FCC's Dated View Drives Dramatic Shifts in Video Strategies

In a recent post featured in today's Policyband newsletter (subscription required), Golden West Telecommunications Cooperative explained (and apologized to its customers for) a $4 per month price increase for video services. The reason put forth: rising cable programming and retransmission consent fees. Golden West even pointed out that "[o]ther telecommunications cooperatives in South Dakota have discontinued cable TV due in part to rising costs" – an exodus part of "a broader trend" that includes WideOpenWest and Frontier Communications.

I and other Free State Foundation scholars have documented extensively the rapid and relentless ascent of streaming services and the corresponding loss of subscribers by traditional providers subject to the FCC's statutory authority. We have argued that these seismic shifts demand an aggressive deregulatory response from both Congress and the Commission. We have implicated the latter's refusal to eliminate one-sided rules – and confounding desire to impose still more one-sided rules – as an exacerbating factor in the decline of facilities-based Multichannel Video Programming Distributors (MVPDs). And we have explained how that decline harms competition and, in turn, consumers.

Not surprisingly, these marketplace trends are not slowing down. By way of example, Netflix days ago announced that it added 1.45 million subscribers in the United States and Canada during the second quarter, bringing its total to over 84 million. Traditional providers, on the other hand, experienced yet another "worst quarter ever" between January and March – an overall drop in pay television subscriptions that surpassed 12 percent – and analysts anticipate that second quarter results could be just as bleak.

Nevertheless, the FCC remains unwilling to remove its blinders and focus on the reality before it. Consequently, an increasing number of facilities-based MVPDs are adapting to the steadily more inhospitable competitive landscape by embracing an "if you can't beat them, join them" approach that deemphasizes their own legacy bundled offerings. Some, as noted above, are exiting the marketplace altogether and/or outsourcing their video operations to virtual MVPDs (vMVPDs) – WideOpenWest, for instance, has partnered with YouTube TV.

Others are striking deals with programmers and streaming platforms so that they can provide consumers the online alternatives that they prefer over traditional video packages. Examples include:

• Comcast is offering broadband customers the Xfinity StreamSaver™ bundle that includes Apple TV+, Netflix Standard with ads, and Peacock Premium with ads. As I noted in a recent post to the FSF Blog describing the available-at-retail Xumo platform, Comcast provides broadband customers with a Xumo Stream Box – which supports hundreds of third-party apps, including those of multiple vMVPDs that compete directly with its own legacy video products – at no additional cost.
• Charter gives subscribers to certain Spectrum TV® video packages access to Disney+ Basic and ESPN+. It also provides a free-for-six-months Xumo Stream Box to those that subscribe to Spectrum One Stream and add Spectrum TV.
• Altice USA last week announced the launch of Entertainment TV, a vMVPD service that offers over 80 channels for $30 per month and is available to broadband subscribers as part of its Optimum Stream product. As reported by Daniel Frankel, managing editor of Next TV, "[l]ike many cable operators, the company would prefer to leave linear video behind."

Traditional MVPDs find it increasingly challenging to win and retain customers in the vibrantly competitive battle for eyeballs that includes not just streaming alternatives, but social media platforms – particularly YouTube – and gaming. The FCC's dogged determination to saddle them with even more one-sided rules, such as unreasonable constraints on their ability to employ common billing practices, is exacerbating the situation and driving them to retrain their focus. As a result, consumer choice and overall consumer welfare are compromised.

The Latest on State Cable Bill Prorating Requirements

There have been two recent developments of note regarding legal challenges to state-level requirements that cable operators prorate customers' last-month bills – obligations that, as I argued in "State Cable Bills Prorating Requirements Clearly Are Preempted," an April 2021 Perspectives from FSF Scholars, constitute a form of rate regulation preempted by the 1984 Cable Act, not an otherwise permissible customer service standard or consumer protection law.

Both Maine and New Jersey require that cable operators – but not any of the countless other distributors of video programming, whether facilities-based (such as the two Direct Broadcast Satellite operators, DIRECTV and DISH Network, or telco TV providers, like Verizon FiOS) or streamed over the Internet (Netflix, Hulu, Amazon Prime Video, Disney+, and so on) – bill canceling customers on a per-day basis during their final month of service.

In "Maine Cable Law, Ignoring Competition, Is 'Unambiguously Preempted'," an October 2020 Perspectives, I reported that the U.S. District Court for the District of Maine had found the Maine statute to be "unambiguously preempted." The Court of Appeals for the First Circuit, however, reversed that decision on January 4, 2022. For more information, please see "First Circuit Wrongly Concludes Maine's Prorated Billing Requirement Is Not Unlawful."

And last week, on January 9, 2023, the U.S. Supreme Court announced that it had denied Charter Communications' petition for certiorari.

New Jersey's "virtually identical" rule likewise, and for similar reasons, was deemed preempted by the Superior Court of New Jersey, Appellate Division, in an October 15, 2021, unpublished opinion. I discussed this decision in "NJ State Court Concurs: Requirement to Prorate Cable Bills Equals Preempted Rate Regulation," a contemporaneous post to the Free State Foundation blog.

The New Jersey Board of Public Utilities and Division of Rate Counsel appealed to the New Jersey Supreme Court, which held oral arguments on Tuesday (subscription required). Should the lower court decision be reversed, this case potentially could make its way to the Supreme Court.

A decision is expected as early as late next month.

NJ State Court Concurs: Requirement to Prorate Cable Bills Equals Preempted Rate Regulation

Last week, a New Jersey state appellate court, wisely siding with two federal district courts, held that requiring cable operators to prorate last-month bills constitutes a form of rate regulation that is preempted by federal law.

Section 623(a)(2) of the 1984 Cable Act unambiguously states that, upon a determination by the FCC that a cable operator is subject to effective competition, "the rates for the provision of cable service by such system shall not be subject to regulation." Section 636(c), meanwhile, expressly preempts any provision of law that is inconsistent with Section 623(a)(2) (as well as with Section 623(a)(1), which states that "[n]o Federal Agency or State may regulate the rates for the provision of cable service except to the extent provided under this section.").

Nevertheless, and as I wrote in an April 2021 Perspectives from FSF Scholars, "State Cable Bills Prorating Requirements Clearly Are Preempted," two states – Maine and New Jersey – have attempted to require cable operators, and cable operators alone, to charge customers for service on a per-day basis.

Fortunately, in both cases a federal district court intervened.

In March 2020, Maine passed Public Law Ch. 657, "An Act To Require a Cable System Operator To Provide a Pro Rata Credit When Service Is Cancelled by a Subscriber." It states that a cable operator "shall grant a subscriber a pro rata credit or rebate for the days of the monthly billing period after the cancellation of service if that subscriber requests cancellation of service 3 or more working days before the end of the monthly billing period."

In an October 2020 opinion, the U.S. District Court of Maine held that obligation to be "unambiguously preempted" by the 1984 Cable Act. Specifically, the court concluded that a mandate to prorate last-month bills effectively requires cable operators to bill on a per-day basis, and therefore is a form of rate regulation preempted by Section 623(a)(1) – not a consumer protection law or customer service standard for which Section 632 creates an exception to the general rule.

For additional information on that decision, please read "Maine Cable Law, Ignoring Competition, Is 'Unambiguously Preempted'," a Perspectives from FSF Scholars published later that same month.

In March 2021, the District Court of New Jersey considered a challenge by Altice to Section 14:18-3.8 of the New Jersey Board of Public Utilities' (BPU) rules, a provision that that court found to be "virtually identical" to Maine Public Law Ch. 657. In an opinion that quoted extensively from the Maine District Court's decision, it not surprisingly reached the identical conclusion.

In addition to filing suit in federal district court, Altice also appealed the cease-and-desist order issued by the New Jersey BPU to the Superior Court of New Jersey, Appellate Division. On October 15, 2021, in an unpublished opinion, that court embraced the reasoning of the New Jersey District Court (and, by extension, the Maine District Court) and invalidated the BPU's cease-and desist order.

Notably, in both of these instances the prorated billing requirement applies exclusively to cable systems. Rival Multichannel Video Programming Distributors (MVPDs), including satellite operators, telco TV providers, and "virtual" MVPDs that distribute content over the Internet, a growing category that includes YouTube TV, Sling TV, and Hulu + Live TV, are free to bill on a monthly basis – a practice that many in fact have embraced.

As such, these court decisions, at the federal and now state levels, don't merely affirm the intent of Congress. They also serve to remove arbitrary barriers that impact only one segment of the video distribution marketplace.

Given the ever-growing prominence of streaming services (Netflix, Hulu, Amazon Prime Video, Disney+, Apple TV+, HBO MAX, and countless others), it is appropriate that regulations premised upon (at best) outdated assumptions be eliminated at every opportunity.