Will The DC Circuit Pull The Plug On Program Access?

Next week, the D.C. Circuit will hear oral argument on the FCC’s 2007 decision to extended the program access rules another five years. What surprises me is how few people seem to have considered the possibility that the D.C. Circuit will reverse this decision and vacate the rule, as they did last month with the 30% cable horizontal ownership limit.

Part of that is the way people tend to make analysis based on conventional wisdom. “Everyone knows” that without the program access rules, competitive providers would be toast because the largest cable incumbents can control programming, just as “everyone knows” that we don’t need a 30% cable ownership limit because the MVPD market is so wildly competitive that the largest cable incumbents can not possibly influence cable programming. As Comcast and Cablevision pointed out to the DC Circuit, however, the conventional wisdom in this regard is not entirely consistent. If, as the court found last month as a matter of law, the MVPD market is wildly competitive and consumers switch willy-nilly from one to the other rendering it impossible for a cable provider to block a rival programming network from emerging, how on Earth can cable programmers below the 30% limit exercise foreclosure?

There are, of course, sound answers to that in both law and economics, although the biggest single deciding factor is likely to be the absence from the panel of Douglas Ginsburg, a man who believes membership in the Federalist Society substitutes for an actual understanding of economics and has published an academic article yearning for the “good old days” when the courts made economic regulation unconstitutional and concluding that courts should not defer to agency efforts to create “synthetic competition.” (An offense in the eyes of the Gods of the Marketplace.) I believe the panel is Sentelle, Griffith and Kavanaugh, which is not exactly good news for the program access rules but isn’t death on wheels like Ginsburg (or Williams or Edwards). Sentelle and Griffith, who were both on the imaginary competition outweighs real competition decision back in June overturning the FCC’s decision not to grant Verizon a forbearance petition, and Kavanaugh, who was on the cable ownership panel and therefore presumably agrees that switching costs aren’t real and cable operators are in such fear of youtube clips they would never make programming decisions based on affiliation. On the flip side, Kavanaugh actually wrote the somewhat more deferential special access opinion from July. Unfortunately for those who rely on program access, none of the judges who affirmed the Inside Wiring Order are on this panel.

Of course, there is something to be said for actual law and analysis of the underlying FCC Order, even in the D.C. Circuit. So below, I shall provide a brief outline of the program access rules, how we end up in court, the likely arguments, and what happens if the D.C. Cir. overturns the rules (which even I give a low probability to, but do not discount — especially given the panel) — including why that might actually be the best thing to happen to cable regulation in the long run.

More below . . .

As always, I will note that I am hardly impartial on the subject of cable and particularly on the subject of the ownership cap. I just can’t understand how an industry that can raise rates every year — despite earning massive profits, a down economy, and no significant rise in the cost of inputs — is competitive. I take some small comfort that Craig Moffett, when he is talking to investors rather than Washington says that cable is a natural monopoly.

The Program Access Extension Proceeding

In any event, as with most cable regulation, we must set our regulatory Wayback Machine for 1992, when Congress passed the Cable Competition and Consumer Protection Act. Twelve years after totally deregulating the cable industry in 1984, members of Congress found themselves sufficiently besieged by constituents, broadcasters, programmers, and would-be competitors that they passed a fairly comprehensive law designed to limit cable market power and make it possible for competitors to get “must have” cable programming. Section 613(f) required the FCC to set a limit on cable ownership “in order to enhance effective competition” and to set the limit low enough that no cable operator, or group of cable operators, could “unfairly” interfere with the flow of video programming from programmers to viewers. There was actually a lot more to this section, but under the rule of statutory interpretation used by the FCC called “we don’t want to enforce this anyway and we have a short attention span,” no one ever cared about the rest of it.

The other element was Section 628 the “program access” rules. Again, it is worth noting that the statute actually gave the FCC much more authority to regulate cable than the FCC ever wanted to admit having — at least until Kevin Martin came along. But that’s not what is important here. What’s important is that, even as early as 1992, Congress labored under the delusion that you could reach a point in competition where actual industry structure became irrelevant, because the Competition Fairy would come with her magic competition fairy dust and eliminate all the friction out of the market and make the information available to all actors totally symmetrical. So Congress included a “sunset provision” on Section 628, which reads:

The prohibition required by paragraph (2)(D) shall cease to be effective 10 years after October 5, 1992, unless the Commission finds, in a proceeding conducted during the last year of such 10-year period, that such prohibition continues to be necessary to preserve and protect competition and diversity in the distribution of video programming.

The prohibition referred to is one on exclusive contracts among vertically integrated cable operators. In other words, Comcast can’t have an exclusive on Golf Channel (which it owns), unless the FCC finds it would serve the public interest to give it one — as long as the rules are in effect.

It’s important to note that by “exclusive” we refer to “exclusive within the franchise territory.” This is how cable operators give access to programming to fellow members of the incumbent cable club while screwing over DBS providers, telcos, and other overbuilders. If I am vertically integrated cable co, I can say “I will license this programming to any provider who doesn’t directly compete with me.” So other cablecos get it and DIRECTV and Verizon don’t.

In 2002, the FCC decided to extend the program access rules — including the exclusivity prohibition — another 5 years. The FCC found that, despite the increase in competition and the availability of content from non-cable providers, vertically integrated incumbent providers still had too much “must have” programming locked up. The FCC also reserved the right to extend the rules if they decided after 5 years the public interest required it. Surprisingly, the cable operators did not challenge this decision.

Flash forward to 2007. The FCC reevaluates and decides, despite even more competition and more unaffiliated programming, that cable operators still have way too much “must have” programming under their control. If you read the Order, you will find it is based on the testimony of competitors that they still need access to the programming controlled by incumbents and that these incumbents have incentive to deny the programming. The FCC also notes that in the related area of regional sports programming where cable operators could withhold programming, they have done so. While the FCC did not have any actual data to support the necessity of the exclusivity ban in terms of how much it would hurt competition, it observed that competition only arose because of the exclusivity ban so there is not exactly a lot of empirical evidence on what happens if it goes away.

This time, Comcast and Cablevision do appeal. Oral argument occurs on Sept. 22nd.

Meanwhile, a few months later, the FCC adopted an order to reinstate the 30% ownership cap on cable. You can read a more complete summary (with links) here. Unlike the program access rules, which are rather popular with everyone accept the cable companies, I (and the editorial board of the New York Times) appear to be the only ones who think that cable companies can still exercise market power over programmers due to size, the difficulty customers encounter switching, and the problem of asymmetric information (that is to say, customers can’t know in advance how much better or worse a different service is, and therefore discount the value of switching. It’s essentially an application of Akerloff’s Lemon Law). In addition to the same sort of evidence that supported decision to extend program access, the FCC also relied on some experimental game studies, two studies on the impact of switching cost on the cable industry, the testimony of independent programmers and would be independent programmers, statements by industry leaders that Comcast has market power due to its size — oh heck, feel free to go read the several thousand pages in the record (FCC Docket No. 92-264).

Unfortunately for the FCC, they drew a panel of True Believers — headed up activist and would-be FCC Czar Douglas Ginsburg (In addition to the above referenced “Synthetic Competition” article, Ginsburg is also co-author of a text on Communications Law which makes his particular prejudices quite clear). In a scathing opinion in which Ginsburg begins by chastising the FCC for taking the court at it’s word in 2001 that it could find other reasons to support the 30%, Ginsburg blows by the mounds of economic evidence in a paragraph without citation. As the language has bearing on the upcoming program access argument here’s the quote from the opinion (I shall interpolate a bit):

Instead the Commission made the four non-empirical observations we enumerated above [HF: Actually, they were empirically based, as well as relying on theory and experiments ]. As for the first, transaction costs undoubtedly do deter some cable customers from switching to satellite services, but Comcast points to record evidence that almost 50% of all DBS customers formerly subscribed to cable; in the face of that evidence, the Commission’s observation that cost may deter some customers from switching to DBS is feeble indeed. [HF: This is so absurd it is hard to know where to begin. Suffice to say that the fact that half the current DBS customers subscribed to cable at one point, even if true, tells us nothing about how many people are likely to switch in the future — which is the basis for the claim that switching cost gives cable companies of sufficient size an ability to interfere with the programming market. See my 2006 white paper for the more complete explanation. More to the point, the Commission relied on two seperate economics papers that had analyzed the data from the various markets and from the Adelphia transaction.] With regard to the second — that some cable consumers may be reluctant to switch to a satellite television service because, unlike cable companies, DBS companies do not offer internet and telephone services — the Commission does not point to any evidence tending to show these inframarginal customers are numerous enough to confer upon cable operators their supposed bottleneck power over programming [HF: Mind, this runs against the holding by a different panel sustaining the ban on exclusive contracts to provide video because of the importance of triple play)]. Moreover, as Comcast points out, both DirecTV and Dish Network have partnered with telephone companies to offer bundled DBS and telephone services.

The Commission’s third justification — that consumers will not switch providers to access new programming because they cannot know the quality of the programming before
consuming it — warrants little discussion. As Comcast points out, there is no record support for this conjecture. In any event, it is common knowledge that new video programming
is advertised on other television stations and in other media, and can be previewed over the internet, thus providing consumers with information about the quality of competing
services. The FCC’s fourth reason — that without its subscriber cap an upstart network will have trouble securing financing unless it has a contract with a cable company serving more than 30% of the market — is no more convincing than the other three when one recalls DBS companies already serve more than 30% of the market [HF: of course, that’s DBS companies as a class, whereas the rule is supposed to address the power of any individual MVPD, but neither relevance nor attentiveness to the actual record is terribly relevant here].

This would be bad enough for the program access rules, but here comes the kicker:

Finally, we note the Commission’s observation that assessing competition from DBS companies is difficult — possibly true even if unexplained — does not justify the agency’s failure to consider competition from DBS companies in important aspects of its model. That a problem is difficult may indicate a need to make some simplifying assumptions, see Chem. Mfrs. Ass’n v. EPA, 28 F.3d 1259, 1264 (D.C. Cir. 1994), but it does not justify ignoring altogether a variable so clearly relevant and likely to affect the calculation of a subscriber limit. Finally, we note the Commission’s observation that assessing competition from DBS companies is difficult — possibly true even if unexplained — does not justify the agency’s failure to consider competition from DBS companies in important aspects of its model. That a problem is difficult may indicate a need to make some simplifying assumptions . . . but it does not justify ignoring altogether a variable so clearly relevant and likely to affect the calculation of a subscriber limit.

Impact on the Program Access Appeal

So now we come to the program access appeal. The problem is that the Commission had even less evidence (if one troubled to actually read the record) here than on ownership, particularly wrt the impact on the rules. The Commission flatly stated it couldn’t get empirical evidence because the rules had worked so well for 15 years, and therefore relied on theory about incentives and a look at some analogous examples. While I think the analogy to regional sports networks is significant, there are ways to explain the differences — assuming the court deigns to notice these considerations at all.

So Comcast and Cablevision sent a letter to the D.C. Circuit after it issued the cable ownership case making this point. No one in the industry is even at 30% of the market, and the court found it laughable that anyone with 30% market share could possibly have an anticompetitive impact. So why not let the wondrously competitive video market do its thing as Congress clearly intended by making a sunset provision and hold that it was arbitrary for the FCC to extend the prohibition on exclusive deals.

This prompted one of the more delightful ironies I have observed in my career. Verizon had intervened in the cable ownership case on the side of Comcast, arguing that the 30% ownership cap was unjustified and unconstitutional (the mad optimism of Verizon that it will need that sort of head room and that this outweighs concerns of Comcast expanding beyond its current size astounds me still). In this case, however, they intervened on the side of the FCC, because they need access to the programming. More to the point, they are being represented by Wiley Rein, the firm that represented Comcast in the cable ownership case. Even better, they are represented by Helgi Walker, who actually did some of Comcast’s initial pleadings.

The placed Helgi in the position of needing to explain to the D.C. Circuit why the market is wildly competitive for purposes of Section 613(f) but not enough for Section 628(c)(5). While I cannot link to the letter (it’s in the docket), the response boils down to “it’s OK to crap all over programmers, but not actual MVPDS — especially as I’m now representing a someone who actually needs access to this programming. And the Court didn’t actually find the market was competitive as a matter of law, just enough for us to win last time.”

The other irony here is that the FCC extended to prohibition on exclusivity under a statutory standard that requires a determination that “such prohibition continues to be necessary to preserve and protect competition and diversity in the distribution of video programming.” Telecom buffs will recognize the word “necessary” — it was also the standard for the old “Unbundled Network Elements” (UNE) rules that required Verizon and other incumbent telcos to make UNEs available to competitors. That rule had a similar requirement to consider whether access to an element was “necessary” (Section 251(d)(2)(A)) and whether failure to provide access would impair the ability of a rival telecom provider to offer competing services (Section 251(d)(2)(B)). Verizon and the other ILECs used this language to get the DC Circuit to basically eliminate the entire UNE scheme through a set of decisions that defined “necessary” as “if there is even a vague possibility of a theoretical way to provide service without this, it isn’t really ‘necessary.’” So Verizon faces the prospect of being hoisted by its own petard twice.

Analysis and Likely Outcomes

The real question is whether the court sees this as being like the UNE scheme, where “necessary” means “you will absolutely drop dead tomorrow without this” and the Verizon forbearance case which says that “imaginary competition is as good or better than real competition,” or if it follows the path of the inside wiring case, where the court gave broad interpretation to the language giving the FCC authority to prevent things that would “hinder or prevent” competitive providers. Unfortunately for Verizon and the other folks depending on Program Access, none of the judges from the Inside Wiring Case are on this panel. Sentelle and Griffith were both on the Verizon Forbearance Case, and I believe Sentelle was also on some of the UNE cases. Kavanaugh was on the cable ownerhsip case, so presumably he agrees that the market is “wildly competitive.”

For the FCC to win, the court must buy that the FCC did enough to show that vertically integrated cable operators still have both incentive to withhold programming and that doing so would hurt the existing competitive market (the actual words of the statute are “preserve and protect competition”). At first glance, this would seem an even harder standard than the cable ownership standard, which required a rule powerful enough to “enhance competition” rather than merely protect it. But the FCC can argue that if it found eliminating the rule would make it significantly harder to maintain the existing levels of competition, the court will affirm. The FCC also has to convince the court that the evidence of withholding programming in the regional markets means the same thing would happen in the national markets. If the court is sympathetically inclined — which the presence of industry folks on the side of the FCC generally does for the DC Circuit — it will notice the empirical evidence here that it chose to ignore in cable ownership. As noted above, consistency is not a prerequisite for the D.C. Circuit and its merry band of judicial activists.

For Comcast and Cabelvision to win, it must show the court that the FCC did not do enough to prove that it was “necessary,” either because the FCC defined “necessary” to leniently or because it openly admitted it didn’t have any empirical data precisely on point. But the problem for Comcast (and the D.C. Circuit) is that there are a lot of things you can never get empirical data for, like future events. The Supreme Court just said in the indecency case that a court can’t demand an agency produce information that is impossible or difficult to obtain. OTOH, the D.C. Circuit cable ownership decision chastised the FCC for its failure to get enough data about DBS competition because it was damned hard to do doesn’t excuse them from doing so.

Comcast/Cablevision’s most powerful argument hinges on the fact that the most likely outcome in a “competitive market” for removing the exclusion ban is that the vertically integrated cable operator trying to foreclose will lose too much money in fees. Empirically, we have seen for local programming that this doesn’t matter. But it is not precisely analogous, because denying entry into a regional market is different from the calculus for the national market. You are forgoing a lot more in fees and the impact on your direct competitive position is less than in the regional context (unless we believe cable companies conspire to keep programming from non-cable cos because they all benefit . . . nahhhhh too crazy paranoid). The more likely outcome is that vertically integrated programmers will use the threat of exclusion to jack up fees for “must have” programming. While this creates an industry structure problem for people who care about actual competition, the record for the D.C. Circuit (and these three judges in particular) seeing this as a problem is not encouraging. After all, they will say, Congress didn’t intend this to last forever — just long enough to get competition going, which the D.C. Circuit found last month is going full throttle. After all, vertically integrated companies will always have incentives to block competition, and programmers with valuable “must have” programming will always have incentive to charge whatever they can get. So if Verizon and DISH have to pay four times as much for programming as Time Warner, that’s just the market for you. Let them develop their own programming, just as ISPs were told to go build their own facilties under a similar “necessary” standard.

Nevertheless, at the end of the day, I think the D.C. Circuit is likely to affirm. It has a soft spot for all those cuddly MVPD providers (as opposed to the programmers and consumers), and the absence of true religious fanatics like Ginsburg make it more likely that the Court will be reluctant to eliminate a significant element in which industry relies. I expect the most likely outcome is language that has the effect of warning that next time this comes up, the FCC better have more data and a more rigorous definition of “necessary” or the court will eliminate the rules. So Verizon and the rest should be safe until 2012. OTOH, I give a reversal (which would still leave the rule in place pending a new proceeding to get better data and a more rigorous definition of “necessary”) about a 20% of happening.

What Happens If the Prohibition on Exclusives is Eliminated?

Good question. As with the elimination of line sharing for ISPs in 2005, I would not expect a radical change. This is especially true if the D.C. Circuit merely remands rather than decides that the FCC had no authority to extend the rule a second time. Also, the time limit only applies to the exclusivity ban. It does not apply to the FCC’s general authority under Section 628, especially the requirement under Section 628(b) that declares it unlawful for cable operators or their vertically integrated programming vendors to “engage in unfair methods of competition or unfair or deceptive acts or practices.” The FCC could revert to the old case by case adjudication of these things to determine when a method or act is “unfair or deceptive” and thus unlawful. This is pretty much how Section 201 and 202 of the Communications Act works when folks complain that Verizon’s special access rates are unreasonable or discriminatory and thus unlawful. But in the face of language about how switching costs don’t exist, must have programming doesn’t exist, and everybody ought to just play nice in the wildly competitive MVPD market, I have no idea what standard of proof could apply.

This would also pretty much stop dead the effort to get the FCC to close the terrestrial loophole. That was unlikely to go anywhere anyway, but it will be deader than a doornail if the FCC cna’t even maintain the exclusivities ban.

On the plus side, elimination of the rule might actually get Congress to look at cable market power again. There is no doubt that without the exclusivities ban, and especially if the D.C. Circuit casts doubt on any rules that impact the ability of programmers to make whatever contracts they please, rival MVPDs like Verizon and DIRECTV will pay much higher prices for needed programming. With things like TV Everwhere and the constant fights over enforcing cablecard already getting some folks grumbling, the elimination of a rule on which the entire non-incumbent segment of the industry depends might pull together a coalition capable of taking on cable.

Well, we’ll just have to see what happens.

Stay tuned . . . .

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