The Quinquennial Question: Should the Ban on Exclusive Program Access Deals Stay or Go?

Tempus fugit! Time for the next five-year assessment of the ban on certain exclusive program access deals – Comments are due by June 22, 2012.

Hard to believe, but it’s that time again – time for the Commission to take a look at competition in the multichannel video programming distribution (MVPD) industry to determine whether the 20-year-old ban on certain exclusive program access deals is still necessary. With the release of a Notice of Proposed Rulemaking (NPRM), the Commission has started that ball rolling again. Interested parties have until June 22 to let the FCC know their thoughts on the issue.

The last two times the Commission considered this question, it concluded that the ban should remain in place. Thanks to at least one intervening court decision, though, this time could be different.

Back in 1992, Congress was concerned about the choke-hold that the largely monopolistic cable industry then had on video delivery in many markets. Congress understood from the FCC that that choke-hold was at least partly the result of the fact that competitors couldn’t secure programming owned by “vertically integrated cable companies”. (In this context, “vertically integrated cable companies” are cable operators that own attributable interests in companies that provide cable programming.)  So Congress just said “no”.

It ordered the Commission (among other things) to prohibit certain exclusivity agreements between a cable operator and a cable program provider in which the operator has an attributable interest. The idea was to assure that all competing cable operators would have access to the primo types of programs most attractive to subscribers.

Congress was aware that the video delivery industry was developing rapidly and that the need for the ban might decline over time. So Congress included a sunset provision: while the 1992 Cable Act required the imposition of the ban, it also required that the FCC revisit the ban in 2002 after the enactment of the Cable Act. Unless the FCC were then to determine that the ban continued to be necessary to protect competition and diversity, the ban would automatically expire. And even if the ban survived the 2002 review, it would be subject to similar reviews every five years thereafter. 

The ban did indeed survive the 2002 review, and the 2007 review as well. But the latter decision was appealed to the U.S. Court of Appeals for the D.C. Circuit in 2010. While the court affirmed the FCC’s decision to leave the ban in place for another five years, the court expressed concern because (a) Congress had clearly intended that the ban go away at some point and (b) the video delivery market has “changed drastically” since 1992. One of the three judges issued a dissenting opinion buying into the appellants’ argument that the ban raised serious First Amendment concerns.

Against that backdrop comes the NPRM.

This time around the Commission appears to be taking to heart the messages from  the Court of Appeals. In contemplation of a possible sunsetting, the Commission is seeking suggestions for how best it could preserve competition and diversity if the ban were finally to be tossed. 

And to those who would urge that the ban be kept in place – at least for another five years – the Commission cautions that it will be looking for specific data and empirical analyses showing that lifting the ban would harm competition. In the past, the ban’s supporters have tended to rely on generalized claims that certain programming controlled by cable-affiliated entities is “must have” and should not be subject to access exclusivity deals. It appears from the NPRM that that won’t cut it anymore.

As a preliminary observation, the Commission notes that, since 2007, there have been at least three developments that might affect the questions at issue: 

The separation of Time Warner Cable Inc. (TWC), a cable operator, from Time Warner Inc. (Time Warner), an owner of satellite-delivered, national programming networks. As a result of the separation, Time Warner’s programming networks are no longer affiliated with TWC, thus reducing the number of satellite-delivered, national programming networks that are cable-affiliated. This is significant because the FCC has historically compared the total number of satellite-delivered channels with the number of those channels affiliated with a cable operator. The actual significance of that comparative approach is not entirely clear.

The joint venture between Comcast (a vertically integrated cable operator) and NBC Universal, Inc. (NBCU), an owner of broadcast stations and satellite-delivered, national programming networks). While this transaction led to an increase in satellite-delivered, national programming networks that are cable-affiliated, the NPRM suggests that the program access conditions of the merger agreement mitigate any adverse effects this deal might have on the video distribution market. (Of course, those merger conditions are in any event set to go away at the end of 2018, and they might be removed or revised earlier than that – so their permanent protective effect are neither as extensive nor as solid as a more general rule or policy applicable to all parties.)

The rapid growth of distributing and viewing of video programming over the Internet (OVD, or online video distribution). In assessing the Comcast/NBCU merger, the Commission acknowledged the potential effect of OVDs on programming choices, viewer flexibility, technological innovation and lower prices. In the Comcast/NBCU Merger Order, the Commission recognized that OVDs “can provide and promote more programming choices, viewing flexibility, technological innovation and lower prices.” According to the Commission, OVDs are a “potential competitive threat” that “must have a similar array of programming” if they are to “fully compete”.  The NPRM solicits information regarding the effect – historical or anticipated – of OVDs on nationwide and regional multichannel video distribution subscription rates. It also asks whether (and if so, how) the emergence of OVDs that could benefit from the exclusive contract prohibition should affect the Commission’s analysis.   (It’s interesting that the FCC may be looking at OVDs as a potential beneficiary of, rather than a reason for sunsetting, the exclusive contract prohibition.)

In view of all these factors, the NPRM asks whether it should: (a) sunset the ban on exclusive contracts involving satellite-delivered, cable-affiliated programming; (b) retain that ban as is, or (c) retain it with some relaxation. It also solicits comments on revisions to the program access rules that might allow it to address alleged violations (e.g., discriminatory volume discounts and uniform prices increases) more effectively.

Anyone looking for continuation of the prohibition – a universe likely to include non-vertically integrated MVPDs – will be expected to demonstrate, with hard data, either that (a) little has changed in the competitive dynamics of the video market since 2007, or (b) as a result of (or in spite of) changes, relaxing or sunsetting the prohibition would harm competition. Among the issues the FCC has teed up are the following:

What is the impact of the allegedly growing number of satellite-delivered national programming networks? According to the NPRM, the percentage of such networks that are cable-affiliated has significantly declined.   One difficult issue here is how to count programming. For example, should a network that provides its programming in standard definition, high definition, 3-D and video-on-demand formats be treated as four networks or one?   (While non-integrated MVPDs might be inclined to argue in this context that a multi-format network like this should really count as only one network, they argued otherwise in 2010 to get the Commission to force regional sports networks (RSNs) to provide access to HD feeds as well as SD feeds.)

Do integrated MVPD/programmers still have the ability to withhold programming from competitors in a manner that harms competition?   The NPRM appears to recognize the continued existence of some popular channels for which there are no current substitutes. The ability to withhold such “must have” channels has generally been viewed as anti-competitive. But the Commission is now looking for “reliable, empirical data” to establish conclusively the existence of such channels. While the notion of “must have” channels may seem obvious – even the Commission seems to acknowledge that RSNs are critical to a competitive MVPD service – proving their existence with facts and figures could be a difficult and expensive proposition.

Do integrated MVPD/programmers still have the incentive to withhold programming from competitors in a manner that harms competition? The historical theory has been that integrated companies are willing to forgo revenue from licensing programming to competitors because such integrated companies can profit more from increased revenues derived from subscribers who flock to the integrated MVPD to get the programming that’s unavailable from its competitors. The NPRM suggests that the decline in national penetration rate for cable operators (67% to 58.5%) may undermine that theory. Of course, presumably the integrated cable operators have lost subscribers to the very competitors to whom they already must make their programming available – so it’s not clear why a declining penetration rate might justify elimination of ban on exclusivity deals, but that’s a point that will presumably be made by commenters.

If, after reviewing all the comments and other record information, the Commission concludes that the prohibition on exclusive programming contracts should be tossed, the Commission will have to decide how, in the absence of the prohibition, it can and should protect and preserve competition. The FCC invites comments on a range of possible approaches, including:

Complete elimination of the prohibition, replaced by reliance other existing protections.    The Commission has complaint processes in place with respect to a variety of programming-related issues on the MVPD front. So even if the absolute ban on exclusive access deals were to be eliminated, aggrieved parties could theoretically still plead their case to the Commission through complaints. But the complainant would have the burden of proof. That would require the complainant to demonstrate the integrated MVPD had engaged in some “unfair act” the “purpose or effect” of which was to “significantly hinder or prevent” the complainant from providing programming to its subscribers. That’s a tough burden to meet, although the NPRM invites suggestions for easing that burden with respect to RSN, and possibly other, programming (through, perhaps, the establishment of rebuttable presumptions regarding the intent and effect of denying such programming to competitors).

Gradual elimination of the prohibition market-by-market. Under this approach, the prohibition would be left in place, but cable operators or satellite-delivered, cable-affiliated programmers would be permitted to file a Petition for Sunset seeking to remove the prohibition on a market-by-market basis based on the extent of competition in the market.

Retention of a more limited prohibition. If any problem arising from the kind of program exclusivity deals barred by the current prohibition is really limited to certain types of programming, the Commission is open to considering narrowing the scope of the prohibition to reach only RSNs and certain other so-called “must-have” programming.   Again, however, hard data is sought as to the alleged “must-have” nature of protected programming.

Finally, the Commission notes that elimination of the prohibition could cause substantial disruptions to cable subscribers. For example, some programming agreements entered into while the prohibition has been in effect might provide that, should the prohibition be eliminated, the cable-affiliated programmer could immediately terminate the agreement and instead enter into an exclusive arrangement with its cable affiliate. If such a provision were invoked, subscribers to non-affiliated MVPDs might suddenly lose access to desirable programming. What steps, if any, should the Commission take to minimize viewer disruptions if the prohibition is eliminated?

The NPRM is a wide-ranging invitation for comments on a host of issues, both general and detailed. It is dense with assertions and questions that demand considerable review and deliberation. Since the bottom line here is the possible elimination of a rule that has been in place for 20 years already, everyone affected by that rule should consider how they may be able to influence the final outcome here. 

The NPRM has been published in the Federal Register, which establishes the deadlines for comments and reply comments. Comments are due by June 22, 2012; replies are due by July 23.

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