Amicus Curiae Brief — TCI Cablevision, Inc. v. Central Telecommunications, Inc.

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IN THE

Supreme Court of the United States

OCTOBER TERM, 1986

TCI CABLEVISION, INC.,

COMMUNITY TELE-COMMUNICATIONS, INC.,

and TELE-COMMUNICATIONS, INC.,

Petitioners,

V.

CENTRAL TELECOMMUNICATIONS, INC.,

Respondent.

On Petition for a Writ of Certiorari to the United States

Court of Appeals for the Eighth Circuit

MOTION OF THE MEDIA INSTITUTE FOR LEAVE

TO FILE BRIEF AMICUS CURIAE AND

BRIEF AMICUS CURIAE IN SUPPORT OF PETITION

FOR A WRIT OF CERTIORARI

JOE SIMS

(Counsel of Record)

KATHRYN M. FENTON

JONES, DAY, REAVIS & POGUE

655 Fifteenth Street, N.W.

Washington, D.C. 20005

(202) 879-3939

Attorneys for

The Media Institute,

January 14, 1987 Amicus Curiae

RLETETELESEPSESADVIEY {PEPE

WILSON - EPES PRINTING Co., INC. - 789-0096 - WASHINGTON, D.C. 20001

IN THE

Supreme Court of the United States

OCTOBER TERM, 1986

No.

TCI CABLEVISION, INC.,

COMMUNITY TELE-COMMUNICATIONS, INC.,

and TELE-COMMUNICATIONS, INC.,

Petitioners,

V.

CENTRAL TELECOMMUNICATIONS, INC.,

Respondent.

On Petition for a Writ of Certiorari to the United States

Court of Appeals for the Eighth Circuit

MOTION OF THE MEDIA INSTITUTE FOR LEAVE

TO FILE BRIEF AMICUS CURIAE IN SUPPORT

OF PETITION FOR A WRIT OF CERTIORARI

The Media Institute (“the Institute’) hereby respect-

fully moves for leave to file the attached brief amicus

curiae in support of the petition for writ of certiorari in

this case. The consent of the attorney for the petitioners

has been obtained. The consent of the attorney for re-

spondent was requested but refused.

The Institute’s interest in this case rises from the sig-

nificant First Amendment issue raised by the decision

below—-whether a municipality can, consistent with the

First Amendment, issue an exclusive franchise for the

provision of cable television services that excludes all

other cable system operators.

The Institute is a not-for-profit, tax-exempt research

organization supported by a wide range of foundations,

corporations, associations and individuals. It is dedicated

to the improvement of business and economic news cover-

age and to a robust, competitive and unfettered press.

It sponsors various programs relating to new communica-

tions technologies, communications policy and First

Amendmendent issues and publishes studies, books and

periodicals on these issues. It has also participated

through friend-of-the-court briefs in significant legal

cases affecting these issues.

The decision of the United States Court of Appeals for

the Eighth Circuit in this case will have a significant im-

pact on the First Amendment rights of cable system op-

erators and viewers of cable television programming

throughout the country. The participation of the Insti-

tute as amicus curiae will permit a fuller and more com-

plete analysis of the First Amendment issues raised.

Respectfully submitted,

JOE SIMS

(Counsel of Record)

KATHRYN M. FENTON

JONES, DAY, REAVIS & POGUE

655 Fifteenth Street, N.W.

Washington, D.C. 20005

(202) 879-3939

Attorneys for

The Media Institute,

Amicus Curiae

January 14, 1987

TABLE OF CONTENTS

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INTEREST OF AMICUS CURIAE .............0000000000.00.....

INTRODUCTION AND SUMMARY

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ea da ache ch dncrcps cece bniabteisincowealetiinive

I. The Justifications For an Exclusive Franchise

II.

Offered by the Eighth Circuit Are Insufficient to

Overcome the First Amendment’s Protections....

A. First Amendment Rights May Not Be

Abridged By a Claim of “Natural Monopoly”

Arising Solely From Economic Conditions....

B. Even If a Market Will Support Only a Single

Provider of Cable Television Services, The

Selection of That Provider Should Be Made

By Consumers In The Marketplace ................

The Eighth Circuit Failed to Conduct an Inde-

pendent Examination of The Record That Would

Establish The Lack of Support For Its Factual

Nn de cickuntsatelabinidin

A. The Record Below Establishes That TCI Did

Not Seek an Exclusive Franchise ...............

B. The Record Below Does Not Support The

Finding of a “Natural Monopoly” ...................

10

13

13

14

20

ii

TABLE OF AUTHORITIES

Cases

Bose Corp. v. Consumers Union of the United

States, Inc., 466 U.S. 485 (1984) ...........................

Century Federal, Inc. v. City of Palo Alto, No. 85-

Bie Chee Cs Hs Be BOD teens ..

Community Communications Co. v. City of Boulder

(Boulder I), 630 F.2d 704 (10th Cir. 1980),

PO ee Ge Se I ED ace evcc rcv ceictee nner

Home Box Office, Inc. v. FCC, 567 F.2d 9 (D.C.

Cir.), cert. denied, 484 U.S. 829 (1977) ...............

Miami Herald Publishing Co. v. Tornillo, 418 U.S.

A __. BRR RETR ERIRSRRENCSDA Nicn ce core eee er

Midwest Video Corp. v. FCC, 571 F.2d 1025 (8th

Cir. 1978), aff’d, 440 U.S. 689 (1979) .................

New York Times v. Sullivan, 376 U.S. 254 (1964) ..

Niemotko v. Maryland, 340 U.S. 268 (1951) ...........

Omega Satellite Products Co. v. City of Indianap-

onus, GOS F.20 119 (7m Cir. 1982) ........................

Preferred Communications, Inc. v. City of Los

Angeles, 754 F.2d 1396 (9th Cir. 1985), aff’d

and remanded, 106 S. Ct. 2034 (1986) ........ 3, 5, 8, 10-11

Quincy Cable TV, Inc. v. FCC, 768 F.2d 1434 (D.C.

Cir. 1985), cert. denied, 106 S. Ct. 2889 (1986)...

Time, Inc. v. Pape, 401 U.S. 279 (1971) ...................

Statutes

Cable Communications Policy Act of 1984, P.L.

I a a

Newspaper Preservation Act, 15 U.S.C. §1801

SERS Oe cs See rR N ERT PN

Miscellaneous

FCC Dkt. No. MM 85-349 (Aug. 7, 1986) ..............

Hazlett, “Competition vs. Franchise Monopoly in

Cable Television,” 4 Contemporary Policy Issues

I sca mihloukeuboes

Hazlett, “Why Cable TV Needs a Free Market,”

N.Y. Times, Nov. 17, 1985 at 2F Col. 3 .22..002........

B. Owen, Economics and Freedom of Expression

SEINE diols achciboring tatoances Lak chanbheh nice anedliaaasates adeouiobiade

11,17

11

iii

TABLE OF AUTHORITIES—Continued

Page

Owen & Greenhalgh, “Competitive Considerations

in Cable Television Franchising,’ 4 Contempo-

rary Policy Issues 69 (Apr. 1986) ....................... 11,17

Paul Kagan Associates, Inc., Cable TV Franchis-

CE Ss Bii W ssideticestaiidiiecigte se ee 13

Smiley, “Direct Competition Among Cable Televi-

sion Systems, EAG Discussion Paper 86-9, Anti-

trust Division, U.S. Dept. of Justice (June 5,

BENIN axciccniccersencnitaniciied bi toaca ane ee tons 12

IN THE

Supreme Court of the United States

OCTOBER TERM, 1986

No.

TCI CABLEVISION, INC.,

COMMUNITY TELE-COMMUNICATIONS, INC.,

and TELE-COMMUNICATIONS, INC.,

. Petitioners,

CENTRAL TELECOMMUNICATIONS, INC.,

Respondent.

On Petition for a Writ of Certiorari to the United States

Court of Appeals for the Eighth Circuit

BRIEF OF THE MEDIA INSTITUTE

AS AMICUS CURIAE IN SUPPORT OF PETITION

FOR A WRIT OF CERTIORARI

INTEREST OF AMICUS CURIAE

The Media Institute (“the Institute”), a not-for-profit,

tax-exempt research organization, is dedicated to the im-

provement of business and economic coverage and to a

robust, competitive and unfettered press.’ The issue de-

cided in this case by the United States Court of Appeals

for the Eighth Circuit—whether a municipality’s grant

of an exclusive cable franchise is prohibited by the First

1The Institute sponsors various programs related to business/

media relations, new communications technologies, communications

policy, and First Amendment issues, and publishes studies, books,

and periodicals on media-related topics. In addition, it participates

through friend-of-the-court briefs in significant legal cases affect-

ing these interests.

2

Amendment—is thus of considerable concern to the In-

stitute. The Institute submits that the decision below is

erroneous in concluding, on the record in this case and

the current state of economic knowledge, that the provi-

sion of cable television services in Jefferson City was in

fact a natural monopoly. Since that finding is critical to

the court’s conclusion that Jefferson City could award an

exclusive franchise consistent with the First Amendment,

and establishes an erroneous precedent with widespread

ramifications for the First Amendment rights of cable

system operators and viewers, the decision below is fatally

flawed and must be reversed.

INTRODUCTION AND SUMMARY OF ARGUMENT

1. This case, arising from an all-too-common dispute

over the municipal award of an exclusive cable television

franchise, raises a significant issue concerning the First

Amendment rights of cable system operators and view-

ers. A judgment of the District Court for the Western

District of Missouri (reported at 610 F. Supp. 891 (W.D.

Mo. 1985)) incorporated a jury verdict against petition-

ers TCI Cablevision, Inc. and affiliated companies (collec-

tively, “TCI’”) and in favor of respondent Central Tele-

communications, Ine, (“Central”), a disappointed appli-

cant for the cable television franchise to be awarded by

Jefferson City, Missouri (“the City”). The jury found

that TCI, the existing holder of the City’s cable television

franchise, had violated the federal antitrust laws and

tortiously interfered with Central’s business expectancy,

and awarded Central damages of approximately $36 mil-

lion. The U.S. Court of Appeals for the Eighth Circuit

subsequently affirmed this judgment. Central Telecommu-

nications, Inc. v. TCI Cablevision, Inc., 800 F.2d 711

(8th Cir. 1986).

2. In affirming the jury verdict, the Eighth Circuit

rejected TCI’s argument that it had a right guaranteed

by the First Amendment to offer cable television service

with or without a franchise from the City, and that, as

a result, Central could not have been damaged by its

failure to receive an exclusive franchise. Instead, the

3

court concluded that “the ‘natural monopoly’ characteris-

tics of the Jefferson City franchise justified the City in

offering a de facto exclusive franchise.” 800 F.2d at 717.

3. This conclusion is inconsistent with the First

Amendment’s guarantee of a free press and must be re-

versed. As this Court recognized last year in City of

Los Angeles v. Preferred Communications, Inc., 106

S. Ct. 2034 (1986), the activities of cable television sys-

tem operators (and viewers) “plainly implicate First

Amendment interests.” Jd. at 2037. Given such pro-

tected interests, an exclusive cable franchise, which pre

cludes all but one cable system operator from communi-

cating with the viewing public, raises significant con-

cerns. The abridgement of First Amendment rights re-

sulting from a grant of an exclusive franchise cannot be

justified here by the claim of a “natural monopoly” re-

sulting from economic conditions.

4. The factual record below does not support the

court’s conclusion that cable television in Jefferson City

is a “natural monopoly,” and economic theory suggests

that no such “natural monopoly” exists. Rather, both the

existing record and the likely result of any economic

analysis would support the opposite conclusion—that

cable television in Jefferson City is not inevitably mo-

nopolistic and indeed is only a part of an intensely

competitive entertainment and information market. The

First Amendment thus clearly forbids-the exclusion of

TCI or any other cable operator from disseminating pro-

gramming and competing for viewers in Jefferson City

or gny other community.

5. Even if Jefferson City, for some reason not appar-

ent on the record, proved to be a market that would

support only a single provider of cable television services,

the First Amendment bars a governmental choice of the

only cable speaker. The district court’s conclusion, ap-

proved by the court of appeals, that “since only one com-

petitor can survive in the market, it makes sense to allow

the local government to choose the best applicant” (800

F.2d at 714) is thus fundamentally inconsistent with the

4

First Amendment. If there is to be only one cable opera-

tor in a community, the First Amendment requires that

choice be made by the citizens of the community function-

ing as purchasers in the marketplace, not by municipal

fiat.

6. In rejecting TCI’s First Amendment right to op-

erate a non-exclusive cable franchise, the Eighth Circuit

failed to undertake an independent review of the record

supporting its natural monopoly conclusion. As _ this

Court has repeatedly recognized, the importance of pre-

serving constitutional rights requires that decisions re-

garding entitlement to such protection cannot be left

merely as questions for the trier of fact. An “independ-

ent examination of the whole record” by the reviewing

court is required before approving a limitation of free

expression. Such a review was lacking below.

7. Because the Eighth Circuit’s decision subjugates

important First Amendment rights to a municipal gov-

ernment’s desire to select a particular cable television

operator as the sole provider of cable services, it cannot

be allowed to stand. Such a limitation on the First

Amendment rights is contrary to prior decisions of this

Court and is inconsistent with recent decisions of other

circuits. If the Eighth Circuit’s decision is not reversed,

it will have an impact well beyond the boundaries of this

case. Cable television and other new technologies are

growing in importance as means of disseminating news,

information and entertainment. The Eighth Circuit’s de-

cision will significantly deter the development of cable

systems and other new technologies as alternative voices,

protected by the First Amendment to the same extent as

the more traditional methods. The petition for certiorari

should therefore be granted and the judgment below

reversed.

5

ARGUMENT

I. The Justifications For an Exclusive Francise Offered

by the Eighth Circuit Are Insufficient to Overcome the

First Amendment’s Protections.

Despite its recognition that “there are profound first

amendment implications inherent in the regulation of

cable operators” (800 F.2d at 716), the Eighth Circuit

concluded that cable television in Jefferson City was a

natural monopoly and that the City could award an ex-

clusive cable franchise. Jd. at 717. It is beyond dispute

that the activities of cable system operators and viewers

are protected by the First Amendment. City of Los An-

geles v. Preferred Communications, Inc., 106 8. Ct. 2034,

2036 (1986). Although this Court in Preferred reserved

decision on the precise contours of that First Amendment

protection,? the approach taken by the Eighth Circuit is

plainly inconsistent with the First Amendment and with

prior decisions of this Court. Because of the current con-

fusion regarding the application of the First Amendment

to the activities of cable system operators * and the con-

flict with the decisions of other circuit courts,’ the peti-

tion for certiorari should be granted.

2 See 106 S. Ct. at 2038 (“We do not think, however, that it is

desirable to express any more detailed views on the proper resolu-

tion of the First Amendment question raised . . . without a fuller

development of the disputed issues in this case.’’).

3 For example, in a decision issued after the Eighth Circuit’s

decision in this case, the U.S. District Court for the Northern

District of California rejected an attempt by a municipality to issue

an exclusive cable television franchise and held that the full pro-

tection of the First Amendment is available to cable speakers

because “cable television is more closely analogous to newspapers

than the broadcast media.” Century Federal, Inc. v. City of Palo

Alto, No. 85-2168, slip op. at 2, 20-23 (N.D. Cal. Dec. 3, 1986).

4 Both the Ninth and the D.C. Circuits have recognized a more

expansive scope of First Amendment protection for the activities

of cable system operators than that afforded by the Eighth Circuit

here. See, e.g., Preferred Communications, Inc. v. City of Los

Angeles, 754 F.2d 1396, 1401-02 (9th Cir. 1985), aff’d on other

grounds, 106 S. Ct. 2034 (1986) ; Home Box Office, Inc. v. FCC, 567

F.2d 9, 46 (D.C. Cir.), cert. denied, 434 U.S. 829 (1977).

6

The Eighth Circuit offered two reasons for rejecting

TCI’s First Amendment claims:

First, the evidence reveals that TCI was not sincere

in advocating competition in the market but simply

sought to retain a monopoly originally gained through

the grant of a de facto exclusive franchise. Second,

the evidence reveals that the City’s cable television

market is currently a natural monopoly which, under

present technology, offers room for only one operator

at a time. Thus, we hold that the City could prop-

erly offer a de facto exclusive franchise in order to

create competition for its cable television market.

800 F.2d at 717. Apart from the inherent contradiction

in the court’s reasoning (i.e., that an award of an ex-

clusive franchise will promote competition), neither of

these rationales provides a supportable basis for abridg-

ing TCI’s First Amendment right to operate a cable

system in Jefferson City. First, even assuming the

court’s characterization was accurate,> TCI’s “sincerity”

or the lack of it regarding its willingness to operate a

non-exclusive cable franchise is simply not relevant to

any First Amendment analysis.® It is equally clear that

an alleged “natural monopoly” arising solely from eco-

nomic conditions does not permit governmental regula-

tion of the number of cable speakers.

5 See pages 13-14 infra.

®It is an essential principle of First Amendment analysis that

entitlement to this constitutional protection does not depend upon

a court’s, the government’s or society’s assessment of the character

of the speaker. See, e.g., Niemotko v. Maryland, 340 U.S. 268, 272

(1951) (“the exercise of those freedoms of speech and religion

protected by the First and Fourteenth Amendments has a firmer

foundation than the whims or personal opinions of a local governing

body”). Even if the facts of this case do not present TCI in the

most sympathetic light, to the extent that the court’s assessment

of the relative characters of the competing applicants for the cable

franchise influenced its analysis of the First Amendment issue, it

was clearly inappropriate.

7

A. First Amendment Rights May Not Be Abridged By

a Claim of “Natural Monopoly” Arising Solely

From Economic Conditions.

The “natural monopoly” theory relied on by the

Eighth Circuit was summarized as follows:

[T]his grant of a single cable franchise is permis-

sible only if the physical and economic conditions of

the relevant market give rise to a “natural monop-

oly” situation. The theory is that, where physical

and economic factors render a market incapable of

accommodating more than one cable television sys-

tem, the local governing body is in the best position

to determine which proposed system offers the best

service to the public for the lowest cost. Since only

one competitor can survive in the market, it makes

sense to allow the local government to choose the best

applicant.

800 F.2d at 714 (quoting 610 F. Supp. at 899-900).

It is clear, however, that ‘physical conditions” do not

make cable television a “natural monopoly.” Unlike

broadcasting, where the need for proper spacing to avoid

interference along the electromagnetic spectrum in fact

imposes physical limitations on the number of broadcast

providers, operation of multiple cable television systems

is not similarly constrained.’ This has led every other

7 The argument that poles can only accommodate one set of cable

wires is no longer plausible given present technology. See, e.g.,

Community Communications Co. v. City of Boulder (Boulder I),

630 F.2d 704, 712 (10th Cir. 1980) (Markey, J., dissenting) (‘“[A]s

the record makes clear, modern technology makes free and open

competition both practically and economically available to the city

by at least four competing cable communicators.”), rev’d, 445 U.S.

40 (1982). Moreover, as the Federal Communications Commission

recognized in a recent Notice of Inquiry concerning the provision

of cable television services by telephone operating companies, tele-

phone facilities (which at present reach almost every U.S. home)

could readily be used for the carriage of cable signals in the ab-

sence of public policy decisions to the contrary. See FCC Dkt. No.

MM 85-349 (Aug. 7, 1986). Finally, of course, there are many

alternative technologies providing most of the services offered by

cable that do not utilize cable wires. See page 18 infra.

8

court that has recently considered the issue to conclude

that the physical scarcity rationale used to justify regu-

lation of broadcast entities does not apply to cable.*

Thus, the Eighth Circuit is left with the theory that

“economic factors render a market incapable of accom-

modating more than one cable television system.” 800

F.2d at 714. Even if factually correct, this ‘economic

scarcity” rationale has explicitly been rejected by this

Court as a basis for governmental regulation of the

media. In Miami Herald Publishing Co. v. Tornillo, 418

U.S. 241 (1974), this Court struck down a state statute

granting political candidates a right to equal space to

reply to criticisms published in newspapers. Despite ac-

knowledging that most newspapers possessed a monopoly

in their areas of distribution (the only fact that appears

to support the “natural monopoly” conclusion of the

panel in this case), Tornillo rejected the argument that

the states could impose a limited right of access to the

press merely because economic conditions made entry

into newspaper markets difficult.

In reaching this decision, this Court found that “[T]he

same economic factors which have caused the disappear-

ance of vast numbers of metropolitan newspapers [make]

entry into the marketplace of ideas served by the print

8 See, e.g., Preferred Communications, Inc. v. City of Los An-

geles, 754 F.2d 1396, 1404 (9th Cir. 1985) (recognizing that cable

technology has evolved significantly and that the physical scarcity

rationale no longer applies), aff'd and remanded, 106 S. Ct. 2034

(1986) ; Quincy Cable TV, Inc. v. FCC, 768 F.2d 1434, 1449 (D.C.

Cir. 1985) (“[physical] ‘scarcity’ rationale has no place in evaluating

government regulation of cable television”), cert. denied, 106 S. Ct.

2889 (1986) ; Omega Satellite Products Co. v. City of Indianapolis,

694 F.2d 119, 127 (7th Cir. 1982) (“Frequency interference [is]

a problem that does not arise with cable television.”’) ; Home Box

Office, Inc. v. FCC, 567 F.2d 9, 44-45 (D.C. Cir.) (“An essential

precondition of [broadcast] theory—physical interference and

scarcity requiring an umpiring role for government—is absent.’’),

cert. denied, 434 U.S. 829 (1977).

9

media almost impossible.” Jd. at 251 (footnote omitted) .°

Yet even though economic conditions were likely to dictate

only a single daily newspaper (in many cases commonly-

owned with other communications media), this Court held

that the restriction on speech resulting from the state

right of reply statute—a restriction several orders of

magnitude less severe than the absolute exclusion sanc-

tioned by the Eighth Circuit in this case—could not be

justified under the First Amendment. Jd. at 258.

As the D.C. Circuit has already recognized, the prin-

ciples of Tornillo are clearly applicable to cable televi-

sion services.’° All forms of media are characterized by

certain economies of scale that may result, in some in-

stances, in the emergence of a single seller in a particu-

lar locality. Under the analysis utilized by the Eighth

Circuit, virtually any community (which experience has

shown is likely to support only a single daily newspaper)

would be entitled to offer an exclusive franchise for the

newspaper publishing business. Yet it is inconceivable

that any court would, solely on the basis of economic

conditions, permit a municipality to create an exclusive

franchise for one newspaper and to exclude all others.

Cable television should be no different. The designa-

tion of an exclusive cable franchise and the prohibition

® By 1973 effective newspaper competition existed in only 4 per-

cent of U.S. cities. 418 U.S. at 249, n.18. Recognition of the eco-

nomic constraints affecting daily newspapers had prompted passage

of the Newspaper Preservation Act, 15 U.S.C. § 1801 et seq., which

permits, under certain circumstances, combination of the physical

production facilities of two newspapers to preserve separate and

independent editorial voices.

10 Home Box Office, Inc. v. FCC, 567 F.2d 9, 46 (D.C. Cir.)

(scarcity resulting from economic conditions is insufficient to

justify even limited government intrusion into First Amendment

rights; “there is nothing in the record before us to suggest a

constitutional distinction between cable television and newspapers

on this point”), cert. denied, 434 U.S. 829 (1977). Indeed, the

Eighth Circuit had previously cited Home Box Office with approval

on this point. Midwest Video Corp. v. FCC, 571 F.2d 1025, 1055

(8th Cir. 1978), aff’d, 440 U.S. 689 (1979).

{

10

of all other cable system operators simply cannot be

reconciled with the First Amendment. The Eighth Cir-

cuit’s failure to recognize this fact has grave implica-

tions for the future effectiveness of cable and other new

technologies as developing methods of communications.

B. Even If a Market Will Support Only a Single Pro-

vider of Cable Television Services, The Selection of

That Provider Should Be Made By Consumers In

The Marketplace.

The error represented by the designation of an exclu-

sive cable television franchise is compounded by the

City’s role in selecting the operator of that franchise.

Even if the Jefferson City market should prove able to

support only a single provider of cable television serv-

ices, the First Amendment forbids the selection of the

exclusive cable speaker by the government. The desire to

dictate the sole provider of cable television comm nica-

tions “cannot serve as the articulated, compelling state

or governmental interest required to justify an otherwise

constitutionally prohibited silencing of the right of free

speech and free press.” '! Yet this is just what the

Eighth Circuit permits by endorsing the grant of an ex-

clusive cable franchise and municipal selection of its

operator.

This procedure is no more consistent with the First

Amendment than allowing a municipality to designate a

particular newspaper to serve its community simply be-

cause the city council concluded that. }; eould support only

one newspaper. As the Ninth Cirenit has found:

Allowing a [franchising] procedure such as the

City’s would be akin to allowing the government dis-

cretion to grant a permit for the operation of news-

paper vending machines located on public streets

only to the newspaper that the government believes

“best” serves the community, a practice which we

find clearly invalid.

11 Community Communications Co. v. City of Boulder (Boulder

I), 630 F.2d 704, 713 (10th Cir. 1980) (Markey, J., dissenting),

rev'd, 455 U.S. 40 (1982).

11

Preferred Communications, Inc. v. City of Los Angeles,

754 F.2d at 1409.

No sound argument supports the claim that franchis-

ing contests conducted by political entities are better able

to select cable firms than consumers who vote with their

dollars by choosing among competing offerings. While

“lclompetitive incentives can usually ensure responsive

service, efficient production, and cost-based pricing,” it is

generally conceded that “[r]egulation generally does not

have as enviable a record.” '* The limitations of munici-

pal action to award cable franchises are well known, as

is evidenced by the delays associated with bringing cable

services to many of the nation’s largest cities.’* More-

over, the level of economic waste introduced by the cable

franchising process itself and by the over-investment re-

quired by the political competition for the franchise is

significant."

Against this record, a competitive marketplace solu-

tion, even if it results in only one surviving firm, is

much more likely to ensure that that firm is best able to

12 See Owen & Greenhalgh, “Competitive Considerations in Cable

_ Television Francising,” 4 Contemporary Policy Issues 69, 71 (Apr.

1986).

13 See, e.g., Hazlett, “Why Cable TV Needs a Free Market,”

N.Y. Times, Nov. 17, 1985 at 2F, col. 3 (Philadelphia has gone

through five franchising battles since the 1960’s and is still without

cable).

14 One study has concluded that the costs imposed by the fran-

chising process on cable consumers and suppliers equal one-fourth

of total revenue or more than twice the level of pre-tax profit.

Hazlett, “Competition vs. Franchise Monopoly in Cable Television,”

4 Contemporary Policy Issues 80, 95 (Apr. 1986). The political

nature of these franchising battles is demonstrated here by the

fact that Central sought the aid of a number of politically well-

connected persons in an attempt to influence the franchise award.

For example, one of the principals of Central, Eugene Bushman,

had not previously worked in the cable industry but had been a

political lobbyist and attempted to use his political connections in

the franchising process. See, e.g., PX 334 (letter authored by

Bushman invoking name of Senator Eagleton without his knowl-

edge or authorization in attempt to obtain bond broker).

—_ TE

12

serve the wants and desires of the public. The continu-

ing existence of competition fueled by the presence of

actual competitors or the possibility of new entry in the

marketplace is more likely to produce superior perform-

ance than that of a monopolist awarded an exclusive

franchise by the municipality and thereafter immunized

from any competition.”

In addition to its logical force, this argument is con-

sistent with the command of the First Amendment to

avoid governmental actions to control the content of

speech by selecting the conduit for it..° In the absence

of conditions such as the physical scarcity that justifies

broadcast regulations, the First Amendment prohibits

government action that selects those who will be per-

mitted to speak or the content of that message.’”

15 Indeed, the passage of the Cable Communications Policy Act

of 1984, P.L. 98-549, which largely eliminated the authority of

municipalities to impose rate regulation on cable systems, places

significant limitations on municipal regulation of cable companies.

Because of this, “It is‘reasonable to conclude that overbuild com-

petition has a potentially significant welfare-enhancing role and

that municipalities and operators may opt for overbuilding more

often than in the past.” Smiley, “Direct Competition Among Cable

Television Systems,” EAG Discussion Paper 86-9, Antitrust Divi-

sion, U.S. Dep’t of Justice at 35 (June 5, 1986).

16 See Midwest Video Corp. v. FCC, 571 F.2d 1025, 1053 (8th

Cir. 1978).

17The Eighth Circuit recognized this pitfall but attempted to

side-step it by disclaiming “We note that there is no question

here of content regulation in determining who would be the ‘best’

applicant.” 800 F.2d at 714, n.4. This effort is futile, however,

for the court clearly relied on the alleged superiority of Central’s

franchise proposal as a basis for rejecting TCI’s First Amendment

claims. See, e.g., 800 F.2d at 717 (‘‘Central’s proposal went further

in advancing the first amendment interests of the viewing public

in the greatest variety of programming available.”). Such content-

based determinations are an inevitable consequence of governmental

determination of the only cable speaker. Furthermore, as noted

above, the history of the cable industry has shown that municipal

franchising procedures often invite “cverbidding” by weighting

the decisional process in favor of expensive, frequently impractical,

cable systems. In city after city, once these promises of technologi-

13

II. The Eighth Circuit Failed to Conduct an Independent

Exan.ination of The Entire Record Prior to Approving

a Limitation of TCI’s First Amendment Rights.

The abridgement of First Amendment rights sanctioned

by the Eighth Circuit becomes even more egregious given

the lack of factual support in the record for its rejection

of TCI’s First Amendment claims. Where First Amend-

ment rights are involved, this Court has required that an

appellate court conduct an “independent examination of

the whole record” before approving a limitation of free

expression. Bose Corp. v. Consumers Union of the United

States, Inc., 466 U.S. 485, 499 (1984). Since this exami-

nation was lacking here, the Eighth Circuit’s decision

must be reversed.

A. The Record Below Establishes That TCI Did Not

Seek an Exclusive Franchise.

The Eighth Circuit’s first basis for rejecting TCI’s

First Amendment claim—the company’s alleged “‘insin-

cerity” in advocating competition—reflects the court’s

view that “TCI’s first amendment defense fails on its

facts because it did not seek to simply remain in the

market but to continue its monopoly.” 800 F.2d at 713.

The court cites no specific factual evidence in support of

this conclusion, apart from the assertion that TCI “began

a campaign, accompanied by various unethical and illegal

acts, to coerce the city to grant it an exclusive franchise.”

Id. at 712-13.

There is abundant evidence in the record, however, that

TCI never sought an exclusive franchise and that, while

not welcoming the prospect of additional competition (as

few businessmen would), it was fully prepared to deal

cally advanced systems prove impossible to implement, they are

eliminated through renegotiation. See, e.g., Paul Kagan Associates,

Inc., Cable TV Francising (Nov. 20, 1985) at 4-5 (70% of the

initial franchises awarded in major markets since 1975 have al-

ready been renegotiated). Thus, the alleged superiority of a pro-

posed system may never be fully realized and a court’s reliance on

such superiority in making First Amendment decisions would be

unfounded.

14

with such competition in the marketplace.’** None of this

evidence is even discussed by the court.”

B. The Record Below Does Not Support The Finding

of a “Natural Monopoly.”

The court’s reliance on a finding that cable television

in Jefferson City was a natural monopoly is equally

flawed. The opinion devotes less than one page to this

critical issue, stating only that the “natural monopoly”

was proven “to the satisfaction of the jury and the trial

judge,” and that there is “substantial support in the rec-

ord” for that conclusion. 800 F.2d at 717. The only rec-

ord evidence cited by the court to support its “natural

monopoly” finding—a consultant’s study prepared on be-

18 As TCI’s President John Malone testified, “[W]hile we didn’t

encourage competition, we accepted it as a fact of life.” Malone,

30 Tr. 88. In an advertisement directed to the customers of TCI

Cablevision, TCI opposed Central’s request for an exclusive fran-

chise and stated:

TCI believes that the citizens of Jefferson City (and eventually

Cole County) should be the ultimate judges of the competing

service offered by the two companies ... TCI has no objection

if the City enters into contracts with competitors of TCI, but

feels that it, too, has a right to do business in Jefferson City.

DX 61. In various discussions with the City Council, TCI’s repre-

sentatives also repeatedly recognized that TCI’s contract was not

exclusive and that they were fully prepared to meet competition

from another cable company. DX 75; PX 53; PX 144, p. 12.

19 Other findings relating to TCI’s conduct and motivations ap-

pear similarly unsupported. One incident, emphasized by the dis-

trict court, was the alleged attempt by TCI “to intimidate city

officials by threatening to flood the . . . City market with satellite

dishes if defendants’ franchise was not renewed.” 610 F. Supp.

at 895. Yet this “threat” appears nowhere in the record. At one

Council meeting, a TCI representative stated that TCI was familiar

with the problem of illegal interception of satellite-delivered pro-

gramming because it was “the largest distributor in the nation of

backyard dishes,” with ‘“‘an exclusive in seventeen states including

Missouri.” PX 144, p. 23. It is hard to see the “threat’’ in such

a statement and Central’s attorney described the issue as “[n]Jot

particularly relevant in this case.’ 32 Tr. 35.

15

half of Central for this litigation ?°—is hardly an over-

whelming basis to support this critical economic determi-

nation.

Other record evidence is contrary to this conclusion. A

starting point for any analysis of the natural monopoly

issue should be the competitive conditions that shape the

market for cable television, yet the Eighth Circuit pays

no attention to the unique characteristics of Jefferson

City. For example, the City’s geography makes reception

of over-the-air broadcast signals very difficult. 610 F.

Supp. at 894, n.3. As a result, cable penetration rates

would be expected to be very high,” a fact that would

make competitive cable operations more likely than in

other communities.** This was particularly so given the

fact that overbuilds appear to stimulate more community

interest in cable, thereby leading to more total sub-

scribers. Malone, 30 Tr. 53.

From a technical standpoint, there was nothing that

would prohibit more than one cable company from operat-

ing a cable system in Jefferson City.** Yet no one at

20 See 800 F.2d at 717 n.6.

21 Trial testimony established that, as a general rule, between 30

and 40 subscribers per mile are necessary to operate a profitable

system. F.g., Sparkman, 26 Tr. 160-61. In 1981, TCI had achieved

a penetration rate for the City of 65.5 subscribers per mile and in

1982, 68 subscribers per mile. PX 171(c).

22 Jefferson City was described by one of Central’s proposed

bankers as “virtually an ideal franchise. It’s a long distance from

broadcast programming. It’s a hilly country, has a pretty good

density for a city of this population . . . offering the potential for

60%-70% subscription rate.” Haynes, 19 Tr. 61. One of Central’s

economic witnesses similarly testified that the high subscriber rate

in the City demonstrated “that cable tv was a very saleable product

in Jefferson City.” Perry, 28 Tr. 83.

23 TCI leased the use of a strand for coaxial cable support from the

telephone company, United Telephone (PX 2) and TCI had no con-

trol over who could use the strand. Lee, 27 Tr. 53-53. There appar-

ently were no technical or legal reasons why two or more cables

could not be lashed to a single strand, a process called “bundling”

eer

16

Central had ever made an effort to find out what it

would cost to place a second set of cables on the existing

poles. Schott, 6 Tr. 8.

Moreover, based on Central’s own damage theory, the

likely profitability of the Jefferson City franchise belies

the existence of a natural monopoly. The exceedingly

high rate of return on investment represented by the

jury’s award of $10.8 million in compensatory damages

reflects a level of anticipated profits from the operation

of the cable system that would be certain to attract com-

petitive entry into the market.

The Eighth Circuit also failed to even acknowledge the

existence of (much less give any consideration to) the gen-

eral body of economic learning relevant to the “natural

monopoly” issue, particularly recent economic studies

raising serious questions about the application of the nat-

ural monopoly theory to the cable television industry. It

is undisputed that operation of a cable television system

requires a significant capital investment in both facilities

and equipment, and that economies of scale arise as these

fixed costs are spread over larger and larger numbers of

subseribers.2> Nevertheless, the historical wisdom that

of cables. Schott, 5 Tr. 45-46; Lee, 27 Tr. 51-52. One of the princi-

pals of Central admitted that a cable company he had previously

owned had shared a strand on the same poles with another cable

company (Schott, 6 Tr. 21).

24 One factor that would affect the viability of Central’s proposal

in an overbuild contest was its higher cost. The total cost of the

system Central proposed to build was higher than would otherwise

be necessary, since it originally included an institutional loop, a

* sge amount of free services for the city, expensive local studies,

and addressable converters. Graham, 4 Tr. 45-46. This, of course,

would require a larger number of subscribers than a lower cost

system to reach the break even point.

25 Cable television is not unique in this regard, for economies

of scale arise as all media products are shared with increasing

numbers of viewers or readers. For example, the cost of producing

(and, in the case of broadcast television, distributing), a book,

television show or newspaper article remains unchanged whether

17

such investment and scale economies represent an in-

superable barrier to competitive cable operations is in-

creasingly being challenged, and recent economic studies

have failed to support this theory.”

The experience of those areas where cable systems cur-

rently do compete shows that such competition is not

only possible, but appears to produce the consumer bene-

fits, including lower prices, that one expects from com-

petition.** This is not consistent with the existence of a

“natural monopoly.”

Moreover, recent evidence of successful competition in

other markets long thought to be “natural monopolies”

should make one skeptical of similar claims in cable

markets. Long distance telephone service was supposed

to represent a “natural monopoly,” but now—after regu-

latory intervention to end the monopoly—it turns out that

the monopoly was not “natural” after all. Overnight mail

delivery service is another example of an industry where

they are read or viewed by one person or one million. See, e.g.,

B. Owen, Economics and Freedom of Expression 19 (1975).

26 See, e.g.. Owen & Greenhalgh, supra note 12, at 78. While these

authors of a recent study of overbuild costs found a 14 percent pen-

alty in unit costs per subscriber resulting from head-to-head com-

petition between two cable systems operating down the same streets

(the worst case scenario in terms of overbuilt systems), they con-

cluded that:

Although this is hardly negligible, it is within the range of

monopoly markups that might be expected in the absence

of competition or effective regulation. Therefore, consumers

might be better off with competition, in spite of the cost pen-

alty from lost scale economies.

Id. at 76.

27 Hazlett, swpra note 14, at 91 (duplicative systems’ rates for

basic cable service and HBO were estimated ‘o be $1.82/month

lower than those of monopoly jurisdictions, providing “direct evi-

dence that monopoly franchising tends to raise prices to con-

sumers”’).

18

competition should not be possible under the “natural

monopoly” theory.**

Indeed, cable seems much less likely than either of

these examples to constitute a “natural monopoly” since

cable television must compete in a broad entertainment

and information market with many similar services (in-

cluding, at a minimum, over-the-air broadcast services,

videocassettes, newspapers, magazines, movies, theaters,

and books). Whether viewed as part of a broad enter-

tainment and information market, or merely as part of a

narrower video programming market, cable operators

hardly have the luxury of a monopoly hold over consum-

ers. Thus, the “natural monopoly” conclusion on which

the Eighth Circuit’s opinion rests is not only not sup-

ported by the record, it is very likely to be just plain

wrong.

In sum, the Eighth Circuit simply assumed the con-

clusion that “there was economic capacity for only one

speaker.” 800 F.2d at 717. It conducted no independent

analysis of that issue and the analysis of the district

court was demonstratively inadequate. Given the im-

portance of the First Amendment interests at stake and

the impact of that conclusion on those interests, the

court’s review of this issue was not consistent with con-

trolling decisions of this Court.

In cases involving the First Amendment, this Court

has repeatedly held that “an appellate court has an ob-

ligation to ‘make an independent examination of the

% The U.S. Postal Service already possessed an existing in-

frastructure through its government monopoly over first class

mail delivery, any newcomer would have to duplicate an extensive

system of local offices, delivery routes, sorting facilities, etc., and

the economies of scale clearly involved would likely permit a single

firm to serve the entire market at a lower per unit cost than two

or more firms. Yet the successful entry of and competition intro-

duced by firms such as Federal Express, Emery, Purolator Courier,

DHL, Airborne and others completely destroys the “natural monop-

oply” hypothesis in this industry.

19

whole record’ in order to make sure ‘that the judgment

does not constitute a forbidden intrusion on the field of

free expression.’” Bose Corp. v. Consumers Union of the

United States, Inc., 466 U.S. 485, 499 (1984) (quoting

New York Times v. Sullivan, 376 U.S. 254, 284-86

(1964) ).2° Here, the Eighth Circuit’s failure to conduct

this independent examination is particularly troublesome

given the absolute ban on the exercise of First Amend-

ment rights represented by an exclusive franchise. As

the district court in this case recognized, “[I]f the mar-

ket has room for more than one cable system, a city’s

efforts to artificially limit the number of operators would

constitute a prior restraint in violation of the First

Amendment.” 610 F. Supp. at 901. Such is clearly the

case here. |

29 This requirement reflects “a deeply held conviction that judges

—and particularly members of this Court—must exercise such

é review in order to preserve liberties established and ordained by

the Constitution.” 466 U.S. at 510-511. As a result, itisa

[S]ettled principle that “[i]n cases in which there is a claim

of denial of rights under the Federal Constitution, this Court

is not bound by the conclusions of lower courts, but will ex-

amine the evidentiary basis on which those conclusions are

founded.”

Time, Inc. v. Pape, 401 U.S. 279, 284 (1971) (quoting Niemotko

v. Maryland, 340 U.S. 268, 271 (1951) ).

20

CONCLUSION

For the reasons stated above, the decision of the

Eighth Circuit in this case erroneously limits an im-

portant constitutional right. In order to prevent this

error from further infecting the First Amendment rights

of cable system operators, the Institute respectfully re-

quests that the petition for a writ of certiorari be

granted so that the judgment below can be reversed.

Respectfully submitted,

JOE SIMS

(Counsel of Record)

KATHRYN M. FENTON

JONES, DAY, REAVIS & POGUE

655 Fifteenth Street, N.W.

Washington, D.C. 20005

(202) 879-3939

Attorneys for

The Media Institute,

January 14, 1987 Amicus Curiae