Tuesday, April 20, 2010

Must-Carry: FCC Regulation's Mismatch With Market Reality

What’s a regulatory agency to do when market conditions render its regulations irrelevant and even unconstitutional? That’s the situation facing the FCC over cable “must-carry” regulation.

Under must-carry, certain over-the-air TV broadcasters can compel carriage of their programming on cable networks covering the same area. Must-carry mandates dating back to the early 1990s were justified as a narrow exception to First Amendment restrictions on government control of media speech and were premised on local cable bottlenecks. The video marketplace of 2010, however, is characterized by vibrant intermodal competition. Direct Broadcast Satellite (DBS) and even some telco companies engage in head-to-head competition with cable incumbents. Video content is also increasingly delivered via broadband. In the face of such competition, the FCC's obligatory legal defense of must-carry regulation makes for a fine a display of Commission cognitive dissonance.

As I discussed in a recent blog post titled "Will the Supreme Court Decide 'Must-Carry' Must Go?" the Supreme Court is currently considering a petition by Cablevision challenging the constitutionality of must-carry on First Amendment grounds. Cablevision’s petition pointed to last fall's decision by the U.S. Court of Appeals for the District of Columbia Circuit in Comcast v. FCC wherein that Court maintained: "the record is replete with evidence of ever increasing competition among video providers…Cable operators, therefore, no longer have the bottleneck power over programming that concerned the Congress in 1992." Perhaps the most significant argument raised in Cablevision’s petition is that the Supreme Court's Turner rulings upholding the must-carry statute can no longer satisfy First Amendment scrutiny in light of vastly changed circumstances. In a recent FSF Perspectives paper, I described Cablevision v. FCC as a plausible "deregulatory First Amendment" ruling that will bring greater evenness and restraint to government with respect to content across mass media platforms.

This chain of events surrounding must-carry and video competition poses a dilemma for the FCC. How does it defend regulation premised on, and narrowly justified by, an apparent lack of cable competition when those old market conditions now have given way to an evident rise of video competition? Reconciling the must-carry statute that the FCC must defend in a court of law with the vibrant video competition is no easy task.

The peculiarities of litigation may give the FCC a fighting chance by allowing it to rely on procedural points rather than the merits of must-carry under the First Amendment. For instance, the FCC has argued that Cablevision’s constitutional and other legal arguments weren't sufficiently raised at the Commission or at the U.S. Court of Appeals for the Second Circuit. (The Second Circuit did consider and reject a Cablevision "as-applied" First Amendment challenge to must-carry.) And the FCC argued that the Cable Act of 1992 requires the constitutionality of must-carry first be decided by a special three-judge district court panel. Regardless of whether the FCC's procedural arguments have any persuasiveness, avoiding the facts of the matter is their best hope because the facts of the video marketplace are clearly on the side of competition. And in this case, competition could mean First Amendment deregulation by the Supreme Court.

The FCC's brief to the Supreme Court also maintains that the current Cablevision v. FCC case record somehow doesn't contain adequate information to permit the Court to conclude —like the D.C. Circuit did— that existing video competition obliterates the old cable "bottleneck" rationale for cable regulation that in any other context would be struck down under the First Amendment. But irrespective of how thoroughly developed the judicial record may be in the current Cablevision case, both the FCC's own video competition report and the D.C. Circuit's conclusion in Comcast v. FCC provide ample basis for judicial reassessment of today's video marketplace dynamics.

The Supreme Court can certainly take judicial notice of the FCC report and the Comcast ruling. To do otherwise would require the Court to shut its eyes when important constitutional free speech principles are at stake. If the Court's recent ruling in Citizens United v. FEC is any indication, it takes seriously the idea that under the First Amendment government should not be favoring or disfavoring different forms of media technologies. (See my FSF Perspectives paper "What Citizens United Means For Free Speech In The Digital Age.")

The FCC's brief also maintains that the absence of bottleneck recognized by the D.C. Circuit in Comcast v. FCC is countered by that Court's more recent observation in its March, 2010 ruling in another Cablevision v. FCC case that the video competition record is "mixed." In that case the D.C. Circuit upheld the FCC's 5-year extension of the ban on exclusive contracts between cable operators and cable affiliated programming networks under Section 628 of the Cable Act. Although the exclusivity ban ruling might blur the picture slightly, it shouldn't deter the Supreme Court from revisiting the Turner decisions' cable "bottleneck" rationale as the basis for heightened regulatory burdens on cable providers. As an initial matter, the exclusivity ban case never expressly disagreed with the Comcast ruling's pronouncement that a cable bottleneck does not exist to impose regulation. It never claimed there is a present cable bottleneck.

Notwithstanding the fact that the Supreme Court is not bound by lower court rulings, the Court should recognize that the D.C. Circuit's exclusivity ban ruling is analytically at odds not only with Comcast but with several other D.C. Circuit rulings. Oddly, the exclusivity ban ruling noted the Comcast ruling but went on to focus entirely on existing video market share, rather than both existing and potential competition in the dynamic market. The FCC's brief to the Supreme Court follows static market approach in part, arguing that Cablevision "did not provide the agency with any Long Island-specific market-share data to substantiate its claim of 'robust competition.'" But in a variety of contexts, including the video market context, the D.C. Circuit has routinely examined regulation in light of both existing market share and potential for competitive entry and future competition. The Supreme Court should likewise not rely on static market share as the savior of outdated regulation.

Crucially, the exclusivity ban case decided by the D.C. Circuit in March skipped over all First Amendment issues as not sufficiently presented. Rather, it applied the deferential "arbitrary and capricious" standard under the Administrative Procedures Act in upholding a 5-year extension of the FCC's ban on exclusive contracts between cable operators and cable affiliated programming networks. In the pending must-carry Cablevision case, however, if the Supreme Court takes up First Amendment issues it will be applying a more rigorous scrutiny regardless of whether it continues to apply intermediate-level scrutiny to must-carry or will instead subject such regulation to strict scrutiny. The D.C. Circuit's exclusivity ban ruling's brief observations on existing video market share should hardly satisfy either level of First Amendment scrutiny.

Hopefully, the Supreme Court will likewise address and reject the FCC brief's argument that "[t]he decreased number of over-the-air viewers makes carriage on cable systems even more critical to further the congressional interest in ensuring that 'a multiplicity of broadcasters' are financially able to provide an alternative sources of programming to the American public.'" This line of argument seeks to make a virtue out of must-carry's mismatch with the current competitive video market. For the Court to accept the logic of the FCC's argument would be to entrench those cable regulations that least fit today's reality. Aside from the intermodal competition offered by DBS and telco providers, increasing numbers of broadcasters are beginning to make content available via broadband using services and applications such as iTunes and Hulu. In reconsidering the constitutional viability of must-carry the Court should frankly consider that the lower the number of over-the-air viewers, the more glaring becomes the government's highly questionable favoritism toward that particular media technology.

Finally, it is worth observing that the FCC's brief rejects what might be a plausible way out of the dilemma posed by the competitive video market's incompatibility with the must-carry statute's regulatory premise. In its brief, the FCC disagreed with a Cablevision argument that must-carry only conceivably could be applied where a cable operator denies carriage to a broadcaster "with a view to stifling competition." The FCC answered that the Turner decisions rejected reliance on antitrust and administrative procedural complaint process as less intrusive means to constitutionally satisfy Congressional goals.

But unless or until the Supreme Court does reconsider its constitutional jurisprudence concerning cable regulation premised on early 1990s market assumptions, wouldn't it be more wise for the FCC to fashion a less intrusive administrative process, one that places the burden on petitioning broadcasters to show anticompetitive intent drove cable providers' rejection of carriage? Instead, we have the FCC continuing to advocate and enforce outdated regulation premised on a lack of cable competition for a video marketplace characterized by dynamic competition. Call that Commission cognitive dissonance.