Potentially Much More At Stake In Michigan Than PEG — NAB, PBS and Folks Worried About Bundling of Services Better Wake Up And Pay Attention!

Compared to the primary battles in Michigan, the fight between Comcast and local governments about Comcast’s decision to migrate Public Educational and Government (PEG) channels to digital seems like small potatoes. But potentially, the lawsuit filed by the cities of Dearborn and Meridian in local federal court could have huge impact on how cable operators carry broadcast television and even how they bundle video services with their voice and broadband offerings.

For those just tuning in: Comcast has decided take advantage of Michigan’s franchise reform law and forcibly migrate PEG channels to digital tier, which will require anyone who wants to see PEG channels to get a digital box and will put the PEG channels waaaay up the dial where channel surfers rarely tread. This has prompted angry protests by city officials, and even a reprimand from House Commerce Chair Rep. John Dingell (D-MI). While other cable operators have used such tactics in the past, Comcast appears to be the first operator to do this for an entire state at once.

As a result, Dearborn and Meridian challenged Comcast’s right to move the PEG channels without consent by the localities in federal court. But while this focus remains on PEG, it goes much further. In 1992, Congress mandated that cable operators must offer subscribers a “basic tier” that consists of the broadcast channels and PEG channels. Congress also prevented cable operators from bundling this “basic tier” with any other service or “buy through.”

For reasons having to do with the Telecommunications Act of 1996, cable operators may no longer need to offer a “basic tier.” But if that’s true, what does that mean for broadcasters? Can cable operators forcibly migrate broadcast channels in the same way they claim they can forcibly migrate PEG? And — looking ahead — does that mean that cable operators will have the freedom to change how they bundle packages? Right now, cable operators generally offer their basic video product and then offer all manner of additional services. But what happens if the “basic tier” requirement is really dead? Will we see cable operators get more aggressive, forcing customers to take additional services if they want video programming?

From where I sit (which is really just looking at the plain language of the statutes), it’s a real muddle. I’m glad I’m not litigating. But if I were the NAB and PBS, I’d start paying real close attention here. Otherwise, they may wake up and discover that they are also going on a forced march migration to digital, even if they can keep their channel position and not end up in the 900s.

Analysis below . . . .

The crux of the matter lies, oddly enough, with the federal rate regulation authority established by the 1992 Cable Act. That Act created Section 623 of the Communications Act, codified at 47 U.S.C. 543. Among other things, Section 623(b)(7) required the FCC to create rules forcing cable operators to offer a “basic tier” consisting of (i) the broadcast channels, and (ii) the PEG channels. The statute explicitly prevents any kind of “buy through” requirement, whereby a subscriber must purchase some other tier or service in order to get the basic tier (623(b)(8)).

So problem solved, yes? Comcast cannot force PEG providers to convert to digital unless it moves the entire basic tier to digital. Even then, it must keep the PEG channels down with the broadcast channels in the basic tier, yes?

Sadly, not so simple. In the Telecommunications Act of 1996, the cable operators persuaded Congress that cable competition was just around the corner. No really, any minute now. And we should therefore get rid of the nasty price controls that stifled investment and free cable operators to provide all manner of splendiferous services to subscribers, etc., etc. So the Telecom Act of 1996 amended Section 623 (codified at 47 U.S.C. 543) to say that where a cable operator petitions the FCC and proves that there is “effective competition” (a rather low threshold), the cable operator escapes rate regulation.

So then the suit is without merit, right? Not necessarily. Leaving aside for the moment any claims other than those based on Section 623, the critical question the court must resolve (or the FCC, but we’ll come to that in a moment) is whether the “get out of price regulation free” card established by the Telecom Act of 1996 applies to all of Section 623, or just to the price regulation part. In other words, once the FCC grants a petition for “effective competition,” is the cable company free to do absolutely whatever the heck it wants (on a theory that since it faces effective competition, it will only do what customers want)? Or is it free from price regulation, but still subject to the other consumer protection regulations of Section 623, such as a requirement to offer a basic tier with PEG channels?

But before we even reach that question, we need to ask who gets to decide — the FCC or the federal courts? For most franchise issues, the proper recourse is the federal courts under 47 USC 545 and 47 USC 546. This makes sense because the authority to demand PEG is a power given the local franchising authorities based by Congress under 47 USC 541 as a condition of franchising, and disputes over franchising conditions between the local franchising authority and the cable operator go to the federal district court.

But the relevant statute here, Section 623 (47 USC 543), explicitly gives rulemaking authority to the FCC. The statute also requires the FCC to promulgate rules on enforcement. Specifically, Section 623(b)(5) of the Communications Act says:

(5) Implementation and enforcement
The regulations prescribed by the Commission under this subsection shall include additional standards, guidelines, and procedures concerning the implementation and enforcement of such regulations, which shall include—
(A) procedures by which cable operators may implement and franchising authorities may enforce the regulations prescribed by the Commission under this subsection;
(B) procedures for the expeditious resolution of disputes between cable operators and franchising authorities concerning the administration of such regulations;
(C) standards and procedures to prevent unreasonable charges for changes in the subscriber’s selection of services or equipment subject to regulation under this section, which standards shall require that charges for changing the service tier selected shall be based on the cost of such change and shall not exceed nominal amounts when the system’s configuration permits changes in service tier selection to be effected solely by coded entry on a computer terminal or by other similarly simple method; and
(D) standards and procedures to assure that subscribers receive notice of the availability of the basic service tier required under this section.

But again, does this apply only to the rate part, with the content of the basic tier set by law and immutable? Or does it apply to all aspects of Section 623? The question is made more complicated by the ongoing litigation over the FCC’s authority to regulate local franchising. So even if LFAs could get the issue resolved more quickly and in their favor at the FCC (a big if, but possible), they would not want to go that route, because it could legitimize the FCC’s broader claim to regulate the franchising process. Mind you, that doesn’t necessarily follow, because we are talking about very different statutes, but would you want to bet on a federal judge being that clever?

But lets assume the federal court gets to decide, and it decides for Comcast that a finding of effective competition frees a cable operator from all of Section 623, including the requirement to offer a basic tier. That goes to the question of a basic tier for broadcast channels. With this requirement gone, we can expect cable operators to stop offering the broadcast channels on a stand alone basis. Why should they? They didn’t before Congress required them to do so, and I don’t expect they will want to do so now if they can get out of it.

True, the “must carry” statutes (47 U.S.C. 534 and 47 U.S.C. 535) require cable operators to keep the broadcast channels on the same position as their broadcast equivalent. So local Channel Five must appear on cable channel five. This would keep the broadcasters from getting forced up into the 900s like the PEG programmers. But nothing would stop a cable operator from flipping a broadcast channel to digital and requiring you to have a set top box to see it, or subscribe to the digital package to get all your local channels.

Similarly, it may impact how the cable operators bundle their services. Right now, because cable operators must offer a basic video tier, cable operators offer video as the basic package and then layer the other bundled services on top. But what if cable operators did not have to offer basic tier as an unbundled service? Could cable operators tie their video service to their phone service, not merely subsidize it? That might not be a smart business move, but cable operators in areas with little competition may chose to force the issue anyway, if they think they can do so legally.

I should add that there are other theories under which the local franchising authorities can defend themselves than reliance on the definition of “basic tier” under Section 623. For example, LFAs can argue that migrating PEG to digital without a permission of the LFA violates the franchise agreement. A franchise is in many ways like a contract. And just as a cable operator may be restricted by contract law from moving a programmer to digital, so too may a franchise — particularly where the migration to digital deprives the subscribers in the franchise area of the benefit negotiated by the franchise authority. And if the claim is that this violates the underlying franchise agreement, rather than violates the requirement to offer a “basic tier” that includes PEG, then federal court is the right place to be.

A court decision along lines like these would avoid a need to even address the Section 623 question on basic tier. Similarly, even if the cities lose in court, they could try their hand under Section 623 at the FCC. But whatever happens, the question of whether Section 623 still requires all cable operators to offer a basic tier remains alive and kicking. So far, Comcast and the other cable operators have kept the issue under the radar, building precedent against PEG programmers while the far more powerful local broadcasters remain blissfully asleep at the switch. Perhaps, with a court potentially about to opine on whether cable operators must offer a basic tier after a finding of effective competition, they will take notice and wake up.

If nothing else, it’d be a good question to raise at the hearing Dingell is planning for January 29th.

Stay tuned . . . . .