Cable Television Act of 1992Vertical Ownership Rules

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 76

[MM Docket 92-264; FCC 95-147]

Cable Television Act of 1992--Vertical Ownership Rules

agency: Federal Communications Commission.

action: Order on reconsideration.

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summary: On reconsideration of the cable television vertical ownership

(or channel occupancy) rules adopted in its Second Report and Order,

the Federal Communications Commission (the ``Commission'') has adopted

a Memorandum Opinion and Order on Reconsideration of the Second Report

and Order (``Reconsideration Order''). The Reconsideration Order denies

petitions for reconsideration filed by the Center for Media Education/

Consumer Federation of America (collectively ``CME'') and Bell Atlantic

Corporation (``Bell Atlantic''). Specifically, the Reconsideration

Order: Denies CME's petition requesting that the Commission; reduce the

percentage of activated channels that a cable operator may devote to

video programming in which it has an attributable interest from 40% to

20%; reverse the Commission's decision to include over-the-air

broadcast, public, educational, governmental (``PEG''), and leased

access channels when calculating total channel capacity; reverse the

Commission's decision to exempt local and regional networks from the

channel occupancy limits; reverse the Commission's decision not to

apply channel occupancy limits beyond a system's first 75 channels; and

reverse the Commission's decision to grandfather all vertically

integrated programming services being carried as of the effective date

of the 1992 Cable Act. The Reconsideration Order also denies Bell

Atlantic's petition asking that the Commission reconsider its decision

to apply the vertical ownership limits to cable systems facing actual

head-to-head competition.

effective date: April 6, 1995.

for further information contact: Rick Chessen, Cable Services Bureau,

(202) 416-0800.

supplementary information: This is a synopsis of the Memorandum Opinion

and Order on Reconsideration of the Second Report and Order

(``Reconsideration Order'') in MM Docket 92-264, adopted April 5, 1995

and released April 6, 1995. This Reconsideration Order responds to

petitions for reconsideration filed in response to the Commission's

Second Report and Order, 58 FR 60135 (November 15, 1993). The Second

Report and Order was established pursuant to section 11(c)(2)(B) of the

Cable Television Consumer Protection and Competition Act of 1992

(``1992 Cable Act''), Public Law 102-385, 106 Stat. 1460 (1992).

The complete text of this Reconsideration Order is available for

inspection and copying during normal business hours in the FCC

Reference Center (room 239), 1919 M Street, NW., Washington, DC, and

also may be purchased from the Commission's copy contractor,

International Transcription Services, Inc. (``ITS, Inc.'') at (202)

857-3800, 2100 M Street, NW., Suite 140, Washington, DC 20037.

Synopsis of the Memorandum Opinion and Order on Reconsideration of the

Second Report and Order

A. Background

Pursuant to section 11(c)(2)(B) of the Cable Television Consumer

Protection and Competition Act of 1992 (``1992 Cable Act''), Pub. L.

102-385, 106 Stat. 1460 (1992), the Commission's Second Report and

Order, 58 FR 60135 (November 15, 1993), established cable channel

occupancy rules, including the following rules relevant here: (1) Cable

operators generally may devote no more than 40% of their activated

channels to the carriage of programing services in which they have an

attributable interest; (2) all activated channels will be included in

calculating channel capacity, including broadcast, PEG and leased

access channels; (3) channal occupancy limits will apply only to

``national'' programming services (i.e., local and regional programming

services are exempt); (4) channel occupancy limits will apply to a

maximum of 75 channels per system; (5) all vertically integrated

programming services carried as of the effective date of the 1992 Cable

Act (December 4, 1992) could continue to be carried; and (6) channel

occupancy limits will not be eliminated in communities where actual

head-to-head competition exists.

B. Petitions for Reconsideration

The Center for Media Education and the Consumer Federation of

America (collectively ``CME'') filed a joint Petition for

Reconsideration asking the Commission to reconsider several issues

decided in the Second Report and Order. Specifically, CME asked the

Commission to: (1) Reduce the channel occupancy limit from 40% to 20%;

(2) require that broadcast, PEG, and leased access channels be

subtracted from the number of activated channels before calculating

total channel capacity; (3) eliminate the exemption for local and

regional networks; (4) apply channel occupancy limits beyond a system's

first 75 channels; and (5) reverse the decision to grandfather all

vertically integrated programming services carried as of December 4,

1992.

After consideration of the various submissions, the Commission

declines to modify the 40% channel occupancy limit. In requiring the

Commission to establish ``reasonable'' channel occupancy limits,

Congress directed the Commission to balance the risks of vertical

integration against benefits such as the development of diverse and

high quality video programming. The Commission continues to believe

that the 40% limit strikes the appropriate balance between these

competing objectives.

Moreover, CME may have overstated the practical effect of must-

carry, PEG and leased access requirements on unaffiliated programmers'

ability to obtain carriage. In the absence of record evidence on this

point, the Commission examined an unscientific sampling of 25 Tele-

Communications, Inc. (``TCI'') and Time Warner Entertainment Company,

L.P. (``Time Warner'') cable systems (those being the most vertically

integrated cable operators) in order to determine whether, in fact,

broadcast, PEG and leased access channels occupied all, or nearly all,

of the systems' unaffiliated programming channels. Generally, the

Commission found that, even after excluding broadcast, PEG and leased

access channels (and even assuming the presence of two local or

regional networks), all of the systems had capacity remaining for

additional unaffiliated programming.

Next, CME claims that the Commission overstated the benefits of

vertical integration. As proof, CME states that the Cable News Network,

Inc. (``CNN''), Black Entertainment Television, Inc. (``BET''), and

Nickelodeon were successful prior to their relationship with cable

operators, and that ``there has been no successful launch of an

unaffiliated video programmer since the cable industry began the trend

toward vertical integration.'' Whether or not CNN, BET and Nickelodeon

achieved some initial independent success, there is evidence in the

record that these and other programmers would have had difficulty

[[Page 21465]] sustaining their success had it not been for cable

operator investment (see, e.g., Comments of Turner Broadcasting System,

Inc., filed February 9, 1993, at 12 (at a time when TBS's

``independence was very much at stake,'' cable operators were willing

to provide long-term equity under terms others were not); Opposition of

Black Entertainment Television, Inc. to Comments of Viacom

International, Inc., filed February 22, 1994, at 2 (``[C]able

investment has been crucial to establishing BET as a viable and

valuable programming service.''). Likewise, CME's assertion that there

has been no successful launch of an unaffiliated programmer since

vertical integration has taken hold was disputed by TBS, citing the

recent successes of ESPN2, FLIX and the SciFi Channel.

Similarly, there is no evidence in the record to substantiate CME's

claim that the 40% limit will deter independent investors from

investing in video programming, or that independent investors are

currently deterred from investing in cable programming by the

Commission's channel occupancy limits.

Finally, the Commission disagrees with CME's assertion that the

Senate Report ``suggested'' a 20% channel occupancy limit. The Senate

Report stated: ``For example, the FCC may conclude that each MSO should

control no more than 20 percent of the channels on any cable system * *

*.'' Thus, the Report used the 20% figure for illustrative purposes

only, while clearly acknowledging that the Commission was free to

choose a different limit. This interpretation is supported by the

actual wording of the statute, which simply requires the Commission to

establish ``reasonable'' channel occupancy limits.

The Commission also denies CME's petition to reconsider the

treatment of broadcast, PEG and leased access channels. CME correctly

notes that the channel occupancy limits are intended to keep cable

operators from filling every available channel with their own

programming. But from this premise, CME draws the conclusion that

channel occupancy limits must therefore be intended to give

``independent commercial programmers a chance to get on the wire.'' The

statute, however, does not distinguish between ``independent''

unaffiliated programmers and other types of unaffiliated programmers.

Section 11 simply ensures that subscribers will have access to some

kind of unaffiliated programming on a prescribed number of channels.

CME does not dispute that broadcast, PEG and leased access channels are

``unaffiliated'' with cable operators, or that the 1992 Cable Act

requires cable operators to reserve channel space for such unaffiliated

programming. Thus, the Commission reaffirms its holding in the Second

Report and Order that it would be unreasonable to subtract such

channels before calculating the system's channel capacity, since they

provide the type of diverse, unaffiliated programming contemplated by

the 1992 Cable Act. Further, as the Commission noted in the Second

Report and Order, it would be unfair to penalize those cable operators

who carried the widest array of broadcast, PEG and leased access

channels by decreasing the number of channels available for affiliated

programming.

Moreover, there is no evidence in the record that ``independent''

commercial programmers (i.e., those with no cable ownership interests

at all) are unable to obtain carriage because of the Commission's

treatment of broadcast, PEG and leased access channels. To the

contrary, in the Commission's sampling of 25 TCI and Time Warner cable

systems described above, the Commission found that all of the systems

carried some ``independent'' unaffiliated programmers, with most

systems carrying between 7 and 11 such channels.

In addition, although the Senate Report's sample calculation

excluded broadcast and access channels in calculating channel capacity,

CME's reliance on it as an expression of Congressional intent is

misplaced. As the Commission stated in the Second Report and Order:

The Senate Report language (* * *) appears to be included merely

as an example to illustrate how the Commission may decide to

calculate channel occupancy limits and therefore does not prohibit

the Commission from adopting an alternative approach if it finds

such an approach to be reasonable to promote the legislative

objectives. In any event, this language is not included in the

statute itself.

Finally, the Commission does not believe that it is weakening

Congress' statutory scheme by considering the impact of other

provisions of the 1992 Cable Act in establishing channel occupancy

limits. Section 11 expressly gives the Commission broad discretion to

fashion ``reasonable'' channel occupancy limits. In the Commission's

view, establishing ``reasonable'' limits requires it to consider all

factors bearing on the dangers or benefits of vertical integration.

Thus, for instance, the Commission believes that not only should it

take into account the impact of broadcast, PEG and leased access

channels, but also the impact of sections 12 and 19 in deterring the

type of discriminatory conduct that may be caused by vertical

integration. Only by considering the whole of Congress' scheme can the

Commission determine the level of vertical structural limits that are

``reasonable.''

The Commission also denies CME's petition to reconsider the

exception for local and regional programming. CME's approach overlooks

Congress' direction that the Commission consider the benefits as well

as the dangers of vertical integration in establishing ``reasonable''

channel occupancy limits. As the Commission stated in the Second Report

and Order, the exception for local and regional networks was ``an

important means of encouraging continued MSO investment in the

development of local cable programming, which is responsive to the

needs and tastes of local audiences and serves Congress' objectives of

promoting localism.'' (Second Report and Order at 78.) CME does not

challenge the value of local and regional programming, or the

Commission's conclusion that given the cost and limited appeal of such

programming, an exception may be necessary to encourage continued MSO

investment. The Commission continues to believe that consideration of

these benefits of vertical integration more accurately reflects

Congressional intent, and fully justifies the exception.

On reconsideration, the Commission also declines CME's invitation

to eliminate the 75-channel cap. There is no evidence in the record to

support CME's claim that ``there is a strong likelihood that all of the

newly available channels will be filled by services affiliated with the

MSO.'' Indeed, the Commission notes that in its informal survey of 25

TCI and Time Warner cable systems, none of the systems were approaching

the current 40% channel occupancy limit for affiliated programming.

However, even if there were some basis for CME's prediction, the

Commission still believes that the vast expansion of channel capacity

may obviate the need for a rigid occupancy limit. As the Commission

noted in the Second Report and Order, although information on how

multichannel video distributors will use the additional capacity ``is

necessarily somewhat speculative,'' the record indicates that the

capacity will likely be used to deliver targeted ``niche'' video

programming services aimed at correspondingly smaller audience sizes,

such as pay-per-view and ``multiplexed'' channels. (Second Report and

Order at 83-84.) Occupancy limits in these

[[Page 21466]] circumstances do not parallel occupancy limits for more

restricted capacity systems where most services are distributed on

discrete channels to a significant portion of a system's

subscribership. Accordingly, the occupancy limits can be relaxed.

In sum, the Commission continues to believe that the introduction

of advanced technologies such as signal compression and fiber optics

will reduce the need for structural occupancy limits in order to ensure

programming diversity and access for unaffiliated programmers.

Nevertheless, as the Commission noted in the Second Report and Order,

the 75-channel cap will be subject to periodic review and will be

eliminated if developments warrant.

The Commission also denies CME's request to reconsider its decision

to grandfather all vertically integrated programming services carried

as of December 4, 1992 (the effective date of the 1992 Cable Act). The

Commission still believes, as it held in the Second Report and Order,

that the public interest would be disserved by requiring cable

operators to delete vertically integrated programming services to

comply with the channel occupancy caps. The Commission continues to

believe that grandfathering existing arrangements will limit consumer

confusion and the disruption of existing programming relationships, and

is consistent with Congress' direction that our channel occupancy

limits ``take particular account of the market structure, ownership

patterns, and other relationships of the cable television industry.''

(Communications Act, section 613(f)(2)(C).)

The Commission also rejects CME's contention that the decision to

grandfather existing vertical arrangements ``has rendered impotent''

the intent of Congress to limit excessive vertical integration. First,

the Commission reiterates that Congress directed it to establish

``reasonable'' channel occupancy limits based on competing interests;

if Congress wished to require the divestiture of existing channels it

could have done so. More importantly, the Commission did not

grandfather non-compliance in perpetuity. Rather, the Second Report and

Order provided that when a grandfathered cable system adds channel

capacity, it cannot add an affiliated programming service until its

system is in full compliance with the Commission's channel occupancy

rules. Thus, the difference is more one of timing than of ultimate

objectives. While CME suggests immediate divestiture of existing

services to bring systems into compliance, the Commission's approach is

to grandfather existing services and remedy non-compliance

prospectively. The Commission continues to believe that its approach

better reflects the various interests at stake, and thus better

reflects Congress' intent.

Bell Atlantic filed a Petition for Limited Reconsideration

requesting that the Commission reconsider its decision to apply the

channel occupancy limits to cable systems that face actual head-to-head

competition. On reconsideration, the Commission declines to modify its

decision to enforce channel occupancy limits in systems which face

actual head-to-head competition. With respect to Bell Atlantic's

argument that channel occupancy limits are even less necessary in

markets where competition exists and one of the competitors is a video

dialtone service, the Commission cannot find, at this time, that video

dialtone will completely eliminate the problems caused by vertical

integration. Under video dialtone, a telephone company must provide

sufficient capacity to serve multiple video programmers, and must

expand capacity as demand increases to the extent technically feasible

and economically reasonable. At this point, there are only eight

commercially licensed video dialtone services in the country. None of

these systems is yet operational; until that time, it is unclear

whether a video dialtone system will fully address the concerns raised

by channel occupancy limits. In addition, the practical effect of

several recent court cases is that certain telephone companies may now

provide their own programming to subscribers in their service areas.

Thus, the Commission does not believe that video dialtone in its

current state can provide sufficient justification to reconsider the

decision to enforce channel occupancy limits in systems which face

actual head-to-head competition.

The remaining arguments raised by Bell Atlantic's Petition have

already been considered and rejected in the Second Report and Order. In

the Second Report and Order, the Commission concluded that it should

not eliminate channel occupancy limits in communities where effective

competition exists because the Commission found that the effective

competition standard was not adopted for this specific purpose and

because it is not clear that the presence of effective competition for

any cable system will address all of the relevant concerns that

Congress expressed in enacting section 11 of the 1992 Cable Act. For

example, the Commission noted that if a competing multichannel

distributor is also vertically integrated, without channel occupancy

limits, unaffiliated programming services may continue to be denied

access from either outlet, thus frustrating the diversity and

competition objectives of the 1992 Act.

Finally, the Commission also agrees that the statutory exemption

from regulation for cable systems subject to effective competition is

very limited: Congress explicitly stated in the statute that, in

systems which faced effective competition, rate regulation would not be

necessary. Thus, it is reasonable to assume that had Congress intended

for all cable regulations to be eliminated where systems became subject

to actual head-to-head competition, this statutory exemption would have

been drafted much more broadly. Nowhere in either the language of

section 11 or its legislative history does it state that the presence

of actual head-to-head competition will render the channel occupancy

limits unnecessary.

The Commission therefore concludes that there is insufficient

evidence in the record before it to warrant elimination or modification

of the channel occupancy limits in systems that face actual head-to-

head competition. However, as the Commission indicated in the Second

Report and Order, it remains aware that Congress has indicated that a

primary objective of the 1992 Act was to rely on the marketplace to the

maximum extent possible, and that the legislation was intended to

protect consumer interests in the receipt of cable service where cable

television systems are not subject to effective competition. Thus, as

competition develops and the Commission gains more experience with the

rules, the Commission will further analyze its rules and the industry

as a whole to see whether vertical ownership limits should be phased

out.

Administrative Matters

Regulatory Flexibility Act Analysis

Pursuant to sections 601-602 of the Regulatory Flexibility Act,

Public Law 96-354, 94 Stat. 1164, 5 U.S.C. 601 et seq. (1981), the

Commission's final analysis is as follows:

Need and Purpose for Action: This action is being taken to address

petitions for reconsideration of the channel occupancy rules adopted by

the Commission to implement section 11(c) of the 1992 Cable Act.

Summary of Issues Raised by the Public Comments in Response to the

Initial Regulatory Flexibility Analysis: There were no comments

received in [[Page 21467]] response to the Initial Regulatory

Flexibility Analysis.

Significant Alternatives Considered: We have analyzed the comments

submitted in light of our statutory directives and have, to the extent

possible, minimized the regulatory burden on entities covered by the

ownership provisions of the 1992 Cable Act.

Ordering Clauses

Accordingly, it is hereby ordered That pursuant to the authority in

sections 1, 4 and 613 of the Communications Act of 1934, as amended, 47

U.S.C. 151, 154, and 533, the petitions for reconsideration filed in

this proceeding by the Center for Media Education/Consumer Federation

of America and Bell Atlantic Corporation are denied.

Federal Communications Commission.

William F. Caton,

Acting Secretary.

[FR Doc. 95-10719 Filed 5-1-95; 8:45 am]

BILLING CODE 6712-01-M