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Friday, August 28, 2009

FCC 30% Cap on Cable Operator Market Penetration Vacated

The D.C. Circuit Court of Appeals has vacated the FCC's 30% cap on national market penetration by a single cable operator. Look for Comcast and Time Warner to acquire more operators and market share. Whether this consolidation will harm consumers depends on the cross-elasticity of alternative services including DBS, IPTV, and telephone company provided video services. It also depends on whether even bigger vertically integrated companies like Comcast do not have clout to "make or break" new content sources.

Reports of problems with access to programming controlled by verticially integrated cable operators challenge the court's optimism. Likewise the court explicitly relies on general antitrust safeguards which don't seem to have much applicability in telecommunications in light of the Trinko case.

Here is my summary of the case:

For the second time, the D.C. Circuit Court of Appeals has rejected the FCC’s decision to cap the national market penetration of a single cable operator at 30%. [1] In what it considered egregious disregard for changed circumstances, such as the onset of substantial competition from Direct Broadcast Satellite operators and fiber optic video providers, the court vacated the rule, rather than remanding to the FCC a requirement that it reconsider the rationale and evidentiary support for the rule.

The court determined that the FCC did not have evidentiary support for the Commission’s assumption that the two largest, vertically integrated cable operators, each having up to 30% national market share, would collude and both refuse to carry programming from new programmers. The Commission’s “open field” analysis assumes that for a competitive video programming marketplace to function, new programmers need to have access to the 40% of the market not controlled by the top two cable operators.

The court also rejected as “feeble” [2] the four “non-empirical” [3] reasons the FCC used for largely ignoring the competitive alternative provided by DBS: 1) high consumer costs in switching to DBS; 2) attractiveness of non-video services, such as broadband Internet access, provided by cable operators; 3) the inability of consumers to know the attractiveness of alternative video programming packages before consuming them; and 4) the inability of DBS to support new programming networks lacking financing. [4] The court noted that 50% of all DBS subscribers previously subscribed to cable television service, and that the Commission did not provide evidence to support the conclusion that offering non-video services confers a competitive advantage to cable operators, particularly in light of the fact that the two DBS operators have partnered with telephone companies to provide bundled services. The court also refused to agree that consumers do not know the nature of the content and new networks offered via DBS.

The court noted the significant increase in the number of cable networks and the fact that the percentage of networks affiliated with, or owned by a vertically integrated cable operator has declined since 1992 when Congress enacted the Cable Television Consumer Protection and Competition Act that authorized FCC-prescribed market penetration caps. [5] The court concluded that:

the Commission has failed to demonstrate that allowing a cable operator to serve more than 30% of all cable subscribers would threaten to reduce either competition or diversity in programming. First, the record is replete with evidence of ever increasing competition among video providers: Satellite and fiber optic video providers have entered the market and grown in market share since the Congress passed the 1992 Act, and particularly in recent years. Cable operators, therefore, no longer have the bottleneck power over programming that concerned the Congress in 1992. Second, over the same period there has been a dramatic increase both in the number of cable networks and in the programming available to subscribers. [6]

In light of the FCC’s “dereliction,” [7] the court eliminated the ownership cap immediately. The court has confidence that competition and the “generally applicable antitrust laws” will provide adequate safeguards. [8]

[1] Comcast Corp. v. FCC, ___ F.3d ___ , slip op. 08-114 (D.C. Cir. Aug. 28, 2009); available at:

[2] Id. at 12.

[3] Id.

[4] See Id. at 8.

[5] “ The Cable Television Consumer Protection and Competition Act of 1992 directed the FCC, “[i]n order to enhance effective competition,” 47 U.S.C. § 533(f)(1), to prescrib[e] rules and regulations ... [to] ensure that no cable operator or group of cable operators can unfairly impede, either because of the size of any individual operator or because of joint actions by a group of
operators of sufficient size, the flow of video programming from the video programmer to
the consumer. Id. § 533(f)(2)(A).

[6] Id. at 13-14.

[7] Id. at 15.

[8] Id. at 16.


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Randolph May, a former FCC associate general counsel and head of the Free State Foundation, said the ruling was not unexpected. "There are commissioners who have persisted in wanting to take an overly constrained view of competition in the communications marketplace," he said, noting this is the second time in recent months the court has reversed an FCC policy.