FCC Last Call — Part I: Cable

The FCC sure had a busy day a its last open meeting on December 20, 2006. In addition to the oral argument for the indecency cases in the 2nd Cir., the FCC also had its last open meeting of 2006. While it is impossible to provide a thorough analysis until the FCC releases the full text of the orders it adopted, below find some brief impressions based on the what we know so far about the FCC’s cable franchising order, cable rates report. Later, a post on the surprise Return of the Incredibly Awful Cyren Call Proposal.

O.K., here’s a quick run down on what went down at last week’s open FCC meeting (assuming anyone is actually reading this between now and New Year’s). It started late, again, which appears to have become almost a a de rigour requirement for meetings under Martin (I know he likes to negotiate, but c’mon . . . )

As expected, the FCC voted 3-2 to impose a new set of limitations on the power of local franchsies to negotiate with telcos. From the press release, it appears that the big items in the new rules are (a) a “shot clock” required the localities to make a decision within “certain time frames”; (b) limitations on public, education and government (PEG) and institutional network (I-Net) demands by the local franchising authority, including a requirement to count such services toward the 5% franchise fee; (c) limitations on build out requirements (such as anti-redlining restrictions); and (c) preemption of any state or local “level playing field” rules that require LFAs to impose identical terms on all video providers (actually, I loath these as well, as they are enormously anticompetitive and stupid, but that doesn’t necessarily give the FCC the authority to deal with them).

As I said when Martin first started talking about “franchise reform”, I don’t see any reason for it so far and I don’t think the FCC has the authority under the Communications Act. The Cable Act of 1984, as amended by the 1992 Cable Act and the Telecommunications Act of 1996, is pretty specific about what powers it apportioned to the local franchise authorities and what powers it apportioned to the FCC. OTOH, MCDowell indiciated that the Order lays out a strong case for additional authority under other provisions of the Communications Act. I’m skeptical, but must reserve judgement until the Order is released.

You can read Martin’s statement here. Basically, he thinks this will create competition and bring down prices. Also relies on a study by Phoenix Center, one of the higher class coin operated think tanks favored by the Bells. (If New Millenium Research Counsel are industry whores, Phoenix Center are more like the gals who used to work for Heidi Fleiss in Hollywood.) The 2005 Phoenix Center paper explained that the promise of providing video services drives fiber deployment, so only giving the Bells a quick path to video will encourage them to build out much needed fiber to the home. (How one reconciles this with AT&T’s “Project Lightspeed” I’m sure I don;t know. But I’m sure for another couple of grand the folks at Phoenix Center will explain to me. Or perhaps I can just call their 900 number.)

On the one hand, I’m glad to see an FCC Chair face up to the reality of cable market power rather than bury it under the rug. Any industry that can raise prices after the most profitable year ever despite the fact that it ranks below an IRS audit in customer satsifaction surveys has market power. And competition is a good way to try to fix that, although it is a heck of a lot harder to get people to switch than regulators believe. But, as Bruce Kushnick has documented, just giving the Bells more regulatory goodies doesn’t gaurantee you anything. If we want to spur video competition, if such a thing is even possible at this point, the regulatory solutions need to target the problems of cable market power and customer lock-in.

So, three cheers for Martin trying to solve the illness of cable market power. Unfortunately, his solution is like trying to cure strep throat with a chain saw rather than antibiotics.

Tate was happy because while this order is filled with all kinds of complicated legal and technical stuff, the important thing is that the FCC has deregulated something. Deregulation pleases the Competition Fairy. If you deregulate, close your eyes, and believe, the Competition Fairy will gather up all the dead competitors that relied on the bad old regulation and will bring you lots of innovative offerings at affordable prices with a high quality of service from cheerful, qualified support teams. (The other Republicans designed to clap hands, but it looked like a close thing.)

McDowell acknowledged doubts. But ulitmately, the neo-con belief in the Competition Fairy and St. Reagan the Anti-Government Crusader won him over. McDowell considered the order a careful balance, becuase it left critical local issues local (i.e., it did not preempt states that passed state franchising laws) but did preempt localities where necessary (i.e., in those states that have not yet been enlightened enough to pass ILEC-authored “franchise reform” legislation).

Copps issued a brief dissent. Succinctly observing that there is a huge difference between agreeing on the many benefits of video competition and a set of rules that actually produce video competition and “this item before us doesn’t get us there.” Copps critcized the majority for acting on the basis of little more than a few unverified anecdotes and under questionable authority. He concluded that the uncertainty created by the legality of the news rules may delay deployment rather than facilitate deployment.

Adelstein, by contrast, wrote a vigorous 8 page dissent that could serve as a model for a judicial opinion reversing the Commission’s actions. It is well-thought out with the occasional snarky bit to delight the TotSF heart.

Adelstein begins with a critique of the Commission’s violation of federalist principles and presumption in undertaking to act outside its authority on an issue Congress and state legisltures have vigorously debated and will continue to debate. Perhaps in response to McDowell’s invocation of Ronald Reagan, Adelstein includes a quote on federalism from Reagan’s first Stae of the Union address and observes how Republicans have changed since then. Adelstein also tartly observed that, unlike the Senate where he used to work, the FCC had become “the least deliberative body” by rushing to act on such a sensitive matter. He also faulted the majority for their unbiased credulousness with regard to the evidence submitted by industry.

From there, Adelstein proceeded to rip the legal justification provided by the Order for the new rules. I can’t personally evaluate these until the Order is released, but Adelstein’s criticism is certainly consistent with my own preliminary gueses based on what we’ve seen so far. Adelstien concluded with a warning that the Majority risks a sweeping reversal that could limit the FCC’s power to craft “appropirate regulation” some time in the future.

So what happens now? Well, I expect we will see a number of appeals. The interesting question is, where? On the one hand, the D.C. Cir. has taken agressive steps to limit the FCC’s general rule making authority under the Communications Act. OTOH, they are also a bunch of activist deregulatory judges that can demonstrably turn on a dime to reach a result they like. If it were me, I’d head for a somewhat conservative circuit that is unlikely to read the FCC’s general powers as overly sweeping but still cares enough about law not to affirm simply because they like a “deregulatory” result. We may see a “race to the court house” as the telecoms file in the DC Cir. and opponents of the new regs file elsewhere.

Cable Rates
Meanwhile, in no small part to bolster its case, the FCC also released its annual report on cable pricing. Again, it’s hard to judge without seeing the report, but the conclusions appear to line up with reality a more than previously (when the Government Accountability Office (then the General Accounting Office) took an entire report to explain why the FCC’s methodology sucked rocks.)

The news release contained the interesting facts that FCC had previously chosen to ignore. a) Cable rates keep going up, and have nearly doubled since deregulation in 1996. The Report also compares where the FCC has previously deregulated the remaining price controls because it has found “effective competition” as defined by the FCC’s interpretation of the relevant statute. It finds that price increases are somewhat less on avergae in areas where incumbent cable operators face “effective competition” — 7.9% on average.

But significantly, the FCC admits for the first time what a bunch of us have been saying since 2001 and what GAO has said since 2003: Satellite doesn’t do squat for cable rates. Where the FCC found effective competition based on the level of DBS penetration, it found no appreciable difference in rates as compared to non-competitive areas. By contrast, areas with a terrestrial overbuilder experienced rates 17% lower. At least as measured for basic tier and basic plus tier.

Also of significance, the FCC Report found that cable rates are higher in places where a single cable operator controls the majority of an urban area, i.e., where cable operators have achieved “clustering.” The report does not, aparently, contain a definitive explanation of why. Again, however, the FCC results mirror results from consumer studies over the last several years that the FCC has seen fit to blissfully ignore in the context of the pending cable ownership proceeding and in the context of the Comcast/Time Warner/Adelphia transaction last year.

It will prove interesting to check this out when the report comes out. The results apear to confirm lots of other results from both consumer and GAO sources, so I’m inclined to believe them.

Also telling was the response of the National Cable and Telecommunications Association, the trade association for large incumbent cable operators. It takes issue with measuring just the cost of video (as opposed to the entire bundle of services cable operaors are trying t sell everyone — video, data and voice) and explans that cable is really a tremendous deal because (I love this one) people are watching more cable, so the cost per hour is down. NCTA provides a more extensive list of baloney docs (I mean, rebuttal arguments) here.

In other words, the cable industry is saying “yes, we have increased profitability per subscriber to record highs and have jacked up the rates for basic cable (the most popular tier), but since were penalizing people who refuse to take the bundle, it’s o.k.” As for the cost per hour being down, do I really need to explain the utter idiocy of such a comparison? (Hint, people don’t buy cable ‘per hour.’)

The report drew separate comments from four Commissioners (Tate, apparently bored without something to deregulate, sat this one out). Chairman Martin to compare cable’s ever spiraling prices with the decline in telco prices generally (apparently skipping over the recent GAO report showing the same problems for competition in the business market). Martin concluded that only agressive means to push telco entry could save the day and bring relief to consumers (surprise). McDowell, OTOH, was much more restrained, suggesting that the matter needs more study before concluding that cable cos are using market power to charge rates in excess of what they could charge in a competitive market. (I suggest he start with my “cable market power for dummies from last year.)

Copps gave the report mixed reviews. While pleased that the Chairman and Media Bureau continue to make progress on flaws that the Ds and others have identified in the report over the years, the agency still has a long way to go before Copps will be satisfied that the agency is fulfilling its statutory responsibility under Section 623(k) of the Act (codified at 47 U.S.C. 543(k)). Notably, the FCC needs to do audit information provided by the cable cos for accuracy — a flaw the GAO identified back in ’03. A little more work on proving a connection between rising rates and market power would also be nice.

Adelstein, apparently still annoyed over the franchising item and how the Chairman rather shameless has used the cable rate report to bolster his argument for mucking about with local franchises, provides a much grumpier concurrence than Copps. But other than pointing out that the report selected one international point of comparison — Singapore — to bolster its conclusion that the Commission needs to push telco entry into video, Adelstein says pretty much the same thing as Copps. The FCC relies on unaudited data submitted by the cable companies themselves. The FCC does not engage in any meaningful analysis. On the plus side, at least the FCC is no longer trying to fudge the numbers to pretend everything is hunky-dory in cable land, but the downside of telling the truth for the first time ever is that the constant changes in format and measurement make it impossible to do longitudinal comparisons.

Anyway, I look forward to seeing the various items when released. The cable rate report will prove particularly interesting, for a change. It may also provide some clues for what happens when the FCC issues its other report on competition in the video programming market generally. While usually a white wash of epic proportions, last year’s report, and this cable rate report, indicate we may see some real changes.

OTOH, I am STILL waiting for the rulemaking on leased access that Martin promised Adelstein back in July as part of the Adelphia transaction. So we’ll see if the change in direction on cable is anything more than just an excuse to deregulate telco video entry and make a new round of offerings to the competition fairy.

Stay tuned . . . .

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