking * N bs 4 all since a “regulation perfectly reasonable an 15 = ate in the face of a given problem may be a. pricious if that r Z R.. ew * cya A 147 U.S. App. D. C. 1 : oan ae Commission has framed the problem it is addressing as uA how cablecasting can best be regulated - — beneficial supplement to over-the-air * — without at the same time undermining the con operation of that “free” television service. Notice of Proposed Rule Making and rr — ion and Order, supra, 35 FCC 2d at 898, JA 6. 7 — the problem this way, however, is to gloss over e — that the Commission has — no — ayy — 4 — television must be a sup » rath — broadcast television. Such an artificial — rowing of the scope of the regulatory problem — re arbitrary and 1 — * = — illai v B. supra, 8. D. C. 2 „ 48! ö — ponte nny by narrowing its 2 N — way the Commission has —.— to 33 a 4 about “siphoning. : peor wee as selective bidding away 1 — ming from conventional television, see First f aif “« Order, supra, 52 FCC 2d at 49, JA 73, sometimes = 2 see id. at 50, JA 74, and sometimes (perhaps) Ae nancial collapse of conventional broadcasting, compare 1d. 61 at 45, JA 69, with Second Report and Order, supra. FCC 2d at , 35 P & F Rapio Rec. 2p at 772, JA 136. As a result, informed criticism has been precluded and formulation of alternatives stymied.” Setting aside the question whether siphoning is harm- ful to the public interest, we must next ask whether the record shows that siphoning will occur. The Commission assures us that siphoning is “real, not imagined.” First Report and Order, supra, 52 FCC 2d at 50, JA 74. We find little comfort in this assurance, however, because the Commission has not directed our attention to any com- ments in a voluminous record which would support its statement. Moreover, whatever evidence the Commission thought it had was self-admittedly insufficient to give it a “clear picture as to the effects of subscription tele- vision upon conventional broadcasting.“ Id. at 49, JA This deficiency was brought to the attention of the Com- mission by, among others, the Justice Department: [Blefore the question posed [as to the existence of al- ternatives] can be answered, the Commission must de- fine exactly what public interests it seeks to protect. Un- til such a determination is made, the Commission cannot conclude whether there exists a “less restrictive” means of serving the public interest. To date, the Commission has not demonstrated exactly what public interest it advances by retarding pay cablecasting. Comments of the Department of Justice in Docket No. 19554, at 26, JA 251 (Nov. 1, 1972) (emphasis in original). % The Commission’s lack of a clear picture is directly at- tributable to its own choice to regulate rather than allow a period of unregulated experimentation in which data could be generated that could form a predicate for informed agency action. This decision was taken over the objections of a number of parties to this proceeding. See, e. g., Reply Com- ments of the United States Department of Justice in Docket No. 19554, at 13, JA 280 (Oct. 4, 1974); Comments of Walter S. Baer, Henry Geller, and Leland L. Johnson Docket No. 19554, at 11-14, JA 293-296 (Sept. 20, 1974). The sole basis RS 62 73. Our own review of the First Report and the joint appendix filed in these cases suggests that, if there is any evidentiary support at all, it is indeed scanty. As to the potential financial power of cable television we are left to draw the inference from two facts—that championship boxing matches often appear only on closed-circuit tele- vision in theaters and that Evel Knievel chose to televise his jet-cycled dive into the Snake River in the same fash- ion—and a series of mathematical demonstrations. See id. at 9, JA 33. See also Memorandum Opinion and Order, supra, 23 FCC 2d at 828 n.6 (Docket 18397) (reliance on mathematical demonstration). While the former may be directly relevant to siphoning of what the Commission has characterized as “specific” sports events, it is not at all clear what light they shed on the question of who for the Commission’s choice to go forward is the conclusory statement that action was needed at a ‘time when it in- volves no disruption of existing patterns.’” First Report and Order, supra note 2, 52 FCC 2d at 49, JA 73, quoting Memorandum Opinion and Order, 23 FCC 2d 825, 828 (1970) (Docket 18397). However, this position is precisely the op- posite of that the Commission took in its First Report and Order in Docket 18397, 20 FCC 2d 201 (1969), see notes 5 & 27 supra. There the Commission expressly refused to impose regulations like those challenged here until it gained “some further experience in this area.” Id. at 204. In particular, the Commission noted that there was no “trend calling for action in the public interest,” id., and that the data de- veloped in the subscription broadcast television proceeding was not apposite, id. The Commission has not called our attention to any data which would fill the gaps in its ex- perience identified in 1969, and we can find none in the record. In this state of affairs, where there is no evidence of any urgent need for preventive action and where approval of the Commission’s position would foreclose the possibility that data could be generated in the future that would allow fully informed decisicnmaking, we are disinclined to give the Com- mission the “benefit of the doubt” which it argues it should have. See br. for respondent FCC at 52-53. 63 is going to pay how much to see feature films and non- specific sports events on pay cable.“ The meaning of the various mathematical demonstra- tions is even less certain. Petitioner American Broad- casting Companies, Inc., for example, has proposed the following technique for estimating the relative income available to cable and conventional television: 30. The most comprehensive attempt to develop a methodology for making this comparison is con- tained in the reply comments of the American Broadcasting Company. It there developed a formula for estimating the pay cable dollars available for the purchase of any particular program. The for- mula, in somewhat simplified terms, is as follows: (Total households) x (percent of households with tv sets) x (percent of households with tv sets that are cable tv subscribers) x (percent of cable tv subscribers that have pay cable op- tion available) x (percent of subscribers with pay option that are pay subscribers) x (percent of pay subscribers that view program in ques- tion) x (charge to subscriber for program) x (percent of subscription charge passed through to program supplier)==(total national pay cable dollars available for the purchase of program in question). ABC’s own assumptions as to the state of the pay cable television industry in 1980 are as follows: e Specific sports events are defined in the First Report and Order, supra note 2, 52 FCC 2d at 59-60, JA 83-84, and in 47 C. F. R. 88 76.225 (b) (1)-(b) (2) (1975). The record reveals that evidence relating to the siphoning of nonspecific sports events is scanty but that available data indicate “that there has been no interference with established over-the-air broad- casting patterns.” Comments of Professional Baseball in Docket 19554, at 28, JA 1069 (Sept. 20, 1974). 64 TE RS RE SET ATED BN ee BE Wie Ae 75,400,000 TV set penetration 1 percent. 97 ß. 1 35 CATV penetration with pay TV potential do- 80 Pay subscriber penetration of systems reer. 22 15 Percent of pay subscribers viewing r a 50 Charge to subscriber for program dollars.... 2.25 Percent of pay fee collected passed on to program producers percent... 35 In the circumstance posited by ABC, slightly more than 1.5 million homes would pay $2.25 each for a particular program making available slightly more tha[n] $1.2 million dollars to the pay cable industry for the purchase of the program in question. This, ABC suggests, compares with the $1.5 million dol- lars a network might pay for two showings of a “blockbuster” feature film like Love Story during a five-year period, and with the $1 million dollars that might be paid for a movie of somewhat less appeal. First Report and Order, supra, 52 FCC 2d at 9-10, JA 33-34. From this demonstration American Broadcasting Companies and other petitioners who presented similar mathematical models would draw the conclusion that [play cable operations will have more money than television stations or television networks to purchase programming and, being creatures of a competitive economic system, will inevitably purchase much of the best programming now broadcast on free televi- sion and leave free television only with what is left our.” * * Id. at 10, JA 34. Even conceding the accuracy of the figures used (a concession which finds no support in the record, how- ever), we think the proponents of the mathematical models have not proved their case. The problem is the incommensurability of the ultimate figures compared: na- tionwide income of pay cablecasters in 1980 on the one —QUU—U—ʒñũ̃. U 2 ——— — —— — —— 65 hand, and recent, but historical,“ network expenditures on the other.“ It seems patently obvious that no com- parison is valid unless financial figures are extrapolated to the same year. More important is the potential for distortion introduced into the comparison by using income on one hand versus expenditure on the other. The Justice Department and other petitioners have repeatedly pointed out that the conventional television industry is highly concentrated and is, therefore, likely to enjoy sub- stantial monopoly and monopsony power. See, e.g., Com- ments of the United States Department of Justice in Docket No. 19554, at 20, JA 168 (April 7, 1969) ; Com- ments of the United States Department of Justice in Docket No. 19554, at 15-16, JA 194-195 (Sept. 5, 1969). Evidence consistent with such an inference is readily available. For example, Noll, Peck and McGowan report that television broadcast stations enjoyed a 20 percent return on sales in 1969 versus eight percent for all manu- facturing industry“ and suggest that this is evidence that “competition is less rigorous in television than else- where in the economy.“ To be sure, television and man- ufacturing are very different industries, and had the Commissicn evaluated and rejected the arguments of the Justice Department and others a different question The precise date of network expenditure data is not clear. American Broadcasting Companies’ presentation to the Commission used 1972 data. See Further Comments of Amer- ican Broadcasting Companies, Inc. in Docket No. 19554, at 14, JA 698 (Sept. 20, 1974). In general, data contemporaneous with the date of comment submission seem to have been used. The deficiencies noted here were pointed out to the Com- mission in Comments of Optical Systems Corp. in Docket No. 19554, at 22, JA 1002 (Sept. 20, 1974). R. NOLL, M. PECK & J. MCGOWAN, supra note 42, at 16. The National Association of Broadcasters has estimated that 1975 profit margins will average 18.9 percent. See Broad- casting, July 26, 1976, at 19. % R. NOLL, M. PECK & J. MCGOWAN, supra note 42, at 17. 66 would be presented on this review. But the Commission did not consider whether conventional television broad- casters could pay more for feature film and sports ma- terial than at present without pushing their profits be- low a competitive return on investment and, conse- quently, it could not properly conclude that siphoning would occur because it could not know whether or how much broadcasters, faced with competition, would in- crease their expenditures by reducing alleged monopoly profits. Since the Commission did not assess either po- tential distorting effect of the comparison offered by the broadcasters, any conclusion it may have drawn from this evidence would be arbitrary. We have similar difficulties with the second cardinal assumption of the Commission, i.e., that “siphoning” would lead to loss of film and sports programming for audiences not served by cable systems or too poor to subscribe to pay cable. See Transcript of Oral Argument at 61-62; br. for respondent FCC at 53-54. To reach such a conclusion the Commission must assume that cable firms, once having purchased exhibition rights to a pro- gram, will not respond to market demand to sell the rights for viewing in those areas that cable firms do not reach. We find no discussion in the record supporting such an assumption. Indeed, a contrary assumption would be more consistent with economic theory since it would prima facie be to the advantage of cable operators to sell broad- cast rights to conventional television stations in regions of the country where no cable service existed. Moreover, the greater the area not covered by cable, the greater the demand would tend to be for broadcast rights, and the more likely it would be that, through a combination of cable and broadcast, nationwide coverage would be achieved. We find the Commission’s argument that “siphoning” could lead to loss of programming for those too poor to purchase cable television more plausible. Here again, 67 however, we find that the Commission has not documented its case that the poor would be deprived of adequate tele- vision service and, worse, that the Commission, by pro- hibiting advertising in connection with subscription op- erations, has virtually ensured that the price of pay cable will never be within reach of the poor. There is little disagreement at the theoretical level about the mechanism through which the poor would be deprived of broadcast service in markets served by cable television. Cable op- erators, to be able to sell a show, would require exclusive exhibitions rights in the markets they served, with the result that events purchased by cable operators for sub- scription presentation would be unavailable to broad- casters, or would be available only after a delay. What follows from this scenario, even assuming that cable operators would have the financial strength to outbid broadcasters, is by no means clear. There is uncontra- dicted evidence in the record, for example, that the popu- larity of film material does not decline with an increase in the interval between first theater exhibition and first television broadcast. See Comments of Program Suppliers in Docket No. 19554, at 21, JA 386 (Nov. 1, 1972). At least as to movies, therefore, “siphoning” [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385004_1959%3A2. Public record. Not legal advice.