FCC Draws Fire from Appeals Court in Cable Cap Loss

The “Commission has failed to demonstrate that allowing a cable operator to serve more than 30 percent of all cable subscribers would threaten to reduce either competition or diversity in programming,” wrote Judge Douglas Ginsburg for a panel also made up of Judges Brett Kavanaugh and Raymond Randolph. “The record is replete with evidence of ever increasing competition among video providers” whose growth in market share means cable operators “no longer have the bottleneck power over programming that concerned the Congress in 1992,” when it passed the Cable Act. “The 30 percent subscriber cap has limited the ability of cable operators to communicate with the public for some 16 years despite our determination eight years ago that a prior version of the Rule was unconstitutional.”

The ruling was widely expected, based on oral arguments and the D.C. Circuit’s 2001 remand of an earlier 30 percent ownership cap in Time Warner v. FCC (CD April 27 p3). Analysts said the decision will make it harder for the commission to hold back Comcast’s growth through acquisitions. Growth is limited now mainly by how few major operators are for sale, they said. “Largely a moral victory for Comcast, with little or no implication as it relates to potential M&A,” wrote Craig Moffett of Sanford Bernstein. “Sweet vindication, perhaps, after an often arbitrarily anti- cable era at the FCC” under Kevin Martin, Moffett added.

If the commission appeals, it probably won’t win in the Supreme Court, David Kaut of Stifel Nicolaus told us. “It would be a hard case to win,” said Kaut, who couldn’t “remember the last time a D.C. Circuit panel was overturned on an important FCC case.” It’s unclear how the FCC under Chairman Julius Genachowski will respond to the ruling, analysts said. “It would seem there would be less pride of ownership with the chairman, given this was a Martin order,” said Kaut. It’s possible the FCC would “try some other means of keeping Comcast below 30 percent,” Paul Gallant of Stanford Washington Research Group told us, but “I'm not sure there’s a compelling policy argument for doing that.”

Commission officials are reviewing the decision and the FCC will “take this decision fully into account in future action to implement the law,” said Genachowski. He noted that the Cable Act requires limits on system ownership. “Despite the Commission staff’s best efforts to provide post hoc empirical support for the chosen outcome, the court recognized that the 2007 analysis’ aging data and questionable assumptions sat oddly against the facts about new - and successful - competitors,” said Commissioner Robert McDowell, who voted against the cap with Deborah Tate, who has left the FCC. “In the future, outcomes in our proceedings should be driven by the facts and law, rather than the other way around.”

The court said the commission’s data didn’t go past 2001 and don’t reflect “the impact of DBS companies’ growing market share,” which almost doubled to 33 percent from 2001 to 2007. “The penetration rate calculation, by the Commission’s own admission, leaves out data regarding DBS penetration -- an omission the FCC attempts to justify with the question-begging assertion that such data would not have materially changed the penetration rate,” Ginsburg wrote. With DirecTV and Dish Network together having one-third of pay-TV subscribers, the FCC’s reasoning that an upstart cable network would have trouble getting financing without a contract with an operator holding a 30 percent share “is no more convincing” than the rest of the commission’s poor policy arguments, he said.

The FCC’s contention that costs to switch from cable to DBS would deter moves “is feeble indeed,” Ginsburg wrote. The commission offered no evidence that customers give cable operators “bottleneck power over programming,” he added. And the FCC had no evidence that would-be switchers have no way of knowing about the quality of rivals’ programing before they switch, the judge wrote. “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.” Referring to the cap, which the FCC maintained after the court remanded it to the commission, Ginsburg wrote, “Plus ca change, plus c'est la meme chose” -- the more things change, the more they stay the same.

“This is not the end of the fight,” since the D.C. Circuit is “disinclined to approve such regulations,” said President Andrew Schwartzman of the Media Access Project, representing groups siding with the FCC. If he doesn’t file an appeal after discussing the prospects with the commission, “we'll be asking Congress to pass new legislation,” Schwartzman added. A spokesman for Verizon, aligned with the cable operator in the case, had no comment. A Comcast spokeswoman said the ruling “affirms that rules must reflect the changing realities of the dynamic video marketplace,” where “consumers have more choice in video providers and channels.”