What the FCC Can Do About CBS and TWC — Nudging The Parties Forward

Last Friday, Federal Communications Commission (FCC) Chairwoman Mingon Clyburn addressed the CBS/Time Warner Cable (TWC) retransmission consent fight for the first time. Clyburn noted her “real distress” about the impact on consumers and said she was “ready to consider appropriate action” if the companies can’t resolve their differences.

 

First, let me say that I am glad to see Clyburn give a “shot across the bow” to the parties that the FCC might actually take some kind of action. This sort of “jaw boning” by officials (like the letters from members of Congress last week) is part of the feedback mechanism for parties. If officials stay quiet or state they have limited options, it is generally taken as a signal by the parties that no official consequences will occur and they can proceed without worries of Washington repercussions. Statements like Clyburn’s amount to a warning that this is not a free ride — even if it is not obvious yet what the FCC would (or could) do.

 

Since all industry players hate Washington intervention, the threat that it might happen is a modest incentive to the parties to get this resolved sooner rather than later. It also helps by indicating to consumers that the FCC does not consider this a perfectly normal event and that they (the consumers) are right to get pissed about it — which may prompt more calls for Congressional action.

 

But to really influence the parties, there needs to be a credible something the FCC can do. Since the FCC (including Chairwoman Clyburn) have said before that they don’t think they have authority to resolve the dispute, it raises the question of what the FCC can actually do.

 

Even accepting the limitation that the FCC cannot resolve the dispute, the FCC still has authority to both limit the scope of the dispute by ordering CBS to stop blocking Time Warner Cable broadband subscribers, and taking other steps to bring the parties together. I outline some of these possibilities below . . .

 

As I’ve written at length before, I think the FCC has much more authority in this area to take action than it (and its members) say it has. You can see a bunch of filings by my employer, Public Knowledge, on the subject in the open retransmission consent reform docket (here, here, here, here, here and here). Nevertheless, while I firmly believe the FCC can (and should) act to address some of the issues here, it is not realistic to expect an interim Chair to utterly upend 20 years of FCC practice in this area.

 

So while a total overhaul like that suggested by Time Warner Cable (and supported by other multichannel video programming distributors (“MVPDs”)) seems unlikely (although possible if this drags on into September, see below) the FCC can take a number of steps under its current authority.

 

 

Theory of Authority for the FCC To Act On Retransmission Disputes

 

For those who didn’t click through to the long explanation, here’s a summary of what you need to know to understand how this works. For more background on how badly broken the current video marketplace is, and how to repair it, I refer you to my Public Knowledge colleague John Bergmayer’s TomorrowVision white paper, and to this white paper by S. Derek Turner of Free Press.

 

The legal underpinnings of this all start with the old model that broadcasters get a free license to use “the public airwaves” when nobody without a license can do so. In exchange, they provide us with free programming (supported by advertising) and act as “public trustees” for their local communities by using this public resource to provide news, entertainment, and otherwise fulfilling the public interest. In theory, the FCC exercises lots of power over these licensees. In reality, the FCC has spent 30 years steadily deregulating the broadcast industry. As a result, “local broadcasters” have virtually vanished in mammoth waves of consolidation and FCC regulation of the broadcast industry has become something of a joke.

 

Because broadcasters are required to provide free broadcasting to everyone in their local viewing area, they were not allowed to charge cable operators for retransmitting their signal on their cable systems. (This “retransmission” right is different from the actual copyright held by producers — who may or may not be the broadcaster or the broadcast network. Copyright holders get compensated by a mechanical license fee under Section 119 of the Copyright Act and don’t figure into these “retransmission disputes.”) Congress changed this in 1992 as part of the general rewrite of laws relating to cable known as the Cable Competition and Consumer Protection Act of 1992 (or, more sensibly, the 1992 Cable Act). The 1992 Cable Act said that no cable system operator (or other MVPD) can retransmit the signal of a local broadcaster without getting permission from the local broadcaster. So if the local broadcaster thinks that its signal adds value to the local cable system, the local broadcaster can say “I won’t let you retransmit that without your paying me.”

 

Thus was born the incredible consumer-abuse machine known as “retransmission consent.” In fairness to Congress of 1992, however, they assumed retransmission black outs, if they happened at all, would remain short-lived local phenomena. Cable systems were smaller, and broadcasters had fewer licenses they controlled. Besides, as any economist would explain — both sides had lots of incentive to avoid a black out. (Which should prove as something of a warning to all those who argue incentives are a perfect substitute for regulation, but I digress.)

 

Authority specific to the retrans statute.

Fortunately, Congress also took some basic precautions to prevent retransmission consent from spinning out of control. Section 325 (47 U.S.C. 325), which creates retransmission consent, says that no cable system (or other MVPD) shall retransmit the signal of a broadcast licensee without “the express authority of the originating station.” However, it also requires the FCC to establish the rules “to govern the exercise by television broadcast stations of the right to grant retransmission consent under this subsection.” 325(b)(3)(A). These rules must, in particular “ensure” that basic rates remain reasonable. (Id.)

 

Even accepting the interpretation that the word “consent” means the FCC cannot compel a specific outcome, the statute clearly gives the FCC the authority to set rules of engagement between the broadcaster and the cable operator. The language also indicates the rules go beyond the purely ministerial to actually being able to influence outcomes and behaviors, since the FCC has a responsibility to use these rules to ensure that the rate for the cable basic tier remains reasonable.

 

In addition, Congress subsequently passed Section 325(b)(3)(C). This imposes a separate duty on both cable operators and broadcast licensees to “negotiate in good faith.”

 

Other general authority.

In addition to this specific authority, the Commission has long-standing broad authority to regulate the business conduct of broadcast licensees in the public interest, under its general grant of authority in Section 303(r) and the obligation of Sections 301, 309 and 310 that all licensees operate “in the public interest.” (See, e.g., National Broadcasting Co. v, U.S, 319 U.S.190 (1943). This is particularly true for broadcasters providing network programming. 47 U.S.C. 303(i) (“chain broadcasting” is the old term for network programming).

 

The FCC has not used its authority over broadcasters in a very long time, and it has become conventional wisdom that this authority doesn’t really exist anymore and would not survive judicial review. As I keep pointing out, however, the Supreme Court keeps stubbornly refusing all invitations to revisit and limit the FCC’s vast authority over broadcasters. Indeed, the the Supreme Court’s recent decisions, such as the Fox Broadcasting indecency case (specifically(Fox I))  and City of Arlington, generally require deference to the FCC when interpreting statutes under its jurisdiction.

Finally, the FCC has general authority to act on its own initiative to issue a declaratory ruling or injunction under its own authority (47 U.S.C. Sections 154(i) and 403).

 

Putting it all together — what can the FCC do.

 

So lets put all this together and apply it to the specific situation here. Lets assume that Clyburn will not revisit the current FCC interpretation that the FCC cannot under its existing rules force CBS to make its programming available to TWC on an interim basis (the so called “stand still”) or force arbitration. What does that leave?

 

Quite a bit actually, especially when it comes to setting the “rules of engagement” for retrans negotiations to fulfill both the “good faith negotiation” requirement and to “ensure” the cable prices don’t become (even more) unreasonable. I propose a list below. Some are designed to directly limit damage to consumers. Others are designed to push the parties to quicker resolution by making the ongoing standoff as painful as possible.

 

1. Order CBS to stop blocking broadband subscribers from accessing all content on CBS.com. Congress intended retrans as a local right for local broadcasters. Certainly it never intended to allow broadcasters to attack cable operators in related lines of business. As I’ve argued over at the PK blog, the FCC can declare that attacks on TWC’s separate (albeit related) line of business of broadband violate the “good faith” requirement, tilts the field in favor of the broadcaster in a way that drives up the basic tier price, and generally violates the public interest with regard to broadcast content and “chain broadcast” content in particular by denying programming to viewers who can access the programming over the air but not in their preferred way online.

This would not in any way require CBS to make programming available online that it does not chose to make available online. It simply says CBS can’t discriminate against specific viewers beyond the remedy Congress gave broadcasters in 1992 of pulling their signal from a specific MVPD in a specific local market.

 

2. Circulate a proposed Order along the lines requested by Time Warner Cable. The Chairwoman can show displeasure with the current fight, and with other ongoing retrans blackouts (see the American TV Alliance website for a list of ongoing blackouts, along with stats on the general rise of retrans blackouts) (full disclosure, my employer PK is a member of ATVA) by circulating an Order to adopt the rule changes urged by TWC. Even if no one expects the FCC to adopt such an order, actually circulating the order would demonstrate severe enough displeasure to consider drastic action, and the possibility that the FCC could adopt something broadcasters in particular would not like once Tom Wheeler gets confirmed as Chair.

 

It also creates the danger to CBS (and other broadcasters) that if the blackout continues into football season, or if something more obnoxious happens, or if support for retrans reform grows in Congress as expressed by more letter to the FCC, that the FCC could move very quickly to change the rules.

 

3. Require both parties to file proposals in excruciating detail so the FCC can “monitor the situation” and “ensure that proposals are in good faith, do not make the price of the basic tier unreasonable, or are otherwise contrary to the public interest.” Companies hate to disclose their information, and dislike being called on the carpet by their regulator. This kind of move can have a shaming effect on the parties even if the FCC takes no action and even if the FCC does not make the contents of the agreement public. There is also the risk to the parties (both CBS and TWC) that the FCC will start picking off specific clauses as in violation of either the “good faith” requirement of Section 325(b)(3)(C) or that they negatively impact basic rates under Section 325(b)(3)(B) (or violate some other provision of the Act).

 

4. Require the parties to enter mediation or non-binding arbitration. Lets assume the FCC will not revisit its current interpretation that it lacks authority to order binding arbitration (I disagree, but lets assume the FCC will not revisit this now). That still leaves the FCC plenty of room to do more than simply order the parties to keep negotiating. Specifically, the FCC can order the parties to go to mediation or non-binding arbitration. Again, this would have a shaming effect and would serve to ratchet up the pressure to push the parties to come to an agreement.

 

 

FCC Action and Congressional Action Move In Tandem.

If the FCC argues that it has taken every step that it can, but still lacks authority to resolve the situation, it puts pressure n Congress to act. As I’ve said on the PK Blog, it does ultimately fall to Congress to fix this mess for the long term. Congress created this mess, and only Congress can really get us out of it.

 

For this reason, I’m rather hoping that people will respond to Public Knowledge’s call to action support the McCain/Blumenthal Television Consumer Freedom Act of 2013 (S. 912). the Act takes a first step toward fixing the problem by trying to nudge broadcasters and cable operators into offering television shows a la carte (meaning, you get to select which channels you get and pay for) rather than in bundles. It wouldn’t solve all the problems, but it would go a long way to reshaping some of the real awful incentives that currently exist and warp the market.

 

All This Depends On People Making Noise.

Finally, neither the FCC or Congress act in a vacuum. If people show by silence they are willing to put up with the latest retrans fight tactics, then they will continue — and continue to escalate. Members of Congress and the FCC don’t need to hear you chose between CBS and TWC (or broadcasters and cable generally) to know that you want this broken system fixed. NOW. If Congress got flooded with calls and members back home on recess got an earful about how tired people are with this crap, then we would see some real action.

 

But without that, the powerful forces of inertia will do what they do best — nothing at all. No one wants to stir up the hornets nest of powerful special interests in video programming by tackling retrans reform unless there is a very clear political reason to do so. E.g., voters want you to do it and will get pissed at you if you don’t.

 

So, as always, a lot depends on citizens standing up and demanding that the people they elected and the people appointed by the people they elected do their job and stand up for the public. So make some noise. Or cut the cord. Or get used to expanded retrans fights that drag in broadband subscribers.

 

Happily for the short term, if the FCC does want to act — it has a lot of options. Even with the limitations the FCC has read into the law and imposed on itself, it still has a lot it can do.

 

Stay tuned . . . .