Tuesday, June 05, 2018

Improving the FCC's Cable Leased Access Proposal

In today’s video services market, consumers choose to access video programming from multiple competing platforms. But, in many respects, cable operators remain regulated as if direct broadcast satellite (DBS), “telephone company” video service providers, and online video options don’t exist, not to mention wireless broadband providers with increasing video capabilities. Many legacy cable regulations are at odds with the free speech rights of cable operators and undermine their ability to compete for consumers. To its credit, the FCC will vote on a reform proposal regarding legacy cable leased access rules at its June 7 public meeting

The Commission should adopt its proposal to vacate rules from its 2008 Leased Access Order. That order suffered from significant legal defects and never went into effect. Rather than make leased access rules stricter, the Commission’s proposal would make compliance at least somewhat less burdensome. Nonetheless, leased access rules are forced speech mandates that clash with the First Amendment rights of cable operators to exercise editorial control over the content they deliver. If the Commission believes it is powerless to eliminate completely the leased access requirements, it should ameliorate the First Amendment problem by predicating enforcement of its leased access rules on findings of market power.  

Federal law requires cable operators to make available a portion of their channel capacity for leasing by unaffiliated video programmers. The Commission is responsible for establishing maximum rates as well as terms and conditionsfor cable operators’ leasing of channel capacity. Cable leased access requirements date back to the Cable Act of 1984. Such mandates were intended to promote a multiplicity of video distribution outlets to consumers. And the underlying premise of legacy cable regulation, including leased access, was that cable operators possessed bottleneck or monopoly power over consumer access to video programming distribution.

Despite growing competition from DBS providers and newly deployed MVPD services offered by AT&T and Verizon, in its 2008 Leased Access Orderthe Commission attempted to increase regulatory burdens rather than reduce them. But serious legal defects kept the 2008 rules from ever going into effect. The Sixth Circuit stayed the 2008 Leased Access Order because “substantial appellate issues” had been raised. The court suspected the regulations would have irreparably harmed cable operators by establishing unreasonably low rates and resulted in an influx of leased access channels displacing other video content selected and paid for by cable operators – thus causing subscribers to cancel and pursue alternative competing services.

Additionally, the Office of Management and Budget (OMB) identified five respects in which the 2008 order’s new regulatory burdens on cable operators were contrary to the Paperwork Reduction Act. According to the Commission’s Notice: “OMB specifically cited the Commission’s failure to demonstrate the need for the more burdensome requirements adopted, its failure to demonstrate that it had taken reasonable steps to minimize the burdens, and its failure to provide reasonable protection for proprietary and confidential information.” 

The procedural history surrounding the 2008 Leased Access Order supports the tentative finding in the Commission’s latest proposal that “there is no sound policy basis for the rules adopted in the 2008 order at this point.” Moreover, The Commission’s tentative finding that “vacating the 2008 Leased Access Order would be consistent with the goal of the Commission’s Modernization of Media Regulation Initiative to remove rules that are outdated or no longer justified by market realities” is solidly backed market evidence.

Today’s video services ecosystem features competitive platforms for video programmers to distribute content to consumers. According to data cited in the Commission’s Eighteenth Video Competition Report (2017), at the end of 2015, 99% of all households were served by three competing multi-channel video programming distributors (MVPDs), and 18% of the households were served by four MVPDs. Cable MVPDs’ share of the national market was 53% of the households, while direct broadcast satellite (DBS) providers served 33%, and former telephone company MVPDs served 13.4% percent. 

Moreover, 2018 will likely be the sixth straight year in which overall MVPD subscriptions have declined. Figures released by SNL Kagan indicate that total MVPD subscriptions declined to 90.3 million residential subscribers in the first quarter of 2018, with cable operators sustaining their largest first-quarter decline on record. And data regarding consumers who have dropped MVPD services in favor of online video distributor (OVD) services provides strong evidence that OVD services are increasingly perceived by consumers as close substitutes. Netflix now exceeds 56 million U.S. subscribers while Hulu has over 20 million. Amazon Prime video viewers totaled approximately 26 million as of early 2017. Niche OTT services, such as HBO Go and CBS All Access are also widely available. Furthermore, households relying exclusively on over-the-air (OTA) broadcast service increased to 12.4 million in 2015, according to data cited in the Commission’s report. And 26.7 million households relied exclusively on OTA service on at least one TV that same year. Indeed, these sweeping changes in the market make the 2008 order’s added regulatory burdens completely unjustifiable.

The Commission’s proposal would also modify its pre-2008 leased access rules by, for instance, requiring cable operators to respond only to bona fide requests from prospective leased access programmers. Additionally, its proposal would clarify Commission procedures for addressing leased access disputes. Those proposed changes are reasonable as far as they go. However, the Commission should build upon its proposal by seeking ways at least to lessen the serious conflict that exists between the First Amendment free speech rights of cable operators and leased access mandates. 

According to Supreme Court jurisprudence, the First Amendment prevents government from dictating to speakers what they must say. Leased access requirements conflict with free speech principles because they are forced speech mandates. Cable operators’ channel lineups selections and channel tier placements are editorial activities – and thus a form of constitutionally protected speech. But under the Cable Act, cable operators lose “editorial control over any video programming” on the channel capacity they are required to lease. Rate controls on leasing channel capacity also undermine cable operators’ editorial rights. 

Although leased access mandates were intended to increase video distribution in the face of cable bottlenecks, as indicated previously, competition among video distribution platforms has increased dramatically since the mid-80s and early 90s. The old rationale for legacy cable regulation, including leased access, no longer holds up. At the very least, any continued enforcement of legacy cable regulation should be predicated on an evidentiary showing of market power. Otherwise, such regulation is contrary to the First Amendment. 

The necessity of demonstrating market power in order to alleviate constitutional problems with imposing forced speech mandates on cable operators was described in an erudite concurring opinion by Judge Brett Kavanaugh in Comcast v. FCC (2008). At issue in that case was the enforcement of the Commission’s program carriage regulations – another form of forced speech mandate. Judge Kavanaugh explained that under Supreme Court decisions such as Turner Broadcasting System v. FCC (1994), legacy cable regulation, such as program carriage rules, were subject to intermediate scrutiny rather than strict scrutiny because of perceived cable bottlenecks in the early 1990s. Under intermediate scrutiny, speech of cable operators may be restricted so long as the regulation furthers an important government interest by means substantially related to further that interest. Recognizing that the old bottlenecks no longer existed in the national cable market, Judge Kavanaugh concluded that the existence of market power must be demonstrated for enforcement of program carriage rules to survive intermediate scrutiny.  

The cable leased access provisions of the Cable Act were upheld on First Amendment grounds by the D.C. Circuit in Time Warner Entertainment v. FCC (1996). However, that decision was close on the heels of the Supreme Court’s ruling in Turner, and it predated much of the dramatic rise in competing video platforms. Also, the editorial speech rights of cable operators in making channel lineup and tier placements appear even more commercially important today, as MVPDs seek to attract and retain subscribers who may be tempted to rely exclusively on OVD services. Now in light of those significant market changes, the same line of reasoning that Judge Kavanaugh applied to program carriage rules in Comcast v. FCC should also apply to cable leased access rules: enforcement of leased access requirements should be predicated on a finding of market power.

Because cable leased access is contained in the Communications Act, outright the Communications Act, outright repeal may not be an option for the Commission. But the Commission should expressly identify the First Amendment problem posed by the leased access requirements in today’s competitive video market. And the Commission should modify its cable leased access proposal to incorporate market power requirements in order to ameliorate that constitutional problem. 

At the very least, the Commission should make the existence or non-existence of market power a factor in determining whether rates or terms and conditions for leased access offered by a cable operator are reasonable. Perhaps other options also exist by which the Commission can incorporate market power findings into the operation of its leased access rules. Such options should be fully explored by the Commission in its leased access proceeding. 

In sum, the FCC deserves credit for putting forward the cable leased access proposal, which deserves to be adopted. But, taking into account the First Amendment free speech rights of cable operators in conjunction with today’s competitive video market, the Commission should consider deregulating even more.