FCC Proposes Leased Access Update, But First Amendment Problem Remains

At its July 16 public meeting, the FCC will vote on a proposed order that would make updates to its commercial leased access rules. The proposed order would bring the rules into closer alignment with actual market values for cable channels and reduce burdens on cable operators. As far as they go, these changes make sense and they ought to be approved by the Commission. If adopted, however, the order would sidestep the glaring First Amendment problems posed by cable leased access regulation. 

Commercial leased access rules require cable operators to lease channel capacity to independent video programmers at government-set rates. Under the proposed order, leased access rates would be set according to a tier-based calculation intended to approximate the actual value of the leased channels. Also, maximum fees that cable operators may charge independent video programmers for leased access would be calculated annually based on contracts in effect the prior year. Apparently, these changes would reduce regulatory burdens on cable operators. Commission deserves credit for proposing these updates to the old rules.

But the First Amendment problem with cable leased access regulation remains. On the one hand, the FCC's proposed order acknowledges that significant changes have taken place in the video marketplace over the several years since the constitutionality of the cable leased access regime was upheld. Those changes put the constitutionality of leased access regulation in doubt. On the other hand, the proposed order agrees that "it is not the role of the Commission to adjudicate in the first instance the constitutionality of leased access requirements that have been mandated by Congress," so it offers no opinion on the First Amendment issue.  

As Free State Foundation President Randolph May and I explained in our July 2019 comments to the FCC in its commercial leased access proceeding, leased access regulation is an unconstitutional "forced speech" mandate. Such regulation infringes on the First Amendment editorial rights of cable operators over what video programming they will carry and how much they can charge for content they may not want to carry. Supposed "bottlenecks" in the distribution pathways for video programming in the late 1980s and early 1990s provided the basis for upholding leased access regulation. Those bottlenecks do not exist in today's competitive video marketplace. Strict scrutiny is now the proper constitutional standard for evaluating cable leased access regulation. But there is no compelling government interest in regulating or limiting the editorial discretion of cable operators to program their services as they wish, and so cable leased access regulation fails strict scrutiny. 

Although the FCC may believe that its limited role prevents it from doing away with leased access regulation, that should in no way inhibit members of Congress or the courts from acting within their own roles to address the glaring First Amendment problem with cable leased access regulation. 

Modern TV Act Would Remove Old Rules, Bring Video Policy Up to Date

The Modern Television Act of 2019 is promising new legislation that would bring federal video policy into greater alignment with 21st century market realities. Introduced in the U.S. House of Representatives on July 25 by Reps. Steve Scalise and Anna Eshoo, the Modern TV Act would repeal or at least reduce a number of old legacy broadcast TV and cable regulations that were based on a now-obsolete picture of the video market. The Modern TV Act is a bipartisan compromise measure that the 116th Congress ought to take up in earnest this year.

Among its provisions, the Modern TV Act would eliminate distant signal importation prohibitions, syndicated exclusivity rules, network non-duplication rules, authority to regulate local cable rates under Section 623, and cable leased access rules. Most of those rules involve dealings between market participants that own video programming and video service providers that distribute programming to retail subscribers. Once those rules are eliminated, video programmers and video service providers can, in most instances, simply negotiate contracts to address which programming receives carriage in which local TV markets. The Modern TV Act also would eliminate, or at least largely eliminate, cable and satellite compulsory licenses for carrying copyrighted video programming, thereby allowing parties to negotiate copyright royalties.

The Modern TV Act moves firmly in the direction of establishing a federal video policy that matches the competitive conditions of today's innovative video marketplace. For several years, Free State Foundation scholars have called attention to the fact that legacy regulations of broadcast, cable, and direct broadcast satellite (DBS) TV services are based largely on early 1990s, or even earlier, assumptions about the analog and VCR-era video market. But those regulations are now hopelessly out of touch with today's marketplace. 

The days are long gone when the video service choices of most Americans were largely limited to over-the-air (OTA) broadcast TV or a single cable operator. Today, most Americans can choose between a cable provider and two DBS providers, while many also have access to a former "telco" video services provider. Unlike the days when cable operators had a 91% market share among pay-TV services, at year's-end 2017, cable served 55.2% of multi-channel video programming distributor (MVPD) subscribers, DBS served nearly 33.5%, and "telco MVPDs" serviced 11.3%. Meanwhile, in 2018 antenna use for OTA broadcast TV reached its highest level since 2005, with 31% of U.S. households having an antenna on at least one TV. Online video distributor (OVD) services have also dramatically transformed the video market. In early 2019, Netflix had over 60 million U.S. subscribers to its streaming video service, while Amazon Prime and Hulu had 101 million and 28 million. Widespread adoption of OVD services has been recognized as an important cause of annual MVPD subscriber losses going back to 2013. Total MVPD subscriptions were down to 94 million at year's-end 2017, and sharp declines have been reported for 2018 and 2019.

Legacy regulations geared toward last century's outdated technologies and less competitive, pre-Internet market conditions confer no benefit on consumers today. Instead, their continuation saddles broadcast, cable, and DBS TV service providers with burdensome compliance costs as well as restrictions that can inhibit their ability to compete with each other and with online competitors. 

Furthermore, as Free State Foundation President Randolph May and I have explained in numerous writings, many legacy video regulations, including leased access rules, amount to forced access mandates. Requiring video service providers to carry video programming not of their own choosing violates their First Amendment free speech rights. The Modern TV Act's proposed repeal of leased access rules would better respect the free speech rights of cable providers. 

To help bring federal video policy up to date, the 116th Congress should give prompt consideration to the Modern TV Act.

FCC Gives the First Amendment Its Due in Cable Leased Access Proposal

On June 6, the FCC will vote on a proposed order and rulemaking to modify its analog-era leased access rules, including its dispute procedures and rate formula. To its credit, the Commission factors First Amendment free speech protections into its proposed modifications of its leased access rules. Indeed, the Commission expressly recognizes that leased access requirements, which restrict the editorial and speech rights of cable providers, are constitutionally on shaky ground. This is an important point that Free State Foundation scholars have been making for several years. 

As I wrote in "FCC Over-Regulation of Video Services Undermines Free Speech, a 2012 Perspectives from FSF Scholars paper:

The Supreme Court's First Amendment jurisprudence holds that content-based restrictions are presumptively unconstitutional and that government is generally prohibited from telling speakers what they must say. But many of the FCC's regulations applicable to video service providers include access or forced sharing mandates. Some agency restrictions are even based on speech content. These continuing legacy regulations governing video services infringe upon the editorial choices of MVPDs. Court precedents recognize that MVPDs are entitled to First Amendment protection. The logic of the Court's relevant First Amendment decisions therefore renders significant aspects of current federal regulation of MVPDs' free speech constitutionally suspect. …The FCC's leased access regulations [] pose First Amendment problems. Under the statute, MVPDs lose "editorial control over any video programming" on the leased channel capacity. Rate controls constitute another facet of leased access regulations, which are another variety of forced access regulation. MVPDs are subject to FCC-set maximum amounts that independent video programmers can be charged for leasing channel capacity.  

Previously, legacy cable regulations, including leased access rules, were upheld under the intermediate scrutiny standard because of perceived cable video programming distribution 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. 

But by the time of my May 2011 blog post on ending legacy cable regulation we already were long past the days when cable operators possessed a 91% or more nationwide market share. And we already were long past the days when consumers' only option for subscription video services was a single local cable provider. Data from the Commission's Communications Marketplace Report (2018) reflect a video services ecosystem featuring competitive cable, direct broadcast satellite (DBS), and online platforms for video programmers to distribute content to consumers. As I summed things up in a February 2019 Perspectives paper:

For video services, the report found that at the end of 2017 all or nearly all U.S. consumers have access to three competing multi-channel video programming distributors (MVPDs). Some consumers had access to four. Furthermore, MVPDs lost subscribers to competing broadcast TV and – especially – to online video distributor (OVD) services. Whereas MVPDs lost 3.6 million video subscribers in 2017, a drop to 94 million, 16.6 million TV households (13.9%) relied exclusively on over-the-air (OTA) TV broadcast signals, up from 15.7 million TV households (13.2%) in 2017. Top three OVDs Amazon Prime, Netflix, and Hulu exceeded 125 million subscriptions in 2017, up from about 103 million in 2016. And "Virtual MVPDs" such as SlingTV and DIRECTV NOW climbed from 2.2 million subscribers to 4.8 million. 

In a June 2018 blog post titled "Improving the FCC's Cable Leased Access Proposal," I again pointed out that the old rationale for leased access rules no longer holds up. Therein I wrote that "the Commission should expressly identify the First Amendment problem posed by the leased access requirements in today’s competitive video market." Furthermore, I wrote: "If the Commission believes it is powerless to eliminate completely the leased access requirements, it should ameliorate the First Amendment problem," perhaps by predicating enforcement of its leased access rules on findings of market power.

Commendably, the Commission's proposed order and rulemaking states: "We agree that dramatic changes in technology and the marketplace for the distribution of programming cast substantial doubt on the constitutional foundation for our leased access rules." It goes on to say: 

[W]e now find that the First Amendment concerns raised by commenters provide additional reason to interpret the statutory obligations of Section 612 in a manner that reduces burdens on the speech of cable operators. We do so here by, among other things, eliminating the Commission rule requiring that cable operators make leased access available on a part-time basis.

The Commission's proposed order would vacate faulty 2008 rules that were never implemented and modify pre-2008 procedural requirements. And its proposed rulemaking would modify its leased access rate formula. Also, the Commission again asks if leased access requirements continue to withstand First Amendment scrutiny, and what discretion the Commission has to reduce the burdens on speech posed by those rules. By this admirable approach, the FCC rightly gives due respect to the First Amendment free speech interests that are burdened by leased access rules. 

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.