Lawyer Article

Published in the May 24, 2005 issue of Southeast Tech Wire

Introduction
The Commission has just released a Second Further Notice of Proposed Rulemaking (Second Further Notice) regarding the implementation of cable horizontal and vertical ownership limits. Section 613(f) of the 1992 Cable Act directed the Commission to conduct proceedings to establish reasonable limits on the number of subscribers a cable operator may serve (horizontal limit) and the number of channels it may devote to its affiliated program networks (vertical, or channel occupancy, limit). The Commission did so, adopting a 30% horizontal limit (all MVPD subscribers) and a 40% channel occupancy (applied to channel capacity up to 75 channels) limit. The D.C. Circuit Court of Appeals, however, reversed and remanded the horizontal and channel occupancy limits, finding among other things, that the limits unduly burdened cable operator’s First Amendment rights. The Commission issued a Further Notice of Proposed Rulemaking in 2001 (2001 Further Notice) in order to address the court’s concerns. A number of comments were filed, however, the Commission did not act finding that the comments did not yield a sound evidentiary basis for setting limits.

Second Further Notice
The Commission opens this further inquiry in light of its inadequate record, mindful that the courts have recently remanded three other matters where ownership limits were under consideration with instructions to better justify its decisions based upon record evidence.

The Commission therefore seeks to update the record in this proceeding through the acquisition of information on how recent developments in the industry may affect its analysis and the development of new evidence supporting the formulation of horizontal and vertical ownership limits. The Commission has invited parties to conduct their own studies on the issue and to comment on Media Bureau Staff Research Paper No. 2004-1, examining the effect of subscribership on a network’s ability to survive.

The Commission poses a number of questions on which it seeks comment. For example, it addressed the substantial growth in DBS subscribership between the close of the 2001 Further Notice, as well as News Corp.’s acquisition of DirecTV must be taken into account in any new rules. The Commission therefore seeks evidence and analysis on the DBS competition and its role in providing alternative means for programmers to reach consumers and thereby protect consumer choice and welfare. The Commission also seeks comment on the effect increased channel capacity, digital tiers, video-on-demand (“VOD”) and subscription VOD, Internet distribution have had on the opportunity for programmers to gain distribution of their programming.

Comment is sought on the appropriate application of the specific elements of Section 613(f). For example, Section 613(f)(2)(A) requires that the Commission “ensure that no cable operator or group of cable operators can unfairly impede, either because of the size of any individual operator or because of joint actions by a group of operators of sufficient size, the flow of video programming from the video programmer to the consumer.” Comment is sought on the appropriate interpretation of “unfair” in light of the Court’s decision that a “broad interpretation is plausible only for actions that impinge on the interest in competition that lay at the heart of Congress’ concern.”

The Commission also reached a number of tentative conclusions on which it seeks comment. For example, several commentors have suggested that the Commission has the discretion to forego imposition of horizontal and vertical limits. The Commission, however, has tentatively concluded that it possesses no such discretion and that it is obligated to establish reasonable horizontal and vertical limits “at some number.”

The Commission acknowledged that it must define the markets involved. Three different markets were identified as being relevant to the horizontal limits analysis: the programming market; the programming distribution market and the relevant geographic market. In considering the programming market, the Commission previously distinguished between producers of programming and the networks, choosing to focus on the ability of networks to gain carriage. It has been suggested however that the focus is better placed on program producers’ ability to find distribution outlets. As for the programming distribution market, it questions anew whether DBS subscribers should be included in the formulation and application of the limit. Comment is sought on how to define those markets in determining channel occupancy limits. For example, it questions whether the market should be segmented according to the type of programming network involved.

This is merely a brief overview of the Second Further Notice. Comments will not be due until thirty days after the Second Further Notice’s publication in the Federal Register. Reply comments will be due forty five days after that date. If you would like a copy of the Second Further Notice, are interested in commenting or have any questions about this client alert or any other issues, please contact Mark Palchick via email or via phone (202) 857-4411 or Howard Barr.