An ownership cap on US cable operators became effective Monday March 31, 2008. The cap limits the number of pay TV subscribers in the US a cable operator may serve at 30 percent nationwide. The Federal Communications Commission (the "FCC"), by a 3-2 majority decision, has re-imposed the cap fifteen years after it was first set in 1993. That original decision was struck down in 2001 by the US Court of Appeals as inadequately reasoned. The majority Commissioners have stated that the cap is still needed today to promote diversity of multichannel video programming and that more robust economic reasoning has been used in justifying the ownership limit. A suit challenging the cap has been filed in the DC Circuit. The cap only applies to cable and not satellite operators.
Background
The 30 percent cap has been set pursuant to a statutory directive that an ownership limit be imposed to prevent a single operator, or group of operators, from unfairly impeding the flow of multichannel video programming to consumers because of the operator's size. The statutory directive is found in the Cable Television Consumer Protection and Competition Act of 1992 (Pub. L. No. 102-385, 106 Stat. 1460), better known as the Cable Act of 1992, which amended 47 U.S.C. §533 of the Communications Act of 1934 ("Communications Act"). Section 613(f) of the Communications Act directed the FCC to establish reasonable limits on the number of subscribers a cable operator may serve (called a "horizontal limit") and on the number of channels a cable operator may devote to affiliated programming (called a "vertical limit").
The FCC implemented this provision in 1993 by imposing a horizontal ownership limit preventing cable operators from serving more than 30 percent of all US homes passed by cable and by imposing a vertical limit prohibiting a cable operator from carrying affiliated programming on more than 40 percent of its channels. The rationale for the horizontal limit was based on the FCC's estimation that a new cable programming network would need access to 40 percent of subscribers nationwide to be viable. A 30 percent ownership cap was designed to allow new programming networks access to a 40 percent "open field" by preventing the two largest cable operators from garnering more than 60 percent of the market. In October 1999, the FCC revised its methodology to permit a cable operator to reach 30 percent of all multichannel video programming distributor ("MVPD") subscribers in order to include satellite subscribers in the calculation of the 30 percent cap.
In 2001 in Time Warner Entertainment v. FCC, 240 F.3d 1126 (D.C. Cir. 2001) ("Time Warner II") the US Court of Appeals for the District of Columbia Circuit reversed the FCC decision imposing the horizontal and vertical limits and remanded to the FCC for re-determination.
Establishing The Limit: A Modified Open Field Approach
The Time Warner II decision indicated that the FCC would be justified in seeking to establish whether any company could be in a position single-handedly to deal a programmer a "death blow." In its 2008 decision, the FCC has indicated that it relied on a modified "open field" approach to ensure that no single operator could become so large that a programming network could only survive if it contracted with that operator. An "open field" determines whether a programming network would have access to alternative MVPDs of sufficient size to allow it successfully to enter the market, if it were denied carriage by one or more of the largest cable operators.
The FCC was therefore required to make a determination of the minimum number of subscribers a content provider needs in order to survive in the marketplace ("minimum viable scale") and then an estimation of the percentage of subscribers a content provider is likely to serve once it secures a carriage contract ("penetration rate"). The combination of the minimum viable scale and the penetration rate gives the "open field", i.e., the percentage of MVPD subscribers that a programming network needs to access in order to secure a minimum viable scale. The FCC continued to use all MVPD subscribers as the denominator in calculating the cable ownership limit (rather than just cable subscribers). Mobile phones, internet and video rentals were not included in the assessment.
In order to assess the minimum viable scale for a programming network, the findings of the FCC relied on the following assumptions:
- all revenue sources that could maintain the viability of a programming network were considered, including international distribution or advertising revenues;
- a five year period from the launch of a network was considered to be an appropriate point to measure whether a network was viable;
- a 70 percent survival probability for a non-vertically integrated operator was regarded as sufficient to indicate viability;
- the FCC investigated actual penetration rates throughout the US (and referred to a number of empirical studies) and accepted that on average a network would be available to 27 percent of the subscribers of an operator carrying the network.
Cap set at 30 percent
Based on these assumptions, the FCC calculated that the minimum viable scale for a network after five years to have a 70 percent probability of survival was 19 million subscribers. Further assuming that viable networks have a penetration rate of at least 27 percent, a programming network would need to have access to 69.4 million subscribers (of a total of 95.7 million) to reach the minimum viable scale. As a proportion of total subscribers this meant that the open field was considered to be 72 percent and maximum horizontal ownership limit would therefore be 28 percent. This was adjusted to 30 percent to reflect past practice of the FCC (which had continued to refer to the limit in merger cases even after 2001). However, unlike the 1993 decision, the FCC did not assume that cable operators might coordinate carriage decisions in order to arrive at the appropriate cap. The FCC therefore concluded that it was likely that a large cable operator controlling more than 30 percent of the MVPD market would have the power significantly to undermine the viability of a network by refusing to carry it, despite the alternative of competing MVPDs including satellite operators.
Two Commissioners dissented
The two dissenting Commissioners argued that the range of MVPD alternatives in today's US marketplace obviated the need for a horizontal limit. Commissioner Robert M. McDowell noted that vertical integration between cable operators and programmers had fallen from 57 percent in 1992 to less than 15 percent . He opined that the cap would likely be struck down again by the Court. Comcast Corporation has already filed suit in the D.C. Circuit to challenge the legality of the cap.
Vertical limits still to be considered
The FCC had also been directed by Section 613(f) of the Communications Act to establish reasonable limits on the number of channels on a cable system that could be occupied by a video programmer in which a cable operator has an attributable interest. The 40 percent "channel occupancy" or "vertical" limit (which was capped assuming 75 channels, i.e. at 30 channels) had also been reversed and remanded in the Time Warner II decision. Instead of proposing a new order, the FCC has called for further consideration of whether a limit should be imposed, although the FCC tentatively concluded the 75 channel cap should be eliminated. The FCC called for comment on, inter alia, whether in today's marketplace, vertically integrated cable operators have an incentive to discriminate unfairly against unaffiliated programming networks (as some empirical studies claim) and whether there may be benefits from vertical integration.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.