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 Federal  Communications  Commission  FCC  05-  96 
 1 
 Before  the  Federal  Communications  Commission 
 Washington,  D.  C.  20554 


 In  the  Matter  of 
 The  Commissions  Cable  Horizontal  and  Vertical  Ownership  Limits 
 )  ) 
 )  )  MM  Docket  No.  92-  264 


 SECOND  FURTHER  NOTICE  OF  PROPOSED  RULEMAKING 
 Adopted:  May  13,  2005  Released:  May  17,  2005 
 Comment  Date:  30  days  after  publication  in  the  Federal  Register  Reply  Comment  Date:  45  days  after  publication  in  the  Federal  Register 


 By  the  Commission:  Commissioners  Copps  and  Adelstein  issuing  a  joint  statement. 
 TABLE  OF  CONTENTS 
 Paragraph 
 I.  INTRODUCTION..................................................................................................................................  1 
 II.  SECOND  FURTHER  NOTICE  OF  PROPOSED  RULEMAKING..................................................  17 
 A.  Legal  Framework.............................................................................................................................  18  1.  Statutory  Objectives............................................................................................................  18 
 2.  Judicial  Review  and  Previous  Implementation  Efforts......................................................  21  3.  Elements  of  the  Horizontal  and  Vertical  Limits.................................................................  27 
 4.  Approaches  to  Establishing  Horizontal  and  Vertical  Limits  .............................................  38  B.  Industry  Developments....................................................................................................................  49 
 C.  Economic  Basis  for  Horizontal  Limit..............................................................................................  61  1.  Defining  the  Market............................................................................................................  64 
 a)  Programming  Market  ............................................................................................  65  b)  Programming  Distribution  Market  .......................................................................  67 
 c)  Relevant  Geographic  Markets  ..............................................................................  69  2.  Potential  Harms  of  Horizontal  Concentration....................................................................  71 
 a)  Analytical  Frameworks  for  Economic  Analysis  of  Harms  ..................................  71  (1)  Open  Field  Approach  ............................................................................  72 
 (2)  Monopsony  Framework.........................................................................  85  (3)  Bargaining  Power  as  a  Source  of  Unilateral  Anticompetitive  Action..  90 
 (a)  The  Use  of  Bargaining  Theory  to  Establish  New  Limits  ........  97 
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 (b)  Experimental  Economics  Study.............................................  101  b)  Additional  Factors  in  the  Analysis  .....................................................................  105 
 (1)  The  Impact  of  Competition  at  the  Distribution  Level  .........................  106  (a)  Threshold  Approach  ...............................................................  114 
 (2)  The  Potential  for  Joint  Action..............................................................  117  (3)  The  Impact  of  Independent  Actions  by  Multiple  Cable  Operators.....  126 
 (4)  The  Impact  of  Vertical  Integration  ......................................................  128  (a)  Empirical  Studies  of  Foreclosure  ...........................................  130 
 3.  Potential  Benefits  of  Horizontal  Concentration  ...............................................................  137  D.  Vertical  Limit.................................................................................................................................  143 
 1.  Defining  the  Market..........................................................................................................  148  2.  Potential  Harms  of  Vertical  Integration  ...........................................................................  150 
 3.  Potential  Benefits  of  Vertical  Integration.........................................................................  154  E.  Diversity  of  Information  Sources  ..................................................................................................  163 


 III.  PROCEDURAL  MATTERS  .............................................................................................................  164  A.  Comment  Information  ...................................................................................................................  164 
 B.  Regulatory  Flexibility  Act  .............................................................................................................  165  C.  Paperwork  Reduction  Act..............................................................................................................  166 
 D.  Ex  Parte  Information  .....................................................................................................................  167 
 IV.  ORDERING  CLAUSES  ....................................................................................................................  169 


 APPENDICES 
 A.  LIST  OF  COMMENTERS  B.  INITIAL  REGULATORY  FLEXIBILITY  ANALYSIS 
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 I.  INTRODUCTION 
 1.  The  Cable  Television  Consumer  Protection  and  Competition  Act  of  1992  amended  the  Communications  Act  of  1934  to  provide  increased  consumer  protection  and  to  promote  increased 


 competition  in  the  cable  television  and  related  markets.  1  Among  other  things,  the  1992  Act  added  behavioral  rules  for  cable  carriage  of  broadcast  signals  and  retransmission  consent;  2  rate  regulation;  3 
 program  access  obligations  with  respect  to  satellite-  delivered  cable  programming;  4  and  structural  rules  intended  to  address  the  consequences  of  increased  horizontal  concentration  and  vertical  integration  in  the 
 cable  industry.  5  Section  613(  f)  directed  the  Commission  to  conduct  proceedings  to  establish  reasonable  limits  on  the  number  of  subscribers  a  cable  operator  may  serve  (horizontal  limit),  and  the  number  of 
 channels  a  cable  operator  may  devote  to  its  affiliated  programming  networks  (vertical,  or  channel  occupancy,  limit).  6  A  principal  goal  of  this  comprehensive  program  was  to  foster  a  diverse,  robust,  and 
 competitive  market  in  the  acquisition  and  delivery  of  multichannel  video  programming.  7  Congress  intended  the  structural  ownership  limits  mandated  by  Section  613(  f)  to  ensure  that  cable  operators  did  not 
 use  their  dominant  position  in  the  multichannel  video  distribution  (MVPD)  8  market,  acting  unilaterally  or  jointly,  to  unfairly  impede  the  flow  of  video  programming  to  consumers.  9  At  the  same  time,  Congress 
 recognized  that  multiple  system  ownership  could  provide  benefits  to  consumers  by  allowing  efficiencies  in  the  administration,  distribution  and  procurement  of  programming,  and  by  providing  capital  and  a  ready 
 subscriber  base  to  promote  the  introduction  of  new  programming  services.  10  The  matters  before  the  Commission  in  this  proceeding  stem  directly  from  efforts  begun  in  1992  to  implement  Congress  mandate 
 to  balance  these  competing  interests  by  adopting  reasonable  cable  ownership  limits  and  attribution  benchmarks.  11 


 1  Cable  Television  Consumer  Protection  and  Competition  Act  of  1992,  Pub.  L.  No.  102-  385,  106  Stat.  1460  (1992 
 Act);  H.  Rep.  No.  628,  102d  Cong.,  2d  Sess.  1  (1992)  (House  Report);  Communications  Act  of  1934,  47  U.  S.  C.    151,  et  seq.  (Communications  Act). 


 2  Communications  Act    614  and  615,  47  U.  S.  C.    534  and  535. 
 3  Id.    623,  47  U.  S.  C.    543. 
 4  Id.    628,  47  U.  S.  C.    548. 
 5  Id.    613(  f),  47  U.  S.  C.    533(  f). 
 6  Id. 
 7  See  S.  Rep.  No.  92,  102d  Cong.,  1  st  Sess.  1,  18  (1991)  (Senate  Report);  House  Report  at  27;  see  also  1992  Act   
 2(  a)(  4),  (b)(  1)-(  5);  47  U.  S.  C.    521  (a)(  4),  (b)(  1)-(  5). 
 8  MVPDs  include,  but  are  not  limited  to,  providers  of  cable,  multichannel  multipoint  distribution,  direct  broadcast 
 satellite,  and  television  receive-  only  program  distribution  services  that  make  available  for  purchase  by  subscribers  or  customers,  multiple  channels  of  video  programming.  47  U.  S.  C.    522(  13). 


 9  47  U.  S.  C.    533(  f)(  2)(  A). 
 10  House  Report  at  41,  43;  see  also  Senate  Report  at  27,  33. 
 11  See,  e.  g.,  Implementation  of  Section  11(  c)  of  the  Cable  Television  Consumer  Protection  and  Competition  Act  of 
 1992  Horizontal  Ownership  Limits,  14  FCC  Rcd  19098  (1999)  (1999  Cable  Ownership  Order);  Implementation  of  the  Cable  Television  Consumer  Protection  and  Competition  Act  of  1992,  14  FCC  Rcd  19014  (1999)  (1999  Cable 


 (continued.) 
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 2.  The  Commission  first  established  a  30%  cable  subscriber  (horizontal)  ownership  limit  and  40%  channel  occupancy  (vertical)  rule  in  1993.  12  It  found  that  a  30%  horizontal  ownership  limit  on 
 cable  households  passed  is  generally  appropriate  to  prevent  the  nations  largest  MSOs  from  gaining  enhanced  leverage  from  increased  horizontal  concentration,  while  at  the  same  time,  ensur[  ing]  that  a 
 majority  of  MSOs  continue  to  expand  and  benefit  from  the  economies  of  scale  necessary  to  encourage  investment  in  new  video  programming  services  and  the  deployment  of  advanced  cable  technologies.  13 
 With  respect  to  the  vertical  limit,  the  Commission  found  that  a  40%  limit  on  the  number  of  activated  channels  that  can  be  occupied  by  the  operators  affiliated  video  programming  services  14  is  appropriate  to 
 balance  the  goals  of  increasing  diversity  and  reducing  the  incentive  and  ability  of  vertically  integrated  cable  operators  to  favor  their  affiliated  programming,  with  the  benefits  and  efficiencies  associated  with 
 vertical  integration.  15  The  limit  applies  only  to  channel  capacity  up  to  75  channels.  16  The  75-  channel  maximum  reflected  the  Commissions  recognition  that  expanded  channel  capacity  would  reduce  the  need 
 for  channel  occupancy  limits  as  a  means  of  encouraging  cable  operators  to  carry  unaffiliated  programming,  and  that  the  dynamic  state  of  cable  technology  required  that  periodic  review  of  the  channel 


 (Continued  from  previous  page)  Attribution  Order);  Implementation  of  11(  c)  of  the  Cable  Television  Consumer  Protection  and  Competition  Act  of 
 1992  Horizontal  Ownership  Limits,  13  FCC  Rcd  14462  (1998)  (1998  Horizontal  Reconsideration  Order);  Implementation  of  the  Cable  Television  Consumer  Protection  and  Competition  Act  of  1992,  Review  of  the  Cable 
 Attribution  Rules,  13  FCC  Rcd  12990  (1998);  Regulations  Governing  Attribution  of  Broadcast  and  Cable/  MDS  Interests,  Regulations  and  Policies  Affecting  Investment  in  the  Broadcast  Industry  and  Reexamination  of  the 
 Commissions  Cross-  Interest  Policy,  11  FCC  Rcd  19895  (1996);  Implementation  of  Sections  11  and  13  of  the  Cable  Television  Consumer  Protection  and  Competition  Act  of  1992,  10  FCC  Rcd  7364  (1995  Vertical 
 Reconsideration  Order);  Implementation  of  Sections  11  and  13  of  the  Cable  Television  Consumer  Protection  and  Competition  Act  of  1992,  Horizontal  and  Vertical  Ownership  Limits,  Cross-  Ownership  Limitations,  and  Anti-trafficking 
 Provisions,  8  FCC  Rcd  8565  (1993)  (1993  Second  Report  and  Order);  Implementation  of  Sections  11  and  13  of  the  Cable  Television  Consumer  Protection  and  Competition  Act  of  1992,  Horizontal  and  Vertical 
 Ownership  Limits,  8  FCC  Rcd  210  (1992). 
 12  1993  Second  Report  and  Order,  8  FCC  Rcd  at  8567    3-  4. 


 13  Id.  at  8577    25. 
 14  Id.  at  8601    83-  84.  The  up  to  75  video  channels  limit  was  based  on  the  technological  capacity  of  the 
 average  cable  system  in  1993,  which  generally  limited  the  number  of  channels  available  for  distribution  of  video  programming,  absent  advancements  such  as  signal  compression  or  fiber  to  the  block,  to  approximately  75 


 channels.  Id.  at  8601    84  &  n.  106.  The  Commission  further  recognized  that  the  need  for  a  vertical  limit  would  likely  decrease  as  channel  capacity  increased,  so  it  capped  the  limit  for  larger  systems  of  greater  than  75  channels. 


 15  Id.  at  8594    68. 
 16  For  a  system  with  75  or  fewer  channels,  the  limit  is  40%  of  actual  activated  channel  capacity;  60%  of  activated 
 channel  capacity  must  be  reserved  for  unaffiliated  programming,  i.  e.,  45  channels  for  a  75  channel  system.  For  systems  with  75  or  more  channels,  the  limit  is  applied  only  to  75  channels,  meaning,  in  effect,  that  45  channels  on 


 such  systems  must  be  reserved  for  unaffiliated  programming  (60%  of  75).  As  a  result,  the  limit  for  larger  systems  is  effectively  higher  when  expressed  as  a  percentage  of  system  capacity,  than  the  limit  for  systems  with  75 
 channels  or  fewer. 
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 occupancy  limit  be  undertaken.  17  In  the  1995  Vertical  Reconsideration  Order,  the  Commission  denied  two  petitions  for  reconsideration  and  reaffirmed  its  decision  regarding  the  40%  channel  occupancy  limit.  18 
 3.  To  better  reflect  changed  market  conditions  and  allow  for  organic  growth  in  subscribership,  in  the  1999  Cable  Ownership  Order  the  Commission  revised  the  30%  horizontal  limit  to 
 permit  a  cable  operator  to  reach  30%  of  all  MVPD  subscribers,  rather  than  solely  cable  subscribers.  19  As  the  Commission  observed,  this  was  equivalent  to  establishing  a  36.7%  cable  subscriber  limit.  20  This  limit 
 was  based  on  the  Commissions  determination  that  cable  operators  at  certain  concentration  levels,  either  by  unilateral,  independent  decisions  or  by  tacit  collusion,  could  effectively  prevent  programming 
 networks  from  entering  or  surviving  the  marketplace  simply  by  deciding  not  to  carry  a  particular  network,  thereby  impeding  the  flow  of  programming  to  the  consumer.  21  The  Commission  estimated  that  a  new 
 cable  programming  network  would  need  access  to  40%  of  the  MVPD  subscribers  nationwide  to  be  viable.  22  A  30%  limit,  the  Commission  reasoned,  would  allow  new  programming  networks  access  to  a 
 40%  open  field  by  ensuring  the  presence  of  at  least  four  cable  operators  in  the  market,  and  by  preventing  the  two  largest  cable  operators  from  garnering  more  than  60%  of  the  market.  23 


 4.  In  proceedings  implementing  the  1992  Acts  broad  structural  rules,  the  Commission  determined  that  use  of  its  broadcast  attribution  standard  was  appropriate  for  defining  what  constitutes  a 
 cognizable  interest.  24  Specifically,  use  of  the  broadcast  attribution  benchmarks  for  horizontal  cable  ownership  and  vertical  channel  occupancy  limits  was  considered  appropriate,  because,  like  the  broadcast 
 ownership  rules,  the  1992  Acts  rules  governing  cable  industry  structure  were  designed  to  ensure  competition  and  diversity  in  the  video  marketplace.  25  The  1993  cable  horizontal  and  vertical  ownership 


 17  Id.  at  n.  86  (measurement  of  the  channel  occupancy  rule  to  be  done  on  a  per  channel  basis  using  the  traditional  6 
 MHz  channel  definition;  periodic  review  necessary  in  light  of  fact  that  it  may  soon  be  common  for  cable  operators  to  provide  several  channels  using  a  single  6  MHz  bandwidth  segment). 


 18  1995  Vertical  Reconsideration  Order,  10  FCC  Rcd  at  7365    3. 
 19  1999  Cable  Ownership  Order,  14  FCC  Rcd  at  19101    5. 
 20  Id.  at  19101    6. 
 21  Id.  at  19114-  16    38-  44. 
 22  The  40%  open  field  was  based  on  the  Commissions  findings  that  in  order  to  be  viable,  a  new  programming 
 network  needs  to  access  approximately  15-  20  million  subscribers  (20%  of  the  market),  and  that,  even  with  such  access,  it  has  only  a  50%  chance  of  actually  reaching  subscribers  given  tier  packaging  and  consumer  preferences. 


 See  1999  Cable  Ownership  Order,  14  FCC  Rcd  at  19115-  18    40-  51. 
 23  Id. 


 24  1993  Second  Report  and  Order,  8  FCC  Rcd  at  8579-  81,    30-  35  (horizontal  attribution  standard),  8590-  92   
 56-  63  (vertical  attribution  standard).  See  also,  Implementation  of  the  Cable  Television  Consumer  Protection  and  Competition  Act  of  1992,  Review  of  the  Commissions  Cable  Attribution  Rules,  Notice  of  Proposed  Rulemaking, 


 13  FCC  Rcd  12990,  991-  993    2,  4  (1998)  (1998  Cable  Attribution  NPRM). 
 25  The  Commission  also  observed  that  the  legislative  history  of  the  1992  Act  expressly  suggested  use  of  the 
 broadcast  attribution  standard.  1998  Cable  Attribution  NPRM,  13  FCC  Rcd  at  12993    4.  The  general  cable  attribution  rules  apply  to  such  broad  structural  limitations  as  the  horizontal  ownership  limits,  47  C.  F.  R.    76.503; 


 channel  occupancy  limits,  47  C.  F.  R.    76.504;  cable/  SMATV  cross-  ownership,  47  C.  F.  R.    76.501(  d);  and  cable-(  continued.) 
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 attribution  standards  mirrored  the  broadcast  attribution  rules,  and  inter  alia,  attributed  all  corporate  voting  stock  interests  of  5%  or  more  and  contained  an  exemption  to  the  voting  stock  threshold  under  which  a 
 minority  corporate  shareholders  voting  interests  were  not  attributed  in  cases  where  a  single  shareholder  owns  more  than  50%  of  the  outstanding  voting  stock  of  the  corporation.  26  Both  broadcast  and  cable 
 standards  attributed  partnership  interests,  except  properly  insulated  limited  partnership  interests.  27  In  1998,  the  Commission  launched  a  comprehensive  review  of  the  cable  attribution  rules  in  light  of  recent 
 developments  in  the  cable  industry  together  with  the  Commissions  review,  in  a  separate  proceeding,  of  the  broadcast  attribution  rules  on  which  many  of  the  cable  attribution  rules  were  based.  28 


 5.  In  the  1999  Cable  Attribution  Order,  the  Commission  revised  several  aspects  of  its  cable  attribution  rules  to  track  certain  changes  made  to  the  broadcast  attribution  rules.  In  addition,  in  a 
 departure  from  the  broadcast  attribution  rules,  the  1999  Cable  Attribution  Order  eliminated  the  single-majority  shareholder  exemption  to  its  general  cable  attribution  standard  and  relaxed  one  of  the  limited 
 partner  insulation  criteria,  which,  if  satisfied,  keep  a  limited  partnership  interest  from  being  attributed  to  a  limited  partner,  to  permit  a  broader  range  of  activities  performed  on  behalf  of  the  partnership  by  a  limited 
 partner  while  still  remaining  insulated.  29  In  general,  limited  partners  cannot  be  relieved  from  attribution  unless  they  are  not  materially  involved  in  the  management  or  operations  of  the  media  entity  concerned 
 (the  no  material  involvement  standard).  In  setting  specific  guidance  as  to  what  kind  of  insulation  is  sufficient  to  exempt  a  limited  partnership  interest  from  attribution,  the  Commission  originally  established 
 seven  criteria,  collectively  referred  to  herein  as  the  ILP  exception,  which,  if  met  would  make  it  safe  to  presume  that  a  limited  partner  will  not  be  materially  involved  in  the  media  management  and  operations  of 
 the  partnership.  30  The  sixth  insulation  criteria  applicable  to  cable  ownership  generally  barred  a  limited  partner  from  performing  any  services  to  the  partnership  relating  to  its  media  activities.  The 
 Commission  narrowed  this  prohibition  to  exclude  only  services  performed  by  the  limited  partner  for  the  partnership  that  are  materially  related  to  the  partnerships  video  programming  activities,  thus  broadening 


 (Continued  from  previous  page)  telco  buyout  prohibition,  47  C.  F.  R.    76.505.  In  contrast,  for  those  rules  implemented  under  the  1992  Act  to  deter 
 specific  improper  practices  and  also  to  promote  competition  and  diversity,  such  as  commercial  leased  access  and  program  access,  the  Commission  adopted  additional,  stricter  cable  attribution  standards.  See  1998  Cable 
 Attribution  NPRM,  13  FCC  Rcd  at  12993    5;  1999  Cable  Attribution  Order,  14  FCC  Rcd  at  19054    104.  These  stricter  attribution  standards  are  also  referred  to  as  program  access  attribution  standards.  1999  Cable  Attribution 
 Order,  14  FCC  Rcd  at  19051    93. 
 26  1993  Second  Report  and  Order,  8  FCC  Rcd  at  8580-  81    34.  See  former  47  C.  F.  R.    73.3555  Note  2(  b); 
 former  47  C.  F.  R.    76.501Note  2(  b).  For  passive  institutional  investors,  voting  stock  interests  of  10%  or  more  were  attributable.  See  former  47  C.  F.  R.    76.501  Note  2(  c). 


 27  47  C.  F.  R.    73.3555  Note  2(  a)  and  (f);  47  C.  F.  R.    76.501Note  2(  a)  and  (f). 
 28  1998  Cable  Attribution  NPRM,  13  FCC  Rcd  at  12990    1;  citing  Review  of  The  Commissions  Regulations 
 Governing  Attribution  of  Broadcast  Interests,  Notice  of  Proposed  Rulemaking,  10  FCC  Rcd  3606  (1995);  Review  of  The  Commissions  Regulations  Governing  Attribution  of  Broadcast  and  Cable/  MDS  Interests,  Further  Notice 


 of  Proposed  Rulemaking,  11  FCC  Rcd  19895  (1996). 
 29  See  1999  Cable  Attribution  Order,  14  FCC  Rcd  at  19039-  41,  19046    61-  64,  81.  Under  the  original  ILP 
 exemption,  a  limited  partner  could  not  be  materially  involved  in  the  media  activities  of  the  partnership  and  retain  insulation.  See  former  47  C.  F.  R.    76.501  Note  2(  f). 


 30  1999  Cable  Attribution  Order,  14  FCC  Rcd  at  19039-  40    61. 
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 the  range  of  activities  that  could  performed  without  loss  of  insulation  for  the  limited  partner.  31  The  Commission  also  indicated  that  a  limited  partners  insulation  would  be  lost  if  an  agreement  for  the  sale  of 
 programming  was  entered  into  between  the  limited  partner  and  the  partnership.  32 
 6.  The  United  States  Court  of  Appeals  for  the  District  of  Columbia  Circuit  in  Time  Warner  Entertainment  Co.  v.  FCC  (Time  Warner  II)  reversed  and  remanded  the  Commissions  30%  horizontal 
 ownership  limit  and  its  40%  channel  occupancy  limit.  33  Additionally,  the  court  vacated  the  Commissions  decision  to  eliminate  the  single  majority  shareholder  exemption  to  its  general  cable 
 attribution  rules  and  the  no  sale  aspect  of  the  limited  partnership  insulation  criteria.  34  The  court  found  that  the  horizontal  and  vertical  ownership  limits  unduly  burdened  cable  operators  First  Amendment 
 rights,  that  the  Commissions  evidentiary  basis  for  imposing  the  ownership  limits  and  its  rationales  supporting  the  vacated  attribution  rules  did  not  meet  the  applicable  standards  of  review,  and  that  the 
 Commission  had  failed  to  consider  sufficiently  changes  that  have  occurred  in  the  MVPD  market  since  passage  of  the  1992  Act.  35  In  response,  the  Commission  issued  a  Further  Notice  of  Proposed  Rulemaking 
 (2001  Further  Notice).  36 
 7.  In  the  2001  Further  Notice,  the  Commission  solicited  comment  on  the  nature  of  the  MVPD  industry,  industry  changes  since  the  1992  Cable  Act,  how  these  changes  affected  the 
 implementation  of  horizontal  and  vertical  limits,  and  various  proposals  for  a  new  horizontal  limit.  The  Commission  sought  to  develop  an  evidentiary  basis  for  setting  limits,  sought  to  establish  the  need  for 
 vertical  limits  and  their  optimal  level,  and  sought  comment  and  evidence  on  the  attribution  rules 


 31  See  1999  Cable  Attribution  Order,  14  FCC  Rcd  at  19039-  41    61-  64;  Applications  for  Consent  to  the  Transfer 
 of  Control  of  Licenses  and  Section  214  Authorizations  from  MediaOne  Group,  Inc.,  Transferor,  to  AT&  T  Corp.,  Transferee,  (AT&  T-  MediaOne  Order)  15  FCC  Rcd  9816,  9839    45  (2000). 


 32  See  1999  Cable  Attribution  Order,  14  FCC  Rcd  at  19055    106. 
 33  240  F.  3d  1126  (D.  C.  Cir.  2001)  (Time  Warner  II).  The  D.  C.  Circuit  upheld  the  underlying  statute  in  Time 
 Warner  Entertainment  Co.  v.  United  States,  211  F.  3d  1313  (D.  C.  Cir.  2000)  (Time  Warner  I). 
 34  Time  Warner  II,  240  F.  3d  at  1142-  43. 


 35  Id.  at  1130-  40.  The  cable  ownership  rules  were  not  vacated  by  the  court  in  Time  Warner  II.  In  addition,  as  the 
 court  noted,  the  Commissions  voluntary  stay  of  enforcement  of  the  horizontal  limit  ended  automatically  upon  the  reversal  of  the  District  Courts  decision  in  Daniels  Cablevision,  Inc.  v.  United  States,  835  F.  Supp.  1  (D.  D.  C. 


 1993)  (Daniels).  Time  Warner  II,  240  F.  3d  at  1128.  The  cable  horizontal  ownership  cap  has  been  reversed  and  remanded,  and  we  have  not  yet  determined  what  rules  will  best  effectuate  Congress  intent  in  enacting  section 
 613(  f)  of  the  Communications  Act.  If  presented  with  a  proposed  merger  or  other  transaction  involving  a  cable  operator  that  called  into  question  compliance  with  our  rules  during  the  pendency  of  this  rulemaking,  we  remain 
 obligated  to  ensure  that  the  resulting  firms  national  subscriber  reach  would  not  result  in  the  harms  to  competition  and  consumers  that  the  horizontal  cap  is  intended  to  prevent  (i.  e.,  ensuring  that  no  cable  operator  can  unfairly 
 impede  the  flow  of  video  programming  from  the  programmer  to  the  consumer). 
 36  Implementation  of  Section  11  of  the  Cable  Television  Consumer  Protection  and  Competition  Act  of  1992,  16 
 FCC  Rcd  17312  (2001)  (2001  Further  Notice).  After  the  2001  Further  Notice,  the  Commission  suspended  the  elimination  of  the  broadcast  single  majority  shareholder  exemption  pending  the  outcome  of  this  proceeding.  See 


 Review  of  The  Commissions  Regulations  Governing  Attribution  of  Broadcast  and  Cable/  MDS  Interests,  Order,  16  FCC  Rcd  22310  (2001). 
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 addressed  by  the  court.  37  The  Commission  also  sought  information  concerning  the  contractual  relationships  between  programmers  and  cable  operators  in  order  to  establish  the  extent  of  cable  operators 
 market  power  and  the  effects  of  market  power  on  the  quantity  and  quality  of  programming,  as  well  as  the  effects  of  market  power  on  the  programming  costs  of  smaller  MVPDs.  38  Further,  the  Commission  sought 
 comment  on  consumers  access  to  alternative  MVPDs,  particularly  Direct  Broadcast  Satellite  (DBS),  and  their  effect  on  competition  in  the  MVPD  market.  39 


 8.  The  2001  Further  Notice  also  asked  commenters  to  address,  with  empirical  and/  or  theoretical  evidence,  the  single  majority  shareholder  exemption  and  application  of  the  limited  partnership 
 insulation  criteria  to  bar  programming  sales,  and,  in  light  of  the  Time  Warner  II  decision,  also  sought  evidence  on  whether  to  reinstate  the  single  majority  shareholder  exemption  for  purposes  of  the  broadcast 
 and  cable/  multipoint  distribution  service  (MDS)  attribution  rules.  40  The  Commission  is  currently  reviewing  these  issues  and  expects  to  address  expeditiously  the  broadcast  and  cable  single  majority 
 shareholder  exemption  and  the  cable  limited  partnership  insulation  criteria.  This  Second  Further  Notice  of  Proposed  Rulemaking  (Second  Further  Notice)  seeks  updated  and  more  specific  comment  on  the 
 Commissions  remanded  cable  horizontal  and  vertical  ownership  limits. 
 9.  Commenters  to  the  2001  Further  Notice  41  offered  a  range  of  viewpoints  on  the  ownership  questions,  arguing  at  one  end  of  the  spectrum  that  the  horizontal  cap  should  remain  at  30%  or  be 
 lowered,  42  and  proposing  at  the  other  end  that  the  cap  be  eliminated.  43  Other  commenters  advocated  using  a  case-  by-  case  approach  44  or  a  local  market-  by-  market  approach.  45  However,  none  of  the  comments 
 yielded  a  sound  evidentiary  basis  for  setting  horizontal  or  vertical  limits  as  demanded  by  the  D.  C.  Circuit.  While  many  commenters  presented  theoretical,  legal  or  economic  arguments  and  anecdotal  evidence,  no 
 party  provided  a  compelling  approach  that  supported  a  particular  horizontal  or  vertical  limit.  As  discussed  in  detail  below,  the  economic  analyses  submitted  are  informative,  but  not  dispositive    we  find 
 that  they  are  either  unconvincing  in  light  of  current  marketplace  conditions  or  are  simply  generalized  economic  theories  that  do  not  provide  a  sound  evidentiary  basis  for  adopting  a  particular  limit.  The 


 37  2001  Further  Notice,  16  FCC  Rcd  at  17320-  21    7. 
 38  Id.  at  17316-  34    2-  45;  17338-  47    50-  73;  17349-  52    76-  84. 
 39  Id.  at  17325-  28    18-  26;  see  also  Time  Warner  II,  240  F.  3d  at  1133-  34. 
 40  Id.  at  17355    87.  In  2004,  MDS/  MMDS  was  renamed  the  Broadband  Radio  Service  (BRS)  by  the 
 Commission.  See  Amendment  of  Part  1,  21,  73,  74  and  101  of  the  Commissions  Rules  to  Facilitate  the  Provision  of  Fixed  and  Mobile  Broadband  Access,  Educational  and  Other  Advanced  Services  in  the  2150-  2162  and  2500- 


 2690  MHz  Bands,  et  al.,  19  FCC  Rcd  14165,  14227-  32    165-  76  (2004). 
 41  Appendix  A  provides  a  list  of  commenters  and  the  abbreviations  by  which  they  are  identified  herein. 


 42  CFA  Comments  at  25. 
 43  Time  Warner  Comments  at  9. 
 44  See,  e.  g.,  Letter  from  Michael  H.  Hammer,  Willkie,  Farr  &  Gallagher,  on  behalf  of  Comcast,  to  Marlene  H. 
 Dortch,  Secretary,  FCC  (Mar.  13,  2003). 
 45  RCN  Comments  at  18. 
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 passage  of  time  since  this  record  closed  gives  us  additional  reason  to  provide  interested  parties  the  opportunity  to  both  augment  and  refresh  the  evidentiary  record. 
 10.  In  addition,  the  Commission  subsequently  sought  to  augment  the  record  by  means  of  a  programming  network  survey  and  an  experimental  economics  analysis.  The  Commissions  efforts  to 
 obtain  empirical  data  and  information  through  the  programming  network  survey  yielded  little  useful  information.  46  The  Commission  then  conducted,  and  released  for  comment,  an  experimental  economics 
 analysis  designed  to  determine  whether  changes  in  concentration  may  impede  the  flow  of  programming  to  consumers  (BKS  Study),  47  and  developed  theoretical  analyses  designed  to  determine  the  relationship 
 between  bargaining  power  and  buyer  size  in  a  bilateral  bargaining  environment.  48  The  BKS  Study  created  an  experimental  market  that  included  many  of  the  features  of  the  actual  market  in  which  MVPDs 
 and  cable  programming  networks  negotiate  affiliate  fees  (e.  g.,  trades  involving  differentiated  products,  differences  in  the  level  of  non-  avoidable  sunk  costs  incurred  by  buyers  and  sellers,  and  the  use  of  a 
 sequential  bilateral  bargaining  process  to  negotiate  fees).  The  study  found  that  increasing  horizontal  concentration  could  impede  the  flow  of  programming  and,  by  at  least  one  measure,  indicated  that 
 impairment  would  be  likely  to  occur  at  a  level  of  concentration  somewhere  between  a  44%  and  a  51%  market  share.  49  The  impairment  could  cause  networks  to  cease  operation  or  reduce  the  quality  of 
 programming  delivered  to  consumers.  However,  the  BKS  Study  did  not  model  some  potentially  important  aspects  of  the  industry  (i.  e.,  vertical  integration,  retail  competition  from  DBS,  entry  into  and 
 exit  from  the  cable  network  programming  industry,  differences  in  Most  Favored  Nation  (MFN)  agreements  across  different-  sized  buyers).  Similarly,  the  theoretical  work  of  Adilov  and  Alexander 
 suggests  that,  under  certain  conditions,  increased  firm  size  can  produce  an  improved  bargaining  position  and  adversely  affect  the  flow  of  programming.  50  While  these  analyses  of  bargaining  power  show  that 
 increasing  horizontal  size  imparts  increased  bargaining  power  to  the  largest  buyer  of  programming,  they  are  imprecise  in  determining  the  point  at  which  such  increased  bargaining  power  impedes  the  flow  of 
 programming. 
 11.  In  addition  to  the  deficiencies  in  the  record,  a  number  of  significant  events  have  occurred  since  the  release  of  the  2001  Further  Notice  that  must  be  taken  into  account  in  fashioning  cable 
 ownership  limits.  First,  the  2002  Comcast-  AT&  T  cable  transaction  resulted  in  one  entity  having  a  share 
 46  See  Letter  from  W.  Kenneth  Ferree,  Chief,  Cable  Services  Bureau,  FCC,  to  Programming  Network  Owners 
 (Feb.  15,  2002).  The  letter  sought  information  from  programming  network  owners  for  each  network  in  which  they  had  an  interest,  including  the  number  of  subscribers  at  the  time  the  network  became  profitable,  the  number  of 


 subscribers  at  the  end  of  calendar  years  1997-  2001,  and  information  on  the  vertical  integration  status  and  genre  of  each  network. 


 47  Mark  Bykowsky,  Anthony  Kwasnica,  &  William  Sharkey,  Horizontal  Concentration  in  the  Cable  Television 
 Industry:  An  Experimental  Analysis,  FCC  Office  of  Plans  and  Policy,  Working  Paper  No.  35  (June  2002  &  rev.  July  2002)  (BKS  Study).  The  BKS  Study  was  released  for  public  comment  and  generated  a  substantial  record  in 


 response. 
 48  Nodir  Adilov  &  Peter  J.  Alexander,  Asymmetric  Bargaining  Power  and  Pivotal  Buyers,  FCC  Media  Bureau 
 Working  Paper  No.  13  (Sept.  2002)  (Asymmetric  Bargaining  Power);  Nodir  Adilov  &  Peter  J.  Alexander,  Most-Favored  Customers  in  the  Cable  Industry,  FCC  Media  Bureau  Working  Paper  No.  14  (Sept.  2002). 


 49  See    101-  102,  infra. 
 50  Asymmetric  Bargaining  Power,  supra  n.  48. 
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 of  MVPD  subscribers  very  close  to  our  remanded  30%  ownership  limit.  51  Second,  the  2003  News  Corp.  -Hughes  transaction  created  the  first  vertically  integrated  DBS  operator,  involving  a  number  of  video 
 programming  assets.  52  Third,  courts  have  remanded  media  ownership  rules  in  three  decisions,  requiring  that  the  Commission  more  firmly  base  its  rules  on  empirical  data  and  record  evidence. 


 12.  In  2002,  two  of  the  Commissions  broadcast  ownership  rules  were  reviewed  and  remanded  by  the  D.  C.  Circuit  in  Fox  Television  Stations,  Inc.  v.  FCC  and  Sinclair  Broadcasting  Group, 
 Inc.  v.  FCC.  53  While  the  court  in  Fox  agreed  that,  [  i]  n  the  context  of  the  regulation  of  broadcasting,  the  public  interest  has  historically  embraced  diversity  (as  well  as  localism),  it  found  that  the  Commission 
 had  not  provide[  d]  an  adequate  basis  for  believing  the  Rule  would  in  fact  further  those  interests.  54  Similarly,  while  the  court  in  Sinclair  found  that  the  Commission  had  adequately  explained  how  the  local 
 ownership  rule  furthers  diversity  at  the  local  level  and  is  necessary  in  the  public  interest  under  202(  h)  of  the  1996  Act,  it  remanded  the  rule,  finding  that  the  Commission  had  not  provided  any  justification 
 for  counting  fewer  types  of  voices  in  the  local  [television]  ownership  rules  than  it  counted  in  its  rule  on  cross-  ownership  of  radio  and  television  stations.  55 


 13.  In  June  2003,  the  Commission  adopted  substantial  revisions  to  its  broadcast  ownership  rules  in  the  Biennial  Review  Order.  56  We  replaced  the  newspaper/  broadcast  and  radio/  television  cross-ownership 
 rules  with  a  set  of  cross-  media  limits;  modified  the  local  television  multiple  ownership  rule;  modified  the  local  radio  ownership  rule  and  its  market  definition;  modified  the  national  television 
 ownership  rule;  and  retained  the  dual  network  rule.  57  In  2004,  in  Prometheus  Radio  Project,  et  al.  v.  FCC 
 51  See  Applications  for  Consent  to  the  Transfer  of  Control  of  Licenses,  Comcast  Corporation  and  AT&  T  Corp., 
 Transferors,  to  AT&  T  Comcast  Corporation,  Transferee  (Comcast-  AT&  T  Order),  17  FCC  Rcd  23246  (2002). 
 52  See  General  Motors  Corporation  and  Hughes  Electronics  Corporation,  Transferors  and  The  News  Corporation 
 Limited,  Transferee,  For  Authority  to  Transfer  Control  (News-  Hughes  Order),  19  FCC  Rcd  473  (2003).  The  programming  assets  involved  in  the  transaction  included  35  owned  and  operated  (O&  O)  full-  power  television 


 broadcast  stations,  a  national  television  broadcast  network,  ten  national  cable  programming  networks,  and  22  regional  cable  programming  networks. 


 53  See  Fox  Television  Stations,  Inc.  v.  FCC,  280  F.  3d  1027,  modified  on  rehearing,  293  F.  3d  537  (D.  C.  Cir.  2002) 
 (Fox)  and  Sinclair  Broadcasting  Group,  Inc.  v.  FCC,  284  F.  3d  148  (D.  C.  Cir.  2002)  (Sinclair).  The  court  in  Fox  remanded  the  Commissions  retention  of  the  then  congressionally-  established  35%  national  television  ownership 


 rule.  See  1998  Biennial  Review    Review  of  the  Commissions  Broadcast  Ownership  Rules  and  Other  Rules  Adopted  Pursuant  to  Section  202  of  the  Telecommunications  Act  of  1996,  15  FCC  Rcd  11058  (2000).  The  court 
 in  Sinclair  remanded  the  Commissions  1999  revision  of  its  local  television  multiple  ownership  rule.  See  Review  of  the  Commissions  Regulations  Governing  Television  Broadcasting,  14  FCC  Rcd  12903  (1999). 


 54  Fox,  280  F.  3d  at  1042,  1043. 
 55  Sinclair,  284  F.  3d  at  160,  162. 
 56  2002  Biennial  Regulatory  Review    Review  of  the  Commissions  Broadcast  Ownership  Rules  and  Other  Rules 
 Adopted  Pursuant  to  Section  202  of  the  Telecommunications  Act  of  1996,  18  FCC  Rcd  13620  (2003)  (2002  Biennial  Review  Order).  See  also  Telecommunications  Act  of  1996,  Pub.  L.  No.  104-  104,  110  Stat.  56  (1996). 


 57  Id.  Congress  subsequently  amended  Section  202(  c)  of  the  Telecommunications  Act  of  1996,  directing  the 
 Commission  to  modify  the  national  television  ownership  limit,  contained  in  47  C.  F.  R.    73.3555,  to  39%.  See  Consolidated  Appropriations  Act,  2004,  Pub.  L.  No.  108-  199,  .  629,  118  Stat.  3  (2004). 
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 (Prometheus),  the  Third  Circuit  remanded  the  cross-  media  limits,  the  local  television  multiple  ownership  rule,  and  the  local  radio  ownership  rule,  finding  them  inadequately  justified.  58  The  court  held  that 
 [  d]  eference  to  the  Commissions  judgment  is  highest  when  assessing  the  rationality  of  the  agencys  line-drawing  endeavors,  59  but  then  directed  the  Commission  to  better  explain  its  conclusions.  60 


 14.  These  court  decisions  are  instructive  as  we  attempt  to  fashion  cable  horizontal  and  vertical  ownership  limits.  The  Fox,  Sinclair,  Prometheus,  and  Time  Warner  II  courts  all  remanded 
 ownership  limits  under  consideration  with  instructions  for  the  Commission  to  better  justify  its  decisions  on  the  basis  of  the  record  evidence.  61  Each  proceeding  involved  line-  drawing  determinations  to  establish 
 ownership  limits,  and  in  each  the  Commission  attempted  to  create  rules  that  would  promote  policy  goals  that  inherently  are  not  easily  measured  or  quantified.  The  broadcast  ownership  proceedings  involved  an 
 assessment  of  the  continued  public  interest  need  for  national  and  local  broadcast  ownership  limits,  including  local  cross-  media  ownership  restrictions  applicable  to  local  broadcast  television,  radio,  and 
 newspaper  outlets.  In  setting  these  limits,  the  Commission  sought  to  demonstrate  how  its  decisions  would  promote  diversity  and  localism,  as  well  as  competition,  based  on  a  wide  array  of  empirical  and  theoretical 
 evidence. 
 15.  In  the  cable  ownership  realm,  the  Commission  is  directed  by  statute  to  promote  effective  competition  and  ensure  diversity.  62  Specifically,  we  must  determine  at  what  point  cable  horizontal  reach 
 will  unfairly  impede  the  flow  of  programming,  a  somewhat  fluid  concept  susceptible  to  a  variety  of  interpretations,  and  our  vertical  limit  must  be  designed  to  achieve  the  statutory  goals  by  means  of  a 
 channel  occupancy  limit    the  mechanism  specified  by  Congress  for  this  purpose.  63  Although  courts  and  agencies  routinely  attempt  to  measure  and  quantify  competition,  our  task  in  this  proceeding  is 
 complicated  by  the  possibility  that  the  harms  our  rules  are  designed  to  prevent  may  arise  at  concentration  levels  higher  than  those  that  exist  in  todays  markets.  As  we  explain  in  more  detail  below,  in  examining  a 
 variety  of  economic  theories  of  harm  relevant  to  cable  ownership  limits,  it  has  been  difficult  to  ascertain  how  hypothetical  market  conditions  might  affect  competition  and  diversity.  In  the  face  of  these 
 difficulties,  Fox,  Sinclair,  Prometheus,  and  Time  Warner  II  instruct  us  to  draw  a  reasoned  and  specific  connection  between  the  record  evidence  and  each  element  of  our  horizontal  and  vertical  ownership  limits, 
 a  task  we  cannot  adequately  accomplish  on  the  basis  of  the  record  compiled  in  response  to  the  2001  Further  Notice. 


 58  See  Prometheus  Radio  Project,  et  al.  v.  FCC,  373  F.  3d  372  (3rd  Cir.  2004)  (Prometheus).  The  court  found  that 
 [  b]  ecause  the  Commission  is  under  a  statutory  directive  to  modify  the  national  television  ownership  cap  to  39%,  challenges  to  the  Commissions  decision  to  raise  the  cap  to  45%  cap  are  moot.  Id.  at  396. 


 59  Id.  at  410-  11  (citations  omitted). 
 60  Id.  at  435.  The  court  identified  several  provisions  in  which  the  Commission  falls  short  of  its  obligation  to 
 justify  its  decisions  to  retain,  repeal,  or  modify  its  media  ownership  regulations  with  reasoned  analysis.  Id. 
 61  Fox,  280  F.  3d  at  1044;  Sinclair,  284  F.  3d  at  169;  Prometheus,  373  F.  3d  at  390;  Time  Warner  II,  240  F.  3d  at 
 1128. 
 62  See  47  U.  S.  C.    533(  f)(  1). 


 63  See  47  U.  S.  C.    533(  f)(  1)(  A)  and  (B). 
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 16.  We  therefore  conclude  that  a  Second  Further  Notice  is  necessary  to  update  the  record  and  provide  additional  input  on  horizontal  and  vertical  ownership  limits  so  that  we  may  comply  with  our 
 statutory  mandate  and  the  courts  directives  in  Time  Warner  II.  We  seek  comment  on  the  proposals  in  the  record,  recent  developments  in  the  industry,  and  our  tentative  conclusions  described  below.  We  ask 
 commenters  to  supplement  the  record  where  possible  by  providing  new  evidence  and  information  to  support  the  formulation  of  horizontal  and  vertical  limits,  and  we  invite  parties  to  undertake  their  own 
 studies  in  order  to  further  inform  the  record.  We  also  invite  comment  on  Media  Bureau  Staff  Research  Paper  No.  2004-  1  which  examines  the  effect  of  subscribership  on  a  networks  ability  to  survive  in  the 
 marketplace.  64  Once  the  record  in  this  Second  Further  Notice  is  complete,  we  intend  to  expeditiously  address  the  issues  contained  therein,  and  enact  sustainable  cable  horizontal  and  vertical  ownership  limits. 


 II.  SECOND  FURTHER  NOTICE  OF  PROPOSED  RULEMAKING 
 17.  As  stated  above,  in  1992,  Congress  enacted  Section  613(  f)  of  the  Communications  Act  to  address  its  concern  that  the  trend  towards  horizontal  and  vertical  concentration  in  the  cable  industry  could 


 affect  and  potentially  impede  the  flow  of  programming  to  consumers  due  to  cable  operators  size  and  market  power.  One  goal  of  the  2001  Further  Notice  was  to  solicit  public  comment  and  develop  an 
 evidentiary  basis  for  setting  horizontal  and  vertical  limits  in  the  current  dynamic  and  evolving  communications  marketplace.  Unfortunately,  as  previously  noted,  the  record  developed  thus  far  does  not 
 contain  sufficient  evidence  that  would  allow  us  to  set  reasonable  and  sustainable  horizontal  and  vertical  ownership  limits.  This  Second  Further  Notice  is  therefore  necessary  to  update  the  record  and  provide 
 additional  input  on  ownership  limits  so  that  we  may  comply  with  our  statutory  mandate  and  the  courts  directives  in  Time  Warner  II.  We  retain  the  original  record  in  this  proceeding,  and  commenters  should 
 therefore  avoid  merely  repeating  their  previously  filed  comments.  Instead,  commenters  should  address  how  recent  developments  in  the  industry  may  affect  our  analysis,  and  provide,  where  available,  new 
 evidence  and  information  to  support  the  formulation  of  horizontal  and  vertical  limits.  Additionally,  to  develop  a  more  focused  and  useful  record,  in  this  Second  Further  Notice,  we  address  the  viability  of 
 proposals  for  setting  limits  suggested  in  the  record. 
 A.  Legal  Framework 
 1.  Statutory  Objectives 
 18.  In  1992,  Congress  recognized  that  cable  operators  increasing  horizontal  concentration  and  vertical  integration  could  frustrate  competition  in  the  production  and  delivery  of  multichannel  video 


 programming.  65  Specifically,  the  Senate  Report  concluded  that  increased  horizontal  concentration  could  give  cable  operators  the  power  to  demand  that  programmers  .  .  .  [provide]  cable  operators  an  exclusive 


 64  Keith  S.  Brown,  A  Survival  Analysis  of  Cable  Networks,  Media  Bureau  Staff  Research  Paper  No.  2004-  1  (rel. 
 Dec.  7,  2004)  (Survival  Analysis).  The  Survival  Analysis  uses  the  statistical  tools  of  survival  and  duration  analysis  to  estimate  how  different  variables  affect  a  cable  networks  probability  of  survival  and  expected  length  of 


 life.  Using  these  results,  the  study  estimates  the  number  of  subscribers  a  cable  network  needs  for  any  given  probability  of  survival  over  a  given  length  of  time.  The  Survival  Analysis  concludes,  for  example,  that  a  network 
 growing  at  an  average  rate  requires  approximately  42  million  subscribers  to  have  a  70%  probability  of  survival  over  its  first  10  years.  The  study  is  being  placed  in  the  record  of  this  proceeding  concurrently  with  the  release  of 
 the  Second  Further  Notice. 
 65  Senate  Report  at  24. 
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 right  to  carry  the  programming,  a  financial  interest  or  some  other  added  consideration  as  a  condition  of  carriage.  66  More  generally,  the  Senate  Report  stated,  a  market  that  is  dominated  by  one  buyer  of  a 
 product,  a  monopsonist,  does  not  give  the  seller  any  of  the  benefits  of  competition.  67  Congress  was  also  concerned  that  an  increase  in  vertical  integration  between  cable  operators  and  programmers  may  provide 
 incentives  and  opportunities  for  cable  operators  to  favor  affiliated  over  non-  affiliated  programmers.  68 
 19.  A  principal  objective  of  the  1992  Act  was  to  foster  competition  in  the  acquisition  and  delivery  of  multi-  channel  video  programming  by  encouraging  the  development  of  alternative  and  new 
 technologies,  including  cable  and  non-  cable  systems.  69  Congress  evidenced  a  preference  for  competition  over  regulation  in  order  to  achieve  this  objective,  believing  that  the  presence  of  alternative  cable  and  non-cable 
 MVPDs  would  constrain  cable  operators  market  power  in  the  acquisition  and  distribution  of  multi-channel  video  programming,  70  as  well  as  improve  their  service  and  programming  quality  and  curb  their 
 subscription  rate  increases.  71  As  detailed  below,  however,  Congress  found  that  the  cable  industry,  the  nations  dominant  and  increasingly  horizontally  concentrated  medium  for  the  delivery  of  multi-  channel 
 programming,  faced  virtually  no  competition  at  the  local  level,  and  only  limited  competition  at  the  regional  and  national  level.  72  Additionally,  Congress  found  that  the  increase  in  vertical  integration 
 between  cable  operators  and  programmers  provided  incentives  and  opportunities  for  cable  operators  to  favor  affiliated  over  non-  affiliated  programmers  and,  likewise,  for  programmers  to  favor  affiliated  over 


 66  Id. 
 67  Id.  at  33  (  Witnesses  .  .  .  testified  that,  with  the  increased  concentration  in  the  cable  industry,  the  large  MSOs 
 have  the  market  power  to  determine  what  programming  services  can  make  it  on  cable.). 
 68  Id.  at  24;  see  also  1992  Act    2(  a)(  5)-(  6);  House  Report  at  41. 


 69  See  generally  Senate  Report,  House  Report;  see  also  1992  Act    2(  b)(  1)-(  5). 
 70  See  Senate  Report  at  12,  18,  20-  24;  House  Report  at  30,  44;  see  also  Annual  Assessment  of  the  Status  of 
 Competition  in  the  Market  for  the  Delivery  of  Video  Programming,  CS  Docket  No.  00-  132,  7  th  Annual  Report,  16  FCC  Rcd  6005,  6007  n.  4  (2001)  (the  1992  Act  imposed  a  regulatory  scheme  on  the  cable  industry  designed  to 


 serve  as  a  transitional  mechanism  until  competition  develops  and  consumers  have  adequate  multi-  channel  video  programming  alternatives).  In  fact,  experience  has  shown  that  competition  does  result  in  lower  rates,  improved 
 service,  and  increased  programming  fare.  Id.  at  6092-  98    213-  34. 
 71  Various  provisions  of  the  1992  Act  reflect  congressional  concern  about  concentration  of  the  media  in  the 
 hands  of  a  few  who  may  control  the  dissemination  of  information  at  the  local,  regional  and  national  levels.  Senate  Report  at  32.  See,  e.  g.,  47  U.  S.  C.    543(  b)(  1)  (requiring  the  Commission  to  issue  rules  to  protect 


 subscribers  of  any  cable  system  that  is  not  subject  to  effective  competition  from  excessive  rates);  47  U.  S.  C.    541(  a)(  1)  (prohibiting  local  authorities  from  granting  exclusive  franchises  or  unreasonably  refusing  to  award 
 additional  franchises);  47  U.  S.  C.    533(  a)(  2)  (limiting  cable  operators  from  owning  MMDS  or  SMATV  systems  within  their  franchise  areas);  47  U.  S.  C.    533(  d)  (allowing  local  authorities  to  deny  transfers  of  franchises  that 
 would  reduce  or  eliminate  competition  in  the  delivery  of  cable  services);  47  U.  S.  C.    544(  b)(  2)(  C)  (requiring  the  Commission  to  issue  rules  that  promote  the  commercial  availability  of  cable  consumer  equipment);  47  U.  S.  C.   
 547(  b)  (prohibiting  cable  operators  from  engaging  in  unfair  practices  vis-  -  vis  video  programmers  and  other  MVPDs). 


 72  See  1992  Act    2(  a)(  2)-(  4),  (6);  see  also  Senate  Report  at  12,  13-  18,  20,  32-  34;  House  Report  at  27,  43-  47. 
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 non-  affiliated  operators  in  the  distribution  of  video  programming.  73  Thus,  given  the  absence  of  competition  at  the  time,  Congress  believed  that  certain  structural  limits  were  necessary.  74 
 20.  To  combat  these  harms,  Section  613(  f)(  1)  of  the  Communications  Act  directs  the  Commission,  in  order  to  enhance  effective  competition,  to  conduct  proceedings  and  to  set  a  reasonable 
 horizontal  limit  on  the  number  of  cable  subscribers  a  person  is  authorized  to  reach  through  cable  systems  owned  by  such  person,  or  in  which  such  person  has  an  attributable  interest,  and  a  reasonable  vertical 
 limit  on  the  number  of  channels  on  a  cable  system  that  can  be  occupied  by  a  video  programmer  in  which  the  cable  operator  has  an  attributable  interest.  75  Section  613(  f)(  2)  directs  that,  in  setting  these  limits,  the 
 Commission  shall,  among  other  public  interest  objectives: 
 (A)  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; 


 (B)  ensure  that  cable  operators  affiliated  with  video  programmers  do  not  favor  such  programmers  in  determining  carriage  on  their  cable  systems  or  do  not  unreasonably 
 restrict  the  flow  of  the  video  programming  of  such  programmers  to  other  video  distributors; 


 (C)  take  particular  account  of  the  market  structure,  ownership  patterns,  and  other  relationships  of  the  cable  television  industry,  including  the  nature  and  market  power  of 
 the  local  franchise,  the  joint  ownership  of  cable  systems  and  video  programmers,  and  the  various  types  of  non-  equity  controlling  interests; 


 (D)  account  for  any  efficiencies  and  other  benefits  that  might  be  gained  through  increased  ownership  or  control; 
 (E)  make  such  rules  and  regulations  reflect  the  dynamic  nature  of  the  communications  marketplace; 
 (F)  not  impose  limitations  which  would  bar  cable  operators  from  serving  previously  unserved  rural  areas;  and 
 (G)  not  impose  limitations  which  would  impair  the  development  of  diverse  and  high  quality  video  programming.  76 


 73  See  Senate  Report  at  24  (  when  cable  systems  are  not  subject  to  effective  competition  .  .  .  [p]  rogrammers  either 
 deal  with  operators  of  such  systems  on  their  terms  or  face  the  threat  of  not  being  carried  in  that  market.  The  Committee  believes  this  disrupts  the  crucial  relationship  between  the  content  provider  and  the  consumer  .  .  .  . 


 Moreover,  these  concerns  are  exacerbated  by  the  increased  vertical  integration  in  the  cable  industry.);  see  also  1992  Act    2(  a)(  5)-(  6);  House  Report  at  41. 


 74  See  Senate  Report  at  18,  25-  26,  33;  House  Report  at  26,  30,  40-  44. 
 75  47  U.  S.  C.    533(  f)(  1)(  A)&(  B). 
 76  47  U.  S.  C.    533(  f)(  2)(  A)-(  G). 
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 2.  Judicial  Review  and  Previous  Implementation  Efforts 
 21.  Facial  Challenge.  Section  613(  f)  ultimately  survived  the  cable  industrys  challenge  that  horizontal  and  vertical  limits  violate  cable  operators  First  Amendment  rights  by  excessively  limiting 


 their  speech.  77  In  2000,  the  Time  Warner  I  court  concluded  that  Section  613(  f)  resulted  from  a  fear  that  an  increase  in  concentration  and  vertical  integration  could  result  in  anticompetitive  behavior  by  cable 
 operators  toward  programming  suppliers,  as  well  as  toward  potential  new  MVPD  entrants.  The  court  accepted  these  concerns  as  well  grounded  in  the  evidence  and  a  bit  of  economic  common  sense  and 
 found  them  to  be  important  government  interests  justifying  an  infringement  of  the  cable  operators  right  to  free  expression.  78 


 22.  Horizontal  Limit.  In  the  1993  Second  Report  and  Order,  the  Commission  found  that  a  limit  of  30%  of  households  passed  by  all  cable  operators  represented  a  careful  balance  between:  (1) 
 limiting  the  possible  exertion  by  a  cable  operator  of  excessive  market  power  in  the  purchase  of  video  programming;  and  (2)  ensuring  that  cable  operators  are  able  to  expand  and  benefit  from  the  economies  of 
 size  necessary  to  encourage  investment  in  new  video  programming  technology  and  the  deployment  of  other  advanced  technologies.  79  In  the  1998  Horizontal  Reconsideration  Order,  the  Commission  sought 


 77  Time  Warner  I,  211  F.  3d  1313.  This  facial  challenge  was  launched  in  1993,  resulting  in  a  judgment  that  same 
 year  that  the  horizontal  subscriber  limits  provision  unconstitutionally  abridged  the  First  Amendment  rights  of  cable  operators,  while  the  vertical  channel  occupancy  provision  did  not.  See  Daniels,  835  F.  Supp.  1.  The 


 Daniels  court  also  decided  that,  because  there  is  substantial  ground  for  difference  of  opinion  as  to  the  constitutionality  of  the  underlying  statute,  it  would  stay  its  proceedings  and  the  issuance  of  any  relief  to  the 
 plaintiffs  pending  appeal.  The  government  appealed  the  former  ruling,  while  Time  Warner  appealed  the  latter.  Time  Warner  I,  211  F.  3d  at  1315.  Thereafter,  the  Commission  issued  the  1993  Second  Report  implementing  the 
 challenged  provisions,  but  voluntarily  stayed  the  effective  date  of  its  rules  pending  the  appeal  in  Daniels.  Time  Warner  then  challenged  the  cable  ownership  rules  in  Time  Warner  Entertainment  Co.,  L.  P.  v.  FCC,  No.  94-  1035 
 (D.  C.  Cir.  1994).  The  D.  C.  Circuit  consolidated  the  Daniels  and  Time  Warner  appeals  in  Time  Warner  Entertainment  Co.,  L.  P.  v.  FCC,  93  F.  3d  957  (D.  C.  Cir.  1996),  and  held  the  consolidated  appeals  in  abeyance 
 pending  the  Commissions  decision  on  petitions  for  reconsideration.  Id.  at  979-  80.  In  1998,  the  Commission  issued  a  Second  Order  on  Reconsideration  and  Further  Notice  of  Proposed  Rulemaking,  13  FCC  Rcd  14462 
 (1998),  maintaining  the  30%  horizontal  limit  and  denying  a  motion  to  lift  the  stay  on  enforcement  of  the  horizontal  limit.  Once  the  Commission  issued  the  Second  Order  on  Reconsideration,  the  D.  C.  Circuit  lifted  its 
 stay  on  its  consideration  of  the  consolidated  Daniels  and  Time  Warner  proceedings,  issuing  a  decision  reversing  the  Daniels  decision  two  years  later  in  Time  Warner  I.  In  the  Second  Order  on  Reconsideration,  the  Commission 
 also  continued  its  stay  of  the  effective  date  of  the  horizontal  ownership  rules  pending  a  decision  by  the  D.  C.  Circuit  on  challenges  to  the  ownership  rules  and  Section  613(  f).  Id.  at  14492    75.  Once  the  Time  Warner  I  court 
 upheld  the  constitutionality  of  the  underlying  statute,  the  Commissions  voluntary  stay  of  the  effectiveness  of  its  rules  ended  automatically,  and  the  rules  went  into  effect.  See  Time  Warner  II,  240  F.  3d  at  1128.  The  sequential 
 series  of  decisions,  revisions,  and  appeals  resulted  in  a  seven  year  delay  of  appellate  resolution  of  the  facial  challenge  to  the  constitutionality  of  the  underlying  statute  and  in  appellate  review  of  the  appropriateness  of  the 
 Commissions  implementation  of  the  statute  not  being  resolved  until  eight  years  after  release  of  the  1993  Second  Report  and  Order,  which  established  the  basic  horizontal  and  vertical  implementation  framework  at  issue  in  this 
 proceeding. 
 78  Time  Warner  I,  211  F.  3d  at  1322. 


 79  1993  Second  Report  and  Order,  8  FCC  Rcd  at  8569,  8582-  84    8,  37-  42.  The  Commission  also  stated  that  it 
 intended  to  review  the  horizontal  limits  every  five  years  in  order  to  determine  whether  they  were  still  reasonable  under  new  market  conditions  and  continued  to  meet  their  policy  objectives.  Id.  at  8583    40. 
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 comment  on  possible  revisions  of  the  horizontal  ownership  rules  and  the  method  by  which  horizontal  ownership  is  calculated.  80  In  the  1999  Cable  Ownership  Order,  the  Commission  revised  the  30% 
 horizontal  limit  on  households  passed  by  all  cable  operators  to  include  all  cable  and  non-  cable  MVPD  subscribers  in  the  calculation  of  the  appropriate  horizontal  market,  a  change  it  stated  was  needed  to  reflect 
 the  growing  impact  emerging  non-  cable  MVPDs  were  having  on  the  programming  marketplace.  81  Under  the  revised  rule,  a  horizontal  subscriber  limit  of  no  more  than  30%  of  MVPD  subscribers  would  be 
 equivalent  to  a  36.7%  limit  based  on  cable  subscribership  alone.  The  Commission  characterized  its  action  as  a  significant  relaxation  of  the  rule,  that  retained  the  theoretical  underpinnings  of  its  original  30% 
 limit  while  taking  account  of  marketplace  changes  through  revision  of  the  definition  of  the  relevant  market  as  all  MVPD  subscribers.  82  The  30%  limit  continued  to  be  based  on  the  Commissions  underlying 
 theory  that  cable  operators  at  certain  concentration  levels,  either  by  unilateral,  independent  decisions  or  by  tacit  collusion,  could  effectively  prevent  programming  networks  from  entering  or  surviving  in  the 
 marketplace  simply  by  deciding  not  to  carry  a  particular  network.  83  Analyzing  industry  data,  the  Commission  estimated  that  a  new  cable  programming  network  would  need  access  to  40%  of  the  MVPD 
 subscribers  nationwide  to  be  viable.  84  A  30%  limit,  the  Commission  reasoned,  would  allow  new  programming  networks  access  to  a  40%  open  field  by  ensuring  the  presence  of  at  least  four  cable 
 operators  in  the  market,  and  by  preventing  the  two  largest  cable  operators  from  garnering  more  than  60%  of  the  market.  85  In  this  regard,  the  Commission  explained,  even  if  two  operators,  covering  60%  of  the 
 market,  individually  or  collusively  deny  carriage  to  a  programming  network,  the  network  would  still  have  access  to  40%  of  the  market,  giving  it  a  reasonable  chance  of  financial  viability.  86 


 23.  The  Time  Warner  II  court  rejected  the  Commissions  approach  to  calculating  the  horizontal  limit.  The  court  found  that  the  Commission  lacked  any  evidence  that  cable  operators  would 
 collude  and  that  it  could  not  simply  assume  that  cable  operators  would  coordinate  their  behavior  in  this  fashion.  The  court  held  that  Section  613(  f)(  1)  authorizes  the  Commission  to  set  a  limit  that  would 
 prevent  a  single  company  from  foreclosing  entry  of  a  programming  network,  87  but  does  not  authorize  the  agency  to  regulate  the  legitimate,  independent  editorial  choices  of  multiple  MSOs.  88  Having  found 
 that  the  Commission  did  not  provide  an  adequate  evidentiary  basis  to  assume  two  operators  might  engage  in  joint  anticompetitive  conduct,  the  court  concluded  that  the  record  would  support  a  limit  no  lower  than 


 80  13  FCC  Rcd  at  14464-  65    4. 
 81  1999  Cable  Ownership  Order,  16  FCC  Rcd  at  19031    37. 
 82  Id. 
 83  Id.  at  19116    43;  see  also    3,  supra. 
 84  The  40%  open  field  was  based  on  the  Commissions  findings  that  in  order  to  be  viable,  a  new  programming 
 network  needs  access  to  approximately  15-  20  million  subscribers  (20%  of  the  market),  and  that,  even  with  such  access,  it  has  only  a  50%  chance  of  actually  reaching  subscribers  given  tier  packaging  and  consumer  preferences. 


 See  1999  Cable  Ownership  Order,  14  FCC  Rcd  at  19115-  18    40-  50. 
 85  Id. 


 86  Id.  at  19119    53. 
 87  Time  Warner  II,  240  F.  3d  at  1131. 
 88  Id.  at  1130-  35. 
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 60%  using  the  40%  open  field  premise.  89  The  court  also  required  that  in  fashioning  another  limit,  we  recognize  that  market  power  depends  not  only  on  market  share  but  on  the  availability  of  competition.  90 
 24.  Vertical  Limit.  In  the  1993  Second  Report  and  Order,  the  Commission  adopted  a  channel  occupancy  limit  that  prohibited  a  cable  operator  from  carrying  video  programming  services  it  owns  or  in 
 which  it  has  an  attributable  interest  on  more  than  40%  of  its  activated  channels.  91  In  setting  the  vertical  ownership  limit  at  40%,  the  Commission  sought  to  maximize  the  number  of  voices  available  to  cable 
 viewers  without  impairing  the  ability  or  incentive  of  cable  operators  to  invest  in  new  and  existing  video  programming  services.  92  The  Commission  recognized  that,  although  Section  613(  f)  contemplated  the 
 establishment  of  some  limits  on  cable  vertical  integration,  MSO  investment  was  responsible  for  the  development  and  survival  of  several  of  the  most  popular  video  programming  services,  and  that  vertical 
 integration  among  the  largest  MSOs  had  contributed  to  program  diversity  by  providing  new  programming  services  with  an  extensive  subscriber  base  and  information  regarding  viewer  tastes  and  desires.  93  The 
 Commission  also  recognized  that  vertical  integration  can  produce  efficiencies  with  respect  to  video  programming  acquisition,  distribution  and  marketing,  which  might  contribute  to  innovative  programming 
 fare  and  lower  subscription  charges.  94  The  Commission  believed  that  the  40%  limit  was  high  enough  to  preserve  the  benefits  of  vertical  integration,  95  and  further  relied  upon  the  fact  that  most  cable  operators 
 who  filed  comments  in  the  rulemaking  proceeding  supported  the  40%  limit.  96 
 25.  The  Commission  recognized  that  the  need  for  a  vertical  limit  would  likely  decrease  as  channel  capacity  increased.  Thus,  the  Commissions  rule  applies  to  channel  capacity  only  up  to  75 
 channels.  97  As  a  result,  for  higher  capacity  systems,  the  percentage  limit  is  effectively  much  higher  than 
 89  Id.  at  1132-  33  (accepting,  but  not  addressing  the  validity  of,  the  Commissions  40%  open  field  premise).  The 
 court  also  found  it  unnecessary  to  reach  the  issue  of  whether  the  record  supported  the  Commissions  conclusion  that  new  programmers  would  need  access  to  an  open  field  of  40%  of  U.  S.  subscribers.  Id. 


 90  Id.  at  1134  (emphasis  in  original). 
 91  47  C.  F.  R.    76.504.  In  calculating  a  systems  capacity,  activated  channels  includes  all  commercial  and  non-commercial 
 broadcast,  public,  educational,  governmental,  and  leased  access  channels  carried.  See  1993  Second  Report  and  Order,  8  FCC  Rcd  at  8588-  89    54.  The  Commission  has  also  defined  the  term  activated  channel  in 


 the  digital  context.  See  Carriage  of  Digital  Television  Broadcast  Signals,  Amendments  to  Part  76  of  the  Commission  Rules,  Implementation  of  the  Satellite  Home  Viewer  Improvement  Act  of  1999,  Local  Broadcast 
 Signal  Carriage  Issues,  Application  of  Network  Non-  Duplication,  Syndicated  Exclusivity  and  Sports  Blackout  Rules  to  Satellite  Retransmission  of  Broadcast  Signals,  16  FCC  Rcd  2598,  2614-  16    39-  41  (2001)  (2001  Digital 
 Must  Carry  Order),  Second  Report  and  Order  and  First  Order  on  Reconsideration,  20  FCC  Rcd  4516  (2005). 
 92  See  1993  Second  Report  and  Order,  8  FCC  Rcd  at  8592    64. 


 93  Id.  at  8584-  85    44. 
 94  Id.  at  8593-  95    68. 
 95  Id.  at  8592-  96    65-  71. 
 96  Id. 
 97  47  C.  F.  R.    76.504(  b).  The  75  channel  threshold  thus  reserves  at  most  45  channels  for  unaffiliated 
 programming  services  (75  x  .60  =  45). 
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 40%.  98  Moreover,  because  future  expansion  of  channel  capacity  through  the  use  of  advanced  technologies  or  the  presence  of  effective  competition  might  reduce  the  need  for  the  limit  or  render  it 
 unnecessary,  the  Commission  stated  that  it  would  revisit  the  restriction  at  a  later  date.  99  In  this  regard,  the  Commission  observed  that  Congress  has  .  .  .  indicated  that  a  primary  objective  of  the  Act  was  to  rely  on 
 the  marketplace,  to  the  maximum  extent  feasible,  to  promote  the  availability  to  the  public  of  a  diversity  of  views  and  information  and  that  the  legislation  was  intended  to  protect  consumer  interests  in  the  receipt  of 
 cable  service  where  cable  television  systems  are  not  subject  to  effective  competition.    Thus  .  .  .  further  analysis  as  to  whether  the  restrictions  might  be  phased  out  where  effective  competition  develops  will  be 
 appropriate.  100  In  the  1995  Vertical  Reconsideration  Order,  the  Commission  reaffirmed  the  vertical  limit,  barring  cable  operators  with  75  or  fewer  channels  from  devoting  more  than  40%  of  channel 
 capacity  to  affiliated  programming.  101  It  again  found  that  the  40%  limit  is  appropriate  to  balance  the  goals  of  increasing  diversity  and  reducing  the  incentive  and  ability  of  vertically  integrated  cable  operators 
 to  favor  their  affiliated  programming,  with  the  benefits  and  efficiencies  associated  with  vertical  integration.  102  The  Commission  found  that  until  cable  operators  deployed  emerging  technologies  such  as 
 fiber  optic  cable  or  digital  signal  compression,  which  would  greatly  expand  channel  capacities  and  thus  obviate  the  need  for  channel  occupancy  limits  as  a  means  of  encouraging  cable  operators  to  carry 
 unaffiliated  programming,  the  75  channel  maximum  continued  to  make  sense.  103 
 26.  The  Time  Warner  II  court  concluded  that  the  Commission  had  not  attempted  to  link  the  40%  limit  with  the  benefits  and  harms  resulting  from  common  control  of  both  programming  supply  and 
 distribution  sources  or  with  current  MVPD  market  conditions.  104  The  court  dismissed  the  Commissions  argument  that  no  MSO  has  yet  complained  that  the  40%  vertical  limit  has  required  it  to  alter 
 programming,  105  stating  this  says  nothing  about  the  plans  that  the  rule  may  have  scuttled.  106  Concluding  that  the  Commission  neither  justified  the  vertical  limit  with  record  support,  nor  established 
 that  the  limit  did  not  burden  speech  more  than  necessary,  the  court  reversed  and  remanded  the  limit.  The  court  cautioned  the  Commission,  on  remand,  to  consider  the  constraining  impact  of  competition  on  cable 
 operators  ability  to  favor  affiliated  programming  at  the  expense  of  unaffiliated  programming,  opining  that  competition  precludes  cable  operators  from  exercising  the  market  power  which  originally  justified 
 channel  occupancy  limits.  107 
 98  For  example,  for  a  200-  channel  system,  45  channels  must  be  reserved  for  unaffiliated  programming,  and  155 
 channels,  i.  e.,  85%,  could  be  occupied  by  operator-  affiliated  programming. 
 99  1993  Second  Report  and  Order,  8  FCC  Rcd  at  8601-  02    83-  84. 


 100  Id.  at  8603-  04    84. 
 101  1995  Vertical  Reconsideration  Order,  10  FCC  Rcd  at  7365    3. 
 102  Id.  at  7367    8. 
 103  Id. 
 104  Time  Warner  II,  240  F.  3d  at  1137-  38. 
 105  Id.  at  1137. 
 106  Id.  at  1137-  38. 
 107  Id.  at  1138. 
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 3.  Elements  of  the  Horizontal  and  Vertical  Limits 
 27.  We  next  examine  the  stated  objectives  of  Section  613(  f)  in  light  of  the  Time  Warner  I  and  Time  Warner  II  decisions  and  the  comments  received  in  response  to  the  2001  Further  Notice  on  the 


 elements  of  the  statute.  Section  613(  f)(  1)  of  the  Communications  Act  directs  the  Commission  to  set  horizontal  and  vertical  limits  in  order  to  enhance  effective  competition.  108  Section  613(  f)(  2)  sets  forth 
 seven  specific  criteria  and  public  interest  objectives  to  be  taken  into  account  in  setting  horizontal  and  vertical  limits.  109  These  include  consideration  of  offsetting  efficiencies  gained  through  ownership  and 
 control  and  establishment  of  limits  that  reflect  the  dynamic  nature  of  the  communications  marketplace.  110  Effectuating  Congress  intent  under  this  statute  therefore  involves  a  careful  weighing  of 
 statutory  objectives  and  factors  in  light  of  an  MVPD  marketplace  that  is  rapidly  evolving  in  terms  of  both  distribution  platforms  and  vastly  expanded  programming  choices. 


 28.  Enhance  Effective  Competition.  Prefacing  the  statutory  directive  to  establish  both  horizontal  and  vertical  cable  ownership  limits  is  the  single  phrase  [  i]  n  order  to  enhance  effective 
 competition.  111  The  2001  Further  Notice  discussed  changes  in  the  MVPD  marketplace  and  assumed  that  non-  cable  MVPDs  and  overbuilders  should  be  considered  competition  for  this  purpose  since  they 
 provide  outlets  for  programmers  and  alternatives  for  consumers.  112  The  2001  Further  Notice  observed  that  perhaps  the  most  important  difference  between  the  industry  in  1992  and  today  is  that  in  1992  there 
 was  no  clear  nationwide  substitute  for  cable,  whereas  today,  DBS  has  a  national  footprint  and,  although  there  are  questions  concerning  DBS  ability  to  constrain  cable  prices,  it  appears  that  DBS  currently  offers 
 an  effective  alternative  path  through  which  program  networks  can  reach  subscribers.  113  At  the  same  time,  the  Commission  recognized  that  this  does  not  suggest  that  consumers  necessarily  enjoy  the  effects 
 of  strong  competition  in  the  MVPD  market,  but  rather,  simply  that  there  are  alternatives  to  cable  available  to  consumers  and  programmers  which  were  not  available  in  1992.  114  In  addition,  the  2001  Further  Notice 
 observed  that  in  the  context  of  Section  613(  f),  effective  competition  seems  to  mean  competition  sufficient  to  provide  alternative  means  for  programmers  viably  to  reach  consumers,  thus  protecting 
 consumer  choice  and  welfare.  115  Comment  was  sought  on  the  impact  of  the  competitive  presence  of  DBS  on  cable  operators  market  power  generally  and  on  their  ability  to  select  programming  for  reasons 


 108  47  U.  S.  C.    533(  f)(  1). 
 109  See  47  U.  S.  C.    533(  f)(  2)(  A)-(  G). 
 110  See  47  U.  S.  C.    533(  f)(  2)(  D),  (E). 
 111  47  U.  S.  C.    533(  f)(  1). 
 112  2001  Further  Notice,  16  FCC  Rcd  at  17327    23. 
 113  Id.  at  17326-  27    22,  citing,  2000  Price  Survey.  See  also  EchoStar  Communications  Corporation,  General 
 Motors  Corporation,  Hughes  Electronics  Corporation  (Transferors)  and  EchoStar  Communications  Corporation  (Transferees),  17  FCC  Rcd  20559,  20605-  09    106-  16  (EchoStar-  DirecTV  HDO)  (tentative  conclusion  that  for 


 purposes  of  initial  analyses  of  EchoStar/  DirecTV  merger  application,  relevant  product  market  was  MVPD  market;  issue  of  whether  DBS  is  in  fact  a  closer  substitute  for  DBS  than  cable  designated  for  hearing). 


 114  Id.  at  17327    24. 
 115  Id. 
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 other  than  quality  and/  or  viewer  interest,  and  on  the  extent  to  which  advertisers  view  DBS  as  an  effective  substitute  for  cable  in  reaching  viewers.  116 
 29.  Comcast  contends  that  cable  faces  competition  in  every  market  because  DBS  is  a  clear  substitute  for  cable,  noting  that  60%  of  all  DBS  subscribers  are  in  areas  served  by  cable,  and  nearly  half 
 of  all  current  DBS  subscribers  are  former  cable  subscribers.  117  Writers  Guild  argues  that  DBS  providers  are  not  yet  significant  enough  to  compete  in  the  market  for  the  purchase  of  programming  and  limit  the 
 market  power  of  cable  operators,  and  that  DBS  will  have  even  less  ability  to  compete  if  the  30%  horizontal  ownership  cap  is  lifted.  118  Writers  Guild  further  contends  that  the  limited  reach  of  DBS  and 
 other  competitive  MVPDs  restricts  their  ability  to  make  a  program  service  viable,  and  that  a  new  network  still  cannot  be  viable  without  cable  carriage.  119  Similarly,  CFA  argues  that  satellite  remains  primarily  a 
 niche  market  player  serving  either  rural  communities  in  which  cable  is  inferior  or  unavailable  or  serving  high-  volume  specialty  programming  markets.  120  Further,  CFA  cites  a  Consumers  Union  Survey  that 
 appears  to  indicate  that  DBS  and  cable  are  viewed  differently  by  consumers  and  function  more  as  complements  rather  than  substitutes  in  the  market.  121  CFA  also  argues  that  enhance  requires  the 
 Commission  to  do  more  than  merely  protect  competition.  122 
 30.  The  record  compiled  in  response  to  the  2001  Further  Notice  is  now  four  years  old.  Total  DBS  subscribership  has  increased  during  this  time  from  about  16.1  million  households  to  approximately 
 23.2  million  households,  a  factor  that  must  be  taken  into  account  in  fashioning  rules  intended  to  enhance  effective  competition.  123  In  addition,  News  Corp.  s  acquisition  of  DirecTV  created,  for  the  first  time,  a 
 DBS  operator  that  is  vertically  integrated  with  programming  networks.  We  therefore  seek  updated  evidence  and  analysis  of  the  role  of  DBS  competition  in  providing  alternative  means  for  programmers  to 
 viably  reach  consumers,  thus  protecting  consumer  choice  and  welfare,  and  comment  on  the  weight  to  be  given  such  competition  in  establishing  the  ownership  limits.  We  seek  comment  on  how  a  vertical  limit 
 can  enhance  effective  competition  if  programming  rejected  by  an  incumbent  cable  operator  can  be  carried  on  an  alternative  MVPD,  or  via  other  means  of  electronic  delivery  to  the  consumer.  Additionally,  the 
 Commission  must  consider  the  extent  to  which  horizontal  and  vertical  limits  are  intended  to  promote 


 116  Id.    23. 
 117  Comcast  Reply  Comments  at  11-  13. 
 118  Writers  Guild  Comments  at  9. 
 119  Id. 
 120  CFA  Comments  at  151-  53. 
 121  Id.  at  159-  63. 
 122  Id.  at  16.  CFA  further  argues  that  the  antitrust  law  alone  supports  a  30%  horizontal  ownership  limit,  and  that 
 because  the  antitrust  law  is  intended  only  to  protect,  not  enhance,  competition,  the  Commission  cannot  adopt  a  limit  higher  than  30%.  Id.  at  25-  29,  citing  U.  S.  v.  Philadelphia  National  Bank,  374  U.  S.  270  (1966)  and  FTC  v. 


 H.  J.  Heinz  Company,  246  F.  3d  708  (DC  Cir.  2001). 
 123  See  Annual  Assessment  of  the  Status  of  Competition  in  the  Market  for  the  Delivery  of  Video  Programming,  20 
 FCC  Rcd  2755,  2792-  93    54  (2005)  (11  th  Annual  Report).  See  also  further  discussion  on  the  significant  recent  growth  in  DBS  subscribership  in    52,  infra. 
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 competition  in  the  programming  market.  We  tentatively  conclude  that  enhance  effective  competition  applies  to  MVPD  competition  as  well  as  competition  in  the  supply  of  programming  and  seek  comment  on 
 this  tentative  conclusion. 
 31.  Not  Unfairly  Impede  the  Flow  of  Programming.  Section  613(  f)(  2)(  A)  requires  that  the  Commission  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.  124  The 
 court  in  Time  Warner  II  held  that  a  broad  interpretation  of  unfair  is  plausible  only  for  actions  that  impinge  on  the  interest  in  competition  that  lay  at  the  heart  of  Congresss  concern.  125  How  should 
 unfair  be  defined  after  the  Time  Warner  II  decision?  Does  unfairly  suggest  that  our  analysis  focus  on  efficiency  as  used  in  a  purely  economic  model?  Or,  should  our  analysis  rely  much  less  on  economic 
 concepts,  as  suggested  by  AT&  T  when  it  argues  that  if  there  are  at  least  two  outlets  and  no  collusion,  a  programmers  failure  to  reach  homes  is  the  result  of  legitimate,  independent  editorial  choices  and 
 cannot  be  deemed  unfair?  126  We  also  seek  comment  on  the  ability  and  incentive  of  an  individual  cable  operator,  or  group  of  cable  operators,  to  restrict  the  flow  of  programming  to  the  consumer.  Is  it  possible 
 for  the  flow  of  video  programming  to  be  quantified,  and  if  so,  what  amount  must  be  unfairly  impeded  before  being  constrained  by  an  ownership  limit?  The  BKS  Study  attempted  to  quantify  the  level  of  cable 
 operator  concentration  where  the  flow  of  programming  becomes  restricted.  We  seek  comment  on  whether  experimental  economics  studies,  other  types  of  studies,  economic  theory,  or  experience  in  other 
 industries  would  be  useful  in  identifying  the  point  at  which  horizontal  concentration  among  cable  operators  is  likely  to  unfairly  impede  the  flow  of  programming. 


 32.  Neither  Favor  Nor  Unfairly  Restrict  Affiliated  Programming.  Section  613(  f)(  2)(  B)  of  the  Act  directs  the  Commission  to  ensure  that  cable  operators  affiliated  with  video  programmers  do  not 
 favor  such  programmers  in  determining  carriage  nor  unreasonably  restrict  the  flow  of  programming  from  such  programmers  to  other  MVPDs.  127  RCN  proposes  that  the  Commission  adopt  regulations,  based 
 on  authority  in  Section  613(  f)  and  its  ancillary  jurisdiction,  that  would,  on  a  market-  by-  market  basis,  measure  market  power  through  an  analysis  of  an  entitys  ability  to  control  access  to  sought-  after 
 programming.  128  According  to  RCN,  if  MVPD  entrants  cannot  gain  access  to  this  programming  due  to  the  incumbents  ability  to  control  that  programming,  then  a  presumptive  finding  of  market  power  would 
 be  made,  which  would  compel  the  owner  of  the  programming  to  make  it  available  on  industry-  standard  terms.  RCN  recommends  limiting  this  rule  to  programming  that  is  unique  and  otherwise  unobtainable, 
 thus  excluding  programming  that  a  competitor  could  produce  itself.  129  In  contrast,  Cablevision  argues  that  the  proliferation  of  unaffiliated  networks,  the  emergence  of  the  broadcast  networks  as  a  significant 
 competitive  force  in  the  cable  programming  market,  and  the  strength  and  durability  of  competition  from 


 124  47  U.  S.  C.    533(  f)(  2)(  A). 
 125  Time  Warner  II,  240  F.  3d  at  1135. 
 126  AT&  T  Comments  at  13-  14,  citing  Time  Warner  II,  240  F.  3d  at  1135. 
 127  47  U.  S.  C.    533(  f)(  2)(  B). 
 128  RCN  Comments  at  15-  18. 
 129  Id.  at  16-  17. 
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 alternative  MVPDs  precludes  cable  operators  from  using  vertical  integration  to  thwart  competition  from  rival  MVPDs  and  programmers.  130  Cablevision  further  argues  that  rival  MVPDs  have  access  to  a  broad 
 range  of  non-  vertically  integrated  programming,  as  well  as  the  ability  to  enter  into  programming  investments  themselves.  131  We  seek  further  comment  on  how  ownership  limits  may  further  the  statutory 
 objective  that  cable  operators  not  favor  affiliated  programmers  in  determining  carriage  nor  unreasonably  restrict  the  flow  of  programming  from  such  programmers  to  other  MVPDs  in  light  of  current 
 marketplace  conditions.  In  addition,  we  seek  comment  on  the  types  of  activity  that  would  constitute  an  unreasonable  restriction  on  the  flow  of  programming  from  affiliated  programmers  to  other  MVPDs,  and 
 how  ownership  limits  could  address  such  activity. 
 33.  Market  Structures;  Industry  Relationships;  Joint  Ownership;  Nature  and  Market  Power  of  Local  Franchise.  Section  613(  f)(  2)(  C)  of  the  Act  directs  the  Commission  to  take  particular  account  of 
 the  market  structure,  ownership  patterns,  and  other  relationships  of  the  cable  television  industry,  including  the  nature  and  market  power  of  the  local  franchise,  the  joint  ownership  of  cable  systems  and 
 video  programmers,  and  the  various  types  of  non-  equity  controlling  interests.  132  In  the  2001  Further  Notice,  we  asked  for  comment  on  the  existing  market  structure  and  ownership  patterns  in  the  cable 
 industry.  133  We  received  no  comments  on  precisely  how  we  should  interpret  the  terms  in  Section  613(  f)(  2)(  C).  Cablevision,  however,  comments  that  the  Commission  should  follow  the  congressional 
 directive  to  rely  on  the  marketplace  to  the  maximum  extent  feasible  when  establishing  rules  under  the  1992  Act.  134  We  seek  comment  on  the  meaning  of  these  statutory  terms  and  their  effect  with  regard  to 
 setting  effective  ownership  limits.  In  particular,  do  ownership  patterns  and  the  nature  and  market  power  of  the  local  franchise  refer  to  clustering,  or  some  other  phenomenon?  Does  joint  ownership  of 
 cable  systems  and  video  programmers,  and  the  various  types  of  non-  equity  controlling  interests  entail  only  issues  of  vertical  integration  and  our  attribution  rules,  or  was  Congress  referring  to  something  more? 


 34.  Offsetting  Benefits  and  Need  for  Rules  to  Reflect  Dynamic  Marketplace.  In  addition  to  accounting  for  potential  harms  that  may  occur  as  a  result  of  horizontal  concentration  and  vertical 
 integration,  Section  613(  f)(  2)  requires  that  the  Commission  account  for  any  .  .  .  benefits  that  might  be  gained  through  increased  ownership  or  control;  135  make  such  rules  and  regulations  reflect  the  dynamic 
 nature  of  the  communications  marketplace;  136  and  not  impose  limitations  which  would  bar  cable  operators  from  serving  previously  unserved  rural  areas.  137  AT&  T  states  that  there  are  clear  public  interest  benefits 
 to  increased  cable  concentration,  mostly  as  the  result  of  cable  operators  economies  of  scale,  and  that  the 


 130  Cablevision  Comments  at  9. 
 131  Id.  at  9-  10,  citing,  for  example,  a  transaction  between  EchoStar,  Vivendi,  and  the  USA  Network. 
 132  47  U.  S.  C.    533(  f)(  2)(  C). 
 133  2001  Further  Notice,  16  FCC  Rcd  at  17334    44. 
 134  Cablevision  Comments  at  10-  11,  citing  the  1992  Act,    2(  b)(  2). 
 135  47  U.  S.  C.    533(  f)(  2)(  D). 
 136  47  U.  S.  C.    533(  f)(  2)(  E). 
 137  47  U.  S.  C.    533(  f)(  2)(  F). 
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 Commission  is  required  to  take  such  benefits  into  account.  138  Citing  Section  613(  f)(  2)(  E),  that  the  ownership  rules  must  reflect  the  dynamic  nature  of  the  communications  marketplace,  Progress  and 
 Freedom  Foundation  (PFF)  explains  that  the  cable  industrys  recent  evolution  from  strictly  analog  video  programming  to  digital  video  and  non-  video  offerings  has  made  the  industry  much  more  dynamic.  139  We 
 seek  comment  on  the  effect  of  these  considerations  of  potential  benefits  with  regard  to  setting  ownership  limits.  140 


 35.  Rules  Not  to  Impair  Development  of  Diverse  and  High  Quality  Programming.  Section  613(  f)(  2)(  G)  requires  the  Commission  to  ensure  that  any  limits  imposed  do  not  impair  the  development 
 of  diverse  and  high  quality  video  programming.  Time  Warner  I  upheld  the  constitutionality  of  Section  613(  f),  finding  that  Congress  reasonably  concluded  that  dramatic  concentration  in  the  cable  industry 
 threatened  the  diversity  of  information  available  to  the  public  and  could  form  a  barrier  to  the  entry  of  new  cable  programmers.  141  In  Time  Warner  II,  however,  the  court  concluded  that  Congress  has  not 
 given  the  Commission  authority  to  impose,  solely  on  the  basis  of  the  diversity  precept,  a  limit  that  does  more  than  guarantee  a  programmer  two  possible  outlets  (each  of  them  a  market  adequate  for  viability).  142 
 Nevertheless,  the  court  suggested  that  diversity,  while  not  the  primary  concern  of  the  statute,  is  a  factor  entitled  to  consideration.  143  To  fully  implement  the  provisions  of  Section  613(  f),  as  well  as  abide  by  the 
 courts  directives  in  Time  Warner  II,  in  the  2001  Further  Notice,  we  asked  for  comment  on  the  scope  of  our  diversity  goal  in  light  of  the  courts  ruling.  144 


 36.  In  response  to  the  2001  Further  Notice,  AT&  T  argues  that  Congress  primary  concern  in  authorizing  ownership  limits  is  fair  competition,  while  diversity  is  a  byproduct  of  requirements  that 
 ensure  there  are  at  least  two  outlets  for  video  programming.  145  Comcast  argues  that  the  availability  of  two  conduits  through  which  a  programmer  could  reach  the  number  of  viewers  needed  for  viability  is  the 
 absolute  limit  on  diversity  as  a  justification  for  horizontal  ownership  restrictions.  146  CFA  argues, 


 138  AT&  T  Comments  at  69,  citing  AT&  T  Comments,  Ordover  Decl.  at  129. 
 139  PFF  Comments  at  9,  12-  16. 
 140  We  further  discuss  each  of  these  goals  in  the  context  of  determining  horizontal  and  vertical  ownership  limits  as 
 appropriate  in  Sections  II.  C.  and  D.,  infra. 
 141  Time  Warner  I,  211  F.  3d  at  1320.  The  court  further  held  that  [  i]  t  is  enough  that,  having  determined  that 
 [  c]  oncentration  has  grown  dramatically  in  the  cable  industry,    S.  Rep.  at  32,  1992  U.  S.  C.  C.  A.  N.  at  1165,  the  Congress  reasonably  concluded  that  this  concentration  threatened  the  diversity  of  information  available  to  the 


 public  and  could  form  a  barrier  to  the  entry  of  new  cable  programmers.  That  is  hardly  an  unreasonable  inference.  Id. 


 142  Time  Warner  II,  240  F.  3d  at  1135. 
 143  Id.  at  1136,  noting  the  duality  of  interests  [competition  and  diversity]  at  work  in  this  section. 
 144  Pursuant  to  Section  613,  our  cable  horizontal  and  vertical  ownership  limits  were  designed  to  promote  a 
 diversity  of  programming  choices  for  consumers. 
 145  AT&  T  Comments  at  11-  12,  citing  Time  Warner  II,  240  F.  3d  at  1136. 


 146  Comcast  Comments  at  16. 
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 however,  that  while  the  court  found  that  the  Commission  cannot  rely  solely  on  diversity  as  a  rationale  for  its  horizontal  ownership  limit,  diversity  remains  one  of  the  two  primary  concerns  animating  the  1992  Act, 
 and  the  Commission  must  act  on  a  prophylactic  basis  to  accomplish  the  dual  goals  of  competition  and  diversity.  147  CFA  also  asserts  that  the  Time  Warner  II  decision  requires  the  Commission  to:  (1)  clearly 
 articulate  economic  and  legal  rationales  supporting  its  decision;  (2)  prove  that  its  enhancement  of  diversity  under  the  rule  is  substantial  rather  than  de  minimis;  148  and  (3)  recognize  that  Congress 
 overarching  purpose  was  to  enhance  effective  competition,  which,  in  turn,  protects  diversity.  149  RCN  argues  that  despite  the  courts  holding  in  Time  Warner  II,  the  Commission  has  ample  authority  under 
 Section  613,  as  well  as  other  sections  of  the  Act,  to  promulgate  rules  that  promote  diversity.  150  We  seek  comment  on  the  role  and  weight  diversity  concerns  should  play  in  setting  our  ownership  limits.  If  our 
 limits  ensure  adequate  competition  in  the  MVPD  marketplace  such  that  the  flow  of  programming  is  not  unfairly  impeded,  would  diversity  likewise  be  ensured? 


 37.  We  are  interested  in  whether  the  widespread  availability  of  DBS  service,  along  with  its  continued  strong  growth  in  subscribership  since  the  2001  Further  Notice,  provide  an  adequate  outlet  for 
 programming  such  that  diversity  is  ensured.  151  Writers  Guild  argues  that  DBS  operators  are  not  a  source  of  programming  diversity,  because  their  limited  subscribership  restricts  their  ability  to  make 
 programming  services  viable.  152  However,  as  we  noted  previously,  since  the  record  closed  on  the  2001  Further  Notice,  total  DBS  subscribership  has  grown  from  approximately  16.1  million  in  June  2001  to 
 23.2  million  in  June  2004,  an  increase  of  almost  45%.  153  At  the  same  time,  it  appears  that  a  number  of  new  networks  have  launched  successfully  using  business  models  that  do  not  require  the  same  subscriber 
 reach  that  more  established,  general  interest  networks  enjoy.  154  In  assessing  how  a  limit  could  promote 


 147  CFA  Comments  at  13-  16. 
 148  CFA  cites  to  the  Commissions  Opposition  to  Certiorari  in  Time  Warner  II,  where  we  stated:  The  court  of 
 appeals  found  the  promotion  of  diversity  to  be  an  insufficient  justification  for  the  rule  because  at  some  point  .  .  .  the  marginal  value  of  such  an  increment  in  diversity  would  not  qualify  as  an  important  governmental  interest  .  .  .  . 


 That  concern  about  de  minimis  enhancements  in  diversity,  however,  has  no  relevance  here  .  .  .  .  The  courts  ability  to  imagine  hypothetical  situations  where  the  incremental  increase  in  diversity  might  not  justify  a  regulation 
 thus  provides  no  basis  for  invalidating  a  regulation  whose  actual  and  foreseeable  operation  substantially  enhances  the  Congressional  goal  of  diversity.  Id.,  citing  FCC  Opposition  to  Cert.  at  10-  11. 


 149  Id. 
 150  RCN  argues  that  the  following  sections  of  the  Act  also  apply:  Sections  601;  612(  a),  (e)(  2)-(  3),  (g);  and  628(  a), 
 (c)(  1),  (c)(  4)(  D).  RCN  Comments  at  9. 
 151  As  of  June  2004,  DirecTV  is  the  second  largest  MVPD  and  EchoStar  (DISH  Network)  is  the  fourth.  See  11  th 
 Annual  Report,  20  FCC  Rcd  at  2793    55. 
 152  Writers  Guild  Comments  at  9. 


 153  See  n.  123,  supra. 
 154  For  example,  College  Sports  Television,  The  Tennis  Channel,  and  Reality  Central  have  focused  on  seeking 
 carriage  on  cable  operators  digital  tiers,  which  generally  reach  a  smaller  segment  of  a  cable  operators  subscribers.  See  discussion  in  Section  II.  B.,  infra.  However,  Oxygen  Network  states  that  carriage  on  a  cable 


 operators  analog  tier    providing  assurance  of  widespread  distribution    is  essential  to  obtain  the  financing  (continued.) 
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 diversity,  should  we  be  concerned  with  maximizing  the  range  of  different  program  types,  or  maximizing  competing  sources  of  each  type  of  programming,  or  both? 
 4.  Approaches  to  Establishing  Horizontal  and  Vertical  Limits 
 38.  Scope  of  Legal  Authority.  The  Time  Warner  II  court  suggested  several  ways  cable  operators  could  unfairly  impede  the  flow  of  programming  that  might  form  the  basis  of  a  horizontal 


 limit.  155  The  court  explained  that  the  Commission  might  justify  a  limit  if  it  could  establish  that  a  single  large  cable  operator  acting  alone  would  be  able  to  act  anticompetitively  by  extort[  ing]  equity  from 
 programmers  or  forc[  ing]  exclusive  contracts  .  .  .  while  serving  somewhat  less  than  [the  market  share]  .  .  .  that  would  allow  it  unilaterally  to  lock  out  a  new  cable  programmer  .  .  .  .  156  It  found,  however,  that  the 
 Commission  failed  to  offer  any  evidence  or  theory  of  anticompetitive  harm  arising  from  the  actions  of  a  single  cable  operator.  157  In  addition,  Time  Warner  II  acknowledged  that  a  cable  operator  might  be  able  to 
 exploi[  t  its]  monopoly  position  in  a  specific  cable  market  to  extract  rents  that  would  otherwise  flow  to  programmers,  but  questioned  whether  such  action  would  give  rise  to  an  important  government  interest 
 justifying  a  burden  on  speech.  158  The  court  further  noted  that  we  must  show  how  cable  operators  hard  bargaining  with  programmers  to  lower  programming  costs  is  unfair.  159  Finally,  the  court  stated  that  the 
 Commission  would  be  justified  in  ensuring  at  least  two  conduits  through  which  programmers  may  reach  an  adequate  number  of  consumers.  160  The  court  found  that  a  cable  operators  size  would  constitute 
 an  unfair  impediment  to  the  flow  of  programming  if  that  operator  were  the  only  viable  conduit  for  programming  independent  of  concerns  over  anticompetitive  conduct.  161  In  the  2001  Further  Notice,  in 
 accordance  with  our  statutory  mandate,  First  Amendment  principles,  and  Time  Warner  II,  we  sought 


 (Continued  from  previous  page)  necessary  to  develop  and  launch  an  independent  programming  service.  See  Oxygen  Comments  filed  in  MB 
 Docket  No.  04-  207  (A  La  Carte  Proceeding)  at  3  (Jul.  15,  2004). 
 155  Time  Warner  II,  240  F.  3d  at  1133. 


 156  Id.  We  note  that,  in  1992,  Congress  instructed  the  Commission  to  adopt  rules  prohibiting  cable  operators  from 
 demanding  equity  in  exchange  for  carriage.  See  47  U.  S.  C    536;  47  C.  F.  R.    76.1301.  Despite  these  protections,  Time  Warner  II  recognizes  that  a  single  MSO,  acting  alone  rather  than  jointly,    might  perhaps  be  able  to  do  so 


 while  serving  somewhat  less  than  the  60%  of  the  market  (i.  e.,  less  than  the  fraction  that  would  allow  it  unilaterally  to  lock  out  a  new  cable  programmer)  despite  the  existence  of  antitrust  laws  and  specific  behavioral  prohibitions 
 enacted  as  part  of  the  1992  Cable  Act,  see  47  U.  S.  C.    536,  and  the  risk  might  justify  a  prophylactic  limit  [horizontal  cap]  under  the  statute.  Time  Warner  II,  240  F.  3d  at  1133. 


 157  Id.  at  1132-  34. 
 158  Id.  at  1133.  The  term  rents  usually  refers  to  all  payments  to  inputs  that  are  above  the  minimum  required  to 
 make  these  inputs  available  to  the  industry.  Edwin  Mansfield  and  Gary  Yohe,  MICROECONOMICS,  462  (10th  ed.,  2000).  Here,  large  cable  operators  can  use  their  size  and  concomitant  bargaining  power  to  claim  more  of  the 


 return  or  surplus  of  their  deals  with  programmers.  Continued  lowered  returns  on  programmers  investment  can  create  an  incentive  for  underinvestment  in  programming,  which  can  result  in  inefficiency. 


 159  Time  Warner  II,  240  F.  3d  at  1136  n.  6. 
 160  Id.  at  1131-  32,  1135. 
 161  Id.  at  1134-  35. 
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 comment  on  the  state  of  competition  in  the  MVPD  market  to  ensure  that  our  rules  are  reasonable  and  serve  the  public  interest.  162 
 39.  Horizontal  Limits.  In  determining  how  to  set  a  horizontal  limit,  we  are  again  guided  by  the  language  in  the  statute  and  the  courts  consideration  and  rejection  of  our  prior  limits.  In  ruling  that 
 the  Commission  had  failed  to  meet  the  required  evidentiary  standard,  the  court  in  Time  Warner  II  stated  that  we  must  base  our  limits  on  a  non-  conjectural  risk  of  economic  harm.  163  Discussing  joint  action,  the 
 court  faulted  the  Commissions  failure  to  point  to  examples  of  collusion  and  stated  that  [  s]  ubstantial  evidence  does  not  require  a  complete  factual  record    we  must  give  appropriate  deference  to  predictive 
 judgments  that  necessarily  involve  the  expertise  and  experience  of  the  agency.  164  The  court  further  stated  that  the  standard  requires  the  Commission  to  put  forth  some  evidence  that  indicates  prospects  for 
 collusion.  165  In  discussing  other  forms  of  anticompetitive  action,  the  court  suggested  that  sound  theory  could  provide  an  evidentiary  basis  for  limits,  stating  there  are  theories  of  anticompetitive  behavior  other 
 than  collusion  that  may  be  relevant  to  the  horizontal  limit  and  on  which  the  FCC  may  be  able  to  rely  on  remand.  166 


 40.  In  response,  cable  operators  generally  oppose  the  imposition  of  any  ownership  limits.  167  Time  Warner  argues  that  because  foreclosure  168  of  entry  by  video  programming  services  does  not 
 constitute  a  non-  conjectural  problem,  a  subscriber  limit  is  neither  necessary  nor  appropriate.  169  Other  commenters,  pointing  to  statutory  provisions  that  require  us  to  take  account  of  changing  market 
 conditions,  as  well  as  the  courts  instruction  to  consider  the  role  of  DBS  in  the  MVPD  marketplace,  argue  that  conditions  have  changed  so  markedly  since  1992  that  the  horizontal  limits  envisioned  by  Section 
 613(  f)  are  no  longer  necessary.  170 


 162  2001  Further  Notice,  16  FCC  Rcd  at  17320-  21    7. 
 163  Time  Warner  II,  240  F.  3d  at  1132. 
 164  Id.  at  1133. 
 165  Id. 
 166  Id. 
 167  See,  e.  g.,  Time  Warner  Comments  at  6-  19;  AT&  T  Comments  at  4-  5;  Comcast  Comments  at  17-  18.  To  support 
 their  position,  cable  operators  rely  heavily  on  the  arguments  of  economist  Alexander  Raskovich,  who  submitted  comments  containing  his  article  on  pivotal  buyers.  See  Raskovich  Comments,  later  revised  and  published  as 


 Alexander  Raskovich,  Pivotal  Buyers  and  Bargaining  Position,  51  J.  OF  INDUS.  ECON.  4,  405-  26  (Dec.  2003)  (Raskovich,  Pivotal  Buyers  and  Bargaining  Position).  Time  Warners  experts,  Paul  L.  Joskow  and  Linda 
 McLaughlin,  and  AT&  Ts  expert,  Janusz  Ordover,  rely  on  Raskovichs  arguments.  See  Jaskow  &  McLauglin,  An  Economic  Analysis  of  Subscriber  Limits  (attached  to  Time  Warner  Comments  and  hereinafter  referred  to  as 
 Joskow  and  McLaughlin)  at  15  n.  30;  AT&  T  Comments,  Ordover  Decl.  at  41. 
 168  Foreclosure  means  that  a  large  vertically  integrated  cable  operators  decision  not  to  grant  a  programmer 
 carriage  could  induce  the  programmer  to  exit  the  market  or  could  deter  the  programmer  from  entering  the  market. 
 169  Time  Warner  Comments  at  9-  14. 


 170  See,  e.  g.,  PFF  Comments  at  7. 
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 41.  In  ex  parte  filings  since  the  2001  Further  Notice,  Comcast  has  proposed  a  burden-  shifting  approach  to  setting  cable  ownership  limits.  171  Comcast  argues  that  marketplace  facts  demonstrate  that  the 
 quantity  and  quality  of  video  programming  available  to  consumers,  as  well  as  the  source  diversity  and  content  diversity,  has  never  been  greater.  Comcast  further  argues  that  there  is  no  evidence  of  current 
 impediments  to  the  flow  of  video  programming  to  consumers,  or  that  the  number  of  one  cable  companys  subscribers  would  create  an  impediment.  In  light  of  the  record,  as  well  as  the  courts  decision  in  Time 
 Warner  II,  Comcast  believes  that  a  sustainable  hard  limit  is  unattainable.  Comcast  therefore  proposes  that  the  Commission  adopt  an  approach  that  uses  a  procedural  trigger  rather  than  a  hard  cap.  172 


 42.  Under  such  an  approach,  Comcast  urges,  all  proposed  mergers  would  be  reviewed  and  would  be  subject  to  a  public  interest  analysis,  but  only  those  above  a  specified  soft  cap  would  require  a 
 more  detailed  information  submission  and  market  analysis.  173  Proponents  of  mergers  below  the  soft  cap  would  still  bear  the  burden  of  proving,  by  a  preponderance  of  the  evidence,  that  the  proposed  transaction 
 serves  the  public  interest.  However,  they  would  be  able  to  establish  a  prima  facie  case  that  the  merger  is  in  the  public  interest  by  certifying  that  the  combined  entitys  size  does  not  exceed  the  soft  cap.  The 
 burden  of  proof  would  then  shift  to  the  opponents  of  the  merger,  who  would  need  to  show  the  existence  of  extraordinary  circumstances  that  pose  competitive  concerns.  174  In  essence,  Comcast  appears  to  be 
 proposing  a  form  of  case-  by-  case  review  premised  on  a  procedural  trigger,  rather  than  a  set  numerical  limit  to  the  number  of  subscribers  an  operator  may  reach. 


 43.  Some  commenters  argue  that  the  Commission  may  satisfy  its  statutory  obligations  under  Section  613(  f)  without  establishing  some  form  of  horizontal  limit.  175  As  noted  above,  Time  Warner 
 argues  that  because  foreclosure  of  entry  by  new  video  programming  services  does  not  constitute  a  non-conjectural  problem,  a  horizontal  limit  is  neither  necessary  nor  appropriate.  176  Time  Warner  also  argues 
 that  Section  613(  f)  grants  the  Commission  discretion  to  not  impose  any  limit.  177  AT&  T  argues  that  the  word  reasonable  in  Section  613(  f)  must  be  read  to  permit  the  Commission  to  decline  to  adopt  a 
 horizontal  limit,  particularly  where,  as  here,  a  regulation  restricts  speech.  178  Comcast  asserts  that  Congress  authorized  horizontal  limits  only  to  the  extent  needed  to  prevent  unfair  impediments  to  the  flow 


 171  See  Letter  from  Michael  H.  Hammer,  Willkie,  Farr  &  Gallagher,  on  behalf  of  Comcast,  to  Marlene  H.  Dortch, 
 Secretary,  FCC  (Mar.  13,  2003);  Letter  from  James  L.  Casserly,  Willkie,  Farr  &  Gallagher,  on  behalf  of  Comcast,  to  Marlene  H.  Dortch,  Secretary,  FCC  (Jan.  31,  2003). 


 172  Id. 
 173  Id. 
 174  Id. 
 175  See  Time  Warner  Comments  at  9;  AT&  T  Reply  Comments  at  18-  19;  Comcast  Reply  Comments  at  4-  5. 
 176  Time  Warner  Comments  at  9. 
 177  Id. 
 178  AT&  T  Reply  Comments  at  18-  19. 
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 of  programming  to  consumers,  and  that  the  record  does  not  show  that  cable  operators  can  impede  the  flow  of  programming  to  consumers,  now  or  in  the  future.  179 
 44.  We  do  not  agree  with  commenters  who  argue  that  we  have  the  discretion  to  forgo  imposing  a  horizontal  limit.  Section  613(  f)  clearly  states  the  Commission  shall  .  .  .  conduct  a  proceeding 
 .  .  .  to  prescribe  rules  and  regulations  establishing  reasonable  limits  on  the  number  of  cable  subscribers  a  person  is  authorized  to  reach  .  .  .  .  180  Further,  Time  Warner  I  held  that  [  t]  he  subscriber  limits 
 provision  directs  the  Federal  Communications  Commission  to  limit  the  number  of  subscribers  a  cable  operator  may  reach.  181  We  therefore  tentatively  conclude  that  the  language  of  Section  613(  f)  requires  us 
 to  set  some  limit  on  the  number  of  MVPD  subscribers  one  entity  may  reach.  182  While  the  current  record  contains  no  evidence  of  the  exact  percentage  of  MVPD  subscribers  attributed  to  one  entity  at  which  the 
 flow  of  programming  may  be  impeded,  it  does  provide  evidence  that  if  an  entity  is  unencumbered  in  its  subscriber  reach,  harms  are  likely  to  occur.  183  We  also  tentatively  conclude  that  Congress  gave  the 
 Commission  significant  discretion  in  determining  the  ownership  limits,  both  in  their  absolute  level  as  well  as  in  their  form  and  structure.  In  particular,  neither  the  statute  nor  the  legislative  history  states  a  clear 
 preference  either  for  hard  limits  or  against  other  types  of  limits.  We  seek  comment  on  our  tentative  conclusions  that  the  statutory  language  requires  us  to  set  a  reasonable  limit  on  the  number  of  subscribers 
 that  a  cable  operator  may  reach,  and  on  the  scope  of  our  discretion  to  fashion  the  form  and  structure  of  such  limits  under  Section  613(  f). 


 45.  Vertical  Limits.  In  the  2001  Further  Notice,  we  asked  for  comment  on  how  the  changes  in  the  MVPD  market  and  in  the  level  of  vertical  integration  for  cable  MVPDs  may  have  affected  cable 
 operators  ability  to  favor  affiliated  over  unaffiliated  programming.  184  We  also  sought  comment  on  how  application  of  stringent  vertical  restrictions  might  impact  economic  efficiencies  and  affect  cable 
 operators  investment  in,  and  production  of,  diverse  and  high  quality  programming.  185  Finally,  we  asked 
 179  Comcast  Reply  Comments  at  4-  5. 
 180  47  U.  S.  C.    533(  f)(  1)(  A).  In  addressing  Section  613(  f)(  1),  the  legislative  history  states:  The  FCC  is  given 
 discretion  in  establishing  the  reasonable  limits  on  horizontal  and  vertical  integration;  however,  the  legislation  is  clear  that  the  FCC  must  adopt  some  limitations.  The  Committee  believes  that  it  has  given  the  FCC  enough 


 discretion  in  the  legislation  to  strike  the  proper  balance.  The  Committee,  therefore,  will  permit  the  FCC  to  establish  limits  that  best  serve  the  public  interest.  The  Committee  will  then  review  this  decision.  Because  these 
 markets  are  dynamic,  the  FCC  should  revisit  these  limitations  at  appropriate  times  to  ensure  that  they  accurately  reflect  the  policies  of  the  legislation.  Senate  Report  at  80  (emphasis  added).  Compare  House  Report  at  43  (the 
 House  bill  directed  the  Commission  to  impose  limits  on  horizontal  integration,  but  the  House  Bills  vertical  integration  provision,  which  was  not  enacted,  required  the  Commission  only  to  conduct  a  study  to  consider  the 
 necessity  and  appropriateness  of  imposing  limitations  on  vertical  integration). 
 181  Time  Warner  I,  211  F.  3d  at  1315. 


 182  47  U.  S.  C.    533(  f)(  1). 
 183  Among  the  findings  of  the  BKS  Study  was  that  increases  in  the  size  of  the  largest  cable  operator  can  lead  to 
 situations  in  which  economic  efficiency  is  reduced,  some  programmers  fail  to  recover  their  costs,  and  smaller  cable  operators  pay  more  for  programming.  BKS  Study  at  3-  5. 


 184  2001  Further  Notice,  16  FCC  Rcd  at  17350    80. 
 185  Id. 
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 commenters  to  address  the  economic  basis  underlying  the  concern  with  vertical  integration  and  market  foreclosure.  186 
 46.  In  response  to  the  2001  Further  Notice,  CFA  argues  that  although  horizontal  market  power  is  the  primary  focus  of  this  proceeding,  vertical  market  power  is  the  driving  force  behind  the 
 horizontal  ownership  cap.  187  It  argues  that  vertical  market  power  results  in  anticompetitive  conduct,  and  that  when  dominant  firms  become  integrated  across  markets  for  critical  inputs,  there  are  potential 
 problems.  CFA  also  argues  that  vertical  integration  can  create  barriers  to  entry.  188  However,  CFA  fails  to  offer  any  argument  or  evidence  on  how  a  channel  occupancy  limit  can  prevent  the  harms  it  alleges. 


 47.  In  its  comments,  Cablevision  argues  that  given  technological  advancements  and  todays  vigorously  competitive  MVPD  marketplace,  no  channel  occupancy  limit  will  survive  constitutional 
 scrutiny.  189  Cablevision  argues  that  competition  from  DBS  significantly  affects  a  cable  operators  incentive  and  ability  to  favor  affiliated  programming,  since  the  use  of  any  program  carriage  criteria  other 
 than  viewer  preference  risks  driving  subscribers  into  the  arms  of  competitors.  190  Cablevision  further  argues  that  Section  613(  f)  does  not  require  the  establishment  of  channel  occupancy  limits  if  the 
 Commission  determines  that  marketplace  conditions  obviate  the  need  for  such  rules.  191  NCTA  argues  that  Congress  concerns  in  1992  clearly  were  premised  on  very  different  market  conditions  than  those  in 
 existence  today.  192  NCTA  argues  that  limiting  the  number  of  channels  that  may  be  occupied  by  vertically  integrated  programmers  is  no  longer  necessary  or  useful  to  advance  the  governments  interest  in  ensuring 
 that  cable  operators  do  not  discriminate  against  unaffiliated  programming.  193  Time  Warner  argues  that  discrimination  on  the  basis  of  affiliation  is  already  targeted  by  other  rules.  194  Time  Warner  further  argues 
 that  Section  613  only  requires  the  Commission  to  conduct  a  proceeding    ,  and  that  if,  after  such  a  proceeding,  the  Commission  finds  that  no  limit  is  justified,  then  reasonable  limits  are  no  limits  at  all.  195 


 48.  The  express  language  of  Section  613(  f)(  1)(  B)  directs  the  Commission  to  conduct  a  proceeding  to  prescribe  rules  and  regulations  establishing  reasonable  limits  on  the  number  of  channels 
 on  a  cable  system  that  can  be  occupied  by  a  video  programmer  in  which  a  cable  operator  has  an 


 186  Id.  at  17350-  51    81. 
 187  CFA  Comments  at  93-  104. 
 188  Id. 
 189  Cablevision  Comments  at  5. 
 190  Id.  at  7. 
 191  Id.  at  10. 
 192  NCTA  Comments  at  22. 
 193  Id.  at  22-  23. 
 194  Time  Warner  Comments  at  36,  citing  47  USC    536(  a)(  3)  and  47  C.  F.  R.  76.1301(  c). 
 195  Id.  at  37. 
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 attributable  interest.  196  We  are  not  persuaded  that  the  qualifier  reasonable  can  reasonably  be  construed  to  mean  no  limits,  a  reading  which  would  effectively  grant  the  Commission  discretion  to  forgo 
 altogether    that  is,  forbear  from    establishment  of  a  vertical  limit.  197  Consistent  with  our  conclusions  above,  198  we  tentatively  conclude  that  Section  613(  f)  requires  us  to  set  both  cable  horizontal  ownership 
 and  vertical  channel  occupancy  limits  at  some  number.  As  discussed  in  greater  detail  below,  we  seek  comment  on  how  we  can  set  both  horizontal  ownership  and  channel  occupancy  limits  that  will  survive 
 constitutional  scrutiny  in  light  of  present  circumstances.  199 
 B.  Industry  Developments 
 49.  There  have  been  significant  changes  in  the  MVPD  industry  in  the  last  several  years  that  bear  upon  the  question  of  establishing  reasonable  cable  horizontal  and  vertical  ownership  limits.  The 


 current  MVPD  market  differs  dramatically  from  that  which  existed  when  Congress  enacted  the  subscriber  and  channel  occupancy  provisions  of  the  1992  Act.  First,  in  1992,  there  was  minimal  competition  to 
 cable;  competition,  particularly  from  DBS  providers,  has  significantly  increased  since  then.  Second,  cable  horizontal  concentration  and  regional  clustering  have  increased  since  1992.  Third,  since  1992, 
 cable  plant  upgrades  have  resulted  in  new,  advanced  digital  services  and  significantly  increased  channel  capacity.  Fourth,  the  number  of  national  programming  networks,  and  their  diversity  in  terms  of  sources 
 and  content,  has  increased.  Fifth,  vertical  integration  between  cable  operators  and  cable  programming  networks  has  decreased  in  percentage  terms.  200 


 50.  Cable  operators,  as  well  as  other  MVPDs,  have  been  increasing  their  plant  capacity,  and  have  upgraded  and  enhanced  system  capabilities.  As  a  result,  MVPDs  are  offering  substantially  more 
 programming  networks  and  are  rolling  out  new,  advanced  services  to  their  customers.  In  1992,  most  cable  systems  had  a  channel  capacity  of  between  30  and  53  analog  channels.  201  Today,  cable  operators 
 are  choosing  to  provide,  on  average,  70  analog  video  channels  and  approximately  150  digital  video  channels,  with  enough  additional  bandwidth  to  provide  high-  definition  television,  video-  on-  demand, 
 Internet  access  services,  and  both  circuit-  switched  and  IP-  based  voice  services.  202 


 196  47  U.  S.  C.    533(  f)(  1)(  B). 
 197  Title  VI  of  the  Communications  Act  contains  no  provision  granting  the  Commission  authority  to  forbear  from 
 applying  its  rules.  Compare  Section  10  of  the  Communications  Act,  added  by  the  Telecommunications  Act  of  1996,  47  U.  S.  C.    160  (upon  appropriate  findings,  the  Commission  may  apply  forbearance  authority  to  a 


 telecommunications  carrier  or  service  in  some  or  all  markets);  47  U.  S.  C.    332(  c)(  1)  (authorizes  the  Commission  to  specify  that  certain  provision  of  Title  II  shall  not  apply  to  commercial  mobile  radio  service  providers). 


 198  See    44,  supra. 
 199  See  Section  II.  C.,  infra. 
 200  See  Annual  Assessment  of  the  Status  of  Competition  in  the  Market  for  the  Delivery  of  Video  Programming  (10  th 
 Annual  Report),  19  FCC  Rcd  1606,  1690-  91    141-  42;  11  th  Annual  Report,  20  FCC  Rcd  at  2832    145. 
 201  See  House  Report  at  31. 


 202  See  11  th  Annual  Report,  20  FCC  Rcd  at  2772  Table  3. 
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 51.  In  addition  to,  and  possibly  as  a  result  of  the  increased  plant  capacity  of  cable  operators,  the  number  of  national  programming  networks  has  increased  dramatically  in  recent  years.  In  1994,  106 
 satellite-  delivered  national  programming  networks  were  in  operation.  By  2001,  there  were  294.  Just  two  years  after  the  2001  Further  Notice,  the  number  of  networks  had  increased  by  45  channels,  to  339,  and  we 
 now  report  388  national  programming  networks.  203  Similarly,  competition  among  programming  networks  and  their  diversity  of  source  and  content  has  increased.  We  recognize,  however,  that  while  the  total 
 number  of  available  programming  networks  has  increased,  individual  viewers  tend  to  concentrate  their  viewing  among  a  small  number  of  networks.  204  In  1992,  there  was  only  one  non-  broadcast  national  news 
 network,  CNN.  Today,  CNN  competes  with  MSNBC,  Fox  News  Channel,  CNBC,  and  Bloomberg,  among  others,  for  viewers.  In  childrens  programming,  consumers  can  now  choose  from  Nickelodeon, 
 several  Disney  networks,  Cartoon  Network,  and  Noggin.  With  respect  to  basic  service  movie  channels,  before  1992,  there  was  only  AMC;  now  there  are  TCM,  Fox  Movie  Channel,  Sundance,  Independent  Film 
 Channel  and  the  Lifetime  Movie  Network.  Today,  there  is  also  a  great  variety  of  more  specialized  niche  programming,  such  as  Food  Network,  Sci-  Fi,  Golf,  HGTV,  Outdoor  Life,  and  the  Speed  Channel.  Even 
 in  niches  in  which  an  existing  network  enjoys  a  strong  brand  name,  new  networks  are  entering,  as  National  Geographic  has  entered  to  challenge  Discovery.  205 


 52.  MVPDs  are  the  primary  purchasers  of  multichannel  video  programming  targeted  to  a  national  audience.  Although  non-  incumbent  MVPDs  continue  to  increase  their  share  of  the  MVPD 
 market,  cable  operators  serve  approximately  72%  of  total  MVPD  households.  206  In  addition,  as  of  December  2003,  the  top  ten  cable  operators  accounted  for  approximately  80%  of  total  cable 
 subscribers.  207  Further,  as  stated  previously,  since  the  2001  Further  Notice,  the  2002  Comcast-  AT&  T  cable  transaction  resulted  in  Comcast  having  the  largest  share  of  U.  S.  MVPD  subscribers,  which  is  very 
 close  to  our  remanded  30%  ownership  limit.  208  The  2003  News  Corporation-  Hughes  transaction  resulted  in  DirecTV,  already  one  of  the  top  three  MVPDs,  becoming  vertically  integrated  with  a  substantial 
 amount  of  cable  and  broadcast  programming  assets.  209  Also,  significant  growth  in  the  number  of  DBS  subscribers  continues.  DirecTV  is  the  second  largest  MVPD,  with  approximately  13  million  subscribers 


 203  10  th  Annual  Report,  19  FCC  Rcd  at  1690-  91    142;  11  th  Annual  Report,  20  FCC  Rcd  at  2832    145. 
 204  For  example,  Nielsen  Media  Research  estimates  that  the  average  cable  household  watches  approximately  17  of 
 the  100  plus  channels  available.  See  Nielsen  Media  Research,  Television  Audience  2004,  Feb.  2005,  at  13. 
 205  See  11  th  Annual  Report,  20  FCC  Rcd  at  2885-  94  Appendix  C,  Table  C-  3.  See  also  Annys  Shin,  Channeling  a 
 New  Wave  of  Viewers,  National  Geographic  Pursues  a  Market  with  Distinction,  WASHINGTON  POST,  July  12,  2004,  at  E-  1. 


 206  Of  92,295,766  MVPD  households,  cable  subscribers  accounted  for  66,100,000.  See  11  th  Annual  Report,  20 
 FCC  Rcd  at  2869  Appendix  B,  Table  B-  1. 
 207  Cable  Developments  2004,  NCTA,  at  7,  28. 


 208  See  Comcast-  AT&  T  Order,  17  FCC  Rcd  at  23263    48  (2002).  As  of  March  22,  2005,  Comcast  had  a  total  of 
 approximately  26.  3  million  attributable  cable  subscribers,  or  approximately  28.  5%  of  all  U.  S.  MVPD  subscribers.  See  Letter  from  Peter  H.  Feinberg,  Comcast  Cable  Communications,  LLC,  to  Marlene  H.  Dortch,  Secretary,  FCC, 


 MM  Docket  No.  92-  264  at  2  (Mar.  22,  2005),  citing  Kagan  Media  Money,  Mar.  2,  2005,  at  7  (noting  that  there  are  approximately  92.  2  million  MVPD  subscribers  nationwide). 


 209  See  News-  Hughes  Order,  19  FCC  Rcd  473  (2004).  See  also  n.  52,  supra. 
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 as  of  June  30,  2004,  an  increase  of  30%  from  the  approximately  10  million  subscribers  as  of  June  2001.  210  EchoStar  is  the  fourth  largest  MVPD,  with  approximately10  million  subscribers  as  of  June  30,  2004,  an 
 increase  of  67%  over  its  approximately  6  million  subscribers  as  of  June  2001.  211  Basic  cable  subscriptions  since  the  2001  Further  Notice  have  actually  declined.  212  And  the  share  of  national 
 programming  services  that  are  vertically  integrated  with  cable  operators  has  also  declined,  decreasing  from  35%  in  June  2001  to  23%  as  of  June  2004.  213  Vertically  integrated  programming  networks  also 
 continue  to  be  the  among  the  most  widely  available  and  most  popular  cable  programming  networks.  In  2004,  seven  of  the  top  20  networks  ranked  by  subscribership  and  three  of  the  top  15  networks  based  on 
 prime  time  ratings  were  vertically  integrated;  214  similarly,  in  2001,  vertically  integrated  networks  represented  nine  of  the  top  20  networks  ranked  by  subscribership  and  six  of  the  top  15  networks  based  on 
 prime  time  ratings.  215 
 53.  Cable  operators  have  also  been  increasingly  upgrading  their  systems  and  rolling  out  advanced  digital  services  such  as  high-  definition  television  (HDTV),  video-  on-  demand  (VOD),  high-speed 
 Internet  access,  and  cable  telephony  (including  voice  over  internet  protocol  (VoIP)).  With  digital  deployment,  depending  on  the  allocation  of  channels  between  digital  and  analog  use  and  the  compression 
 ratio  employed,  cable  systems  serving  the  vast  majority  of  cable  subscribers  now  are  capable  of  offering  those  subscribers  well  over  200  channels  of  programming  and  advanced  services.  216 


 54.  With  the  growth  of  system  capacity,  there  has  been  a  rise  in  the  number  of  cable  networks  that  are  seeking  to  be  positioned  primarily  on  cable  operators  digital  tiers.  These  networks  are 
 generally  focused  on  specialized  content,  such  as  movies  or  sports.  217  College  Sports  Television  has  achieved  carriage  on  systems  giving  it  seven  million  subscribers,  mostly  on  digital  sports  tiers.  218  In 
 January  2004,  Crown  Media  launched  a  digital  24-  hour  channel,  Hallmark  Movie  Channel  for  placement  on  digital  cable  systems.  219  More  often  than  not,  these  channels  are  either  packaged  in  wide  ranging 


 210  See  11  th  Annual  Report,  20  FCC  Rcd  at  2792-  93    54-  55. 
 211  Id. 
 212  In  2001,  there  were  66.9  million  basic  cable  subscribers.  In  June  2004,  the  number  had  fallen  to  66.1  million. 
 See  11  th  Annual  Report,  20  FCC  Rcd  at  2869  Appendix  B,  Table  B-  1. 
 213  10  th  Annual  Report,  19  FCC  Rcd  at  1690-  91    142;  11  th  Annual  Report,  20  FCC  Rcd  at  2832    145. 


 214  11  th  Annual  Report,  20  FCC  Rcd  at  2834-  35,  2901-  02    150-  51,  Appendix  C,  Tables  C-  6,  C-  7. 
 215  See  Annual  Assessment  of  the  Status  of  Competition  in  the  Market  for  the  Delivery  of  Video  Programming,  (8  th 
 Annual  Report),  17  FCC  Rcd  1244,  1363-  64,  Appendix  D,  Tables  D-  6,  D-  7  (2002). 
 216  Id.  For  example,  Comcast  reports  that  a  typical  upgraded  750  MHz  plant  can  provide  84  analog  video 
 channels,  216  digital  video  channels,  eight  HDTV  channels,  VOD  service  for  400  digital  video  customers  at  any  one  time,  high  speed  data  service  for  400  subscribers,  and  telephone  service  for  300  customers.  Id.  at  1625    25 


 n.  59. 
 217  See  R.  Thomas  Umstead,  Diginets  Hit  the  Screen,  MULTICHANNEL  NEWS,  Dec.  8,  2003. 


 218  R.  Thomas  Umstead,  CSTV  Continues  to  Fight  for  Acceptance,  MULTICHANNEL  NEWS,  Apr.  12,  2004. 
 219  Crown  Media  Holdings,  Inc.,  Crown  Media  Announces  Hallmark  Movie  Channel  (press  release),  Nov.  11, 
 (continued.) 
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 programming  genre  packages  or  in  niche  packages,  such  as  sports  or  family  only  programming.  220  It  remains  to  be  seen  how  specialized  digital  programming  tiers  will  become.  It  is  possible  that  the  more 
 narrow  digital  tiers  become,  a  new  network  in  an  already  existing  genre  or  niche  may  face  difficulty  gaining  carriage  if  it  is  perceived  as  being  duplicative  of  another  networks  programming.  We  seek 
 comment  on  the  impact  of  digital  tiers  on  carriage  for  independent  networks. 
 55.  Video-  On-  Demand/  Subscription  Video-  On-  Demand.  VOD  permits  subscribers  to  instantly  access  video  programming  content  on  a  program  by  program  basis.  Similarly,  subscription 
 VOD  (SVOD)  allows  a  programmer  to  create  a  library  of  content  that  can  be  accessed  at  any  time  and  as  often  as  desired  for  a  monthly  subscription  fee.  221  Several  new  networks  as  well  as  networks  that  are 
 seeking  cable  carriage  have  announced  that  they  will  create  content  solely  for  video-  on-  demand  placement.  For  example,  Reality  Central,  a  24-  hour  reality  programming  network,  is  offering  cable 
 companies  versions  of  its  exclusive  and  original  programming  for  broadband  and  VOD/  SVOD.  222  Although  VOD  presents  programmers  with  a  new  venue  through  which  to  present  their  content,  this 
 business  model  may  constrain  the  growth  of  new  networks  as  consumers  balk  at  accepting  additional  subscription  fees  to  access  new  and  independent  programming.  We  seek  comment  on  the  effect  that 
 VOD/  SVOD  may  have  on  the  opportunity  for  independent  programmers  to  gain  distribution  of  their  programming. 


 56.  Internet  Distribution.  Increasingly,  programmers  are  directing  their  content  over  the  Internet  for  programming  distribution.  In  June  2004,  Real  Networks,  Inc.,  a  streaming  media  company, 
 announced  a  partnership  with  Starz,  a  provider  of  premium  movie  services,  to  provide  cable  modem,  digital  subscriber  line  (DSL)  and  other  high-  speed  data  users  a  subscription-  based  service  allowing  them 
 to  download  up  to  100  first-  run  and  library-  based  movies.  223  Movielink,  MovieFlix  and  CinemaNow  also  offer  the  ability  to  access  programming  via  high  speed  data  access,  bypassing  the  traditional  video 
 services  offered  by  cable  and  DBS  operators.  224  In  addition,  Comcast  has  begun  to  provide  video  (Continued  from  previous  page) 
 2003. 
 220  For  example,  Cable  One,  which  operates  cable  systems  in  the  Northwestern  and  Midwestern  United  States, 
 offers  a  Digital  Value  Pak  that  includes  a  wide  range  of  channels  such  as  Outdoor  Channel,  Golf  Channel,  Fuel,  National  Geographic  Channel,  Court  TV,  Discovery  Kids,  G4TechTV.  Cable  One  also  offers  a  Digital  Faith  and 


 Family  Pak  offering  family  and  faith-  based  network  programming.  See  Cable  One,  Inc.,  at  http://  www.  cableone.  net/  (visited  May  12,  2005). 


 221  See  Simon  Bernholt  and  Pascal  Volle,  SVOD:  The  Optimum  Business  Model  Remains  Unclear,  Mercer 
 Management  Consulting,  Media  Context,  Oct.  2002. 
 222  Reality  Central  has  signed  carriage  agreements  with  Insight,  which,  in  addition  to  carriage  on  Insights  cable 
 system,  includes  a  cable  modem  feed,  interactive  programming  feed  and  daily  VOD  content.  Launch  Pad,  CableFax,  Feb.  19,  2004.  See  also  Reality  Central,  Inc.,  Mediacom  To  Carry  Reality  Central  (press  release),  May 


 26,  2004. 
 223  Alan  Breznik,  Starz,  RealNetworks  Start  Movie  SVOD  Service  on  Web,  CABLE  DATACOM  NEWS,  July  1,  2004 
 (Breznik  Article).  The  service  costs  $12.95  per  month.  In  addition  to  a  library  of  movies,  which  will  rotate  25%  on  a  monthly  basis,  subscribers  will  also  have  access  to  a  streamed  version  of  the  Starz  Channel  programming  that 


 can  be  subscribed  to  through  a  cable  or  DBS  provider.  See  also  RealNetworks,  Inc.,  Starz  and  RealNetworks  Launch  First  Subscription  Premium  Movie  Service  for  Broadband  (press  release),  June  14,  2004. 


 224  Breznik  Article. 
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 programming  to  its  Internet  customers  over  its  high-  speed  data  lines.  On  July  21,  2004,  Comcast,  ABC  News,  and  Walt  Disney  Internet  Group  announced  a  broadband  content  distribution  agreement  225  in 
 which  Comcast  will  provide  its  customers  with  ABC  News  live  and  ABC  News  on  demand  video,  226  and  will  also  offer  an  online  Kids  Channel  with  interactive  games,  activities,  and  videos  from  Disney.  These 
 developments  would  seem  to  indicate  that  programmers  have  alternative  distribution  platforms  for  some  types  of  content.  We  seek  comment  on  the  impact,  if  any,  of  Internet-  based  delivery  on  the  ability  of 
 programming  producers  to  reach  consumers. 
 57.  Even  with  the  introduction  of  these  additional  channels  and  services,  however,  cable  operators  may  once  again  face  capacity  constraints  for  the  distribution  of  some  types  of  content.  227  In  an 
 effort  to  address  potential  constraints  proactively,  the  cable  industry  is  investigating  various  new  technologies  to  allow  operators  to  attain  more  capacity  over  their  upgraded  plant.  Three  cable  providers, 
 Comcast,  Cox,  and  Time  Warner,  are  reported  to  be  pursuing  a  project  entitled  Next  Generation  Network  Architecture  (NGNA),  which  is  attempting  to  squeeze  more  carriage  capacity  over  their  upgraded  plant 
 through  means  of  various  compression  technologies  and  customer  premises  equipment  (CPE).  The  NGNA  project  seeks  to  define  the  features  of  a  next-  generation,  all-  digital  cable  network,  which  could 
 have  broad  implications  for  functionality  and  cost.  228  The  effort  involves  rethinking  cables  basic  technologies,  including  everything  from  encryption  strategies  to  set-  top  boxes  that  can  be  dramatically 
 upgraded  via  software  uploads,  to  create  more  carriage  capacity  by  completely  migrating  cable  service  from  analog  to  digital  transmission  so  that  all  services  could  be  provided  utilizing  Internet  Protocol.  229  In 
 addition,  instead  of  offering  hundreds  of  channels  at  once,  cable  operators  might  offer  switched  video,  treating  every  channel  the  way  current  systems  treat  VOD:  sending  channels  only  when  requested  by  a 
 customer  via  remote  control.  230 
 58.  We  are  interested  in  obtaining  information  on  existing  and  planned  channel  capacity  and  usage,  both  analog  and  digital,  particularly  with  regard  to  the  relationship  between  horizontal  ownership 
 and  independent  cable  network  distribution.  We  seek  comment  on  the  opportunities,  if  any,  that  the  increased  channel  capacity  of  cable  systems  provides  to  independent  programmers  seeking  to  launch  new 
 channels.  To  what  extent  are  new  programming  services  launching  on  digital  tiers  or  VOD?  We  also  seek  information  on  how  cable  operators  apportion  channel  capacity  among  cable  networks  they  own  or 
 have  an  ownership  interest  in,  and  what  relationship,  if  any,  that  has  to  the  ability  of  independent  cable  networks  to  obtain  carriage.  We  also  request  information  on  how  channel  capacity  is  being  used,  and 


 225  See  Comcast,  ABC  News,  and  Walt  Disney  Internet  Group  Sign  Landmark  Broadband  Distribution  Deal  (press 
 release),  Jul.  21,  2004,  available  at  http://  www.  cmcsk.  com/  phoenix.  zhtml?  c=  118591&  p=  irol-  newsArticle&  ID=  594276&  highlight=  (visited  May  12,  2005). 


 226  Comcast  high-  speed  Internet  customers  will  be  able  to  access  reports  from  Nightline,  World  News  Tonight, 
 Good  Morning  America,  This  Week,  20/  20,  and  Primetime  Live.  Id. 
 227  See  Communications  Daily,  June  21,  2004,  at  4. 


 228  Jeff  Baumgartner,  NGNA:  A  Sneak-  Peek  at  Cables  Battle  Plan  for  the  Future,  CED  MAGAZINE  (Sneak-  Peek 
 at  NGNA)  (May  2004),  at  http://  testced.  cahners1.  com/  ced/  2004/  0504/  05a.  htm  (visited  May  12,  2005). 
 229  Id.  See  also  John  H.  Higgins  and  Ken  Kerschbaumer,  Cable  Operators:  Still  No  Space  85  Billion  Dollars 
 Later,  BROADCASTING  &  CABLE,  June  14,  2004  at  38  (Still  No  Space). 
 230  Id.  at  38. 
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 whether  excess  capacity  on  systems  exists.  Further,  we  are  interested  in  information  on  plans  for  increasing  channel  capacity  through  projects  such  as  NGNA,  and  comment  on  the  implications  of  such 
 efforts. 
 59.  Unaffiliated  Programming  Networks.  In  an  effort  to  fine  tune  our  inquiry  in  light  of  industry  developments,  we  find  it  useful  to  examine  some  of  the  factors  that  have  been  integral  to  the 
 success  of  new  programming  networks  that  are  not  affiliated  with  any  cable  operator.  Generally,  successful  independent  networks  that  have  launched  in  the  past  ten  years  have  possessed  one  or  more  of 
 the  following:  a  strong,  experienced  executive  suite;  programming  niches  with  a  track  record  of  viewer  support;  investor  interest  from  existing  content  companies,  cable  distributors  or  venture  capital  firms;  and 
 a  degree  of  flexibility  in  negotiating  with  cable  operators  for  carriage.  231  Are  any  of  these  factors  critical  to  obtaining  carriage,  or  are  they  assumed  within  the  industry  as  must-  have  attributes  necessary  to  initiate 
 distribution  discussions  with  cable  operators?  What  specific  factors  do  independent  networks  lack  that  retard  their  ability  to  obtain  carriage?  For  example,  retransmission  consent  leverage  has  been  used 
 successfully  by  Disney/  ABC  and  Viacom  to  gain  cable  carriage  for  their  new  cable  networks.  232  In  the  News-  Hughes  Order,  we  found  that  the  transaction  would  increase  News  Corp.  s  incentive  and  ability  to 


 231  Independent  networks  such  as  The  Tennis  Channel,  College  Sports  Television,  The  Game  Show  Network,  and 
 Oxygen  appear  to  have  leveraged  one  or  more  of  these  attributes  to  build  a  distribution  base.  For  example,  The  Tennis  Channel  was  founded  by  former  executives  of  Viacom,  has  secured  distribution  rights  for  major  U.  S.  and 


 international  tennis  matches,  has  received  venture  capital  financing  to  support  its  commercial  launch  and  the  creation  of  original  programming,  and  has  focused  primarily  on  obtaining  carriage  on  cable  operators  digital  tiers. 
 The  Tennis  Channel  launched  in  May  2003  with  three  million  subscribers.  By  May  2005,  the  network  was  available  in  approximately  56  million  cable  homes.  See  Bob  Keisser,  Dirtbag  Commentator  Delivers  Sales  Pitch, 
 PRESS-  TELEGRAM  (Long  Beach,  CA),  May  12,  2005.  See  also,  e.  g.,  Jim  McConville,  Biondi-  Led  Group  Lobbing  Tennis  Channel  at  Cable,  HOLLYWOOD  REPORTER,  Aug.  29,  2001;  Larry  Stewart,  Fledgling  Tennis  Channel 
 Gains  Momentum,  LOS  ANGELES  TIMES,  June  17,  2002.  Similarly,  College  Sports  Televisions  founders  have  prior  cable  network  experience,  attracted  approximately  $125  million  in  pre-  launch  financing,  and  have  secured 
 the  rights  to  a  large  number  of  college  sporting  events.  It  too  has  focused  on  obtaining  carriage  on  cable  operators  digital  tiers  and  credits  its  willingness  to  be  placed  on  a  digital  sports  tier  for  its  early  success  in  obtaining 
 distribution.  See  R.  Thomas  Umstead,  CSTV  Continues  Fight  for  Acceptance,  MULTICHANNEL  NEWS,  Apr.  12,  2004.  The  founders  have  stated,  however,  that  long-  term  they  will  need  wider  distribution  than  sports  tiers  to 
 remain  viable.  Id. 
 232  In  April  1999,  Disney/  ABC  created  SoapNet,  a  24-  hour  soap  opera  channel,  in  part  in  response  to  Sony 
 Corporations  SoapCity,  which  was  created  in  1997.  Disney  used  its  retransmission  consent  negotiations  involving  carriage  of  its  owned  and  operated  local  ABC  broadcast  stations  to  secure  an  initial  distribution  on 


 smaller  cable  systems  covering  between  three  and  five  million  subscribers  for  its  January  2000  launch  date.  Sony,  which  did  not  have  the  benefit  of  retransmission  consent  leverage,  failed  to  secure  cable  carriage  for 
 SoapCity,  ultimately  diverting  the  network  to  an  online-  only  business  model.  See,  e.  g.,  Linda  Moss,  Disneys  Retransmission  Clout  Comes  to  SoapNets  Aid,  MULTICHANNEL  NEWS,  Nov.  1,  1999;  Jim  McConville,  SoapNet 
 All  Set;  Soap  City  Stalled,  ELECTRONIC  MEDIA,  Jan.  17,  2000.  With  respect  to  Viacom,  it  announced  a  multi-  year  distribution  agreement  with  Comcast  covering  its  broadcast  and  cable  networks.  Viacoms  press  release 
 describing  the  agreement  states  that  retransmission  will  make  it  possible  for  Comcast  subscribers  in  CBS  owned-and-  operated  markets  to  receive  CBSs  industry  leading  lineup  of  high  definition  television  programming  and 
 that  (  u)  nder  the  terms  of  the  affiliation  agreements,  Viacoms  MTV  Networks  (including  Spike  TV,  Comedy  Central,  CMT  and  the  MTVN  Digital  Suite)  and  the  BET  Networks  will  continue  to  be  available  on  Comcast 
 systems  nationwide.  Additionally,  Comcast  will  augment  its  digital  suite  of  services  by  launching  Nicktoons  and  MTV  Hits  and  increasing  the  distribution  of  MTV2,  Nickelodeon  GAS,  VH1  Classic  and  VH1  Country.  See 
 Viacom,  Inc.,  Viacom  and  Comcast  Sign  Multi-  Year  Affiliation  Agreement  (press  release),  Dec.  19,  2003. 
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 temporarily  withhold  from  other  MVPDs  access  to  the  signals  of  its  television  broadcast  stations  as  a  negotiating  tactic,  and  we  designed  a  remedy  to  this  potential  harm  in  our  merger  conditions.  233  Are 
 independent  networks  being  squeezed  out  of  distribution  due  to  available  slots  being  assigned  to  larger,  vertically  integrated  programmers?  Similarly,  cable  operator  investment  has  been  attributed  as  a  critical 
 factor  in  the  early  success  of  most  networks  to  gain  carriage.  234  One  analyst  found  that  the  major  factor  determining  a  successful  cable  network  launch  was  whether  the  network  was  backed  either  by  a  major 
 programmer  or  by  a  cable  operator  with  large  scale  distribution.  235 
 60.  We  seek  comment  on  whether  there  is  a  relationship  between  ownership  limits,  either  at  present  levels  or  some  alternative  limit,  and  the  ability  of  independent  programmers  to  gain  carriage  from 
 cable  operators,  and  remain  independent,  viable  entities. 
 C.  Economic  Basis  for  Horizontal  Limit 
 61.  In  this  section,  we  discuss  potential  harms  and  benefits  of  horizontal  concentration  and  proposed  economic  foundations  for  establishing  a  horizontal  limit  on  cable  operator  size.  In  response  to 


 the  2001  Further  Notice,  commenters  positions  range  from  arguing  that  the  horizontal  cap  should  remain  at  30%  or  be  lowered,  236  to  elimination  of  the  cap,  237  to  the  adoption  of  a  nationwide  case-  by-  case 
 approach,  238  to  using  a  local  market-  by-  market  approach.  239  PFF  does  not  advocate  specific  horizontal  or  vertical  ownership  limits.  Instead,  PFF  urges  the  Commission  to  allow  the  markers  the  2001  Further 


 233  See  News-  Hughes  Order,  19  FCC  Rcd  at  568,  572-  73    209,  220-  21. 
 234  For  example,  Oxygen  Network  received  a  $100  million  investment  from  Paul  Allens  Vulcan  Ventures.  Paul 
 Allen  is  the  chairman  of  Charter  Communications  and  is  its  largest  stockholder.  See  Jim  McConville,  Allen  Buys  Again:  Invests  $100M  in  Oxygen  Media,  ELECTRONIC  MEDIA,  June  7,  1999.  Vulcan  Ventures  received  7%  equity 


 ownership  in  Oxygen  Media  and  a  seat  on  the  companys  board  of  directors.  In  addition,  Oxygen  received  analog  carriage  on  Charter  Communications  systems,  which  served  approximately  2.  3  million  subscribers.  According  to 
 Oxygens  website,  it  is  currently  available  in  approximately  54  million  households.  See  http://  www.  oxygen.  com/  basics/  about/?  slot=  footer  (visited  May  12,  2005). 


 235  Kagan  World  Media,  Upstart  Networks:  Its  All  About  Who  You  Know,  Cable  Program  Investor,  Sept  12, 
 2003,  at  4.  Kagan  reviewed  116  independent,  cable  operator-  owned,  and  major  programmer-  owned  networks,  finding  that  in  83  of  116  launches,  or  approximately  72%,  involved  networks  that  had  investment  participation  by 


 either  a  content  programmer  or  a  distributor. 
 236  CFA  Comments  at  25.  Some  cable  networks  state  that  50  million  subscribers  is  the  approximate  threshold  for 
 achieving  meaningful  national  advertising  revenues  in  order  to  ensure  viability.  See  GSN  Comments  in  MB  Docket  No.  04-  207  at  3-  4  (Jul.  15,  2004);  Crown  Media  Comments  in  MB  Docket  No.  04-  207  at  6  (Jul.  15,  2004); 


 Viacom  Comments  in  MB  Docket  No.  04-  207  at  17  (Jul.  15,  2004).  As  noted  in  Time  Warner  II,  in  setting  the  30%  horizontal  ownership  limit,  the  Commission  found  that  the  average  cable  network  needs  to  reach  15  million 
 subscribers  to  be  economically  viable.  Time  Warner  II,  240  F.  3d  at  1131,  citing  1999  Cable  Ownership  Order,  14  FCC  Rcd  at  19114-  16    40-  42. 


 237  Time  Warner  Comments  at  9. 
 238  See  Letter  from  Michael  H.  Hammer,  Willkie,  Farr  &  Gallagher,  on  behalf  of  Comcast,  to  Marlene  H.  Dortch, 
 Secretary,  FCC  (Mar.  13,  2003). 
 239  RCN  Comments  at  18. 
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 Notice  identified    the  statutory  mandate,  the  Time  Warner  II  decision,  First  Amendment  principles,  and  MVPD  market  conditions    to  guide  its  action  on  remand.  PFF  argues  that  if  the  Commission  heeds  these 
 guideposts,  it  will  adopt  minimally  restrictive  ownership  limits.  240  AT&  T  and  Time  Warner  generally  oppose  any  type  of  horizontal  limit,  arguing  that  in  todays  competitive  environment,  a  subscriber  limit  is 
 neither  necessary  nor  appropriate.  241  Comcast  likewise  argues  that,  based  on  Time  Warner  II  and  the  record,  no  sustainable  ownership  limit  can  reasonably  be  set.  242  However,  Comcast  states  that  if  the 
 Commission  concludes  that  some  limit  is  required,  the  Commission  should  adopt  a  burden-  shifting  approach.  243 


 62.  Comments  filed  by  competitive  MVPDs  (i.  e.,  overbuilders)  focus  mainly  on  the  clustering  taking  place  in  some  markets  by  large  cable  operators.  They  argue  that  programmers  often 
 accede  to  the  dominance  of  incumbent  cable  operators  and  refuse  to  sell  their  programming  to  overbuilders,  who  lack  a  critical  mass  of  subscribers.  244  The  Broadband  Service  Providers  Association 
 (BSPA)  argues  that  incumbent  cable  operators  already  have  the  incentive  and  ability  to  use  their  control  over  sports  and  other  regional  programming  to  foreclose  entry  by  overbuilders.  245  BSPA  urges  the 
 Commission  to  address  access  to  terrestrially-  delivered  programming  in  this  proceeding  pursuant  to  Section  613(  f)  or  Section  628  (i.  e.,  program  access  rules).  246  RCN  argues  that  the  ultimate  significance 
 of  a  national  cap  is  what  it  means  for  the  local  distribution  of  programming  because  competition  occurs  at  the  local  level.  247  RCN  is  not  principally  concerned  about  the  total  number  of  MVPD  subscribers 
 served  by  any  particular  cable  operator,  but  with  whether  it  is  frozen  out  of  a  target  market  by  anticompetitive  tactics.  248  RCN  therefore  urges  the  Commission  to  develop  a  local  market-  by-  market 
 approach  to  ownership  limits.  249 
 63.  None  of  the  comments  filed  in  response  to  the  2001  Further  Notice  yields  a  sound  evidentiary  basis  for  setting  horizontal  or  vertical  limits.  While  many  commenters  presented  theoretical, 
 legal  or  economic  arguments  and  anecdotal  evidence,  no  party  provided  a  compelling  approach  that  supported  a  particular  horizontal  or  vertical  limit.  In  this  section,  we  discuss  and  seek  comment  on  an 


 240  PFF  Comments  at  7. 
 241  AT&  T  Comments  at  4-  5;  Time  Warner  Comments  at  6-  19. 
 242  Comcast  Comments  at  17-  18. 
 243  See  Letter  from  Michael  H.  Hammer,  Willkie,  Farr  &  Gallagher,  on  behalf  of  Comcast,  to  Marlene  H.  Dortch, 
 Secretary,  FCC  (Mar.  13,  2003);  Letter  from  James  L.  Casserly,  Willkie,  Farr  &  Gallagher,  on  behalf  of  Comcast,  to  Marlene  H.  Dortch,  Secretary,  FCC  (Jan.  31,  2003). 


 244  CMVPDs  Comments  at  6-  7. 
 245  BSPA  Comments  at  4-  5. 
 246  Id. 
 247  RCN  Comments  at  6. 
 248  Id. 
 249  Id.  at  18. 
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 economic  foundation  for  a  horizontal  limit.  250  We  start  by  discussing  our  proposed  definitions  for  the  various  markets  and  solicit  additional  information  on  some  remaining  questions.  Next,  we  analyze  the 
 potential  harms  of  horizontal  concentration  through  various  frameworks,  discuss  the  comments  received  in  response  to  the  2001  Further  Notice,  and  discuss  the  potential  benefits  of  horizontal  concentration. 
 Finally,  we  request  further  information  on  how  a  horizontal  limit  can  prevent  potential  harms  while  protecting  potential  benefits. 


 1.  Defining  the  Market 
 64.  The  first  step  in  our  analysis  of  whether  increasing  cable  operator  size  and  concentration  is  likely  to  reduce  competition  and  impede  the  flow  of  programming  is  to  define  the  markets  involved. 


 In  the  2001  Further  Notice,  we  proposed  a  definition  of  markets,  in  which  we  distinguished  between  three  separate  but  interrelated  markets:  the  production  of  programming;  the  packaging  of  programming 
 in  networks;  and  the  distribution  of  programming  to  consumers.  251  While  we  have  received  comments  on  these  proposed  market  definitions,  we  find  that  some  key  questions  remain  unresolved.  We  therefore 
 seek  comment  on  certain  questions  discussed  below,  and  seek  further  analysis  and  evidence  to  help  resolve  the  issues  raised. 


 a)  Programming  Market 
 65.  In  the  2001  Further  Notice,  we  distinguished  between  the  producers  of  programming  and  the  networks  that  packaged  this  programming  and  distributed  it  to  subscribers  using  MVPD 


 facilities.  The  focus  of  our  analysis  was  on  the  ability  of  networks  to  gain  carriage  on  cable  operators  systems.  252  AT&  T  argues  that  we  should  not  be  concerned  with  networks  ability  to  enter  the  market, 
 but  instead  should  focus  on  program  producers  ability  to  find  outlets  to  distribute  their  programming  to  the  public.  253  Thus,  if  each  network  is  viewed  as  simply  a  conduit  for  distributing  programming  to 
 consumers,  the  problem  would  then  become  whether  there  are  sufficient  conduits  available  to  ensure  that  there  is  a  competitive  marketplace  for  programming,  which  will  allow  programming  to  flow  unimpeded 
 to  consumers.  254  Under  this  theory,  the  ability  of  networks  to  enter  the  MVPD  marketplace  would  not  be  important  if  there  are  sufficient  conduits  for  programming  to  reach  consumers.  Indeed,  we  observe  that 
 some  programs  that  were  rejected  or  dropped  by  one  network  have  been  picked  up  by  other  networks.  255 
 66.  If,  on  the  other  hand,  networks  play  a  significant  role  in  developing  and  producing  original  and  high  quality  programming,  then  the  entry  of  new  networks  will  encourage  the  production 


 250  Vertical  limits  are  discussed  below  in  Section  II,  D. 
 251  2001  Further  Notice,  16  FCC  Rcd  at  17321-  28    8-  26. 
 252  Id.  at  17321-  25    9-  17. 
 253  AT&  T  Comments,  Ordover  Decl.  at  59. 
 254  Id.  This  analysis  might  have  to  be  performed  for  each  niche/  genre,  to  the  extent  that  the  market  is  segmented 
 by  niche,  as  discussed  below.  Thus  a  sports  channel  might  not  provide  a  suitable  alternative  conduit  for  news,  movies,  or  science  fiction  programming. 


 255  See,  e.  g.,  Bill  Carter,  ABC  Under  Disney:  Kingdom,  Yes.  Magic,  No.,  The  NEW  YORK  TIMES,  Mar.  8,  2004. 
 ABC  rejected  Survivor  and  The  Apprentice,  which  found  homes  on  CBS  and  NBC,  respectively. 
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 and  distribution  of  new  programming  to  consumers.  In  support  of  this  theory,  we  note  that  many  networks  contract  for  programming  appropriate  to  their  genre,  suggesting  that  these  networks  may  play  a 
 critical  role  in  the  development  and  production  of  programming.  256  We  seek  comment  generally  on  the  role  that  networks  play  in  the  production  and  distribution  of  programming,  and  on  the  role  of  niche 
 networks  in  the  development  of  genre-  specific  programs  that  may  target  audiences  that  are  too  small  and  specific  to  make  them  attractive  to  general  entertainment  networks  or  networks  serving  other  genres. 


 b)  Programming  Distribution  Market 
 67.  We  previously  determined  that  the  programming  distribution  market  should  be  measured  by  the  number  of  subscribers  rather  than  the  number  of  homes  passed,  and  that  DBS  subscribers  should  be 


 included  in  the  count  of  total  subscribers  to  which  the  limit  is  applied;  that  is,  that  the  limit  should  be  formulated  as  a  percentage  of  all  MVPD  subscribers,  rather  than  as  a  percentage  of  cable  homes  passed.  257 
 CFA  argues  that  we  should  not  include  DBS  subscribers  in  the  calculation  of  total  subscribers.  CFA  claims  that  DBS  services  appeal  only  to  customers  seeking  a  higher  quality  and  higher  priced  product, 
 and  are  not  a  substitute  for  cable  services  for  the  typical  lunch  bucket  cable  subscriber.  258  Some  commenters  have  also  discussed  the  importance  of  alternatives  to  MVPDs,  such  as  the  sale  and  rental  of 
 DVDs  and  videocassettes,  to  distribute  programs.  259  We  again  seek  comment  on  the  appropriate  definition  of  the  programming  distribution  market.  We  specifically  seek  comment  on  our  decision  to 
 include  DBS  subscribers  in  the  formulation  and  application  of  a  limit.  We  observe  that  DirecTV  and  EchoStar  rank  among  the  top  five  MVPDs  today,  260  and  that  DBS  equipment  prices  have  fallen 
 significantly  such  that  DBS  has  become  more  comparable  to  cable  service.  261 
 68.  We  seriously  question,  however,  whether  other  physical  conduits,  such  as  theatrical  showings  in  movie  theaters  and  sales  and  rentals  of  VHS  tapes  and  DVDs,  should  be  included  in  our 
 analysis  of  the  distribution  market.  The  economics  literature  indicates  that  in  many  cases  these  conduits  merely  represent  separate  exhibition  windows  and  not  alternative  means  of  entry.  262  We  tentatively 


 256  For  example,  Oxygen  Network  launched  in  February  2000  with  55  hours  of  original  programming.  Ron 
 Grover,  Does  Oxygen  Have  Enough  Money  to  Burn,  Business  Week  Online,  Dec.  10,  1999.  CSTV  has  developed  100  original  30-  minute  shows.  See  College  Sports  Television,  CSTV  Goes  Back  to  School  with  Launch  of  CSTV 


 U.  Programming  Initiative  Featuring  Curriculum  of  100  30-  Minute  Instructional  and  Educational  Shows  Aimed  at  Aspiring  Athletes  (press  release),  Apr.  12,  2004. 


 257  1999  Cable  Ownership  Order,  14  FCC  Rcd  at  19101    5. 
 258  CFA  Comments  at  45,  151-  71.  CFA  refers  to  those  consumers  that  only  purchase  the  basic  and  expanded 
 basic  tiers  of  cable  service  as  the  lunch  bucket  crowd  and  estimates  that  42  million  subscribers  fall  in  this  category.  CFA  Comments  at  159. 


 259  See  AT&  T  Comments,  Ordover  Decl.  at  56-  57. 
 260  See    52,  supra. 
 261  See  10  th  Annual  Report,  19  FCC  Rcd  at  1609,  1652    5,  68;  11  th  Annual  Report,  20  FCC  Rcd  at  2794-  95   
 56-  57.  See  also  U.  S  Government  Accountability  Office,  Direct  Broadcast  Satellite  Subscribership  Has  Grown  Rapidly,  but  Varies  Across  Different  Types  of  Markets,  GAO-  05-  257  (Apr.  2005)  (2005  GAO  Report). 


 262  Owen  &  Wildman,  VIDEO  ECONOMICS  26-  38  (1992);  Barry  Litman,  The  Motion  Picture  Entertainment 
 Industry,  THE  STRUCTURE  OF  AM.  INDUS.  199-  200  (Walter  Adams,  ed.  8  th  ed.  1990). 
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 conclude  these  other  conduits  should  not  be  considered  part  of  the  same  market  of  programming  network  distribution  because  they  are  not  a  means  for  network  programmers  to  distribute  their  programming.  We 
 seek  comment  on  this  tentative  conclusion. 
 c)  Relevant  Geographic  Markets 
 69.  In  the  2001  Further  Notice,  we  recognized  that  [  t]  he  geographic  market  for  certain  types  of  niche  programming  may  .  .  .  be  national  or  international  in  scope  and  sought  comment  on  this 


 conclusion.  263  Some  commenters  allege  that  the  market  for  programming  is  international.  264  Other  commenters  say  we  should  also  consider  regional  markets.  265 


 70.  We  continue  to  find  it  reasonable  to  concentrate  our  inquiry  on  the  effects  of  cable  concentration  in  the  United  States,  and  ask  for  comment  on  this  tentative  conclusion.  We  have 
 concluded  in  the  past  that  the  programming  market  is  at  least  national.  266  No  commenter  has  presented  economic  data  that  define  the  contours  of  the  programming  market.  Instead,  commenters  make  the 
 uncontroversial  point  that  domestic  programmers  sell  some  programming  to  international  buyers  and  also  rely  on  distribution  outlets  other  than  cable  or  DBS.  We  tentatively  conclude  that  the  relevant 
 geographic  market  is,  for  purposes  of  the  Section  613(  f)  analysis,  no  greater  than  the  United  States.  We  also  believe  that  regional  markets  may  be  relevant  when  considering  programming,  such  as  regional 
 sports  and  news  networks,  that  is  only  of  interest  to,  or  available  in,  a  particular  region.  As  discussed  further  below,  267  we  seek  comment  on  whether  and  how  the  existence  of  regional  markets  should  affect 
 our  development  of  horizontal  and  vertical  limits.  Would  a  regional  limit  on  concentration  better  effectuate  any  of  the  statutory  purposes  set  forth  in  Section  613(  f)(  2),  and  if  so,  under  what 
 circumstances,  and  what  would  be  the  measure? 
 2.  Potential  Harms  of  Horizontal  Concentration 
 a)  Analytical  Frameworks  for  Economic  Analysis  of  Harms 
 71.  In  this  section,  we  seek  further  comment  on  the  appropriate  economic  framework  for  determining  whether,  and  at  what  level,  a  cable  operators  size  is  likely  to  impede  the  flow  of 


 programming  to  consumers  or  diminish  effective  competition.  As  described  above,  we  have  not  found  sufficient  economic  evidence  in  the  record  to  make  such  a  determination.  We  discuss  in  this  section  the 
 strengths  and  weaknesses  of  a  number  of  analytical  frameworks  and  economic  theories  that  have  been  proposed.  We  also  discuss  arguments  and  evidence  that  have  been  put  in  the  record  concerning  the 
 viability  and  usefulness  of  these  analytical  frameworks.  Within  the  context  of  each  analytical  framework,  we  further  consider  the  strength  of  the  evidence  concerning  whether  a  horizontal  limit  is 
 necessary  to  ensure  the  flow  of  programming. 


 263  2001  Further  Notice,  16  FCC  Rcd  at  18532    9. 
 264  See,  e.  g.,  AT&  T  Comments  at  20-  24;  Cablevision  Comments  at  21. 
 265  See,  e.  g.,  CFA  Comments  at  112-  17. 
 266  AT&  T-  Comcast,  17  FCC  Rcd  at  23269    43. 
 267  See    148,  infra. 
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 (1)  Open  Field  Approach 
 72.  In  the  1999  Cable  Ownership  Order,  the  Commission  adopted  horizontal  limits  based  on  a  theory  that  cable  operators  at  certain  concentration  levels  could  effectively  prevent  programming 


 networks  from  entering  or  surviving  in  the  marketplace  simply  by  deciding  not  to  carry  them.  268  The  Commission  found  that  a  new  programming  network  needs  to  access  15  to  20  million  subscribers  and 
 that  the  typical  programming  network  had  only  a  50%  chance  of  actually  reaching  all  available  MVPD  subscribers.  269  The  Commission  concluded  that  a  programmer  needed  to  have  an  open  field  of  40%  of 
 MVPD  subscribers  nationwide  and  that  a  30%  MVPD  subscriber  limit  would  assure  that  a  40%  open  field  remained  even  if  the  two  largest  cable  operators  decided  not  to  carry  it.  270  The  Commission 
 determined  that  calculations  of  the  horizontal  limit  should  include  all  MVPD  subscribers,  including  non-cable  MVPD  subscribers,  to  take  into  account  the  increased  market  share  of  non-  cable  MVPDs.  271 


 73.  The  Time  Warner  II  court  rejected  certain  aspects  of  this  approach,  finding  that  the  Commission  lacked  any  evidence  that  cable  operators  would  collude  and  that  it  could  not  simply  assume 
 that  cable  operators  would  coordinate  their  behavior.  272  Further,  the  court  held  that  Section  613(  f)(  1)  does  not  authorize  the  agency  to  regulate  the  legitimate,  independent  editorial  choices  of  multiple 
 MSOs.  273  Thus,  the  court  found  that  the  record  supported  only  a  60%  limit  under  the  Commissions  40%  open  field  premise.  274  However,  the  court  did  not  reach  the  question  of  whether  the  40%  open  field 
 assumption  was  reasonable.  In  discussing  the  open  field  approach,  the  court  admonished  the  Commission  that  market  share  does  not  necessarily  equate  with  market  power.  275  The  court  stated  that 
 on  remand  the  Commission  should  take  into  account  relevant  measures  of  market  power,  and  elasticities  of  supply  and  demand  vis-  -  vis  other  MVPD  offerings,  mainly  DBS.  276  The  court  was  specifically 
 referring  to  the  effects  of  retail  competition  from  DBS  and  other  MVPDs  and  consumer  demand  for  programming  on  a  cable  operators  incentive  to  foreclose  an  unaffiliated  programming  rival  from 
 carriage  in  an  effort  to  favor  a  competing  programming  network  that  is  affiliated  with  the  cable  operator.  277 


 268  1999  Cable  Ownership  Order,  14  FCC  Rcd  at  19116    43. 
 269  Id.  at  19114-  18    40-  50. 
 270  Id.  at  19118-  21    51-  57. 
 271  Id.  at  19121    57. 
 272  Time  Warner  II,  240  F.  3d  at  1133-  34. 
 273  Id.  at  1130-  35. 
 274  Id.  at  1132-  33  (accepting,  but  not  addressing  the  validity  of,  the  Commissions  40%  open  field  premise). 
 275  Id.  at  1134. 
 276  Id. 
 277  Id. 
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 74.  Issues  in  Utilizing  an  Open  Field  Approach.  In  the  2001  Further  Notice,  the  Commission  asked  for  comment  on  the  open  field  approach.  278  Pursuant  to  the  courts  directive  in  Time 
 Warner  II,  the  2001  Further  Notice  sought  comment  on  what  horizontal  limit  would  be  necessary  to  ensure  that  programmers  have  access  to  at  least  two  viable  outlets,  independent  of  concerns  over 
 anticompetitive  conduct.  279  In  response,  several  commenters  claim  that  an  open  field  approach  cannot  justify  a  horizontal  limit.  280  For  example,  commenters  point  out  that  many  successful  programming 
 networks  reach  fewer  than  15  million  providers.  281  AT&  T  lists  nearly  50  such  networks,  and  points  out  that  some  successful  networks  are  more  than  five  years  old  and  have  fewer  than  three  million 
 subscribers.  282  AT&  T  argues  that  because  advertising  supports  programming,  networks  can  be  viable  even  if  they  reach  fewer  than  15  million  MVPD  subscribers.  283  More  generally,  AT&  T  argues  that  the 
 open  field  approach  assumes  that  all  services  need  the  same  size  open  field  to  achieve  viability,  when  in  reality  the  open  field  requirement  is  highly  individualized  and  depends  on  the  unique  characteristics  of 
 each  programming  package.  284  Commenters  also  dispute  the  methods  the  Commission  used  to  move  from  the  20%  of  the  industry  necessary  for  network  survival  to  the  30%  limit,  such  as  the  50%  success 
 rate  assumption,  285  and  theories  of  collusion.  286 
 75.  An  examination  of  the  subscriber  numbers  AT&  T  cites  indicates  that  many  of  the  programming  networks  it  discusses  have  subsequently  achieved  substantial  subscriber  growth.  For 
 instance,  AT&  T  lists  Oxygen  with  14.7  million  subscribers  in  2001,  but  by  February  2004,  Oxygen  had  grown  to  49  million  subscribers.  287  Similarly,  AT&  T  states  that  the  National  Geographic  Channel  had 
 14.1  million  subscribers  in  2001,  whereas  by  January  2004,  the  channel  had  47  million  subscribers.  288  AT&  T  also  lists  the  Style  Channel  in  2001  with  11  million  subscribers,  but  by  January  2004  it  had  34 
 million  subscribers.  289  These  statistics  may  undermine  AT&  Ts  point  that  networks  can  survive  without 
 278  2001  Further  Notice,  16  FCC  Rcd  at  17338-  41    52-  59. 
 279  Id.  at  17339-  41    55-  58,  citing  Time  Warner  II,  240  F.  3d  at  1134-  35. 
 280  See  AT&  T  Comments  at  61-  66;  AT&  T  Comments,  Besen  Decl.    3,  11,  14;  AT&  T  Comments,  Ordover  Decl. 
 at    145;  Time  Warner  Comments  at  19-  28;  Time  Warner  Reply  Comments  at  14-  18. 
 281  AT&  T  Comments  at  60-  65;  AT&  T  Comments,  Besen  Decl.  at  3-  6;  Time  Warner  Comments  at  24-  26;  Time 
 Warner  Reply  Comments  at  17. 
 282  AT&  T  Comments  at  61-  65. 


 283  AT&  T  Comments,  Besen  Decl.  3. 
 284  AT&  T  Comments  at  62-  5;  AT&  T  Comments,  Besen  Decl.    3,  11,  14. 
 285  AT&  T  Comments  at  65-  66;  Time  Warner  Comments  at  27-  28;  Time  Warner  Reply  Comments  at  18. 
 286  AT&  T  Comments  at  66-  68;  NCTA  Comments  at  18-  20;  Time  Warner  Comments  at  20-  23;  Time  Warner 
 Reply  Comments  at  15-  16. 
 287  AT&  T  Comments  at  60-  61;  NCTA  Cable  Developments  2004  at  143. 


 288  AT&  T  Comments  at  60-  61;  NCTA  Cable  Developments  2004  at  134. 
 289  AT&  T  Comments  at  60-  61;  NCTA  Cable  Developments  2004  at  172. 
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 more  than  15  million  subscribers,  and  they  also  point  to  a  larger  factor  that  must  play  a  part  in  our  analysis.  Programmers  may  need  not  just  a  certain  number  of  subscribers  at  any  point  in  time,  but  must 
 also  maintain  continued  growth  after  that  time  to  have  a  probability  of  survival.  AT&  Ts  numbers  were  accurate  at  the  time  submitted,  but  those  subscriber  numbers  have  increased  over  the  intervening  years. 
 Presumably,  the  possibility  of  this  kind  of  growth  was  a  factor  in  the  programmers  decisions  to  enter  or  remain  in  the  market. 


 76.  It  does  appear  that  some  programming  networks  can  survive  with  access  to  few  subscribers,  perhaps  because  they  have  unusually  high  advertising  revenues,  obtain  high  affiliate  fees 
 from  MVPDs,  or  have  lower-  cost  programming.  290  Similarly,  we  expect  that  there  are  other  programming  networks  that  require  access  to  higher  levels  of  subscribers.  291  The  statute  does  not  refer  to 
 particular  types  of  programming  networks,  but  rather  to  programming  generally.  The  simple  fact  that  some  networks  may  be  able  to  survive  with  fewer  subscribers  than  others  does  not  invalidate  the  use  of 
 averaged  data  to  fashion  a  limit;  rather,  it  suggests  that  if  we  use  averaged  data,  we  must  recognize  that  it  may  underestimate  the  viability  requirements  of  high-  cost  networks.  Clearly  different  types  of  networks 
 need  access  to  different  numbers  of  subscribers.  We  seek  comment  on  whether  we  should  focus  our  analysis  on  the  minimum  number  of  subscribers  needed  by  an  average  network,  or  instead  examine 
 separately  the  requirements  of  networks  with  high-  cost  and  with  low-  cost  programming. 
 77.  AT&  T  also  lists  a  large  number  of  spin-  off  networks,  such  as  CNN  International,  and  a  variety  of  Discovery  networks,  as  surviving  with  very  few  subscribers.  292  Presumably,  programmers 
 with  the  financial  backing  of  large  corporations,  and  lower  costs  from  economies  of  scope,  can  survive  longer  with  fewer  subscribers  than  networks  without  such  backing.  293  The  flow  of  programming  from 
 sources  other  than  large  corporations  could  be  impeded  unfairly  even  while  programmers  with  the  backing  of  large  corporations  could  survive.  We  believe  that  preserving  access  only  for  programmers 
 with  this  kind  of  financial  backing  would  not  serve  the  goals  of  Section  613(  f). 
 78.  Time  Warner  argues  that  there  was  plentiful  entry  in  the  period  1992-  2001,  including  entry  by  independent  networks.  294  It  points  to  a  number  of  factors,  including  the  increase  in  cable 
 channel  capacity  and  the  rise  of  DBS  competition.  It  also  presents  evidence  that  large  cable  operators 


 290  For  example,  regional  sports  networks  such  as  those  in  the  Comcast  SportsNet  and  Fox  Sports  Net  networks 
 typically  have  fewer  than  five  million  subscribers.  NCTA  Cable  Developments  2003  at  178  and  180-  189.  GoodLife  TV  Network,  a  general  entertainment  network  which  began  service  in  1985,  survives  today  with  10 


 million  subscribers.  NCTA  Cable  Developments  2004  at  102. 
 291  See,  e.  g.,  the  Survival  Analysis,  which  found  that  a  national,  non-  premium  network  growing  at  the  average  rate 
 requires  over  19  million  subscribers  at  the  end  of  five  years  to  have  a  70%  probability  of  survival  over  its  first  five  years,  and  over  41.  5  million  subscribers  to  have  a  70%  probability  of  survival  over  its  first  ten  years.  Id.  at  29. 


 292  AT&  T  Comments  at  60-  61. 
 293  AT&  T  also  lists  TV  Japan  as  surviving  with  very  few  subscribers.  AT&  T  Comments  at  60-  61.  TV  Japan, 
 however,  is  owned  by  NHK,  Japans  largest  broadcaster. 
 294  Time  Warner  Comments,  Joskow  and  McLaughlin  Decl.  at  2-  7. 
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 have  tended  to  carry  more  programming  over  time,  both  affiliated  and  unaffiliated,  indicating  that  the  increase  in  size  of  operators  will  help,  rather  than  hinder,  entry  by  new  networks.  295 
 79.  CFA,  on  the  other  hand,  argues  that  the  Commissions  30%  limit  was  too  high,  and  it  would  instead  support  a  lower  limit  in  the  range  of  20%  to  25%.  296  CFA  contends  that  anticompetitive 
 behavior  can  occur  at  levels  short  of  complete  foreclosure  and  in  markets  with  more  than  two  dominant  firms.  CFA  claims  that  a  far  greater  open  field  therefore  may  be  necessary  for  competitive  entry  by  a 
 new  programmer,  as  much  as  30  to  40  million  subscribers  instead  of  the  15  million  figure  previously  relied  on  by  the  Commission,  resulting  in  a  limit  in  the  range  of  15%  to  33%.  297  CFA  adds  that 
 increased  programming  costs  further  underscore  the  need  for  an  open  field  of  20  to  25  million  subscribers.  298  Writers  Guild  argues  that  DBS  operators  are  not  a  source  of  programming  diversity, 
 because  the  limited  reach  of  DBS  and  other  competitive  MVPDs  restricts  their  ability  to  a  make  programming  service  viable.  299 


 80.  We  seek  additional  comment  on  whether  we  should  continue  to  use  an  open  field  approach,  and  whether  this  best  meets  Congresss  goal  of  ensuring  the  flow  of  programming  to 
 consumers.  Commenters  should  focus  on  a  programmers  ability  to  survive  in  the  marketplace  without  carriage  by  the  largest  operator.  In  other  words,  we  seek  to  ensure  that  a  programmer  denied  carriage  by 
 the  largest  operator  could  nevertheless  survive  in  the  marketplace  if  it  gained  carriage  on  all  remaining  MVPDs.  In  effect,  the  programmer  viability  analysis  seeks  to  identify  the  subscriber  reach  necessary  for 
 a  cable  operator  to  become  a  pivotal  buyer,  such  that  a  programming  network  must  gain  access  to  at  least  some  of  this  operators  subscribers  to  enter  or  survive  in  the  market.  Commenters  advocating  the  use  of 
 an  open  field  approach  should  also  address  how  we  should  determine  the  size  of  the  open  field,  recognizing  that  different  types  of  networks  may  require  different  subscriber  reaches  to  be  viable, 
 depending  on  the  cost  of  the  programming,  the  target  audience,  and  projected  advertising  revenue. 
 81.  Calculating  a  Limit  under  the  Open  Field  Approach.  Developing  a  defensible  horizontal  limit  under  the  open  field  approach  requires  an  analysis  of  the  number  of  subscribers  a 
 programmer  requires  in  order  to  remain  viable.  Because  the  court  did  not  specifically  address  the  40%  open  field  assumption,  300  and  because  of  the  passage  of  time  since  the  Commission  first  developed  the 
 estimates  on  which  it  rests,  the  Commission  attempted  on  remand  to  gather  fresh  data  on  programmer  viability.  Selected  programmers  were  asked  to  provide  data  that  would  allow  us  to  correlate  programmer 
 characteristics  with  profitability  and  thereby  determine  what  subscriber  reach  is  necessary  for  survival  in  the  market.  301  The  survey  asked  cable  programming  networks  to  report  five  years  of  subscribership 


 295  Id.  at  5-  8. 
 296  CFA  Comments  at  195-  201. 
 297  Id.  at  196-  98. 
 298  Id.  at  198-  200. 
 299  Writers  Guild  Comments  at  9. 
 300  Time  Warner  II,  240  F.  3d  at  1132. 
 301  A  copy  of  the  letter  sent  to  programmers  can  be  found  in  the  record  of  this  proceeding.  See  Letter  from  W. 
 Kenneth  Ferree,  Chief,  Cable  Services  Bureau,  FCC,  to  Programming  Network  Owners  (Feb.  15,  2002). 
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 information,  the  year  they  became  profitable,  their  subscribership  at  time  of  profitability,  whether  they  are  vertically  integrated,  and  their  geographic  reach.  Unfortunately,  the  vast  majority  of  responses  were 
 incomplete.  Most  responses  came  back  with  little  more  than  address  and  subscribership  information.  By  itself,  this  information  is  not  sufficient  to  allow  us  to  draw  any  conclusions  about  viability. 


 82.  Although  the  primary  purpose  of  the  cable  horizontal  ownership  rules  is  to  ensure  that  the  flow  of  video  programming  to  consumers  not  be  unfairly  impeded  by  cable  operators,  the  record  in 
 this  proceeding  generated  almost  no  comments  from  independent  cable  programming  networks  on  the  number  of  subscribers  required  to  remain  viable.  302  A  more  recent  inquiry  generated  a  substantial 
 volume  of  comments  opposing  mandatory  a  la  carte  and  themed  tier  service  offerings,  in  which  independent  cable  programming  networks  estimated  the  number  of  subscribers  they  require  to  remain 
 viable.  On  May  15,  2004,  the  Media  Bureau  issued  a  Public  Notice  (A  La  Carte  PN)  on  factual  questions  regarding  the  provision  of  a  la  carte  and  themed-  tier  services  on  cable  television  and  direct 
 broadcast  satellite  systems.  303  The  Bureau  sought  this  information  in  response  to  specific  requests  from  members  of  Congress  for  a  report  on  these  issues.  304  On  November  19,  2004,  the  Media  Bureau  released 
 a  report  (A  La  Carte  Report)  on  the  efficacy  of  a  la  carte  pricing  in  the  pay-  television  industry.  305  Several  video  programmers  responded  to  the  A  La  Carte  PN  alleging  adverse  impacts  of  mandated  a  la 
 carte  or  themed  tier  offerings.  306  In  support  of  their  positions,  the  programmers  identified  certain  subscriber  targets  they  claimed  were  necessary  to  ensure  network  survival,  which  they  generally  claimed 
 would  not  be  possible  to  accomplish  under  an  a  la  carte  or  themed  tier  regime.  Programmer  comments  on  network  survival  reflect  the  following:  (1)  the  Commissions  suggestion  that  programming  services 
 may  survive  with  a  subscriber  base  of  15  to  20  million  subscribers  is  long  out  of  date;  307  (2)  on  average,  niche  networks  revenues  are  split  roughly  50-  50  between  advertising  and  license  fees,  both  of 
 which  are  essential  to  the  survival  of  a  niche  network  because  neither  is  sufficient  standing  alone,  with  both  tied  directly  to  the  networks  distribution  level    the  total  number  of  subscribers  who  can  view  the 
 network;  308  (3)  a  typical  new  network  does  not  launch  until  it  can  gain  commitments  from  MVPDs  for 


 302  The  America  Channel  reports  that  investors  desire  to  reach  50  million  subscribers  within  5  to  7  years  of  the 
 launch  of  a  cable  programming  network.  America  Channel  ex  parte  Comments  (Dec.  9,  2004,  and  Jan.  3,  2005). 
 303  See  Comment  Requested  on  A  La  Carte  and  Themed  Tier  Programming  and  Pricing  Options  for  Programming 
 Distribution  on  Cable  Television  and  Direct  Broadcast  Satellite  Systems,  19  FCC  Rcd  9291  (2004).  The  Bureau  also  conducted  a  symposium  to  explore  the  advantages  and  disadvantages  of  an  a  la  carte  marketing  scheme, 


 including  possible  effects  on  retail  prices. 
 304  See  May  18,  2004  Letter  from  Congressmen  Barton,  Dingell,  Upton,  Markey  and  Deal  of  the  House 
 Committee  on  Energy  and  Commerce  to  FCC  Chairman  Powell,  and  May  19,  2004  Letter  from  Senator  John  McCain,  Chairman,  Senate  Committee  on  Commerce,  Science  and  Transportation  to  FCC  Chairman  Powell. 


 305  See  Report  on  the  Packaging  and  Sale  of  Video  Programming  Services  to  the  Public  (A  La  Carte  Report)  (MB 
 Nov.  18,  2004). 
 306  See,  e.  g.,  Comments  filed  in  MB  Docket  No.  04-  207  (A  La  Carte  Proceeding),  Oxygen  Comments  at  2-  8; 
 A&  E  Comments  at  15-  25;  Crown  Media  Comments  at  7-  12;  TV  One  Comments  at  1-  3,  Decl.  of  Larry  D.  Gerbrandt  at  4-  11. 


 307  See  Crown  Media  Comments  at  6;  GSN  Comments  at  3-  4. 
 308  A&  E  Comments  at  19. 
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 distribution  to  at  least  10  million  homes  within  the  first  two  years,  and  a  typical  start-  up  business  plan  is  to  reach  a  minimum  of  30  million  households  within  the  first  three  to  five  years  of  launch  in  order  to 
 attract  sufficient  advertising  fees  to  make  up  for  the  fact  that  during  the  early  years  a  new  network  receives  minimal  (if  any)  affiliate  license  fees;  309  (4)  because  new  networks  receive  minimal  or  no 
 affiliate  fees,  the  primary  source  of  revenue  for  a  start-  up  is  advertising  revenue,  and  advertising  revenue  only  becomes  viable  once  a  network  has  20-  25  million  subscribers,  but  even  at  these  subscriber  levels,  it 
 is  impossible  to  sell  meaningful  national  advertising;  310  (5)  although  Nielsen  will  rate  a  network  with  20  to  25  million  subscribers,  ratings  data  at  these  levels  are  unstable  and  of  little  value  until  the  network 
 reaches  current  survivability  targets,  somewhere  between  40  to  60  million  subscribers;  311  and  (6)  because  advertisers  are  primarily  interested  in  subscriber  growth,  even  at  the  50  million  or  more  subscriber  level, 
 a  network  must  be  able  to  demonstrate  that  its  distribution  is  growing,  or  risk  advertiser  abandonment.  312  We  find  this  data  relevant  to  our  analysis  of  reasonable  horizontal  ownership  limits  and  intend  to 
 incorporate  by  reference  the  data  filed  in  MB  Docket  No.  04-  207  into  the  record  of  this  proceeding.  We  seek  comment  generally  on  how  this  data  should  be  applied  and  specifically  on  the  impact  of  these 
 changing  subscriber  targets  on  the  calculation  of  the  number  of  subscribers  a  programmer  requires  for  launching  and  remaining  viable  in  todays  marketplace. 


 83.  Regardless  of  the  horizontal  ownership  limit  we  adopt,  reliable  MVPD  subscribership  data  is  needed  to  determine  whether  a  violation  occurs.  The  1999  Cable  Ownership  Order  endorsed  the 
 use  of  published,  current  and  widely-  cited  industry  data  to  establish  the  number  of  MVPD  subscribers  nationwide,  for  purposes  of  determining  a  cable  operators  share  of  the  market.  313  Subscriber  data  are 
 currently  available  from  a  variety  of  published  sources;  however,  at  times,  these  publicly  available 


 309  See  TV  One  Comments,  Decl.  of  Larry  D.  Gerbrandt  at  4. 
 310  Id.  at  6;  GSN  Comments  at  3-  4;  Oxygen  Comments  at  4. 
 311  A&  E  Comments  at  19  (a  national  niche  network  needs  to  achieve  a  threshold  level  of  at  least  30  to  40  million 
 subscribers);  Bloomberg  Comments  at  5  (once  the  service  reaches  40  million  subscribers,  it  will  be  able  to  generate  higher  affiliate  and  advertising  fees  to  sustain  the  service  over  the  long-  term);  Oxygen  Comments  at  4 


 (ratings  data  useful  only  once  network  reaches  45  to  50  million  subscribers);  GSN  Comments  at  3-  4  (50  million  is  the  approximate  threshold  for  achieving  meaningful  national  advertising  revenues);  TV  One  Comments,  Decl.  of 
 Larry  D.  Gerbrandt  at  4  (combination  of  advertising  and  affiliate  fees  exceeds  operating,  marketing  and  programming  expenses  when  network  reaches  40  million  or  more  households);  Viacom  Comments  at  19  (50 
 million  households  are  necessary  in  order  to  reach  a  meaningful  number  of  viewers);  Crown  Media  Comments  at  6  (more  realistic  plateau  for  meaningful  advertising  revenues  is  now  approaching  50  to  60  million  subscribers; 
 with  nearly  26  million  full  and  part-  time  subscribers,  the  performance  of  the  Hallmark  Channels  predecessor  was  stagnant  and  its  financial  prospects  were  dim). 


 312  GSN  Comments  at  4.  See  also  Morgan  Stanley  Equity  Research,  News  Corp.,  Highlights  from  the  Media 
 Conference,  September  9,  2004  at  1  (  Currently,  the  peak  potential  distribution  for  smaller  cable  networks  is  estimated  at  40-  50  million  subscribers,  but  this  number  is  likely  to  increase  over  time,  creating  further 


 opportunities  for  growth  at  Foxs  youngest  networks.). 
 313  See  1999  Cable  Ownership  Order,  14  FCC  Rcd  at  19112  at    35.  In  the  1999  Cable  Ownership  Order,  we 
 recognized  that  not  all  of  the  data  used  by  the  industry  is  identical  and  that  some  degree  of  estimation  and  double  counting  may  be  involved.  Id.  At  that  time,  the  Commission  found  it  unnecessary  for  the  Commission  or  firms 


 subject  to  the  ownership  limit  to  refine  generally  accepted  industry  estimates  because  the  rule  was  based  on  estimates.  Id. 
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 sources  are  inconsistent  with  one  another.  In  addition,  firm-  specific  subscriber  figures  submitted  to  the  Commission  may  differ  from  figures  reported  in  other  contexts  (e.  g.,  in  SEC  filings  or  investment 
 reports).  We  seek  comment  on  whether  we  should  take  steps  to  address  the  reliability  of  any  subscriber  data  we  may  use  in  applying  the  horizontal  limit,  and  whether  the  Commission  should  adopt  its  own  data 
 collection  procedures  to  obtain  industry-  wide  subscriber  data. 
 84.  As  noted  above,  the  Media  Bureau  recently  released  Media  Bureau  Staff  Research  Paper  No.  2004-  1  (Survival  Analysis),  which  focuses  on  the  actual  failure  and  success  rates  of  networks  and  the 
 relationship  of  those  rates  to  subscriber  reach.  314  We  seek  comment  on  the  value  of  this  method  in  developing  a  horizontal  limit  under  the  open  field  approach.  We  also  seek  comment  on  the  method  as 
 applied  in  the  Survival  Analysis  and  alternatives  and  refinements  to  the  methods  employed. 
 (2)  Monopsony  Framework 
 85.  Time  Warner  II  faulted  the  Commissions  open  field  analysis  for  failing  to  identify  a  non-  conjectural  harm,  and  for  providing  no  analysis  of  whether  cable  operators  have  the  ability  to 


 exercise  market  power.  315  It  stated  that  the  statute  requires  the  Commission  to  assess  the  determinants  of  market  power  in  the  cable  industry  and  to  draw  a  connection  between  market  power  and  the  limit 
 set.  316  In  the  2001  Further  Notice  we  sought  comment  on  the  harms  that  might  result  from  high  concentration,  including  those  that  result  from  anti-  competitive  behavior.  317  We  asked  at  what  level  of 
 concentration  a  large  cable  operator  gains  sufficient  market  power  to  be  able  to  refuse  carriage  of  programming  for  reasons  other  than  consumer  demand.  318  We  further  asked  questions  that  would  help 
 answer  whether  cable  operators  have  market  power,  and  whether  they  have  an  incentive  to  exercise  it.  Our  questions  concerning  the  concentration  of  the  market,  and  whether  a  40%  open  field  was  sufficient 
 for  entry  by  the  typical  programming  network,  relate  to  two  key  determinants  of  market  power,  which  are  the  number  of  competitors  in  the  market  and  the  ability  of  firms  to  enter  the  market.  319  In  this  and  the 
 next  sections  we  discuss  the  comments  we  received,  and  the  further  questions  that  we  find  need  to  be  answered,  concerning  several  theories  of  harm  based  on  market  power,  and  how  a  horizontal  limit  can 
 eliminate  those  harms. 


 314  See    16  supra. 
 315  Having  failed  to  identify  a  non-  conjectural  harm,  the  Commission  could  not  possibly  have  addressed  the 
 connection  between  the  harm  and  market  power.  But  the  assessment  of  a  real  risk  of  anti-  competitive  behavior-  -  collusive  or  not--  is  itself  dependent  on  an  understanding  of  market  power    .  Time  Warner  II,  240  F.  3d  at 


 1133-  34. 
 316  Id. 


 317  2001  Further  Notice,  16  FCC  Rcd  at  17340    57. 
 318  Id.  at  17328,  17340-  41    28,  58. 
 319  Id.  at  17340-  41    58. 
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 86.  In  response  to  the  2001  Further  Notice,  some  commenters  argue  that  the  market  for  programming  does  not  meet  the  key  conditions  necessary  for  the  monopsony  320  model  to  be  applicable. 
 For  example,  they  argue  that  the  supply  curve  is  not  upward  sloping,  and  that  buyers  cannot  force  the  price  down  by  reducing  their  purchases,  because  it  is  costless  to  supply  programming  to  one  more 
 subscriber,  if  the  service  is  already  being  provided  to  other  subscribers.  321  Other  commenters  argue  that  the  talent  used  to  provide  programming  have  plenty  of  other  employment  opportunities,  such  as 
 theatrical  motion  pictures  and  broadcast  network  programming,  and  therefore  the  supply  of  such  services  is  likely  to  be  flat.  322 


 87.  To  support  using  the  theory  of  monopsony  to  demonstrate  how  a  large  purchaser  of  programming  could  cause  harm  to  the  market,  CFA  points  to  numerous,  widely  accepted  economic 
 theories  that  state  a  monopsonist  would  have  the  power  to  decrease  programmers  output  and  the  prices  they  receive.  323  It  claims  that  these  theories  apply  to  cable  operators  relationship  to  programmers.  324 
 We  seek  comment  on  the  appropriateness  of  applying  standard  monopsony  arguments  to  our  analysis  of  the  specific  nature  of  the  programming  market. 


 88.  Commenters  proposing  monopsony  as  an  analytical  framework  should  address  how  monopsony  power  can  be  measured.  Can  Pigous  Index  (called  by  Pigou  the  rate  of  exploitation), 
 which  is  the  monopsony  version  of  Lerners  Index,  be  used  to  measure  monopsony  power  here?  325  Are  there  other  measures  that  indicate  that  monopsony  power  is  being  exercised?  For  example,  is  the  failure 
 of  some  networks  to  gain  carriage  an  indication  that  monopsony  power  is  being  exercised,  or  is  it  due  to  the  low  quality  of  those  networks?  Are  launch  fees  326  a  means  of  extracting  monopsony  rents,  or  are 
 they  serving  a  filtering  function  to  help  weed  out  low-  quality  networks?  327  Some  cable  operators  have 
 320  A  firm  is  called  a  monopsony  if  it  is  the  only  buyer  in  a  market,  and  a  firm  that  is  the  only  seller  in  a  market 
 is  called  a  monopoly.  Dennis  W.  Carlton  and  Jeffrey  Perloff,  MODERN  INDUSTRIAL  ORGANIZATION  87,  105  (3rd  Ed.,  2000)  (Carlton  and  Perloff). 


 321  Time  Warner  Comments,  Joskow  and  McLaughlin  Decl.  at  8-  9;  AT&  T  Comments,  Ordover  Decl.  at  12-  13. 
 322  Time  Warner  Comments,  Joskow  and  McLaughlin  Decl.  at  9. 
 323  CFA  Comments  at  91-  92. 
 324  Id.  at  26,  28  (citing  FTC  v.  H.  J.  Heinz  Co.    246  F.  3d  708,  715  (D.  C.  Cir.  2001);  United  States  v.  Philadelphia 
 National  Bank,  374  U.  S.  270  (1966)). 
 325  Pigous  Index  is  the  measure  of  the  difference  between  the  input  price  and  the  marginal  revenue  product. 
 Pigous  Index  =  E  =  (MRP-  w)/  w  =  1/  e  s  ,  where  MRP  =  marginal  revenue  product  =  revenue  produced  by  purchasing  one  more  unit  of  the  input,  w  =  the  cost  of  the  input,  and  e  s  =  the  price  elasticity  of  supply.  William 


 Boal  and  Michael  Ransom,  Monopsony  in  the  Labor  Market,  35  J.  OF  ECON.  LITERATURE  1,  86-  112  (Mar.  1997). 
 326  In  the  case  of  a  new  programming  network,  an  MVPD  may  demand  that  the  programmer  pay  it  for  the  right  to 
 access  its  subscribers  (a  practice  sometimes  referred  to  as  a  launch  fee). 
 327  Launch  fees  in  the  cable  industry  have  certain  similarities  to  slotting  allowances  in  the  grocery  industry. 
 Slotting  allowances  are  payments  by  manufacturers  to  grocers  for  stocking  new  products.  The  Staff  of  the  Federal  Trade  Commission  has  identified  a  number  of  possible  benefits  and  harms  of  the  practice,  including  its  use  as  a 


 signal  of  quality  and  as  a  by-  product  of  market  power  at  the  retail  level.  Federal  Trade  Commission  Staff,  Report  (continued.) 
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 sought  equity  from  programming  networks  as  part  of  their  carriage  negotiation  stance.  328  Is  this  an  exercise  of  monopsony  power,  or  is  it  a  more  efficient  mechanism  of  risk-  and  profit-  sharing  than  a 
 simple  fixed  price  for  carriage?  Does  the  alleged  need  for  a  new  network  to  have  bargaining  leverage,  usually  in  the  form  of  an  affiliated  broadcast  station  or  popular  network,  329  indicate  that  monopsony 
 power  is  being  exercised  against  independent  networks  lacking  popular  affiliates,  or  is  this  bargaining  just  an  efficient  means  of  achieving  the  transaction  at  lower  cost?  330 


 89.  The  most  significant  challenge  to  the  use  of  the  monopsony  model  would  appear  to  come  from  the  need  for  prices  for  individual  transactions  to  be  publicly  known  and  to  vary  with  the 
 market-  clearing  price.  The  market  for  programming  appears  to  be  characterized  by  private  bilateral  negotiations  that  yield  complex  prices  that  are  not  made  public.  If  this  is  the  case,  is  there  a  market  price 
 that  could  be  affected  by  the  monopsonists  purchasing  decisions?  If  the  existence  of  private  negotiations  with  nonpublic  terms  of  agreement  implies  that  there  is  no  market  price,  then  we  ask 
 whether  a  bilateral  bargaining  model  would  be  more  useful  for  analyzing  the  programming  market  than  the  monopsony  model.  We  discuss  the  use  of  bilateral  bargaining  models  in  the  next  section. 


 (3)  Bargaining  Power  as  a  Source  of  Unilateral  Anticompetitive  Action 
 90.  Bargaining  theory  is  an  alternative  framework  to  the  theory  of  monopsony  for  analyzing  how  a  large  purchaser  of  programming  services  could  exercise  market  power  and  cause  harm  to  the 
 market.  In  the  2001  Further  Notice  we  suggested  that  at  much  higher  levels  of  concentration  cable  operators  could  use  their  bargaining  power  to  force  down  the  prices  they  pay  for  programming,  which 
 could  harm  the  flow  of  programming.  331  We  explore  here  bargaining  power  as  a  source  of  unilateral  anticompetitive  action.  Bargaining  theory  may  better  describe  and  model  the  private  negotiations  and 
 non-  public  terms  of  agreements  typically  employed  in  the  purchase  of  programming  by  cable  operators,  as  compared  to  the  theory  of  monopsony.  Bargaining  theory  is  often  used  to  model  bilateral 


 (Continued  from  previous  page)  on  the  Federal  Trade  Commission  Workshop  on  Slotting  Allowances  and  Other  Marketing  Practices  in  the 
 Grocery  Industry,  February  2001. 
 328  See  The  Bridge  July  2004  (.  .  .  many  big  providers  will  want  a  piece  of  the  new  channel  company);  The 
 Cable  Center,  Peter  Barton:  An  Oral  History  (  The  theory  was,  why  not  own  -  because  we  had  the  leverage  to  own  -  why  not  insist  on  owning  a  piece  of  programming  service.)  available  at 


 http://  www.  cablecenter.  org/  library/  collections/  oral_  histories/  subjects.  cfm. 
 329  Some  of  these  may  involve  retransmission  consent  agreements  of  local  broadcast  stations,  while  others  may 
 involve  the  carriage  of  new  networks  negotiations  for  carriage  of  a  particularly  popular  network. 
 330  The  tying  of  carriage  of  a  new  affiliated  network  to  an  agreement  for  carriage  of  a  popular  network  or  station 
 can  be  mutually  beneficial  to  the  cable  operator  and  network,  since  the  cable  operator  may  provide  something  that  is  lower  cost  (the  channel  capacity),  compared  to  paying  the  full  cash  value  of  the  popular  network,  while  the 


 network  gains  carriage  of  a  potentially-  profitable  affiliate.  In  other  words,  it  may  be  of  lower  cost  to  each  side  than  would  strictly  cash  deals  of  the  cable  operator  paying  a  popular  network  for  carriage,  or  for  a  program 
 producer  paying  to  get  carriage  for  its  new,  unproven  network. 
 331  2001  Further  Notice,  16  FCC  Rcd  at  17327-  28,  17333-  34    26,  43. 
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 negotiations,  332  and  is  usually  better  able  to  handle  complex  market  structures,  and  to  take  into  account  transaction-  specific  factors. 
 91.  Several  specific  institutional  features  shape  the  economics  of  negotiations  between  programming  networks  and  MVPDs.  For  example,  prior  to  entering  negotiations,  MVPDs  and 
 programming  networks  make  substantial  investments.  For  MVPDs,  these  investments  include  the  construction  of  their  video  distribution  systems.  These  costs,  however,  are  systemic  rather  than  specific 
 to  the  contractual  relationship  with  any  single  programming  network.  For  programming  networks  the  investments  include  the  acquisition  or  production  of  programs.  Importantly,  the  programming  network 
 must  continue  to  incur  these  costs  on  an  ongoing  basis  to  develop  new  content.  Moreover,  a  significant  portion  of  these  investments  are  considered  specialized,  in  that  a  substantial  portion  of  the  investments 
 would  be  lost  if  the  programming  network  failed  to  obtain  carriage  on  cable  systems  or  other  MVPDs. 
 92.  After  making  these  investments,  programmers  and  MVPDs  enter  into  contractual  negotiations.  During  this  process,  programming  networks  attempt  to  maximize  their  affiliate  fees  and 
 advertising  revenue.  In  contrast  with  programmers,  which  compete  fiercely  for  carriage,  MVPDs  generally  do  not  compete  with  each  other  to  acquire  programming.  333  On  the  other  hand,  MVPDs  likely 
 attempt  to  maximize  their  subscription  and  advertising  revenue  while  attempting  to  minimize  their  affiliate  payments.  In  economic  terms,  each  MVPD  and  each  programmer  are  engaged  in  a  bilateral 
 bargaining  problem. 
 93.  The  bargaining  and  contract  theory  literature  has  established  that  when  at  least  one  side  of  the  negotiation  has  sufficient  bargaining  power,  inefficiencies  can  arise.  334  One  source  of  inefficiency 
 is  directly  related  to  the  relative  bargaining  power  of  the  parties.  Many  programming  networks  compete  among  themselves  for  the  right  to  sell  programming  to  an  MVPD  and  thereby  acquire  access  to  its 
 subscribers.  Thus,  the  cost  the  MVPD  incurs  from  not  reaching  an  agreement  with  any  particular  programming  network  is  low  because  of  the  willingness  of  competing  programming  networks  to  sell  to 
 it.  However,  the  cost  a  programming  network  incurs  from  not  reaching  an  agreement  with  a  large  cable  operator  may  be  high  if  access  to  that  operators  subscribers  is  needed  for  it  to  remain  viable  and  earn  a 
 profit.  335  According  to  this  reasoning,  because  of  the  existence  of  one  or  more  close  substitutes,  some  programming  networks  may  have  very  little  bargaining  power  in  negotiations  with  MVPDs.  However, 
 other  programming  networks  may  have  few  close  substitutes  and,  if  popular,  may  have  substantial 


 332  Drew  Fudenberg  and  Jean  Tirole,  GAME  THEORY,  ch.  10  (1993). 
 333  Absent  an  exclusivity  provision,  one  MVPDs  acquisition  of  program  carriage  rights  does  not  diminish  the 
 supply  of  programming  available  to  other  MVPDs. 
 334  We  use  the  term  economic  efficiency  in  its  generally  accepted  sense    the  maximization  of  societys  scarce 
 resources.  However,  in  the  discussion  of  the  BKS  Study,  the  term  efficiency  is  used  in  a  narrower  sense  of  trading  efficiency,  which  is  one  of  the  three  sources  of  (in)  efficiency  discussed  in  this  section. 


 335  For  example,  Comcast  is  generally  viewed  as  an  important  distributor  for  video  programmers.  See  George 
 Anders,  Want  to  Start  a  TV  Channel?;  Amy  Banse,  WALL  ST.  J.,  Jan.  19,  2004  (  If  youve  got  Comcast  behind  you,  youre  practically  guaranteed  of  being  a  success.);  Andrew  Grossman,  NBA  TV  scores  Comcast  Deal, 


 HOLLYWOOD  REPORTER,  Mar.  10,  2004,  at  4,  (referring  to  Comcast  as  the  cable  gorilla  that  every  programmer  needs). 
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 bargaining  power  over  MVPDs.  336  Moreover,  the  situations  in  which  a  programming  network  can  be  expected  to  have  the  least  amount  of  bargaining  power  relative  to  a  cable  operator  are  those  in  which  the 
 investment  costs  of  the  programmer  are  high,  and  the  cost  incurred  by  the  cable  operator  from  declining  to  carry  it  is  low.  Thus,  it  is  plausible  that  programming  networks  with  low  relative  bargaining  power 
 may  be  unable  to  recover  their  fixed  programming  costs.  In  this  instance,  the  bargaining  power  of  a  cable  operator  may  induce  a  programming  network  to  exit  the  market,  or  to  reduce  its  costs  by  lowering 
 the  quality  of  its  programming.  We  ask  for  comment  on  whether  a  cable  operator  of  sufficient  size  would  have  the  bargaining  power  to  force  prices  down,  and  whether  this  would  reduce  the  quality  and 
 flow  of  programming,  and  create  economic  inefficiency.  Furthermore,  we  ask  how  we  can  determine  at  what  level  this  would  occur. 


 94.  A  second  and  closely  related  form  of  inefficiency  is  known  as  the  hold-  up  problem  or  the  underinvestment  effect.  337  Here,  the  party  undertaking  a  relationship-  specific  investment,  in  this 
 case  the  programming  network,  realizes  that  once  its  investments  are  sunk  they  cannot  be  recouped  if  bargaining  breaks  down.  338  Therefore,  the  more  a  firm  invests  upfront  in  relationship-  specific  assets,  the 
 weaker  its  bargaining  position,  and  the  lower  its  expected  surplus  from  the  negotiation.  Anticipating  this,  a  firm  in  this  circumstance  will  under-  invest,  relative  to  the  economic  optimum,  in  relationship-specific 
 assets.  339  Viewed  broadly,  the  fear  that  parties  may  be  held-  up  by  other  parties  may  lead  to  too  little  investment  in  specialized  assets,  i.  e.,  programming,  compared  with  the  level  of  investment  that 
 maximizes  economic  efficiency.  Thus,  even  if  programming  networks  are  able  to  negotiate  successfully  with  a  sufficient  number  of  MVPDs  under  favorable  terms,  economic  efficiency  may  not  be  maximized 
 because  of  the  relationship-  specific  nature  of  the  programming  networks  investments.  We  seek  comment  on  whether  contracts  can  be  written  that  overcome  this  problem  such  that  the  possibility  of 
 hold-  up  can  be  reduced  or  eliminated. 
 95.  A  third  source  of  inefficiency  occurs  when  mutually  beneficial  trades  fail  to  occur  because  the  two  parties  in  the  bargaining  process  are  uncertain  about  the  size  of  the  surplus  available 
 from  a  completed  deal.  In  this  case,  each  party  may  demand  a  larger  amount  than  is  available  and  a  complete  bargaining  breakdown  or  delay  might  occur,  which  in  the  present  context  would  result  in  the 
 withholding  of  otherwise  valued  programs  from  the  market.  340  Any  such  breakdown  or  delay  would 
 336  See  News-  Hughes  Order,  19  FCC  Rcd  at  543-  48    147-  62. 


 337  See  Oliver  Williamson,  MARKETS  AND  HIERARCHIES:  ANALYSIS  AND  ANTITRUST  IMPLICATIONS  (1975). 
 Williamsons  insight  has  been  widely  adopted  in  the  study  of  contracts  as  well  as  vertical  relationships  in  antitrust  and  regulation.  See,  e.  g.,  J.  J.  Laffont  and  J.  Tirole,  A  THEORY  OF  INCENTIVES  IN  PROCUREMENT  AND 


 REGULATION,  99-  100  (1993). 
 338  The  seller  can  reduce  the  likelihood  of  having  the  bargaining  breakdown  by  increasing  its  willingness  to  accept 
 a  low  price  from  the  buyer. 
 339  Programming  networks  and  MVPDs  have  a  unique  relationship  in  that  their  investments  are  co-  specialized; 
 the  economic  value  of  their  respective  investments  depends  upon  the  behavior  of  the  other  party.  Specifically,  the  value  of  the  investments  made  by  programming  networks  depends,  in  part,  on  the  investment  and  other  decisions 


 made  by  MVPDs.  Likewise,  the  value  of  the  investments  made  by  MVPDs  depends,  in  part,  on  the  investment  and  other  decisions  made  by  the  programming  networks.  The  co-  specialized  nature  of  their  respective 
 investments  means  that  the  interests  of  the  programming  networks  and  MVPDs  are  imperfectly  aligned. 
 340  When  the  number  of  programming  networks  exceeds  the  number  of  channels  the  MVPD  has  allocated  to  carry 
 those  channels,  an  economic  inefficiency  may  also  be  caused  by  the  MVPDs  uncertainty  regarding  the  size  of  the  (continued.) 
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 impede  the  flow  of  programming.  Economic  theory  has  shown,  however,  that  as  the  number  of  competitors  on  each  side  of  the  market  increases,  the  likelihood  of  breakdown  or  delay  is  diminished,  so 
 that  markets  that  have  many  competitors  are  approximately  efficient.  341  Thus,  the  level  of  the  inefficiency  is  directly  and  inversely  related  to  the  number  of  competing  buyers  and  sellers.  We  ask 
 whether  an  increase  in  cable  concentration  will  likely  lead  to  such  breakdowns  occurring,  and  thus  increase  the  level  of  inefficiency. 


 96.  If  bargaining  power  is  the  frame  of  reference,  then  the  economic  question  before  the  Commission  is  whether  an  increasing  level  of  concentration  among  cable  operators  is  likely  to  reduce  the 
 bargaining  power  of  programmers  to  such  an  extent  that  (1)  programmers  cannot  recover  their  costs,  (2)  the  hold-  up  problem  is  amplified,  or  (3)  the  likelihood  of  bargaining  breakdown  increases.  We  seek 
 comment  on  which  of  these  economic  inefficiencies  may  rise  to  the  level  of  reducing  the  flow  of  programming  to  consumers. 


 (a)  The  Use  of  Bargaining  Theory  to  Establish  New  Limits 
 97.  Cable  industry  commenters  draw  on  the  work  of  Alexander  Raskovich  to  argue  that  large  firm  size  could,  in  fact,  weaken  a  cable  operators  bargaining  position.  For  example,  AT&  T 


 suggests  that  increased  firm  size  reduces  the  likelihood  of  hold-  up,  because  a  larger  cable  operator  can  less  credibly  threaten  to  free-  ride  than  a  smaller  cable  operator,  since  the  larger  the  operator,  the  more  it 
 will  lose  from  failure  to  carry  programming  consumers  value.  342  Moreover,  if  a  buyer  becomes  so  large  that  it  becomes  pivotal  to  a  suppliers  production  decision,  the  buyer  cannot  credibly  abdicate 
 responsibility  for  ensuring  that  the  suppliers  costs  are  covered.  343  Time  Warner,  relying  on  Raskovich  as  well  as  Chipty  and  Snyder  (1999),  344  claims  that  the  larger  cable  operators  decreased  bargaining 
 position  results  in  larger  operators  sharing  in  efficiencies  that  they  have  helped  to  create  rather  than  exerting  greater  buyer  market  power.  345 
 (Continued  from  previous  page)  rents  available  from  carrying  each  channel. 


 341  The  original  result  on  the  inefficiency  of  bilateral  bargaining  is  know  as  the  Myerson-  Satterthwaite  Theorem. 
 See  Roger  B.  Myerson  and  Mark  A.  Satterthwaite,  Efficient  Mechanisms  for  Bilateral  Trading,  29  J.  ECON.  THEORY  2,  265-  81  (Apr.  1983).  The  proof  that  as  individual  bargaining  power  goes  away  the  market  becomes 


 efficient  is  in  Thomas  Gresik  and  Mark  Satterthwaite,  The  Rate  at  Which  a  Simple  Market  Converges  to  Efficiency  as  the  Number  of  Traders  Increases:  An  Asymptotic  Result  for  Optimal  Trading  Mechanisms,  48  J.  ECON.  THEORY 
 1,  304-  32  (Jun.  1989).  For  an  exposition  of  these  and  related  results,  see  Drew  Fudenberg  and  Jean  Tirole,  GAME  THEORY  (1993). 


 342  AT&  T  Comments,  Ordover  Decl.  at  47-  44;  AT&  T  Comments  at  47.  Assuming  programmers  recoup  their 
 programming  investment  by  selling  to  a  cable  operator,  they  can  sell  their  product  to  other  operators  at  a  substantially  reduced  price.  Thus,  competing  cable  operators  free-  ride  on  the  operator  who  paid  the  up-  front 


 fixed  costs  of  the  seller.  However,  the  ubiquity  of  so-  called  most-  favored-  nation  clauses  in  programming  contracts  resolves  this  free-  rider  problem  and  protects  the  cable  operator  who  initially  purchases  the  programming 
 from  opportunism  on  the  part  of  the  programmer  and  other  operators. 
 343  AT&  T  Comments,  Ordover  Decl.    47-  48. 


 344  Tasneem  Chipty  &  Christopher  Snyder,  The  Role  of  Firm  Size  in  Bilateral  Bargaining:  A  Study  of  the  Cable 
 Television  Industry,  81  REV.  ECON.  &  STAT.  2,  326-  40  (1999). 
 345  Time  Warner  Comments,  Joskow  and  McLaughlin  Decl.  at  15. 
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 98.  Raskovichs  model  is  a  generalization  of  the  work  of  Chipty  and  Snyder,  who  construct  a  bargaining  framework  in  which  a  program  seller  engages  in  simultaneous  bilateral  bargaining  with 
 multiple  program  buyers.  Raskovich  amends  the  model  of  Chipty  and  Snyder  to  include  pivotal  buyers,  that  is,  buyers  without  whom  sellers  would  produce  zero  output.  346  Assuming  that  there  is  an  even  split 
 between  buyers  and  seller  (i.  e.,  50%-  50%  of  a  trades  surplus),  Raskovich  demonstrates  conditions  under  which  the  pivotal  buyer  finds  its  bargaining  position  worsened.  347  Raskovich  posits  a  situation  in  which 
 a  buyer  becomes  so  large  through  merger  that  only  the  buyer  can  cover  the  sellers  cost  of  producing  programming.  In  this  context,  the  programmers  surplus  from  bargaining  with  the  single  large  cable 
 operator  would  be  greater  than  the  sum  of  the  surpluses  the  programmer  would  receive  from  the  two  buyers  prior  to  the  merger.  This  implies  that  once  a  cable  operator  reaches  a  sufficient  size,  its  payments 
 to  programmers  will  increase.  348 
 99.  Neither  the  Chipty  and  Snyder  model  nor  the  Raskovich  model  persuades  us  that  limits  on  cable  operator  size  are  unnecessary.  Adilov  and  Alexander  show  that  if  there  are  asymmetries  in 
 bargaining  power,  i.  e.,  the  surplus  split  varies  from  50%-  50%,  the  results  of  Chipty  and  Snyder  and  Raskovich  may  not  hold.  349  Rather,  they  demonstrate  that  where  bargaining  power  is  not  symmetric, 
 mergers  could  improve  a  cable  operators  bargaining  position  and  decrease  payments  to  programmers,  even  when  the  merged  firm  becomes  pivotal.  350 


 100.  We  find  it  unlikely  that  bargaining  power  is  symmetric  across  all  buyers  regardless  of  size.  No  commenters  offer  any  reasons  or  evidence  to  support  the  assumption  that  it  is.  Adilov,  using 
 basic  data  from  the  BKS  Study,  estimates  bargaining  power  directly.  351  Adilovs  results  reveal  statistically  significant  differences  in  individual  buyers  bargaining  power,  a  result  that  is  not  consistent 
 with  an  assumption  of  constant  bargaining  power  across  firm  size.  The  data  generated  from  the  BKS  Study  also  show  that  buyers  and  sellers  did  not  split  the  economic  surplus  evenly  under  all  conditions.  352 
 We  seek  comment  on  the  usefulness  of  the  technical  analyses  contained  in  bilateral  bargaining  theory  in  light  of  the  wide  range  of  results  it  appears  to  generate. 


 (b)  Experimental  Economics  Study 
 346  Raskovich  Comments  at  3-  4;  Raskovich,  Pivotal  Buyers  and  Bargaining  Position. 
 347  Id.  at  11-  22. 
 348  Id.  at  22. 
 349  Adilov  and  Alexander  generalize  the  models  of  Raskovich  and  Chipty  and  Snyder  to  allow  for  asymmetric 
 bargaining  power  (i.  e.,  the  split  does  not  have  to  be  50%-  50%).  See  Adilov  &  Alexander,  Asymmetric  Bargaining  Power,  supra. 


 350  Id.  at  8. 
 351  Adilov  ex  parte  statement  (Jan.  9,  2003)  (submitting  Nodir  Adilov,  Firm  Size  and  Bargaining  Power:  A  Non-Linear 
 Least  Squares  Estimate  from  the  Cable  Industry,  Working  Paper,  Department  of  Economics,  Cornell  University  (Nov.  2002)). 


 352  Id.  at  11. 
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 101.  In  2002,  the  Commission  launched  the  BKS  Study,  regarding  the  extent  to  which  different  levels  of  horizontal  concentration  among  MVPDs  might  affect  the  flow  of  video  programming  to 
 consumers.  The  study  utilized  the  methodology  of  experimental  economics,  which  examines  economic  interactions  among  market  participants  in  controlled  laboratory  settings.  The  study  was  designed  to  aid 
 the  Commission  in  its  evaluation  of  a  horizontal  limit  on  remand  from  the  court  in  Time  Warner  II.  The  Commission  placed  the  BKS  Study  in  the  record  of  this  proceeding  and  sought  comment  on  it.  353  To 
 assist  the  public  in  its  analysis  of  the  study,  the  Commission  also  made  available  the  raw  data  upon  which  the  studys  conclusions  are  based.  354 


 102.  The  BKS  Study  created  an  experimental  market  that  parallels,  in  significant  ways,  the  market  in  which  programming  networks  and  MVPDs  negotiate  affiliate  fees.  355  Economic  experiments 
 were  run  under  different  levels  of  horizontal  concentration  among  cable  buyers.  356  The  concentration  levels  were  chosen  so  as  to  generate  a  wide  size  range  for  buyers  while,  at  the  same  time,  depicting 
 concentration  levels  that  may  occur  in  the  future  absent  government  intervention.  The  study  assessed  the  effects  of  horizontal  concentration  using  four  measures:  economic  efficiency,  buyers  bargaining  power, 
 buyer  surplus,  and  seller  profits  and  losses.  357  The  results  for  each  measure  varied,  but  by  at  least  one  measure    seller  profits  and  losses    the  study  found  that  all  except  the  most  popular  programming 
 networks  fared  significantly  worse  in  the  market  dominated  by  a  single  51%  buyer  than  in  the  market  in  which  the  two  largest  buyers  served  44%  and  39%  of  subscribers.  358  The  adverse  effects  on  seller  profits 
 in  these  hypothetical  markets  could  induce  sellers  to  either  exit  the  market  or  lower  the  quality  of  their  programming,  particularly  if  alternative  investments  offered  better  comparative  returns. 


 103.  Commenters  raise  several  objections  to  reliance  on  the  BKS  Study  in  setting  a  horizontal  ownership  limit.  Perhaps  the  most  common  criticism  of  the  study  concerns  parallelism.  Critics  claim 
 that  because  experiments  cannot  mirror  the  real  world  perfectly,  the  study  cannot  provide  useful  evidence.  359  For  example,  commenters  noted  the  experiment  failed  to  model  the  DBS  operator  as  a  direct 
 competitor  to  the  cable  operators.  Commenters  also  raise  a  number  of  arguments  concerning  the  studys  methodology.  For  instance,  AT&  T  argues  the  studys  alleged  poor  design  induced  subjects  to  engage  in 


 353  Public  Notice,  Media  Bureau  Seeks  Comment  on  Experimental  Economics  Study  Examining  Horizontal 
 Concentration  in  the  Cable  Industry,  17  FCC  Rcd  10544  (2002). 
 354  See  www.  fcc.  gov/  osp/  workingp.  html. 


 355  BKS  Study  at  9-  21. 
 356  The  experiment  measured  effects  under  three  different  hypothetical  market  configurations:  (1)  a  market  in 
 which  the  largest  buyer  served  27%  of  all  subscribers;  (2)  a  market  with  two  large  buyers  serving  44%  and  39%  of  the  market;  and  (3)  a  market  in  which  one  large  buyer  served  51%  of  the  market  and  the  next  largest  buyer  served 


 only  17%.  Id.  at  15. 
 357  Id.  at  22-  26. 


 358  Id.  at  45-  48.  In  this  environment,  the  least  popular  networks  suffered  greater  losses  than  in  the  44%/  39% 
 market,  and  the  moderately  popular  network  enjoyed  lower  profits  than  in  the  44%/  39%  market.  Id. 
 359  AT&  T  Supplemental  Comments  at  8;  Comcast  Supplemental  Comments  at  6,  8;  Time  Warner  Supplemental 
 Comments  at  5;  SBC  Supplemental  Comments  at  1. 
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 loss  avoidance  rather  than  profit-  maximizing  behavior.  360  Time  Warner,  on  the  other  hand,  claims  that  the  study  induced  subjects  to  act  erratically.  361 
 104.  We  recognize  that  the  BKS  study  has  limitations  in  that  DBS  was  not  modeled  as  a  competitor,  and  the  study  did  not  include  vertically  integrated  players.  However,  we  believe  that 
 experimental  economics  can  be  a  useful  tool  for  evaluating  the  effects  of  increasing  concentration.  We  seek  comment  on  whether  we  should  continue  to  consider  experimental  economics,  as  well  as  additional 
 analytical  methods  that  may  help  us  devise  a  limit. 
 b)  Additional  Factors  in  the  Analysis 
 105.  In  the  previous  section  we  presented  three  frameworks  for  analyzing  the  potential  harms  associated  with  horizontal  concentration  among  buyers  in  the  programming  market.  In  this  section  we 


 discuss  four  factors  that  should  be  considered  when  designing,  evaluating,  and  applying  an  analytical  framework.  For  each  of  these  factors  we  seek  comment  on  its  weight  and  importance  in  each  of  the 
 analytical  frameworks  we  have  examined,  as  well  as  suggestions  on  how  to  incorporate  the  factor  into  the  analytical  frameworks. 


 (1)  The  Impact  of  Competition  at  the  Distribution  Level 
 106.  The  Time  Warner  II  court  criticized  the  Commission  for  failing  to  examine  whether  cable  operators  had  market  power  in  the  distribution  market,  and,  in  particular,  for  failing  to  take  into 


 account  the  growth  of  competition  from  DBS  providers.  362  It  also  expressed  concern  that  the  Commissions  analysis  was  focused  too  narrowly  on  cable  operators  current  market  share,  and  that  a 
 proper  analysis  of  market  power  should  include  consideration  of  the  availability  of  competition,  and  its  impact  on  the  elasticities  of  supply  and  demand.  363  It  pointed  out  that  MVPDs  that  attempted  to 
 exercise  market  power  by  refusing  to  carry  new  programming  might  find  their  customers  switching  to  other  MVPDs.  364 


 360  AT&  T  Supplemental  Comments  at  14. 
 361  Time  Warner  Supplemental  Comments  at  10.  In  addition  to  the  above  objections,  there  are  a  standard  set  of 
 criticisms  leveled  against  economic  experiments.  See  Vernon  Smith,  Method  in  Experiment:  Rhetoric  and  Reality,  5  EXPERIMENTAL  ECONOMICS  2,  91-  100  (Oct.  2002).  For  example,  it  is  sometimes  asserted  that  the  subjects 


 participating  in  the  experiments  do  not  have  the  requisite  level  of  knowledge  and  experience,  and  that  parties  to  actual  negotiations  use  consultants  to  assist  in  the  decision-  making  process.  Another  criticism  is  that  the 
 instructions  that  describe  the  economic  environment  in  which  the  subjects  participate  may  have  been  unclear  or  inadequate,  thereby  leading  to  anomalous  subject  behavior.  A  closely  related  criticism  is  that,  perhaps  because  of 
 the  complexity  of  the  economic  environment,  subjects  were  not  given  sufficient  opportunity  to  learn  how  best  to  behave  in  the  economic  experiment. 


 362  Time  Warner  II,  240  F.  3d  at  1134. 
 363  Id.  (emphasis  in  original). 
 364  Id. 
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 107.  In  the  2001  Further  Notice  we  noted  the  growth  of  DBS  share  of  the  MVPD  market.  365  We  sought  comment  on  the  impact  of  DBS  growth  and  presence  on  cable  operators  market  power  and 
 on  their  incentive  to  choose  programming  for  reasons  other  than  quality.  366  We  also  sought  comment  on  what  level  of  competition  in  the  MVPD  market  would  be  sufficient  to  provide  alternative  means  for 
 programmers  viably  to  reach  consumers,  and  on  the  appropriate  measure  for  determining  when  this  level  of  competition  is  reached.  367 


 108.  In  response,  cable  commenters  argue  that  the  Commission  must  conduct  a  dynamic  examination  of  market  power.  They  suggest  that  the  ability  to  exercise  market  power  depends  not  only 
 on  market  share,  but  on  the  elasticities  of  supply  and  demand.  Thus,  to  determine  cable  operators  market  power,  we  should  consider  barriers  to  entry  and  emerging  competition,  as  well  as  their  long-  run 
 effects.  These  commenters  maintain  that  a  dynamic  analysis  of  the  MVPD  market  indicates  that  the  Commission  need  not  impose  any  limits,  since  programmers  have  so  many  different  outlets  for  their 
 product  that  cable  operators  hold  no  deleterious  market  power.  368  They  point  out  that  when  Section  613(  f)  was  enacted,  cable  and  broadcast  television  were  the  primary  outlets  for  distributing  video 
 programming,  while  in  the  interim,  other  forms  of  video  distribution,  primarily  DBS,  have  become  much  more  widespread,  such  that  cables  share  of  all  MVPD  subscribers  has  been  reduced  by  almost  25%.  369 
 Furthermore,  many  commenters  contend  that  DBS  is  growing  at  a  fast  rate    a  rate  that  exceeds  cables  growth  rate    and  that  it  is  offering  digital  technology  that  has  vastly  expanded  channel  capacity.  In 
 addition,  Comcast  points  out  that  while  DBS  was  originally  predicted  to  thrive  only  in  areas  not  served  by  cable,  today,  at  least  half  of  all  new  DBS  subscribers  are  switching  from  cable.  370  These  commenters 
 maintain  that  because  any  dissatisfied  cable  customer  can  switch  to  DBS,  cable  operators  have  no  incentive  to  lower  the  quality  or  quantity  of  programming.  Therefore,  in  their  view,  limits  are  not 
 necessary.  371 
 109.  CFA  argues  that  DBS  is  not  a  substitute  for  cable,  because  of  its  higher  price  and  quality.  372  It  argues  that  DBS  provides  a  high  end  product  that  is  not  attractive  to  the  typical  lunch 
 bucket  consumer  of  cable  services.  373  CFA  claims  that  DBS  providers  prefer  to  compete  in  terms  of 
 365  2001  Further  Notice,  16  FCC  Rcd  at  17326    21. 


 366  Id.  at  17326-  27    22. 
 367  Id.  at  17327    23-  24. 
 368  Comcast  Comments  at  29-  31;  Time  Warner  Comments,  Joskow  and  McLaughlin  Decl.  at  2-  6,  11,  21;  NCTA 
 Comments,  Shelanski  Decl.  at  8;  AT&  T  Comments,  Ordover  Decl.  at  62;  Time  Warner  Comments  at  13-  14;  AT&  T  Reply  Comments  at  6. 


 369  Comcast  Comments  at  17-  29;  NCTA  Comments  at  11-  14. 
 370  Comcast  Comments  at  23. 
 371  Comcast  Comments  at  17-  21;  Time  Warner  Comments,  Joskow  and  McLaughlin  Decl.  at  6-  7;  AT&  T 
 Comments,  Ordover  Decl.  at  10,  23-  26;  PFF  Comments  at  18;  AT&  T  Reply  Comments  at  7. 
 372  CFA  Comments  at  163-  70.  See  also  Writers  Guild  Comments  at  9-  10  (rejecting  the  notion  that  the  existence 
 of  DBS  could  render  horizontal  limits  unnecessary). 
 373  CFA  Comments  170-  71. 
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 programming  and  not  price,  and  that  the  rise  of  DBS  competition  has  failed  to  limit  cable  rate  increases.  374  CFA  points  to  survey  data  that  show  that  rural  areas  often  lack  cable  service,  and  that  a 
 large  proportion  of  satellite  customers  live  in  rural  areas.  375  CFA  claims  that  the  survey  data  demonstrate  that  for  most  satellite  customers  cable  is  not  a  substitute,  either  because  it  is  not  available,  or  because 
 consumers  view  it  as  a  complement.  376  As  supporting  evidence  CFA  provides  an  analysis  of  consumer  survey  data  and  consumer  monthly  bills  that  shows  that  DBS  services  are  considered  higher  quality,  and 
 cost  more  than  basic  cable.  377 
 110.  We  seek  comment  on  CFAs  arguments  and  evidence,  especially  in  light  of  the  rapid  growth  of  DBS  subscribership  and  recent  changes  in  the  prices  and  programming  DBS  operators  offer. 
 We  find  no  evidence  that  cable  subscribers  are  substantially  less  affluent  than  satellite  subscribers.  In  2003,  average  household  income  of  cable  subscribers  was  $48,700,  while  that  of  satellite  subscribers  was 
 $51,600.  378  In  addition,  we  note  that  recent  reports  suggest  that  cable  subscriber  growth  has  stalled,  while  DBS  subscribership  continues  to  grow  at  a  rapid  rate.  379 


 111.  We  also  seek  comment  on  whether  a  dynamic  analysis  of  the  type  envisioned  by  cable  commenters  is  necessary,  and  comment  on  how  we  could  perform  such  an  analysis.  A  number  of  factors 
 suggest  that  a  dynamic  analysis  is  not  necessary.  First,  barriers  to  entry  in  the  MVPD  market  remain  high  for  new  entrants.  380  Cable  overbuilders  in  particular  have  faced  many  obstacles  in  their  attempts  to 
 enter  and  survive  in  the  marketplace,  and  many  overbuilders  have  scaled  back  construction  plans  or  failed.  381  Because  the  costs  of  building  competing  cable  systems  are  high,  overbuilders  today  generally 


 374  Id.  at  155-  57. 
 375  Id.  at  159-  60. 
 376  According  to  CFA:  Thus,  in  this  survey,  just  under  60%  of  respondents  either  cannot  get  cable  or  appear  to 
 view  it  as  a  complement,  rather  than  a  substitute.  Id.  at  163. 
 377  Id.  at  163-  70.  See  also  2005  GAO  Report  at  7-  8. 


 378  Calculated  by  FCC  staff  using  survey  data  from  TNS  Telecoms  ReQuest  Market  Monitor,  Bill  Harvesting. 
 379  See  11  th  Annual  Report,  20  FCC  Rcd  at  2758,  59    5,  7;  Peter  Grant,  Cable  Trouble:  Subscriber  Growth  Stalls 
 As  Satellite  TV  Soars,  WALL  ST.  J.,  Aug.  4,  2004,  at  B1. 
 380  Because  of  the  high  sunk  costs  and  specialized  assets  needed  to  enter  this  market,  one  possible  dynamic 
 theory,  that  of  contestable  market  theory,  may  not  apply  to  this  market.  See  William  J.  Baumol,  John  C.  Panzar  &  Robert  D.  Willig,  Contestable  Markets  and  the  Theory  of  Industry  Structure  (1988). 


 381  See,  e.  g.,  8  th  Annual  Report,  17  FCC  Rcd  at  1294-  97    107-  15;  Annual  Assessment  of  the  Status  of 
 Competition  in  the  Market  for  the  Delivery  of  Video  Programming,  17  FCC  Rcd  26901,  26948-  52    102-  11  (2002)  (9  th  Annual  Report).  See  also  RCN  Comments  at  3-  4.  There  have  been  recent  announcements  regarding 


 some  Bell  Operating  Companies  plans  to  roll  out  fiber  optic  cable  to  the  home  (FTTH)  to  provide  advanced  digital  services  to  their  customers,  including  multichannel  video  programming.  See,  e.  g.,  Verizon,  Verizon  Poised 
 to  Deliver  First  Set  of  Services  to  Customers  Over  Its  Fiber-  to-  the-  Premises  Network  (press  release),  July  19,  2004,  available  at  http://  newscenter.  verizon.  com/.  The  announcements  generally  involve  limited  test  market 
 areas.  Widespread  deployment,  if  determined  to  be  feasible,  is  still  several  years  away.  See  also  11  th  Annual  Report,  20  FCC  Rcd  at  2823-  25    127-  28. 
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 are  concentrated  in  high-  density  portions  of  urban  and  suburban  markets.  382  New  satellite-  based  competitors,  on  the  other  hand,  must  contend  with  physical  spectrum  constraints  and  limited  orbital 
 capacity.  383 
 112.  Second,  the  number  of  existing  MVPD  competitors  in  most  geographic  areas  remains  small  for  the  distribution  market,  three  in  most  cases,  and  two  in  others.  384  Because  this  market  is  still 
 highly  concentrated,  cable  operators  are  likely  to  retain  substantial  market  power  in  those  areas.  We  note  that  commenters  make  no  serious  attempt  to  calculate  the  effect  of  DBS  on  cable  operators 
 bargaining  power.  We  seek  comment  on  the  degree  to  which  the  presence  of  DBS  distribution  alternatives  acts  to  curb  cable  operators  bargaining  power  in  the  total  programming  market.  385 


 113.  We  also  find  that  commenters  have  failed  to  provide  a  method  of  analyzing  the  effects  of  competition  in  the  MVPD  market  that  would  allow  us  to  establish  a  specific  limit.  Despite  their 
 criticisms  of  the  static  model,  no  commenter  described,  demonstrated,  or  utilized  a  theoretical  framework  that  could  incorporate  the  competitive  effects  that  were  alleged  to  be  important.  386  We  seek  comment  on 
 whether  we  can  modify  the  model  to  incorporate  these  important  competitive  effects,  or  develop  a  new  framework,  taking  all  relevant  effects  into  account  that  would  enable  us  to  carry  out  our  statutory 
 responsibility  under  Section  613(  f). 
 (a)  Threshold  Approach 
 114.  In  the  2001  Further  Notice  the  Commission  asked  for  comment  on  whether  to  assess  a  cable  operators  market  power  in  the  MVPD  market  with  a  measure  other  than  its  market  share  in  the 


 national  market,  and  to  use  this  alternative  measure  in  a  so-  called  threshold  approach.  Under  this  approach,  the  Commission  would  determine  the  level  of  competition  from  DBS  and  other  MVPDs 
 necessary  to  prevent  the  harms  identified  by  Congress  in  Section  613(  f).  387  As  long  as  competition  exceeded  this  threshold,  no  horizontal  limit  would  be  necessary.  The  threshold  would  denote  a  level  of 
 competition  at  which  the  market  afforded  sufficient  alternative  means,  in  addition  to  cable,  for  video 


 382  See  8th  Annual  Report,  17  FCC  Rcd  at  1294    107. 
 383  See  EchoStar-  DirecTV  HDO,  17  FCC  Rcd  at  20616-  19    140-  50.  See  also  Morgan  Stanley,  Cablevision 
 Plans  To  Spin  Off  Satellite  and  Theater  Assets,  June  3,  2003  (  Even  with  all  13  frequencies,  there  is  not  enough  spectrum  to  effectively  offer  local  into  local.) 


 384  See  EchoStar-  DirecTV  HDO,  17  FCC  Rcd  at  20612-  14    126-  32. 
 385  We  note  that  subscribership  totals  for  existing  non-  cable  MVPDs,  especially  DBS,  are  included  in  our 
 calculations  of  market  shares  of  the  programming  market  for  cable  operators.  Thus  the  importance  of  DBS  providers  in  providing  a  competitive  alternative  to  cable  providers  could  be  considered  to  be  reflected  in  DBS 


 shares  of  the  total  MVPD  subscribers. 
 386  It  is  important  to  recognize  that  although  commenters  have  called  for  a  dynamic  market  analysis,  they  have 
 failed  to  provide  a  mathematically  rigorous  dynamic  model.  The  Raskovich  model,  which  commenters  rely  upon  extensively,  is  a  static  model.  We  are  not  aware  of  a  dynamic  model  of  the  MVPD  industry. 


 387  2001  Further  Notice,  16  FCC  Rcd  at  17343    64. 
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 programmers  to  reach  consumers.  The  2001  Further  Notice  proposed  several  measures  that  could  be  used  in  a  threshold  test  discussed  below,  and  asked  for  comment  on  these.  388 
 115.  PFF  advocates  a  threshold  approach,  and  argues  that  the  Commission  should  find  that  the  existence  of  a  single  MVPD  competitor  to  incumbent  cable  operators  is  sufficient  to  curb  the  harms 
 envisioned  by  Section  613(  f).  389  RCN  supports  a  similar  approach  for  measuring  and  addressing  market  power  to  control  sought-  after  programming  in  individual  markets  and  stresses  that  the  threshold 
 approach  should  be  applied  on  a  market-  by-  market  basis  and  not  simply  applied  nationally.  390  CFA  opposes  the  proposed  threshold  approach,  arguing  that  it  does  not  meet  the  statutory  requirement  that  the 
 Commission  shall  set  a  horizontal  ownership  limit.  391  CFA  further  contends  that  the  approach  is  unworkable  because  the  Commission  could  not  effectively  enforce  it.  392 


 116.  We  seek  additional  comment  on  the  use  of  the  threshold  approach  in  establishing  a  horizontal  ownership  cap.  In  the  2001  Further  Notice,  the  Commission  requested  comment  on  whether 
 the  Implicit  Lerner  Index,  the  q  ratio,  or  the  Herfindahl-  Hirschman  Index  (HHI)  could  be  used  in  the  threshold  approach.  393  We  seek  additional  comment  on  the  use  of  these  measures,  as  well  as  alternative 
 measures  of  market  performance.  How  well  does  the  economic  theory  underlying  these  measures  comport  with  the  characteristics  of  the  video  programming  and  MVPD  markets?  How  do  the  numeric 
 values  of  these  measures  relate  to  the  degree  to  which  the  flow  of  video  programming  from  the  programmer  to  the  consumer  may  be  unfairly  impeded?  If  we  adopted  any  of  these  measures,  how 
 would  they  be  calculated  and  applied  to  determine  the  appropriate  horizontal  limit? 


 388  Id.  at  17345-  46    69-  70.  In  the  2001  Further  Notice,  we  also  sought  comment  on  a  restriction  on  cable-  DBS 
 cross-  ownership  as  it  would  relate  to  the  adoption  of  a  threshold  approach.  Id.  at  17345    68.  We  received  comments  both  supporting  (Writers  Guild  Comments  at  10)  and  opposing  (Cablevision  Comments  at  5,  15-  16) 


 adoption  of  such  a  restriction.  Since  we  are  not  adopting  the  threshold  approach,  we  do  not  reach  the  question  of  whether  a  cable-  DBS  cross-  ownership  restriction  is  necessary  to  promote  the  goals  of  Section  613(  f). 


 389  PFF  Comments  at  17-  18.  At  the  same  time,  PFF  recommends  that  the  Commission  be  permitted  to  continue  to 
 gather  evidence  of  the  existence  of  market  power  and  resulting  harms  to  consumers  in  the  MVPD  marketplace  and  fashion  remedies  where  appropriate.  Id. 


 390  RCN  Comments  at  17-  18. 
 391  CFA  Comments  at  21-  25. 
 392  Id.  at  24-  25. 
 393  2001  Further  Notice,  16  FCC  Rcd  at  17342-  43    62-  64.  The  Commission  has  previously  examined  the  q-ratio 
 (also  known  as  Tobins  Q).  For  instance,  commenters  to  the  1990  Report  calculated  q-  ratios  for  the  cable  industry  of  between  3.3  and  4.3.  We  noted  in  the  report  that  although  the  high  q-  ratios  indicated  some,  or  even 


 substantial,  market  power  in  1990,  application  in  this  context  must  be  made  carefully  because  the  q-  ratio  is  sensitive  to  the  assumptions  made  in  its  calculation  and  to  specific  industry  characteristics.  See  Competition,  Rate 
 Deregulation  and  the  Commissions  Policies  Relating  To  the  Provision  of  Cable  Television  Service,  5  FCC  Rcd  4962,  4997-  5003    54-  70  (1990)  (  1990  Report).  Similar  conclusions  were  made  in  the  First  Annual  Video 
 Competition  Report.  See  Annual  Assessment  of  the  Status  of  Competition  in  the  Market  for  the  Delivery  of  Video  Programming,  9  FCC  Rcd  7442,  7542-  45    204-  12  (1994). 
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 (2)  The  Potential  for  Joint  Action 
 117.  Section  613(  f)(  2)(  A)  of  the  Communications  Act  requires  that  the  Commission  ensure  that  cable  operators,  either  singly  or  as  a  group,  because  of  their  size  or  because  of  their  joint  actions,  not 


 be  able  to  unfairly  impede  the  flow  of  video  programming.  394  In  the  1999  Cable  Ownership  Order,  the  Commission  assumed  that  multiple  avenues  of  entry  were  necessary  to  ensure  the  unimpeded  flow  of 
 programming.  The  Commission  utilized  an  open  field  approach  to  set  a  30%  limit,  which  guaranteed  that  even  if  there  were  collusion  between  the  two  largest  players  to  attempt  to  prevent  entry  by  a 
 programmer,  that  programmer  would  still  be  able  to  gain  enough  subscribers  through  carriage  on  other  systems.  The  1999  order  also  hypothesized  that  the  two  largest  operators  might  effectively  preclude 
 entry  of  a  new  programmer  by  tacitly  reaching  the  same  carriage  decision.  The  Time  Warner  II  court  rejected  the  Commissions  analysis,  arguing  that  the  risk  of  collusion  had  been  inadequately 
 substantiated,  and  that  the  Commission  had  failed  to  demonstrate  that  the  legitimate,  independent  editorial  choices  of  multiple  cable  operators  could  unfairly  impede  the  flow  of  video  programming.  395 
 It  found  the  Commission  had  not  presented  evidence  that  collusion  was  likely  and  therefore  had  not  adequately  supported  its  limits. 


 118.  We  ask  whether  Section  613(  f)(  2)(  A)  of  the  Communications  Act  requires  the  Commission  to  examine  the  possibility  of  joint  action,  in  which  firms  act  to  maximize  their  joint  benefits 
 by  reducing  competition,  either  through  overt  collusion,  which  is  generally  prohibited  by  the  antitrust  laws,  396  or  tacit  collusion,  without  direct  communication  between  the  firms.  397  We  also  ask  whether  such 
 an  analysis  would  be  consistent  with  the  courts  findings  in  Time  Warner  II.  Because  the  language  of  the  Act  refers  to  cable  operators  joint  actions,  and  because  the  economics  and  legal  literatures 
 (including  the  Horizontal  Merger  Guidelines)  398  acknowledge  the  possibility  of  tacit  collusion  in  certain 


 394  Section  613(  f)(  2):  In  prescribing  rules  and  regulations  under  paragraph  (1),  the  Commission  shall,  among 
 other  public  interest  objectives    (A)  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. 
 395  Time  Warner  II,  240  F.  3d  at  1134-  36. 


 396  In  most  cases,  for  example,  communications  between  or  among  firms  in  order  to  fix  prices  is  per  se  illegal. 
 397  Tacit  collusion  is  the  standard  term  used  in  the  economics  literature  used  to  refer  to  competing  firms  acting 
 to  maximize  their  joint  benefits  by  reducing  competition  between  them  without  directly  communicating  with  each  other.  Other  terms  used  are  conscious  parallelism  and  tacit  coordination.  See,  e.  g.,  Carlton  and  Perloff  at  134; 


 Marc  Ivaldi,  Bruno  Jullien,  Patrick  Rey,  Paul  Seabright,  and  Jean  Tirole,  The  Economics  of  Tacit  Collusion,  n.  2,  Final  Report  for  DG  Competition,  European  Commission,  Institut  DEconomie  Industrielle  (Toulouse)  (Mar. 
 2003);  F.  M.  Scherer  and  David  Ross,  INDUSTRIAL  MARKET  STRUCTURE  AND  ECONOMIC  PERFORMANCE,  265,  339  (3rd  ed.,  1990).  The  1997  Horizontal  Merger  Guidelines  use  the  broader  term  coordinated  interaction  in  section 
 2.1  to  refer  to  actions  by  a  group  of  firms  that  are  profitable  for  each  of  them  only  as  a  result  of  the  accommodating  reactions  of  the  others.  It  is  a  broader  term  because  it  refers  to  both  tacit  and  express  collusion. 
 1997  Horizontal  Merger  Guidelines,  section  2.1. 
 398  1997  Horizontal  Merger  Guidelines,  section  2.1.  See,  e.  g.,  Carlton  and  Perloff  at  134;  Ivaldi,  Jullien,  Rey, 
 Seabright,  and  Tirole;  Scherer  and  Ross  at  205-  06,  ch.  7,  9;  Herbert  Hovenkamp,  Antitrust  Law:  An  Analysis  Of  Antitrust  Principles  And  Their  Application,  XII  ASPEN  LAW  &  BUSINESS,  21  (1999). 
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 circumstances,  we  tentatively  conclude  that  we  should  determine  whether  joint  action  399  by  cable  operators  is  likely,  and  if  we  determine  that  it  is  likely,  we  should  factor  this  into  the  analysis. 
 119.  We  note  that  an  explicit  agreement  among  firms  in  a  given  market  may  not  be  necessary  for  that  market  to  be  characterized  by  joint  action.  Such  collusive  behavior  may  arise  as  a  result  of 
 conscious  parallelism  in  the  behavior  of  firms.  Conscious  parallelism  can  arise  without  any  explicit  agreement  among  firms,  but  simply  as  the  result  of  a  rational  calculation  by  each  firm  of  the 
 consequences  of  its  actions  for  competing  firms,  particularly  taking  into  account  the  most  likely  reactions  of  those  firms.  400  This  kind  of  coordinated  action  is  difficult  to  detect  or  control.  As  one  court 
 observed:  Tacit  coordination  is  feared  by  antitrust  policy  even  more  than  express  collusion,  for  tacit  collusion,  even  when  observed,  cannot  easily  be  controlled  directly  by  the  antitrust  laws.  It  is  a  central 
 object  of  merger  policy  to  obstruct  the  creation  or  reinforcement  by  merger  of  such  oligopolistic  market  structures  in  which  tacit  coordination  can  occur.  401 


 120.  We  sought  comment  and  economic  evidence  in  the  2001  Further  Notice  on  whether  cable  operators  have  the  incentives  to  engage  in  collusive  behavior,  and  on  what  kinds  of  coordinated  or 
 collusive  conduct  would  be  relevant  to  the  establishment  of  a  limit.  402  We  also  sought  information  and  evidence  on  whether  cable  operators  existing  activities  constitute  collusion.  403  Cable  commenters  argue 
 that  cable  operators  lack  an  incentive  to  collude,  and  that  this  is  evidenced  by  their  past  behavior,  which  shows  that  cable  operators  have  not  disfavored  unaffiliated  programming  nor  hindered  the  flow  of 
 programming.  404  They  also  argue  that  collusion  to  block  entry  by  a  rival  programmer  is  a  violation  of  the  antitrust  laws.  405  Time  Warner  argues  that  cable  operators  that  are  not  vertically  integrated  do  not 
 have  an  incentive  to  collude,  because  they  do  not  compete  with  each  other.  406  Cable  commenters  also  argue  that  reducing  purchases  of  programming  will  not  yield  lower  prices  and  that  therefore  cable 
 operators  have  nothing  to  gain  from  colluding  in  order  to  jointly  exercise  monopsony  power.  407  AT&  T 


 399  We  focus  our  analysis  on  the  likelihood  of  tacit  collusion,  since  overt  collusion  is  per  se  illegal  under  the 
 antitrust  laws.  Scherer  and  Ross  at  ch.  9. 
 400  See,  e.  g.,  D.  F.  Turner,  The  Definition  of  Agreement  Under  the  Sherman  Act:  Conscious  Parallelism  and 
 Refusal  to  Deal,  75  HARV.  L.  REV.  655  (Feb.  1962)  at  661;  Scherer  and  Ross  at  339-  46. 
 401  Federal  Trade  Commn  v.  H.  J.  Heinz  Co.,  246  F.  3d  708,  725  (D.  C.  Cir.  2001)  (citing  Phillip  E.  Areeda, 
 Herbert  Hovenkamp  &  John  L.  Solow,  Antitrust  Law    901b2  at  9  (rev.  ed.  1998)). 
 402  2001  Further  Notice,  16  FCC  Rcd  at  17340    56. 


 403  Id. 
 404  AT&  T  Comments  at  66-  67;  AT&  T  Comments,  Ordover  Decl.  at  77-  82;  AT&  T  Comments,  Besen  Decl.  at  6- 
 14;  Time  Warner  Comments,  Joskow  and  McLaughlin  Decl.  at  19-  20;  NCTA  Comments  at  17-  20;  Time  Warner  Comments  at  20-  22. 


 405  Time  Warner  Comments,  Joskow  and  McLaughlin  Decl.  at  20;  Time  Warner  Comments  at  21;  AT&  T 
 Comments,  Ordover  Decl.  at  77. 
 406  Time  Warner  Comments,  Joskow  and  McLaughlin  Decl.  at  19-  20. 


 407  Id.  at  20;  AT&  T  Comments,  Ordover  Decl.  at  78;  NCTA  Comments  at  19-  20. 
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 argues  that  the  possibility  that  cable  operators  would  jointly  engage  in  vertical  foreclosure  is  particularly  far-  fetched,  because  joint  action  increases  the  costs  and  reduces  the  benefits  of  such  an 
 action.  408  Time  Warner  argues  that  the  characteristics  of  the  industry  make  collusion  unlikely.  It  argues  that  the  wide  variation  in  the  value  of  carrying  particular  programming  to  cable  operators,  and  the 
 complex  non-  public  nature  of  program  carriage  contracts,  make  reaching  a  formal  or  tacit  agreement,  policing  it,  and  punishing  cheating  extremely  difficult.  409 


 121.  We  are  not  persuaded  by  the  comments  that  joint  action  could  not  occur  under  certain  circumstances.  Much  of  the  empirical  evidence  cited  by  the  cable  industrys  economists  is  based  on  past 
 performance  of  the  market,  when  cable  operators  were  much  smaller  than  we  are  contemplating  today,  although  even  then  there  were  reports  of  various  forms  of  joint  action.  410  We  also  find  unpersuasive 
 arguments  that  cable  operators  lack  an  incentive  to  act  jointly  to  gain  advantage.  If  we  determine  that  a  cable  operator  of  a  sufficient  size  would  find  it  profitable  to  engage  in  conduct  of  the  types  discussed 
 above,  411  then  the  possibility  exists  that  two  or  more  smaller  cable  operators,  whose  combined  size  is  also  sufficiently  large,  would  seek  to  maximize  their  profits  by  jointly  engaging  in  this  conduct.  Because 
 we  remain  concerned  about  the  possibility  of  joint  action,  we  seek  further  comment  on  whether  cable  operators  have  the  incentive  and  ability  to  engage  in  joint  action.  If  joint  action  is  likely,  we  ask  how 
 many  cable  operators  are  likely  to  engage  in  joint  action  on  any  programming  decision,  412  and  how  we  should  use  the  findings  on  these  issues  to  devise  a  horizontal  limit. 


 122.  We  first  ask  whether  cable  operators  have  an  incentive  to  engage  in  joint  action  with  respect  to  the  acquisition  of  programming.  If  a  single  firm  of  sufficient  size  has  an  incentive  to  engage 


 408  AT&  T  Comments,  Ordover  Decl.  at  79.  In  contrast,  Time  Warner  believes  that  only  vertically-  integrated  cable 
 operators  could  have  an  incentive  to  collude.  It  argues  that  the  legal  restrictions  on  collusion,  the  wide  variation  in  benefits  for  cable  operators  carrying  a  program,  and  the  complexity  of  program  carriage  contracts,  make  it 


 difficult  to  collude.  Time  Warner  Comments,  Joskow  and  McLaughlin  Decl.  at  20. 
 409  Time  Warner  Comments,  Joskow  and  McLaughlin  Decl.  at  20;  see  also  AT&  T  Comments,  Ordover  Decl.  at 
 78. 
 410  See,  e.  g.,  Leo  Hindery  and  Leslie  Cauley,  The  Biggest  Game  of  All:  The  Inside  Strategies,  Tactics,  And 
 Temperaments  That  Make  Great  Dealmakers  Great,  New  York:  The  Free  Press,  2003,  at  185.  (  Some  years  ago,  Group  W,  the  cable  arm  of  Westinghouse,  tried  to  launch  a  news  service  to  compete  with  CNN.  Cable  operators 


 locked  arms    and  turned  Group  W  down  flat.  After  months  of  trying  to  get  carriage  for  the  service  and  getting  nowhere,  Group  W  finally  shut  the  whole  thing  down.) 


 411  For  example,  the  possibility  of  a  cable  operator  using  its  bargaining  power  to  force  down  the  price  for 
 programming  to  below  competitive  levels,  and  engaging  in  vertical  foreclosure  to  reduce  entry  and  competition  in  the  programming  or  distribution  markets.  See  Sections  II.  C.,  supra  (analysis  of  monopsony  power,  bargaining 


 power,  and  vertical  foreclosure). 
 412  Clearly,  the  greater  the  number  of  cable  operators  that  are  likely  to  act  jointly,  the  smaller  the  individual 
 threshold  size  we  should  be  concerned  with.  Thus  if,  for  example,  the  threshold  size  for  anticompetitive  conduct  were  found  to  be  60%  for  one  firm,  the  threshold  assuming  joint  action  by  two  firms  would  be  30%,  by  three  firms 


 20%,  and  by  four  firms  15%,  to  achieve  the  same  benefits  (assuming  that  the  threshold  size  remains  constant  as  the  number  of  firms  acting  jointly  increases).  The  economics  literature  suggests  that  the  ability  and  desire  to  act 
 jointly  decreases  as  the  number  of  firms  participating  increases.  Carlton  and  Perloff  at  132-  34;  Scherer  and  Ross  at  277-  79. 
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 in  anticompetitive  behavior,  does  it  necessarily  follow  that  a  group  of  smaller  firms  would  have  an  incentive  to  collectively  engage  in  similar  behavior?  413  Assuming  that  a  single  firm  did  have  an 
 incentive  to  engage  in  anticompetitive  behavior  of  some  sort,  414  a  key  question  that  follows  is  whether  cable  operators  are  likely  to  have  similar  or  divergent  interests  in  their  purchase  of  programming.  The 
 MVPD  market  appears  to  exhibit  a  number  of  characteristics  that  could  provide  an  incentive  for  cable  operators  to  coordinate  their  actions  in  the  purchase  of  programming.  Cable  operators  are  dependent  on 
 quality  programming  to  attract  and  keep  subscribers;  programming  networks  depend  on  MVPDs  for  distribution  of  their  programming  to  consumers,  the  most  important  of  which  in  most  geographic 
 markets  are  the  cable  operators;  and  cable  operators  compete  against  DBS  and  other  entrants,  but  generally  not  against  each  other.  These  facts  align  cable  operators  interests  in  such  a  way  that  makes 
 joint  action  potentially  desirable  for  them.  415  In  certain  aspects  cable  operators  may  have  similar  interests,  while  in  others  their  interests  may  diverge.  For  example,  it  is  likely  that  all  cable  operators 
 want  to  minimize  their  payments  for  the  programming  networks  they  carry,  or  at  least  to  extract  the  best  value  possible  for  the  lowest  price.  Yet  they  may  differ  in  the  cost-  quality  tradeoffs  they  might  accept, 
 with  some  cable  operators  preferring  lower-  quality,  lower-  cost  programming.  They  may  also  have  a  divergent  interest  in  desiring  to  shift  the  burden  of  paying  the  fixed  costs  of  programming  onto  other 
 cable  operators.  Cable  operators  may  also  diverge  in  their  interests  in  discriminating  against  rival  networks.  Some  cable  operators  may  not  have  the  same  interest  in  foreclosing  an  independent  network 
 as  an  operator  who  owns  a  rival  affiliated  network,  and  may  in  fact  prefer  to  maintain  competition  in  network  programming.  Certain  practices  may  increase  cable  operators  incentives  to  act  jointly.  For 
 example,  joint  ventures  by  cable  operators  in  providing  network  programming  potentially  give  the  co-owners  a  shared  incentive  to  discriminate  against  rival  networks.  416  We  seek  comment  on  this  analysis. 


 413  If  so,  it  could  be  argued  that  any  time  we  find  that  a  single  cable  operator  of  a  particular  threshold  size  is  likely 
 to  successfully  engage  in  anticompetitive  behavior,  we  should  then  consider  whether  multiple  operators  whose  combined  size  achieves  at  least  that  threshold  size,  would  likely  engage  in  collusive  behavior  to  achieve  the  same 


 results. 
 414  The  question  of  whether  a  single  firm  of  sufficient  size  would  have  an  incentive  to  engage  in  anticompetitive 
 behavior  is  discussed  above  in  the  sections  on  monopsony  power,  bargaining  power,  and  vertical  foreclosure.  See  Sections  II.  C.,  supra.  See  also  Time  Warner  II,  240  F.  3d  at  1130  (  The  Commission  is  on  solid  ground  in 


 asserting  authority  to  be  sure  that  no  single  company  could  be  in  a  position  singlehandedly  to  deal  a  programmer  a  death  blow.);  Time  Warner  I,  211  F.  3d  at  1320  (  Congress  reasonably  concluded  that  this  concentration  [in  the 
 cable  industry]  threatened  the  diversity  of  information  available  to  the  public  and  could  form  a  barrier  to  entry  of  new  cable  programmers.).  Aside  from  the  question  of  a  single  firms  behavior,  we  ask  whether  it  is  possible  that 
 two  or  more  firms  could  have  an  incentive  to  collude  and  jointly  engage  in  anticompetitive  behavior. 
 415  In  certain  key  aspects,  much  of  the  discussion  of  the  theory  of  collusion  in  the  economics  literature  does  not 
 apply  to  this  market.  While  in  the  usual  discussion  of  a  cartel  selling  a  good,  each  members  sales  will  potentially  reduce  the  sales  of  the  other  members,  here,  because  the  product  is  characterized  by  non-  rivalrous  consumption, 


 each  purchase  does  not  reduce  the  quantity  available,  or  the  purchases  by  others,  of  the  product.  In  addition,  cable  operators  do  not  compete  with  each  other,  so  they  cannot  gain  market  share  by  cheating  on  the  cartel. 


 416  Many  cable  operators  participate  in  joint  ventures  to  provide  network  programming.  For  example,  Cox 
 Communications  and  Advance/  Newhouse  Communications  each  own  25%  of  Discovery  Communications,  which  owns  cable  networks  such  as  the  Discovery  Channel,  Animal  Planet,  and  TLC.  See  11  th  Annual  Report,  20  FCC 


 Rcd  at  2874-  76  Appendix  C,  Table  C-  1.  See  also  Annys  Shin,  Big  Discovery  Shareholders  Refuse  to  Join  Liberty  Spinoff,  WASHINGTON  POST,  May  13,  2005,  at  E1. 
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 123.  We  also  seek  comment  on  whether  cable  operators  have  the  ability  to  engage  in  joint  action,  and  we  seek  economic  analysis  and  evidence  indicating  the  ease  of  engaging  in  joint  action  in 
 this  market.  Some  general  characteristics  of  the  industry  may  facilitate  joint  action.  The  MVPD  market  is  highly  concentrated  with  high  barriers  to  entry  by  new  competitors  and  an  absence  of  close  substitutes 
 for  the  services  both  bought  and  sold  by  the  industry.  These  characteristics  are  similar  to  the  general  characteristics  described  in  the  economic  literature  as  leading  to  either  overt  collusion  or  conscious 
 parallelism  in  behavior.  417 
 124.  Other  general  characteristics  of  the  industry  may  make  joint  action  more  difficult.  The  product  purchased,  network  programming,  is  heterogeneous  between  networks.  Therefore  establishing  a 
 uniform  price  schedule  for  the  purchase  of  all  programming  418  would  be  very  difficult.  419  However,  each  programmers  product  (i.  e.,  its  programming  network),  which  is  offered  to  all  MVPDs,  is  homogenous, 
 providing  cable  operators  the  opportunity  to  engage  in  joint  action  with  respect  to  the  price  paid  for  that  network.  The  use  of  private  negotiations,  with  non-  public  terms  of  agreement,  would  appear  to  make  it 
 very  difficult  for  cable  operators  to  tacitly  engage  in  joint  action,  at  least  in  terms  of  prices.  The  complexity  of  these  agreements,  and  the  tendency  to  specify  lower  per-  subscriber  prices  for  larger 
 purchases  of  programming  in  these  agreements,  also  mitigate  against  joint  action.  420  Joint  action  for  the  purpose  of  vertical  foreclosure  of  rival  networks,  however,  will  not  be  hindered  by  these  practices,  since 
 network  carriage  is  easy  to  observe. 
 125.  We  seek  comment  on  the  harms  (or  benefits)  that  could  be  caused  by  joint  action.  We  do  not  wish  to  promulgate  regulations  that  prevent  beneficial  joint  action,  but  we  are  concerned 
 nonetheless  about  the  possibility  for  harmful  joint  action.  Some  joint  actions  may  harm  consumers  by  making  the  potential  harms  arising  from  horizontal  concentration  possible  at  lower  levels.  Joint  action 
 can  be  particularly  harmful  because  it  creates  the  inefficiency  attendant  to  a  monopoly,  but  denies  consumers  the  efficiencies  that  might  result  from  a  merger.  421  In  addition,  joint  action  that  seeks  to  shift 
 costs  onto  rival  MVPDs  or  to  favor  affiliated  programming  over  unaffiliated  programming  distorts  the  market  and  denies  consumers  the  benefits  of  fair  competition.  On  the  other  hand,  some  forms  of  joint 
 action  among  cable  operators  benefit  consumers  and  are  desirable.  For  instance,  joint  action  to  save  struggling  networks  or  joint  ventures  to  launch  new  networks  may  preserve  or  increase  the  diversity  and 
 quality  of  programming  available  to  consumers.  422  The  effects  of  other  actions  are  indeterminate  in  that 
 417  See  Pepell,  Richards  and  Norman,  Industrial  Organization  at  383.  These  general  characteristics  are  as  follows: 
 (1)  there  are  very  few  substitutes  available  to  consumers  for  the  products  sold  (or  bought)  by  the  firms  in  the  market  (i.  e.,  the  demand  curves  for  the  products  are  relatively  inelastic);  (2)  there  is  little  or  no  prospect  of 


 competitive  entry  into  the  market;  (3)  the  cost  of  reaching  a  cooperative  agreement  among  firms  in  the  market  is  small  due  to  the  high  level  of  industry  concentration,  the  small  number  of  firms  in  the  market,  the  similar  cost 
 conditions  among  the  firms  and/  or  the  lack  of  significant  product  differentiation  among  the  firms;  (4)  the  cost  of  maintaining  a  cooperative  agreement  among  the  firms  is  also  small  due  to  frequent  interaction  among  the  firms; 
 and  (5)  market  conditions  tend  to  be  relatively  stable. 
 418  Price-  fixing  is  a  traditional  goal  of  cartels. 


 419  Time  Warner  Comments,  Joskow  and  McLaughlin  Decl.  at  20. 
 420  Id. 
 421  See  John  E.  Kwoka,  Jr.  and  Lawrence  J.  White,  THE  ANTITRUST  REVOLUTION,  167  (3  rd  ed.,  1999). 
 422  For  example,  on  several  occasions,  MSO  investment  has  enabled  a  programming  service  to  remain  in 
 (continued.) 
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 they  may  benefit  consumers,  but  may  also  harm  them.  For  instance,  joint  bargaining  for  lower  programming  costs  may  lower  cable  operator  costs  and  allow  them  to  charge  lower  prices,  but  it  may 
 also  harm  programmers  or  MVPD  rivals  by  reducing  the  amount  and  quality  of  programming  available,  and  thus  deny  consumers  quality  programming  or  the  benefits  of  competition.  We  seek  comment  on  the 
 likelihood  that  joint  action  will  impede  the  flow  of  programming,  either  by  forcing  down  the  price  of  programming  paid  by  cable  operators  to  a  level  that  reduces  the  quantity  and/  or  quality  of  programming, 
 or  by  foreclosing  entry  by  either  rival  unaffiliated  network  programmers  or  by  competing  MVPDs. 
 (3)  The  Impact  of  Independent  Actions  by  Multiple  Cable  Operators 
 126.  We  ask  whether  there  are  theories  addressing  how  multiple  cable  operators  that  are  acting  independently  could  unfairly  impede  the  flow  of  programming,  as  discussed  in  Time  Warner  II. 


 The  open  field  approach  the  Commission  used  in  the  1999  Cable  Ownership  Order  assumed  that  multiple  avenues  of  entry  were  necessary  to  ensure  the  unimpeded  flow  of  programming.  The 
 Commission  pointed  out  that  a  30%  limit  would  ensure  that  there  were  at  least  four  cable  operators.  The  Time  Warner  II  court  held  that  the  Commission  had  failed  to  demonstrate  that  the  legitimate, 
 independent  editorial  choices  of  multiple  cable  operators  could  unfairly  impede  the  flow  of  video  programming.  In  the  2001  Further  Notice  we  sought  comment  on  the  possible  harms  that  could  arise 
 from  high  levels  of  horizontal  concentration.  423  We  also  sought  comment  on  the  possible  effects  of  the  level  of  concentration  on  the  amount  and  diversity  of  programming.  424  AT&  T  argued  that  if  there  are  at 
 least  two  outlets  and  no  collusion,  a  programmers  failure  to  reach  homes  is  the  result  of  legitimate,  independent  editorial  choices  and  cannot  be  deemed  unfair.  425  Comcast  argues  that  cable  operators  are 
 unable  to  exercise  editorial  oversight  and  impair  the  ability  of  a  program  producer  to  access  viewers  through  broadcast  stations  because  the  stations  can  secure  carriage  through  the  exercise  of  their  must-carry 
 rights.  426  The  Writers  Guild  of  America  argues  that  consolidation  in  program  production  and  distribution  has  already  eroded  quality  and  creativity  and  reduced  diversity.  427  We  seek  comment  on 
 whether  there  are  analytical  approaches  that  would  establish  whether  multiple  cable  operators,  acting  independently  and  with  no  attempt  to  overtly  or  tacitly  coordinate  their  actions  with  other  cable 
 operators,  could  harm  the  market  or  the  ability  of  programmers  to  gain  carriage.  We  further  ask  whether  such  approaches  would  be  consistent  with  the  courts  holding  in  Time  Warner  II  that  promoting  diversity 
 alone  is  not  a  sufficient  basis  for  crafting  a  limit  designed  to  address  multiple  cable  operations  independent  editorial  choices.  428 
 (Continued  from  previous  page)  operation  when  it  otherwise  would  have  been  forced  to  discontinue  its  programming.  MSO  commenters 
 emphasize  that  the  cable  industry  provided  critical  financial  support  to  sustain  both  Turner  Broadcasting  (owner  of  WTBS  and  CNN)  and  C-  SPAN.  In  addition,  NCTA  quotes  Discovery  Channel  Chairman  John  S.  Hendricks 
 statement  that  cable  operators  investment  rescue[  d]    his  programming  service.  1990  Report,  5  FCC  Rcd  at  5009    83  (citations  omitted). 


 423  2001  Further  Notice,  16  FCC  Rcd  at  17340    57. 
 424  Id.  at  17330-  31    35. 
 425  AT&  T  Comments  at  13-  14. 
 426  Comcast  Comments  at  25-  26.  See  Communications  Act    614-  615,  47  U.  S.  C.    534-  535. 
 427  Writers  Guild  of  America  Comments  at  5. 
 428  See  Time  Warner  II,  240  F.  3d  at  1135. 
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 127.  We  seek  comment  on  whether  and  to  what  extent  the  independent  decisions  of  cable  operators  regarding  carriage  of  new  networks  should  be  considered,  and  how  the  actions  of  independent 
 cable  operators,  not  acting  in  overt  or  tacit  collusion,  could  cause  harm  to  the  market  and  to  independent  programmers.  We  seek  comment  on  the  ability  of  cable  operators  to  identify  networks  that  will  be 
 successful,  and  the  cost  to  programmers  and  to  consumers  of  cable  operator  errors  in  predicting  the  value  of  new  networks.  We  also  request  information  on  whether  the  existence  of  two  powerful,  incumbent 
 DBS  operators  affects  these  relationships.  429 
 (4)  The  Impact  of  Vertical  Integration 
 128.  In  the  2001  Further  Notice  we  asked  whether  large  cable  operators  with  programming  interests  would  have  an  incentive  to  unfairly  favor  affiliated  programming  over  unaffiliated 


 programming,  and  whether  they  could  withhold  their  affiliated  programming  from  competitors  in  order  to  disadvantage  or  prevent  entry  by  competing  MVPDs,  such  as  cable  overbuilders.  430  We  also  asked  if 
 they  could  use  their  size  to  gain  large  programming  license  fee  discounts  and  exclusive  contracts  with  nonaffiliated  programming,  and  whether  this  would  harm  rival  MVPDs,  lessen  competition,  and  reduce 
 the  flow  of  programming  to  consumers.  431  We  sought  comment  and  empirical  evidence  on  whether  these  problems  have  occurred  in  the  past  or  are  likely  to  occur  if  cable  operators  are  not  constrained  by 
 an  ownership  limit.  432  As  discussed  below,  we  find  the  studies  and  analysis  submitted  in  the  record  on  the  issue  of  vertical  foreclosure  to  be  insufficient  evidence  to  support  a  particular  horizontal  limit  on 
 subscribership,  and  we  seek  further  comment  and  empirical  evidence  on  the  likelihood  of  vertical  foreclosure  and  the  ability  of  a  horizontal  limit  to  reduce  that  likelihood. 


 129.  We  seek  comment  and  evidence  on  whether  a  large  cable  operator  that  reaches  a  threshold  size  will  have  the  incentive  and  ability  to  engage  in  consumer  foreclosure.  We  further  ask 
 whether  an  open  field  approach,  such  as  that  employed  by  the  Commission  in  the  1999  Cable  Ownership  Order,  in  conjunction  with  our  program  access  rules,  433  would  be  sufficient  to  ensure  that  a  large  cable 
 operator  would  not  be  able  to  successfully  engage  in  vertical  foreclosure. 
 (a)  Empirical  Studies  of  Foreclosure 
 130.  In  response  to  the  2001  Further  Notice,  empirical  studies  were  submitted  to  the  Commission  that  examined  whether  vertically  integrated  cable  operators  have  favored  their  affiliated 


 programming  services  and  are  likely  to  do  so  in  the  future.  434  CFA  alleges  that  large  cable  operators 


 429  Several  independent  networks,  such  as  CSTV,  NFL  Network  and  Reality  TV,  secured  their  first  distribution 
 deals  on  DBS  systems  before  securing  distribution  on  cable  systems. 
 430  2001  Further  Notice,  16  FCC  Rcd  at  17328-  29    29. 


 431  Id.  at  17329    30. 
 432  Id. 
 433  See  47  C.  F.  R.    76.1000-  1003. 
 434  AT&  T  Comments,  Besen  Decl.  at  10-  14;  Time  Warner  Comments,  Joskow  and  McLaughlin  Decl.  at  2-  7. 
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 already  engage  in  foreclosure.  CFA  cites  several  examples  of  alleged  abuses.  435  The  specific  allegations  of  abuses  that  CFA  raises,  however,  are  either  anecdotal  or  unsubstantiated.  Most  of  the  anecdotal 
 examples  occurred  several  years  or  even  decades  ago.  CFA  also  points  to  two  studies  which  examined  the  effects  of  vertical  integration  on  the  carriage  of  cable  programming,  and  found  that  vertically 
 integrated  cable  operators  may  have  favored  their  affiliated  programming  services  in  the  past.  For  example,  using  an  econometric  model  of  the  cable  TV  industry,  Chipty  found  that  vertically  integrated 
 cable  operators  tend  to  exclude  programming  services  provided  by  their  rivals.  436  Similarly,  Waterman  and  Weiss  empirically  examined  the  effects  of  vertical  integration  in  the  cable  industry.  They  found  that 
 vertically  integrated  cable  operators  tend  to  favor  the  programming  providers  with  which  they  have  an  ownership  affiliation.  437  They  also  found  that  increasing  channel  capacity  reduces,  but  does  not 
 eliminate,  this  tendency.  438 
 131.  Although  these  academic  papers  indicate  that  some  foreclosure  may  have  occurred  in  the  past,  they  use  data  from  a  time  when  channel  capacity  was  more  constrained.  For  instance,  Waterman 
 and  Weiss  chose  to  examine  cable  systems  with  54  or  more  channels  separately,  because  this  represented  the  state-  of-  the  art  technology  at  the  time,  and  found  that  systems  with  more  channels  carried  more 
 networks,  including  rivals  to  affiliated  programming.  439  Today,  most  cable  subscribers  have  access  to  more  than  54  channels,  and  consumers  purchasing  digital  tiers  often  have  access  to  over  100  channels  of 
 programming.  Given  the  Waterman  and  Weiss  finding  that  the  tendency  to  favor  affiliated  programming  diminished  with  increased  channel  capacity,  combined  with  the  increase  of  channel  capacity  since  their 
 study  was  performed,  we  ask  whether  it  is  possible  to  conclude  that  the  behavior  they  observed  is  likely  to  continue.  The  data  used  by  Chipty  are  also  quite  old,  covering  1991,  and  examine  home  shopping 
 networks,  which  may  present  cable  operators  with  different  financial  incentives  than  other  types  of  networks.  440  In  addition,  the  significant  increase  in  retail  competition  from  DBS  could  raise  the  cost  to 
 cable  operators  of  favoring  affiliated  networks,  and  thus  act  as  a  deterrent  to  a  policy  of  foreclosure.  441  Since  the  industry  has  undergone  tremendous  change  since  these  studies  were  performed,  we  tentatively 
 conclude  that  these  studies  are  of  little  probative  value  in  our  analysis. 
 132.  Cable  operators  have  submitted  studies  that  purport  to  show  that  they  have  no  theoretical  incentive  to  favor  affiliated  programming  networks  and  not  carry  attractive  unaffiliated  programming 


 435  CFA  reports  examples  where  MVPDs  were  denied  access  to  New  England  Cable  News  and  TVLand  by  AT&  T 
 Broadbands  Headend  in  the  Sky.  CFA  Comments  at  128-  29. 
 436  Tasneem  Chipty,  Vertical  Integration,  Market  Foreclosure,  and  Consumer  Welfare  in  the  Cable  Television 
 Industry,  91  THE  AMERICAN  ECONOMIC  REVIEW  3,  428-  53  (Jun.  2001)  (Tasneem  Chipty,  Vertical  Integration). 
 437  Waterman  and  Weiss  at  101.  Waterman  and  Weiss  examine  both  premium  networks  and  basic  cable  networks. 


 438  Id. 
 439  Waterman  and  Weiss  found  that  as  capacity  expands,  vertically  integrated  systems  tend  to  increase  the  carriage 
 of  all  networks,  including  those  of  rival,  unaffiliated  networks.  Waterman  and  Weiss  at  93,  100-  01. 
 440  See  Chipty  at  429,  432-  33,  436-  39. 


 441  See  AT&  T  Comments  at  51;  NCTA  Comments  at  13-  14.  We  discuss  CFAs  argument  that  DBS  does  not  act 
 as  a  constraint  on  cable  operators  behavior  in    109  and  110,  supra. 
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 networks;  442  that  programmers  could  use  alternative  distribution  channels  (such  as  broadcast  TV,  foreign  MVPDs,  and  DVD  sales)  if  a  cable  operator  attempted  to  foreclose  rival  networks;  443  that  larger  cable 
 operators  have  tended  to  have  more  channel  capacity  and  carry  more  channels;  444  that  cable  operators  have  not  engaged  in  foreclosure  in  the  past,  and  there  has  been  plentiful  entry;  445  and  that  a  cable 
 operators  incentive  to  foreclose  shrinks  as  its  size  increases.  446  They  argue  that  this  evidence  demonstrates  that  an  increase  in  cable  concentration  will  not  increase  the  likelihood  of  foreclosure  and 
 reduce  the  flow  of  programming.  447 
 133.  For  a  number  of  reasons,  we  tentatively  conclude  that  these  studies  fail  to  prove  that  future  increases  in  cable  concentration  will  not  increase  the  incentives  and  ability  of  vertically  integrated 
 cable  operators  to  engage  in  vertical  foreclosure.  First,  much  of  the  evidence  presented  on  past  entry  looks  solely  at  aggregate  data.  If,  indeed,  the  programming  network  market  is  segmented  according  to 
 genre  and  type  of  programming,  then  a  policy  of  vertical  foreclosure  might  only  be  profitable  in  particular  submarkets.  Second,  evidence  that  cable  operators  have  not  engaged  in  foreclosure  in  the  past 
 does  not  prove  that  they  will  not  do  so  in  the  future,  especially  if  they  are  still  growing  in  size.  The  Commission  has  previously  found,  448  and  the  cable  operators  evidence  does  not  refute,  that  only  if  the 
 cable  operators  exceed  a  particular  threshold,  will  a  policy  of  foreclosure  likely  be  successful.  449 
 134.  Third,  the  argument  that  the  cable  operators  incentive  to  foreclose  shrinks  as  the  cable  operator  grows  in  size,  which  is  integral  to  AT&  Ts  analysis,  450  fails  to  take  into  account  the  key  point 
 that  the  cable  operators  ability  to  successfully  foreclose  rival  programming  networks  grows  with  each  increase  in  subscriber  reach.  If  the  likelihood  of  engaging  in  foreclosure  depends  not  just  on  the  benefit 
 if  successful,  but  also  on  the  likelihood  of  success,  then  an  increase  in  size  may  make  a  policy  of  foreclosure  viable  where  such  a  policy  was  previously  unprofitable. 


 442  AT&  T  Comments,  Besen  Decl.  at  6-  8;  AT&  T  Comments,  Ordover  Decl.  at  48-  52. 
 443  AT&  T  Comments,  Ordover  Decl.  at  52-  65.  Ordover  focuses  his  analysis  on  program  developers  ability  to 
 find  outlets  to  distribute  their  programming,  and  not  on  the  ability  of  a  new  programming  network  to  enter  the  market. 


 444  Time  Warner  Comments,  Joskow  and  McLaughlin  Decl.  at  5-  6. 
 445  Id.  at  2-  4;  AT&  T  Comments,  Besen  Decl.  at  10-  14. 
 446  AT&  T  Comments,  Besen  Decl.  at  14-  20;  AT&  T  Comments,  Ordover  Decl.  at  48-  52. 
 447  AT&  T  Comments,  Besen  Decl.  at  14-  21;  AT&  T  Comments,  Ordover  Decl.  at  48-  68. 
 448  1999  Cable  Ownership  Order,  14  FCC  Rcd  at  19119    55. 
 449  Since  there  is  no  data  on  the  behavior  of  domestic  cable  operators  that  exceed  the  Commissions  limits, 
 because  it  has  not  happened  yet,  it  appears  that  empirical  evidence  can  say  little  about  the  effect  of  allowing  operators  to  grow  larger  than  their  current  size. 


 450  AT&  T  Comments,  Besen  Decl.  at  14-  20;  AT&  T  Comments,  Ordover  Decl.  at  48-  52. 
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 135.  Fourth,  while  alternative  distribution  channels  do  exist,  it  is  not  certain  that  these  channels  are  available  to  a  new  programmer  that  is  entering  the  market,  451  nor  that  they  generate  the 
 kinds  of  revenue  necessary  to  support  high  quality  original  programming.  452  Some  of  these  distribution  channels  may  not  be  appropriate  for  serial  programming  such  as  a  TV  series,  or  programming  designed 
 for  a  particular  genre  or  niche.  We  ask  for  more  evidence  that  these  alternative  distribution  channels  are  available  to  the  kinds  of  new  programming  found  on  cable  TV,  and  will  provide  sufficient  revenues  to 
 provide  a  means  of  entering  the  market.  We  also  ask  whether  a  programming  network  could  make  use  of  these  alternative  distribution  channels  for  distributing  its  regular  programming,  as  opposed  to  a 
 program  producer  attempting  to  distribute  a  single  piece  of  programming,  such  as  a  movie. 
 136.  We  find  that  cable  operators  potentially  have  an  incentive  to  engage  in  vertical  foreclosure,  and  that  the  evidence  presented  about  their  past  behavior  does  not  rule  out  the  possibility  that 
 a  cable  operator  of  larger  size  could,  in  the  future,  have  the  incentive  and  ability  to  discriminate  against  or  foreclose  an  unaffiliated  network.  We  seek  comment  on  independent  analyses  that  have  been  performed 
 on  this  issue  since  the  close  of  the  comment  period  in  the  2001  Further  Notice.  453  Studies  submitted  by  commenters  should  be  based  on  current  technological  and  market  conditions.  Studies  should  predict  the 
 likelihood  of  vertical  foreclosure  if  there  were  growth  in  industry  concentration.  The  changes  in  both  cable  operators  incentive  and  ability  to  engage  in  vertical  foreclosure  should  be  taken  into  account  in  any 
 studies. 
 3.  Potential  Benefits  of  Horizontal  Concentration 
 137.  In  the  2001  Further  Notice,  we  asked  about  the  benefits  of  horizontal  concentration,  such  as  economies  of  scale,  development  of  new  programming,  digital  deployment,  and  investment  in 


 non-  video  services.  454  Some  commenters  have  claimed  that  concentration  would  bring  such  benefits.  455  They  have  not  attempted  to  quantify  these  benefits  or  otherwise  substantiate  their  claims  in  any 
 meaningful  fashion.  We  have  no  evidence  on  the  record  that  would  help  us  identify  these  benefits  or  evaluate  them  at  concentrations  higher  than  those  that  exist  today.  Further,  many  of  the  purported 
 benefits  are  emerging  at  current  levels  of  concentration.  456  Therefore,  although  we  discuss  some  theoretical  benefits  of  concentration  below,  at  this  point  we  have  received  no  conclusive  evidence  that 
 additional  concentration  is  necessary  to  produce  these  benefits. 
 451  Some  channels,  such  as  DVD  sales  and  overseas  markets,  may  be  open  mostly  to  programming  that  has  proven 
 itself  through  an  established  early  window  channel.  Distribution  on  a  programming  network  is  important  not  just  for  generating  immediate  revenues,  but  also  for  advertising  the  programming,  by  creating  a  reputation  for  the 


 program.  This  generates  further  revenues  in  DVD  sales  and  overseas  showings. 
 452  See    82,  supra. 


 453  See,  e.  g.,  Michael  E.  Clements  and  Amy  D.  Abramowitz,  Ownership  Affiliation  and  the  Programming 
 Decisions  of  Cable  Operators,  available  at  http://  web.  si.  umich.  edu/  tprc/  papers/  2004/  289/  TPRC2004.  pdf  and  General  Accounting  Office,  Issues  Related  to  Competition  and  Subscriber  Rates  in  the  Cable  Television  Industry 


 (Oct.  2003). 
 454  2001  Further  Notice,  16  FCC  Rcd  at  17331-  32,    36-  40. 


 455  See,  e.  g.,  AT&  T  Comments  at  69-  70. 
 456  See,  e.  g.,  11  th  Annual  Report,  20  FCC  Rcd  at  2779-  92    36-  52;  AT&  T  Comments  at  24. 
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 138.  Commenters  argue  that  the  largest  operator  in  a  concentrated  market  may  enjoy  efficiencies  as  a  result  of  economies  of  size  and  scale.  457  The  fixed  costs  of  providing  service  can  be 
 spread  over  a  larger  customer  base.  One  study  referenced  by  commenters  suggests  that  cable  operator  growth  is  due  to  increased  efficiencies,  and  that  bargaining  power  does  not  increase  with  size.  458  Even  if 
 a  cable  operators  bargaining  power  does  increase  with  size,  the  operator  may  pass  some  of  its  savings  on  to  consumers  in  the  form  of  lower  rates  (or  smaller  rate  increases).  Another  study  suggests  that  large 
 operators  do  pass  a  small  percentage  of  their  programming  cost  savings  onto  consumers.  459  The  2001  Price  Survey,  however,  found  the  opposite,  that  cable  rates  increase  with  cable  operator  size.  460  Other 
 studies  have  reached  the  same  conclusion.  461 
 139.  AT&  T  suggests  that  cable  ownership  rules  could  impede  cable  operators  from  gaining  the  scale  necessary  to  offer  high-  speed  Internet,  digital  cable,  and  telephony  services,  potential  benefits 
 to  consumers.  462  High-  speed  Internet  and  digital  cable  services,  however,  have  been  deployed  rapidly  throughout  the  country,  by  large  and  small  cable  operators  alike,  463  and  AT&  T  offers  no  evidence  that 
 speed  of  deployment  would  increase  with  increased  industry  concentration.  NCTA  reports  that  91%  of  households  passed  by  cable  now  have  access  to  cable  advanced  services.  464  We  tentatively  conclude  that 
 further  concentration  is  not  necessary  to  speed  development  and  delivery  of  these  services.  We  seek  comment  on  this  tentative  conclusion.  We  also  seek  comment  on  the  relevance  of  the  deployment  of 
 high-  speed  Internet  and  telephony  services  to  this  proceeding,  since  they  generally  do  not  involve  the  goals  specified  in  Section  613(  f)(  2),  in  particular  that  cable  operators  do  not  unfairly  impede  the  flow  of 
 programming  to  consumers,  and  do  not  favor  affiliated  programming  or  unreasonably  restrict  the  flow  of  affiliated  programming  to  other  video  distributors. 


 140.  Commenters  argue  that  high  levels  of  concentration  may  provide  direct  benefits  to  programmers,  in  particular  by  better  enabling  programmers  to  recover  their  costs.  465  Programming 
 involves  high  fixed  costs  to  produce,  and  low  marginal  costs  for  distribution.  Uncertainty  about  whether  the  programmer  will  gain  sufficient  carriage  to  recover  its  fixed  costs  can  act  as  a  barrier  to  entry.  Time 


 457  See  Time  Warner  Comments,  Joskow  and  McLaughlin  Decl.  at  14-  16. 
 458  Chipty  and  Snyder  at  326;  Time  Warner  Comments,  Joskow  and  McLaughlin  Decl.  at  15. 
 459  George  S.  Ford  and  John  D.  Jackson,  Horizontal  Concentration  and  Vertical  Integration  in  the  Cable 
 Television  Industry,  REVIEW  OF  INDUSTRIAL  ORGANIZATION,  Vol.  12  (1997). 
 460  See  2001  Price  Survey,  17  FCC  Rcd  at  6318    45. 


 461  See  General  Accounting  Office,  The  Effects  of  Competition  from  Satellite  Providers  on  Cable  Rates  (Jul. 
 2000);  W.  M.  Emmons  and  R.  A.  Prager,  The  Effects  of  Market  Structure  and  Ownership  on  Prices  and  Service  Offerings  in  the  U.  S.  Cable  Television  Industry,  RAND  JOURNAL  732-  50  (Winter  1997). 


 462  AT&  T  Comments,  Ordover  Decl.  at  17-  18,  70-  73. 
 463  10  th  Annual  Report,  19  FCC  Rcd  at  1636-  48    39-  60. 
 464  National  Cable  &  Telecommunications  Association  2004  Year-  End  Industry  Overview  at  5. 
 465  Time  Warner  Comments,  Joskow  and  McLaughlin  Decl.  at  14-  15. 
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 Warner  points  out  that  a  carriage  commitment  from  a  large  cable  operator  can  reduce  this  uncertainty,  and  make  entry  easier.  466 
 141.  Commenters  also  argue  that  increasing  concentration  can  help  solve  the  potential  problem  of  multiple  small  cable  operators  attempting  to  free  ride  on  the  payments  made  by  the  other 
 cable  operators,  in  which  each  cable  operator  forces  down  the  price  it  pays  to  a  level  that  fails  to  cover  an  adequate  share  of  the  fixed  costs.  467  They  state  that  each  cable  operator  would  prefer  to  pay  just  the 
 marginal  cost  of  providing  the  programming,  and  let  the  other  buyers  pay  for  the  fixed  costs  of  producing  the  programming.  If,  instead,  there  were  a  single  buyer  that  was  large  enough  that  its 
 purchasing  decision  would  affect  the  viability  of  a  programmer,  then  it  would  have  to  consider  the  effects  of  the  price  it  demands  on  the  financial  viability  of  the  programmer,  and  hence  the  likelihood  the 
 programmer  will  stay  in  the  market.  According  to  this  view,  a  large  pivotal  buyer  will  be  less  likely  to  demand  discounts  that  threaten  the  viability  of  the  programmer.  468 


 142.  The  realization  of  this  potential  benefit,  however,  depends  upon  several  factors  that  are  not  likely  to  occur  in  practice.  In  a  highly  concentrated  industry,  operators  may  demand  large  discounts 
 from  programming  networks  because  of  the  market  power  they  enjoy.  Because  MVPDs  depend  upon  programmers  for  content,  even  a  monopsonist  MVPD  would  not  generally  want  to  demand  prices  so  low 
 that  they  harm  programming  networks  ability  to  provide  programming.  In  order  to  ensure  that  programming  networks  receive  sufficient  payment  to  cover  their  fixed  costs,  however,  the  operator 
 would  have  to  have  an  intimate  knowledge  of  the  cost  structure  of  particular  networks,  which  is  unlikely  in  practice.  As  a  result,  even  a  pivotal  buyer  might  unwittingly  force  video  programming  networks  to 
 accept  compensation  that  does  not  cover  all  of  their  relevant  costs,  thus  reducing  their  ability  to  provide  high  quality  programming  or,  possibly,  forcing  some  out  of  business.  469  The  argument  also  assumes  that 
 buyers  want  to  ensure  the  financial  viability  of  their  suppliers.  Large  buyers,  however,  may  decide  that  pursuing  a  policy  of  forcing  prices  down  is  more  profitable,  because  the  resulting  reduction  in 
 purchasing  costs  outweighs  the  loss  of  some  higher-  cost  programmers  that  may  be  forced  to  exit  the  business.  Being  a  pivotal  buyer  may  also  give  the  cable  operator  an  incentive  to  vertically  integrate  and 
 favor  its  affiliated  programming  networks,  since  it  can  ensure  that  no  competing  programming  networks  can  enter  the  market.  For  these  reasons,  we  tentatively  conclude  that  commenters  have  not  demonstrated 
 that  allowing  a  cable  operator  to  become  large  enough  to  become  a  pivotal  buyer  will  improve  the  flow  of  programming,  and  should  therefore  be  counted  as  a  benefit  of  increased  horizontal  concentration. 


 D.  Vertical  Limit 
 143.  Section  613(  f)  of  the  Communications  Act  directs  the  Commission  to  prescribe  rules  and  regulations  establishing  reasonable  limits  on  the  number  of  channels  on  a  cable  system  that  can  be 


 466  Id. 
 467  Raskovich  Comments;  Raskovich,  Pivotal  Buyers  and  Bargaining  Position;  Time  Warner  Comments,  Joskow 
 and  McLaughlin  Decl.  at  15-  16;  AT&  T  Comments,  Ordover  Decl.  at  39-  45. 
 468  Id. 


 469  Offering  higher  payments  to  keep  just  the  high  cost  networks  in  business  is  not  likely  to  solve  the  problem 
 here,  because  cable  operators  may  not  know  which  networks  are  high  cost.  If  they  offered  higher  payments  to  all  networks  that  are  high  cost,  all  networks  would  claim  to  be  high  cost. 
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 occupied  by  a  video  programmer  in  which  a  cable  operator  has  an  attributable  interest.  470  Among  other  things,  in  setting  the  limit,  the  Commission  is  directed  to  ensure  that  cable  operators  affiliated  with  video 
 programmers  do  not  favor  such  programmers  in  determining  carriage  .  .  .  471  and  to  refrain  from  impos[  ing]  limitations  which  would  impair  the  development  of  diverse  and  high  quality  video 
 programming.  472  In  1993  the  Commission  found  that  a  40%  limit  on  the  number  of  activated  channels  that  can  be  occupied  by  affiliated  video  programming  services  struck  an  appropriate  balance  between  the 
 goals  of  reducing  the  incentive  and  ability  of  vertically  integrated  cable  operators  to  favor  their  affiliated  programming,  increasing  diversity,  and  permitting  cable  operators  to  realize  the  benefits  and  efficiencies 
 associated  with  vertical  integration.  473 
 144.  The  Time  Warner  II  decision  reversed  and  remanded  the  40%  channel  occupancy  limit,  finding  that  the  Commission  had  failed  to  justify  its  vertical  limit  with  record  evidence,  and  had  failed  to 
 adequately  consider  the  benefits  and  harms  of  vertical  integration  or  current  MVPD  market  conditions  in  its  analysis.  474  In  the  2001  Further  Notice,  the  Commission  sought  comment  on  how  it  could  fashion 
 meaningful  and  relevant  channel  occupancy  limits  given  the  changes  that  have  occurred  in  the  MVPD  industry.  475  The  2001  Further  Notice  requested  comment  on  the  economic  underpinnings  of  the  statutory 
 requirement,  and  asked  commenters  to  address  the  economic  basis  underlying  the  concern  with  vertical  integration  and  market  foreclosure.  476 


 145.  In  response  to  the  2001  Further  Notice,  several  commenters  assert  that  the  Commission  should  not  adopt  any  channel  occupancy  rules  and  should  not  limit  the  carriage  of  affiliated 
 programming.  477  Cablevision  argues  that  given  the  technological  advancements  and  todays  vigorously  competitive  MVPD  marketplace,  no  channel  occupancy  limit  will  survive  constitutional  scrutiny.  478 
 NCTA  contends  that  competition  in  the  sale  of  video  programming  has  effectively  eliminated  incentives  to  discriminate,  and  that  if  a  cable  operator  refuses  to  carry  attractive  programming  services,  it  will  not 
 only  fail  to  attract  subscribers  and  fail  to  maximize  revenue  from  existing  subscribers,  it  may  lose  subscribers.  479  Other  commenters,  however,  assert  that  horizontal  concentration  and  vertical  integration 


 470  See  47  U.  S.  C.    533(  f)(  1)(  A)-(  B). 
 471  47  U.  S.  C.    533(  f)(  2)(  B). 
 472  47  U.  S.  C.    533(  f)(  2)(  G).  The  Commission  is  also  directed  to  consider  the  other  public  interest  objectives 
 listed  in  Section  613(  f)(  2).  See  47  U.  S.  C.    533(  f)(  2)(  A),  (C)-(  F). 
 473  1993  Second  Report  and  Order,  8  FCC  Rcd  at  8593-  95    68. 


 474  Time  Warner  II,  240  F.  3d  at  1137-  39. 
 475  2001  Further  Notice,  16  FCC  Rcd  at  17350-  51    81. 
 476  Id. 
 477  See  Cablevision  Comments  at  5-  11;  Comcast  Comments  at  29-  33;  NCTA  Comments  at  20-  23;  Time  Warner 
 Comments  at  35-  37. 
 478  Cablevision  Comments  at  5. 


 479  NCTA  Comments  at  11,  14. 
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 in  the  MVPD  industry  require  that  the  Commission  enact  and  enforce  a  strict  channel  occupancy  limit.  480  CFA  argues  that  vertical  integration  of  cable  firms  facilitates  the  imposition  of  higher  costs  on 
 programming  rivals  or  a  degradation  in  their  quality  of  service  (by  withholding  desired  programming)  to  gain  an  advantage.  481  Writers  Guild  contends  that  the  Commission  should  not  only  retain  the  existing 
 40%  channel  occupancy  limit,  but  should  strengthen  it  through  ownership  limits  on  both  cable  and  broadcast  networks,  regardless  of  whether  the  owner  is  a  cable  operator.  482 


 146.  Both  Congress  and  the  Commission  have  long  recognized  that  vertical  integration  produces  efficiencies  in  the  production,  distribution,  and  marketing  of  video  programming,  enabling  cable 
 operators  to  make  additional  investments  in  both  distribution  plant  and  programming.  483  Congress  and  the  Commission,  on  the  other  hand,  also  have  been  concerned  that  such  integration  may  provide  an 
 incentive  for  cable  operators  to  engage  in  strategic,  anticompetitive  behavior.  484  The  economics  literature  provides  support  for  both  propositions:  vertical  integration  between  programmers  and  MVPDs  can  result 
 in  both  efficiency  gains  (which  can  lower  prices)  and  market  foreclosure  (which  can  lead  to  higher  prices).  485  While  the  public  interest  objectives  enumerated  in  Section  613(  f)(  2)(  A)-(  G)  direct  that  we  take 
 account  of  the  risks  and  benefits  of  vertical  integration  in  the  cable  industry  together  with  prevailing  market  conditions  in  choosing  what  limit  is  reasonable,  the  record  before  us  provides  no  new 
 evidentiary  support  or  metrics  with  which  to  better  calculate  a  limit  that  is  reasonable  in  todays  marketplace.  None  of  the  comments  filed  in  response  to  the  2001  Further  Notice  yielded  a  sound 
 evidentiary  basis  for  either  retaining  the  current  40%  vertical  limit  or  for  setting  a  different  limit.  Nonetheless,  we  disagree  with  commenters  who  assert  that  the  Commission  should  not  adopt  any  channel 
 occupancy  rules  and  should  not  limit  carriage  of  affiliated  programming.  486 
 147.  The  statute  expressly  directs  the  Commission  to  conduct  a  proceeding  and  to  prescribe  rules  and  regulations  establishing  reasonable  limits  on  the  number  of  channels  on  a  cable  system  that  can 


 480  See  CFA  Comments  at  93-  105;  Writers  Guild  Comments  at  15. 
 481  CFA  Comments  at  96-  97. 
 482  Writers  Guild  Comments  at  15. 
 483  See  Senate  Report  at  26-  27,  81;  House  Report  at  41;  1995  Vertical  Reconsideration  Order,  10  FCC  Rcd  at 
 7365-  66    5-  6;  1993  Second  Report  and  Order,  8  FCC  Rcd  at  8584-  85    43-  44;  Initial  Notice,  8  FCC  Rcd  at  218-  19    44-  45. 


 484  See  Senate  Report  at  25-  27,  81;  House  Report  at  41;  1995  Vertical  Reconsideration  Order,  10  FCC  Rcd  at 
 7365    4;  1993  Second  Report  and  Order,  8  FCC  Rcd  at  8583-  84    41-  42;  Initial  Notice,  8  FCC  Rcd  at  218    42-  43.  Cf.  generally  Program  Access  Order,  17  FCC  Rcd  at  12135-  50    24-  55  (discussing  ability  and  incentive 


 of  vertically  integrated  programming  networks  to  favor  affiliated  cable  operators). 
 485  See  Tasneem  Chipty,  Vertical  Integration,  supra.  Using  an  econometric  model  of  the  cable  industry,  Chipty 
 found  that  the  harmful  effects  of  integration  due  to  foreclosure  are  offset  by  the  efficiency-  enhancing  effects  of  integration.  See  also  Michael  E.  Clements  and  Amy  D.  Abramowitz,  Ownership  Affiliation  and  the  Programming 


 Decisions  of  Cable  Operators,  available  at  http://  web.  si.  umich.  edu/  tprc/  papers/  2004/  289/  TPRC2004.  pdf. 
 486  See  Cablevision  Comments  at  5-  11;  Comcast  Comments  at  29-  33;  NCTA  Comments  at  20-  23;  Time  Warner 
 Comments  at  35-  37. 
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 be  occupied  by  a  video  programmer  in  which  a  cable  operator  has  an  attributable  interest.  487  Further,  in  the  examination  of  the  scope  of  our  legal  authority  under  Section  613(  f),  we  found  that  the  Commission 
 lacks  express  authority  under  Title  VI  to  forbear  from  the  implementation  and  enforcement  of  its  provisions.  488  Thus,  we  are  bound  to  follow  Congress  statutory  directive  that  a  vertical  limit  be  set,  and 
 the  challenge  in  implementing  Section  613(  f)(  1)(  B)  in  light  of  Time  Warner  II  remains  one  of  finding  and  adequately  justifying  a  reasonable  numerical  limit  that  permits  cable  operators  to  enjoy  the  benefits  of 
 vertical  integration,  protects  against  any  potential  harms  of  discrimination  against  rival  programming  that  may  exist,  and  takes  account  of  the  vastly  changed  technological  and  competitive  landscape  that 
 characterizes  todays  MVPD  marketplace,  while  not  burdening  substantially  more  speech  than  necessary.  489  We  again  request  comment  and  empirical  and  theoretical  evidence  to  assist  in  the 
 development  of  reasonable  limits  and  in  the  articulation  of  how  such  limits  address  the  statutory  goals. 
 1.  Defining  the  Market 
 148.  We  seek  comment  on  how  to  define  the  programming  and  distribution  markets  for  the  purposes  of  determining  an  appropriate  limit  on  channel  occupancy  by  vertically  integrated  cable 


 operators.  In  the  2001  Further  Notice  we  proposed  that  programming  could  be  classified  into  two  broad  categories,  general  entertainment  and  niche  programming.  490  We  also  suggested  that  programming 
 networks  vary  according  to  whether  they  focus  on  a  particular  subject  or  are  more  general  purpose,  whether  they  gain  a  large  nationwide  audience,  how  narrowly  focused  they  are  in  a  particular  subject,  and 
 whether  they  are  national  or  regional  in  scope.  491  We  received  little  comment  on  whether  these  differences  in  the  types  of  programming  networks  affect  a  cable  operators  incentive  and  ability  to  engage 
 in  vertical  foreclosure.  As  we  discuss  above,  we  ask  whether  the  market  for  programming  should  be  segmented  according  to  the  type  of  programming  network  involved.  Could  the  incentive  and  ability  of 
 cable  operators  to  engage  in  vertical  foreclosure  vary  according  to  the  type  of  programming  network?  We  note  that  a  channel  occupancy  limit  only  ensures  that  cable  operators  carry  some  unaffiliated 
 programming  networks.  It  does  not  prevent  a  cable  operator  from  discriminating  against  any  specific  programming  network.  If  we  were  to  determine  that  the  incentive  and  ability  for  a  cable  operator  to 
 discriminate  varies  according  to  the  submarket  involved,  how  could  a  channel  occupancy  limit  prevent  discrimination  against  rival  programming  networks? 


 149.  We  also  seek  comment  on  whether  placement  of  networks  on  different  tiers  affects  how  vertical  foreclosure  might  be  implemented  by  a  cable  operator,  and  whether  our  rules  should  be  applied 
 on  a  tier-  specific  basis.  Networks  are  often  placed  on  different  tiers,  or  in  different  packages  of  programming  made  available  to  consumers.  Also,  cable  operators  typically  have  a  much  greater  channel 
 capacity  on  their  digital  tiers,  but  fewer  customers  have  access  to  this  tier,  compared  to  the  analog  portions  of  their  network.  We  ask  whether  our  analysis  should  take  into  consideration  the  existence  of 


 487  See    48,  supra. 
 488  Id. 
 489  See  Time  Warner  II,  240  F.  3d  at  1137. 
 490  2001  Further  Notice,  16  FCC  Rcd  at  17321    9. 
 491  Id.  at  17322-  23    12-  13. 
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 tiers  and  packages,  with  their  differences  in  technical  characteristics,  numbers  of  channels,  and  pricing.  We  also  ask  whether  a  vertical  limit  should  be  applied  on  a  tier-  specific  or  package-  specific  basis. 
 2.  Potential  Harms  of  Vertical  Integration 
 150.  In  the  2001  Further  Notice  we  asked  commenters  to  address  the  economic  basis  underlying  the  concern  with  vertical  integration  and  market  foreclosure.  We  asked  whether  the 


 necessary  conditions  existed  in  the  MVPD  industry  for  cable  operators  to  profitably  engage  in  vertical  foreclosure,  and  for  this  foreclosure  to  be  harmful  to  the  flow  of  programming.  492  We  also  sought 
 comment  on  whether  current  and  likely  future  developments  in  the  MVPD  market  will  mitigate  past  concerns  regarding  the  ability  of  cable  operators  to  discriminate  against  unaffiliated  programming 
 networks.  493 
 151.  We  discussed  above  how  vertical  integration  can  create  an  incentive  for  a  large  vertically  integrated  cable  operator  to  engage  in  foreclosure,  by  not  carrying  a  rival  programming  service  that 
 competes  with  its  affiliated  programming  service.  494  We  also  discussed  the  types  and  causes  of  vertical  foreclosure,  and  the  harms  that  this  can  cause.  495 


 152.  In  their  responses  to  the  2001  Further  Notice,  cable  operators  point  to  market  factors  that  make  vertical  foreclosure  unlikely.  First,  they  state  that  a  programmer  can  obtain  carriage  despite  a  cable 
 operators  preference  not  to  carry  the  programmers  service  under  several  scenarios:  496  (1)  where  the  programmer  is  seeking  carriage  of  a  broadcast  network  entitled  to  must  carry  status  under  the 
 Commissions  rules;  497  (2)  where  the  programmer  is  seeking  carriage  of  a  must  have  programming  network  that  consumers  demand;  and  (3)  where  the  programmer  is  seeking  carriage  of  a  service  pursuant 
 to  the  Commissions  leased  access  rules.  498  Second,  they  assert  that  discrimination  on  the  basis  of  affiliation  is  already  targeted  by  the  program  access  rules.  499  Third,  they  argue  that  competition  from 
 alternative  MVPDs  such  as  DBS  makes  it  unprofitable  for  a  cable  operator  to  engage  in  foreclosure,  since  failure  to  carry  unaffiliated  popular  networks  will  drive  customers  to  other  MVPDs.  500  Lastly,  they  argue 
 that  market  conditions  have  changed  to  make  foreclosure  unlikely,  citing  in  particular  the  increase  in  channel  capacity  of  cable  systems.  501 


 492  2001  Further  Notice,  16  FCC  Rcd  at  17350-  51    81. 
 493  Id.  at  17351-  52    83. 
 494  See  Section  II.  C.  2.  c.  (4),  supra. 
 495  Id. 
 496  AT&  T  Comments  at  50-  51;  Comcast  Comments  at  25-  28. 
 497  47  C.  F.  R.    76.56. 
 498  47  C.  F.  R.    76.701. 
 499  Time  Warner  Comments  at  35-  37  (citing  47  U.  S.  C.    536(  a)(  3);  47  C.  F.  R.  76.1301(  c)). 
 500  Cablevision  Comments  at  7-  10;  NCTA  Comments  at  21. 
 501  Cablevision  Comments  at  7-  9. 
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 153.  Nonetheless,  the  terms  of  Section  613(  f)(  1)(  B)  require  that  we  establish  reasonable  limits  on  channel  occupancy,  and  we  therefore  again  seek  empirical,  theoretical  and  anecdotal  evidence  to 
 support  our  effort  to  carry  out  this  statutory  mandate. 
 3.  Potential  Benefits  of  Vertical  Integration 
 154.  In  the  2001  Further  Notice  we  asked  commenters  to  discuss  the  benefits  of  vertical  integration,  and  the  extent  to  which  these  benefits  mitigate  or  outweigh  the  harms  caused  by  cable 


 operators  favoring  affiliated  programming.  502  We  asked  how  these  benefits  should  affect  the  fashioning  of  vertical  limits  and  restraints.  We  sought  comment  on  what  impact  relaxing  or  modifying  the  current 
 limit  of  40%  might  have  on  producing  economic  efficiencies,  fostering  innovation  in  services,  and  encouraging  greater  investment  in  and  development  of  diverse  and  responsive  programming.  503  We  also 
 asked  whether  the  existence  of  these  benefits  means  that  we  should  employ  alternative  regulatory  restrictions,  other  than  imposing  limits  on  cable  operators  carriage  of  affiliated  programming,  to  prevent 
 foreclosure.  504 
 155.  In  response,  cable  commenters  argued  that  vertical  integration  provides  efficiencies,  by  increasing  the  likelihood  of  financing  for  new  networks  and  reducing  the  likelihood  of  hold-  up.  505 
 They  also  argue  that  it  eliminates  the  problem  of  double  marginalization,  which  occurs  when  both  upstream  and  downstream  firms  attempt  to  exercise  market  power  by  charging  above-  cost  prices.  506 
 Commenters  failed,  however,  to  demonstrate  that  the  benefits  of  vertical  integration  will  always  exceed  the  potential  harms  from  vertical  foreclosure.  They  also  failed  to  identify  those  circumstances  in  which 
 the  benefits  from  a  particular  vertical  investment  or  merger,  for  example  a  cable  operator  investment  intended  to  create  a  new  programming  network  in  an  underserved  market  niche,  are  large  enough  to 
 warrant  exemption  from  the  vertical  limits.  We  thus  seek  further  comment  on  whether  and  when  the  benefits  of  vertical  integration  mitigate  the  potential  harms  that  might  result,  either  generally  or  for 
 particular  vertical  combinations. 
 156.  The  literature  indicates  that  historically  content  providers  have  received  benefits  from  vertical  integration  with  distributors.  507  In  the  multichannel  video  programming  industry,  three  kinds  of 
 benefits  can  result  from  vertical  integration:  transaction  efficiencies,  enhanced  availability  of  capital  and  creative  resources,  and  risk  reduction  through  signaling  commitment.  508  We  examine  each  below. 


 502  2001  Further  Notice,  16  FCC  Rcd  at  17351    82. 
 503  Id.  at  17352    84. 
 504  Id.  at  17351    82. 
 505  Time  Warner  Comments,  Joskow  and  McLaughlin  Decl.  at  22.  (For  a  discussion  of  the  problem  of  hold-  up, 
 see    94,  supra.) 
 506  Id.  at  23. 


 507  See  Waterman  and  Weiss  at  45-  54. 
 508  Id.  at  47-  49. 
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 157.  Transaction  Efficiency.  Vertical  integration  may  increase  transaction  efficiency  by  allowing  more  efficient  contracting  between  entities.  An  affiliation  agreement  between  cable  operators 
 and  programming  networks  may  reduce  the  incentive  of  each  to  engage  in  post-  contractual  opportunistic  behavior.  509  Such  opportunistic  behavior  is  especially  likely  to  occur  if  market  conditions  are  likely  to 
 change.  It  can  also  reduce  the  inefficiency  of  both  parties  attempting  to  exercise  market  power  by  charging  prices  above  cost,  in  what  is  often  called  double  marginalization.  510  Each  of  these 
 inefficiencies  will  result  in  higher  consumer  prices,  and  eliminating  the  inefficiencies  therefore  can  lower  prices. 


 158.  Resources.  Vertical  integration  makes  available  to  programming  networks  the  capital  resources  of  large  cable  operators.  Since  only  the  large  cable  operators  tend  to  be  vertically  integrated, 
 this  can  offer  programmers  significant  financial  resources,  potentially  facilitating  the  development  of  a  greater  quantity  of  programming  and  higher  quality  programming.  This  is  particularly  important  to  new 
 networks,  which  usually  incur  losses  for  the  first  several  years  of  operation.  511  In  addition,  vertical  relationships  allow  programming  networks  access  to  creative  and  management  resources  at  the  cable 
 operators,  which  may  increase  the  efficiency  of  operation  at  the  networks.  Finally,  cable  operators  have  a  direct  relationship  with  subscribers,  and  access  to  this  relationship  through  vertical  integration  may  give 
 programmers  better  knowledge  about  consumer  demand. 
 159.  Signaling  Commitment.  Signaling  commitment  is  the  commitment  to  carry  a  network,  perhaps  even  before  it  launches.  Vertical  integration  creates  at  least  the  appearance  of  signaling 
 commitment,  which  may  allow  new  programmers  access  to  capital  from  sources  other  than  the  affiliated  MVPD  and  the  ability  to  acquire  talent  and  content.  Absence  of  signaling  commitment  may  cause 
 networks  to  exit  the  market,  or  never  to  enter  the  market  in  the  first  place.  Thus,  vertical  integration  may  reduce  the  risk  of  failure  for  new  networks,  thereby  increasing  program  diversity. 


 509  An  example  of  opportunistic  behavior  on  the  part  of  the  cable  operator  would  be  failure  to  promote  an 
 unaffiliated  programming  network.  Opportunistic  behavior  by  a  programmer  might  involve  reducing  quality  or  providing  content  of  a  different  sort  than  what  was  promised  (for  example,  promising  to  provide  programming  for 


 a  niche  that  was  previously  unserved,  and  then  switching  to  a  genre  with  a  larger  audience).  In  addition,  one  of  the  parties  could  in  the  future  attempt  to  take  advantage  of  the  other  partys  committed  sunk  costs  by  demanding  a 
 more  advantageous  price,  which  would  reduce  the  incentive  of  the  other  party  to  commit  to  the  transaction  (i.  e.,  the  hold-  up  problem).  Oliver  Williamson,  MARKETS  AND  HIERARCHIES:  ANALYSIS  AND  ANTITRUST 
 IMPLICATIONS  (1975).  See    94,  supra. 
 510  Double  marginalization  occurs  when  both  the  license  fee  that  a  programmer  charges  a  cable  operator,  and  the 
 retail  rate  charged  by  the  cable  operator  to  subscribers,  are  set  above  cost.  This  will  cause  the  operator  to  set  its  subscription  rate  higher  than  the  most  efficient  level,  thus  reducing  subscription  levels  and  reducing  total  revenue 


 to  both  the  operator  and  the  programmer.  Joint  ownership  is  one  means  of  eliminating  this  problem.  See  Waterman  and  Weiss  at  48-  49. 


 511  One  example  of  this  is  the  Radio  One-  Comcast  partnership  to  launch  a  network  to  compete  with  Black 
 Entertainment  Television.  Krissah  Williams,  Radio  One,  Comcast  in  Cable  Deal,  WASHINGTON  POST,  Jan.  13,  2003,  at  A1.;  see  also  Krissah  Williams,  Comcast  Alliance  May  Be  Key  to  Cable  Channels  Success, 


 WASHINGTON  POST,  Jan.  15,  2003,  at  E1. 
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 160.  Vertical  integration  can  be  particularly  beneficial  in  the  development  and  launch  of  local  and  regional  programming.  512  Incumbent  cable  operators,  with  their  direct  connection  to  local 
 communities,  experience  in  ownership  of  programming,  and  large  financial  resources,  may  be  uniquely  positioned  to  develop  and  distribute  local  and  regional  programming.  For  instance,  in  response  to  the 
 Commissions  2002  Competition  Report  Notice  of  Inquiry,  AT&  T  claimed  that  with  increased  clustering,  it  was  able  to  develop  and  offer  more  local  and  regional  programming  to  consumers.  513  Additionally, 
 upgrades  to  cable  systems  are  allowing  operators  to  expand  channel  capacity,  which  facilitates  inclusion  of  local  and  regional  programming  in  cable  system  offerings. 


 161.  We  lack  record  evidence  concerning  the  actual  benefits  of  vertical  integration,  and  we  seek  comment  on  whether  there  are  benefits  from  vertical  integration,  and  in  particular  whether  and  how 
 much  vertical  integration  has  increased  the  flow  of  programming.  We  ask  whether  there  are  means  of  directly  measuring  these  benefits,  such  as  the  added  resources  gained  by  programmers  from  vertical 
 integration,  and  the  reduction  in  double-  marginalization.  We  also  ask  what  metrics  to  use  to  measure  the  resulting  benefits  to  consumers,  such  as  the  increase  in  programming.  We  ask  what  information  and  data 
 would  be  needed  to  calculate  these  benefits. 
 162.  In  sum,  on  the  record  before  us,  we  lack  the  evidence  necessary  under  Time  Warner  II  to  establish  a  firm  channel  occupancy  limit  that  would  both  preserve  the  benefits  of  vertical  integration  and 
 protect  against  potential  harms  without  unduly  burdening  cable  operators  First  Amendment  rights.  We  seek  additional  evidence  or  suggested  approaches  that  would  support  a  specific  limit  in  light  of  current 
 market  conditions,  consistent  with  the  statutory  obligation  to  establish  a  reasonable  limit  on  the  number  of  channels  that  a  cable  operator  may  occupy  with  video  programming  in  which  the  operator  has  an 
 attributable  interest. 
 E.  Diversity  of  Information  Sources 
 163.  Section  612(  g)  of  the  Communications  Act  provides  that  at  such  time  as  cable  systems  with  36  or  more  activated  channels  are  available  to  70%  of  households  within  the  United  States  and  are 


 subscribed  to  by  70%  of  those  households,  the  Commission  may  promulgate  any  additional  rules  necessary  to  promote  diversity  of  information  sources.  514  In  its  Eleventh  Annual  Report,  the  Commission 
 surveyed  available  data  sources  to  determine  whether  this  threshold  has  been  met.  515  The  Commission  found  that  cable  systems  with  36  or  more  channels  are  available  to  79.8%  (84,415,707    105,842,000)  of 


 512  See  9  th  Annual  Report,  17  FCC  Rcd  at  26957    128;  2002  Program  Access  Order  17  FCC  Rcd  at  12132, 
 12148-  49    19,  54  (most  regional  programming  networks  are  vertically  integrated). 
 513  See  9  th  Annual  Report,  17  FCC  Rcd  at  26956    127.  MVPD  competitors  responded  in  the  record  that  such 
 clustering  was  allowing  anticompetitive  behavior  by  cable  incumbents,  such  as  migrating  local  and  regional  programming  to  terrestrial  delivery  so  that  the  incumbent  could  deny  downstream  rivals  access  to  the 


 programming.  Id.  at  26956-  57    128. 
 514  47  U.  S.  C.    532(  g). 


 515  See  11  th  Annual  Report,  20  FCC  Rcd  at  2767-  68    20. 
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 168.  Contact  Information.  The  Media  Bureau  contact  for  this  proceeding  is  Barbara  Esbin  or  Patrick  Webre  at  (202)  418-  7200.  Press  inquiries  should  be  directed  to  Rebecca  Fisher  at  (202)  418- 
 2359,  TTY:  (202)  418-  7365  or  (888)  835-  5322. 
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 IV.  ORDERING  CLAUSES 
 169.  Accordingly,  IT  IS  ORDERED,  that  pursuant  to  authority  contained  in  sections  2(  a),  4(  i),  303,  307,  309,  310,  and  613  of  the  Communications  Act  of  1934,  as  amended,  47  U.  S.  C.    152(  a), 


 154(  i),  303,  307,  309,  310,  and  533,  this  Second  Further  Notice  of  Proposed  Rulemaking  IS  ADOPTED. 
 170.  IT  IS  FURTHER  ORDERED  that,  pursuant  to  the  authority  contained  in  sections  2(  a),  4(  i),  303,  307,  309,  310,  and  613  of  the  Communications  Act  of  1934,  as  amended,  47  U.  S.  C.    152(  a), 
 154(  i),  303,  307,  309,  310,  and  533,  NOTICE  IS  HEREBY  GIVEN  of  the  proposals  described  in  this  Second  Further  Notice  of  Proposed  Rulemaking. 


 171.  IT  IS  FURTHER  ORDERED  that  the  Commissions  Consumer  and  Governmental  Affairs  Bureau,  Reference  Information  Center,  SHALL  SEND  a  copy  of  this  Second  Further  Notice  of 
 Proposed  Rulemaking,  including  the  Initial  Regulatory  Flexibility  Analysis,  to  the  Chief  Counsel  for  Advocacy  of  the  Small  Business  Administration. 


 FEDERAL  COMMUNICATIONS  COMMISSION 


 Marlene  H.  Dortch  Secretary 
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 APPENDIX  A 
 LIST  OF  COMMENTERS 
 INITIAL  COMMENTS 
 Alexander  Raskovich,  Economist  Altrio  Communications,  Inc.  et  al.  (  CMVPDs)  [jointly  filed  on  behalf  of  Altrio  Communications,  Inc., 
 BellSouth  Entertainment,  LLC,  the  Independent  Multi-  Family  Communications  Council,  Qwest  Broadband  Services,  Inc.,  the  Wireless  Communications  Association  International,  Inc.] 
 AT&  T  Broadband  (  AT&  T)  Broadband  Service  Providers  Association  (  BSPA) 
 Cablevision  Systems  Corporation  (  Cablevision)  Comcast  Corporation  (  Comcast) 
 Concerned  Consumers*  Consumer  Federation  of  America,  et  al.  (  CFA)  [jointly  filed  by  the  following:  Alliance  for  Community 
 Media,  Association  for  Independent  Video  and  Filmmakers,  Center  for  Digital  Democracy,  Consumer  Federation  of  America,  Consumers  Union,  Media  Access  Project,  National  Alliance  for  Media  Arts  and 
 Culture,  and  the  United  Church  of  Christ,  Inc.]  National  Cable  &  Telecommunications  Association  (  NCTA) 
 Media  General,  Inc.  (  Media  General)  National  Association  of  Broadcasters  (  NAB) 
 Paxson  Communications  Corporation  (  Paxson)  Progress  &  Freedom  Foundation  (  PFF) 
 RCN  Telecom  Services,  Inc.  (  RCN)  Sherjan  Broadcasting  Co.,  Inc.  (  Sherjan) 
 Time  Warner  Cable  (  Time  Warner)  United  States  Conference  of  Catholic  Bishops  (  USCCB) 
 Viacom,  Inc.  (  Viacom)  Writers  Guild  of  America  (  Writers  Guild) 


 *  late  filed 
 REPLY  COMMENTS 
 AT&  T  Broadband  (  AT&  T)  Comcast  Corporation  (  Comcast) 
 Consumer  Federation  of  America,  et  al.  (  CFA)  [jointly  filed  by  the  following:  Alliance  for  Community  Media,  Association  for  Independent  Video  and  Filmmakers,  Center  for  Digital  Democracy,  Consumer 
 Federation  of  America,  Consumers  Union,  Media  Access  Project,  National  Alliance  for  Media  Arts  and  Culture,  National  Association  of  Telecommunications  Officers  and  Advisors,  and  the  United  Church  of 
 Christ,  Inc.]  Fox  Entertainment  Group  et  al.  (  Fox)  [jointly  filed  by  the  following:  Fox  Entertainment  Group,  Inc., 
 National  Broadcasting  Company,  Inc.,  the  Walt  Disney  Company,  and  Viacom,  Inc.]  Media  Access  Project  et  al.  (  MAP)  [jointly  filed  by  the  following:  Center  for  Digital  Democracy, 
 Consumer  Federation  of  America,  Consumers  Union,  and  Media  Access  Project]  National  Association  of  Broadcasters  (  NAB) 
 National  Cable  &  Telecommunications  Association  (  NCTA) 
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 Paxson  Communications  Corporation  (  Paxson)  RCN  Telecom  Services,  Inc.  (  RCN) 
 Time  Warner  Cable  (  Time  Warner)  United  States  Department  of  Justice  (  DOJ) 
 World  Satellite  Network,  Inc.  (  World  Satellite)  Writers  Guild  of  America  (  Writers  Guild) 


 INITIAL  COMMENTS  ON  EXPERIMENTAL  STUDY  (  SUPPLEMENTAL  COMMENTS) 
 AT&  T  Corporation  (  AT&  T)  Comcast  Corporation  (  Comcast) 
 National  Cable  &  Telecommunications  Association  (  NCTA)  RCN  Telecom  Services,  Inc.(  RCN) 
 SBC  Communications,  Inc.  (  SBC)  Time  Warner  Cable  (  Time  Warner) 


 REPLY  COMMENTS  ON  EXPERIMENTAL  STUDY  (  SUPPLEMENTAL  REPLY  COMMENTS) 
 AT&  T  Corporation  (  AT&  T)  Time  Warner  Cable  (  Time  Warner) 
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 APPENDIX  B 
 INITIAL  REGULATORY  FLEXIBILITY  ANALYSIS 


 1.  As  required  by  the  Regulatory  Flexibility  Act  of  1980,  as  amended  (RFA),  1  the  Commission  has  prepared  this  Initial  Regulatory  Flexibility  Analysis  (IRFA)  of  the  possible  significant 
 economic  impact  on  a  substantial  number  of  small  entities  by  the  policies  and  rules  considered  in  the  Second  Further  Notice  of  Proposed  Rulemaking  (Second  Further  Notice).  Written  public  comments  are 
 requested  on  this  IRFA.  Comments  must  be  identified  as  responses  to  this  IRFA  and  must  be  filed  by  the  deadlines  for  comments  provided  on  the  first  page  of  this  document.  The  Commission  will  send  a  copy  of 
 the  Second  Further  Notice,  including  this  IRFA,  to  the  Chief  Counsel  for  Advocacy  of  the  Small  Business  Administration  (SBA).  2  In  addition,  the  Second  Further  Notice  and  the  IRFA  (or  summaries  thereof)  will 
 be  published  in  the  Federal  Register.  3 
 A.  Need  for,  and  Objectives  of,  the  Proposed  Rules 
 2.  Section  613(  f)  of  the  Communications  Act  is  intended,  in  part,  to  foster  a  diverse,  robust,  and  competitive  market  in  the  acquisition  and  delivery  of  multichannel  video  programming.  Specifically, 
 Section  613(  f)  requires  the  Commission  to  establish  reasonable  limits  on  the  number  of  cable  subscribers  that  may  be  reached  through  commonly  owned  or  attributed  systems  (horizontal  limits)  and  on  the 
 number  of  channels  that  can  be  occupied  by  the  cable  systems  owned  or  attributed  video  programming  services  (vertical  limits).  Congress  intended  these  limits  to  ensure  that  cable  operators  do  not  use  their 
 horizontal  reach  in  the  multichannel  video  distribution  (MVPD)  market,  acting  unilaterally  or  jointly,  to  unfairly  impede  the  flow  of  video  programming  to  consumers.  However,  Congress  recognized  that 
 multiple  system  ownership  could  benefit  consumers  by  allowing  efficiencies  in  the  administration,  distribution,  and  procurement  of  programming,  and  by  providing  capital  and  a  ready  subscriber  base  to 
 promote  the  introduction  of  new  programming  services.  Pursuant  to  its  statutory  mandate,  and  balancing  these  competing  interests,  the  Commission  has  adopted  and  periodically  revised  cable  ownership  limits. 


 3.  The  Commission  first  established  horizontal  and  vertical  ownership  limits  in  1993.  4  The  horizontal  limit  bars  cable  operators  from  serving  more  than  30%  of  all  U.  S.  MVPD  subscribers.  The 
 vertical  limit  bars  cable  operators  with  75  or  fewer  channels  from  devoting  more  than  40%  of  channel  capacity  to  affiliated  programming.  In  Time  Warner  Entertainment  Co.  v.  FCC,  240  F.  3d  1126  (D.  C.  Cir. 
 2001)  (Time  Warner  II),  the  D.  C.  Circuit  remanded  the  Commissions  horizontal  and  vertical  limits,  finding  that  the  horizontal  and  vertical  ownership  limits  unduly  burdened  cable  operators  First 
 Amendment  rights,  that  the  Commissions  evidentiary  basis  for  imposing  the  ownership  limits  and  its 


 1  See  5  U.  S.  C.    603.  The  RFA,  5  U.  S.  C.    601  et.  seq.,  has  been  amended  by  the  Small  Business  Regulatory 
 Enforcement  Fairness  Act  of  1996  (  SBREFA),  Pub.  L.  No.  104-  121,  Title  II,  110  Stat.  847  (1996). 
 2  See  5  U.  S.  C.    603(  a). 


 3  Id. 
 4  See  Implementation  of  Sections  11  and  13  of  the  Cable  Television  Consumer  Protection  and  Competition  Act  of 
 1992,  Horizontal  and  Vertical  Ownership  Limits,  Cross-  Ownership  Limitations,  and  Anti-  trafficking  Provisions,  8  FCC  Rcd  8565,  8567    3-  4  (1993)  (1993  Second  Report  and  Order). 
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 rationales  supporting  the  vacated  attribution  rules  did  not  meet  the  applicable  standards  of  review,  and  that  the  Commission  had  failed  to  consider  sufficiently  changes  that  have  occurred  in  the  MVPD  market 
 since  passage  of  the  1992  Act.  The  Commission  thereafter  issued  a  Further  Notice  of  Proposed  Rulemaking  (2001  Further  Notice)  soliciting  comment  aimed  at  establishing  a  sound  record  on  which  to 
 base  cable  horizontal  and  vertical  limits.  5 
 4.  None  of  the  comments  to  the  2001  Further  Notice  yielded  a  sound  evidentiary  basis  for  setting  horizontal  or  vertical  limits.  While  many  commenters  presented  theoretical,  legal,  or  economic 
 arguments  and  anecdotal  evidence,  no  party  provided  a  compelling  approach  that  supported  a  particular  horizontal  or  vertical  limit.  The  Commission  subsequently  sought  to  augment  the  record  by  means  of  a 
 programming  network  survey  and  econometric  analysis,  with  limited  results.  The  Commission  concludes  that  a  Second  Further  Notice  is  necessary  to  update  the  record  and  provide  additional  input  on  horizontal 
 and  vertical  ownership  limits  so  that  the  Commission  may  comply  with  the  statutory  mandate  and  the  courts  directives. 


 5.  In  the  Second  Further  Notice,  the  Commission  seeks  comment  on  how  recent  developments  in  the  industry  may  affect  the  issues  before  us.  Additionally,  to  develop  a  more  focused 
 and  useful  record,  the  Commission  addresses  the  viability  of  proposals  for  setting  limits  suggested  in  the  record. 


 B.  Legal  Basis 
 6.  The  authority  for  the  action  proposed  in  this  rulemaking  is  contained  in  Sections  2(  a),  4(  i),  303,  307,  309,  310,  and  613  of  the  Communications  Act  of  1934,  as  amended,  47  U.  S.  C.    152(  a), 
 154(  i),  303,  307,  309,  310,  533. 
 C.  Description  and  Estimate  of  the  Number  of  Small  Entities  to  Which  the  Proposed  Rules  Will  Apply 


 7.  The  RFA  directs  agencies  to  provide  a  description  and,  where  feasible,  an  estimate  of  the  number  of  small  entities  that  will  be  affected  by  the  rules.  6  The  RFA  defines  the  term  small  entity  as 
 having  the  same  meaning  as  the  terms  small  business,  small  organization,  and  small  governmental  jurisdiction.  7  In  addition,  the  term  small  business  has  the  same  meaning  as  the  term  small  business 
 concern  under  the  Small  Business  Act,  unless  the  Commission  has  developed  one  or  more  definitions  that  are  appropriate  to  its  activities.  8  Under  the  Small  Business  Act,  a  small  business  concern  is  one 


 5  See  Implementation  of  Section  11  of  the  Cable  Television  Consumer  Protection  and  Competition  Act  of  1992,  16 
 FCC  Rcd  17312  (2001)  (2001  Further  Notice).  The  Initial  Regulatory  Flexibility  Analysis  for  the  2001  Further  Notice  is  at  16  FCC  Rcd  at  17360-  17369. 


 6  5  U.  S.  C.    603(  b)(  3). 
 7  5  U.  S.  C.    601(  6). 
 8  Id.    601(  3)  (incorporating  by  reference  the  definition  of  small  business  concern  in  the  Small  Business  Act,  15 
 U.  S.  C.    632).  Pursuant  to  5  U.  S.  C.    601(  3),  the  statutory  definition  of  a  small  business  applies  unless  an  agency,  after  consultation  with  the  Office  of  Advocacy  of  the  Small  Business  Administration  and  after  opportunity 


 for  public  comment,  establishes  one  or  more  definitions  of  such  term  which  are  appropriate  to  the  activities  of  the  agency  and  publishes  such  definition(  s)  in  the  Federal  Register. 
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 which:  (1)  is  independently  owned  and  operated;  (2)  is  not  dominant  in  its  field  of  operation;  and  (3)  satisfies  any  additional  criteria  established  by  the  SBA.  9 
 8.  Cable  and  Other  Program  Distribution.  This  category  includes  cable  systems  operators,  closed  circuit  television  services,  direct  broadcast  satellite  services,  multipoint  distribution  systems, 
 satellite  master  antenna  systems,  and  subscription  television  services.  The  SBA  has  developed  a  small  business  size  standard  for  this  census  category,  which  includes  all  such  companies  generating  $12.5 
 million  or  less  in  revenue  annually.  10  According  to  the  Census  Bureau  data  for  1997,  there  were  1,311  firms  in  this  category,  total,  that  operated  for  the  entire  year.  11  Of  this  total,  1,180  firms  had  annual 
 receipts  of  under  $10  million  and  an  additional  52  firms  had  receipts  of  $10  million  or  more,  but  less  than  $25  million.  Consequently,  the  Commission  estimates  that  the  majority  of  providers  in  this  service 
 category  are  small  businesses  that  may  be  affected  by  the  rules  and  policies  in  the  Second  Further  Notice.  We  note,  however,  that  the  ownership  rules  at  issue  here  apply  only  to  cable  operators,  and  not  other 
 MVPD  providers. 
 9.  Cable  System  Operators  (Rate  Regulation  Standard).  The  Commission  has  developed,  with  SBAs  approval,  our  own  definition  of  a  small  cable  system  operator  for  purposes  of  rate  regulation. 
 Under  the  Commissions  rules,  a  small  cable  company  is  one  serving  fewer  than  400,000  subscribers  nationwide.  12  We  last  estimated  that  there  were  1,439  cable  operators  that  qualified  as  small  cable 
 companies  at  the  end  of  1995.  13  Since  then,  some  of  those  companies  may  have  grown  to  serve  over  400,000  subscribers,  and  others  may  have  been  involved  in  transactions  that  caused  them  to  be  combined 
 with  other  cable  operators.  Consequently,  we  estimate  that  there  are  fewer  than  1,439  small  cable  companies  that  may  be  affected  by  the  adopted  rules. 


 10.  Cable  System  Operators  (Telecom  Act  Standard).  The  Communications  Act  of  1934,  as  amended,  also  contains  a  size  standard  for  a  small  cable  operator,  which  is  a  cable  operator  that, 
 directly  or  through  an  affiliate,  serves  in  the  aggregate  fewer  than  one  percent  of  all  subscribers  in  the  United  States  and  is  not  affiliated  with  any  entity  or  entities  whose  gross  annual  revenues  in  the  aggregate 
 exceed  $250,000,000.  14  The  Commission  has  determined  that  there  are  67.7  million  subscribers  in  the 
 9  15  U.  S.  C.    632. 
 10  13  C.  F.  R.    121.201,  NAICS  Code  517510. 
 11  U.  S.  Census  Bureau,  1997.  Economics  and  Statistics  Administration,  Bureau  of  Census,  U.  S.  Department  of 
 Commerce,  1997  Economic  Census,  Subject  Series    Establishment  and  Firm  Size,  Information  Sector  51,  Table  4  at  50  (2000).  The  amount  of  $10  million  was  used  to  estimate  the  number  of  small  business  firms  because  the 


 relevant  Census  categories  stopped  at  $9,999,999  and  began  at  $10,000,000.  No  category  for  $12.5  million  existed.  Thus,  the  number  is  as  accurate  as  it  is  possible  to  calculate  with  the  available  information. 


 12  47  C.  F.  R.    76.901(  e).  The  Commission  developed  this  definition  based  on  its  determinations  that  a  small  cable 
 company  is  one  with  annual  revenues  of  $100  million  or  less.  See  Implementation  of  Sections  of  the  Cable  Television  Consumer  Protection  and  Competition  Act  of  1992:  Rate  Regulation,  MM  Doc.  Nos.  92-  266  and  93- 


 215,  Sixth  Report  and  Order  and  Eleventh  Order  on  Reconsideration,  10  FCC  Rcd  7393,  7408-  7409    28-  30  (1995). 


 13  Paul  Kagan  Assocs.,  Inc.,  Cable  TV  Investor,  Feb.  29,  1996  (based  on  figures  for  Dec.  30,  1995). 
 14  47  U.  S.  C.    543(  m)(  2). 
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 United  States.  15  Therefore,  an  operator  serving  fewer  than  677,000  subscribers  shall  be  deemed  a  small  operator,  if  its  annual  revenues,  when  combined  with  the  total  annual  revenues  of  all  of  its  affiliates,  do 
 not  exceed  $250  million  in  the  aggregate.  16  Based  on  available  data,  we  estimate  that  the  number  of  cable  operators  serving  677,000  subscribers  or  less  totals  approximately  1,450.  17  The  Commission  neither 
 requests  nor  collects  information  on  whether  cable  system  operators  are  affiliated  with  entities  whose  gross  annual  revenues  exceed  $250  million,  18  and  therefore  is  unable  at  this  time  to  estimate  more 
 accurately  the  number  of  cable  system  operators  that  would  qualify  as  small  cable  operators  under  the  size  standard  contained  in  the  Communications  Act. 


 11.  Private  Cable  Operators  (PCOs)  or  Satellite  Master  Antenna  Television  (SMATV)  Systems.  PCOs,  also  known  as  SMATV  systems  or  private  communication  operators,  are  video 
 distribution  facilities  that  use  closed  transmission  paths  without  using  any  public  right-  of-  way.  PCOs  acquire  video  programming  and  distribute  it  via  terrestrial  wiring  in  urban  and  suburban  multiple 
 dwelling  units  such  as  apartments  and  condominiums,  and  commercial  multiple  tenant  units  such  as  hotels  and  office  buildings.  The  SBA  definition  of  small  entities  for  cable  and  other  program  distribution 
 services  includes  PCOs.  19  In  2003,  there  were  approximately  250  PCOs  operating  in  the  United  States.  PCOs  often  serve  approximately  3,000-  4,000  subscribers,  but  the  larger  operations  serve  as  many  as 
 15,000-  55,000  subscribers.  20  As  of  June  2004,  PCOs  served  1.1  million  subscribers,  down  100,000  subscribers  from  June  2003.  21  Because  these  operators  are  not  rate  regulated,  they  are  not  required  to  file 
 financial  data  with  the  Commission.  Furthermore,  we  are  not  aware  of  any  privately  published  financial  information  regarding  these  operators.  Based  on  the  estimated  number  of  operators  and  the  estimated 
 number  of  units  served  by  the  largest  ten  SMATVs,  we  believe  that  a  substantial  number  of  SMATV  operators  qualify  as  small  entities. 


 D.  Description  of  Projected  Reporting,  Recordkeeping  and  Other  Compliance  Requirements 
 12.  None  proposed. 
 15  See  FCC  Announces  New  Subscriber  Count  for  the  Definition  of  Small  Cable  Operator,  Public  Notice,  16  FCC 
 Rcd  2225  (2001). 
 16  47  C.  F.  R.    76.901(  f). 


 17  See  FCC  Announces  New  Subscriber  Count  for  the  Definition  of  Small  Cable  Operator,  Public  Notice,  16  FCC 
 Rcd  2225  (2001). 
 18  The  Commission  does  receive  such  information  on  a  case-  by-  case  basis  if  a  cable  operator  appeals  a  local 
 franchise  authoritys  finding  that  the  operator  does  not  qualify  as  a  small  cable  operator  pursuant  to    76.901(  f)  of  the  Commissions  rules.  See  47  U.  S.  C.    573. 


 19  13  C.  F.  R.    121.201,  NAICS  Code  517510.  Small  entities  are  defined  as  all  such  companies  generating  $12.5 
 million  or  less  in  annual  receipts.  Id. 
 20  See  Annual  Assessment  of  the  Status  of  Competition  in  the  Market  for  the  Delivery  of  Video  Programming,  19 
 FCC  Rcd  1606,  1666    90  (2004). 
 21  See  Annual  Assessment  of  the  Status  of  Competition  in  the  Market  for  the  Delivery  of  Video  Programming,  20 
 FCC  Rcd  2755,  2816    110  (2005). 
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 E.  Steps  Taken  to  Minimize  Significant  Impact  on  Small  Entities  and  Significant  Alternatives  Considered 
 13.  The  RFA  requires  an  agency  to  describe  any  significant  alternatives  specifically  affecting  small  entities  that  it  has  considered  in  proposing  regulatory  approaches,  which  may  include,  among 
 others,  the  following  four  alternatives:  (1)  the  establishment  of  differing  compliance  or  reporting  requirements  or  timetables  that  take  into  account  the  resources  available  to  small  entities;  (2)  the 
 clarification,  consolidation,  or  simplification  of  compliance  or  reporting  requirements  under  the  rule  for  small  entities;  (3)  the  use  of  performance,  rather  than  design,  standards;  and  (4)  an  exemption  from 
 coverage  of  the  rule,  or  any  part  thereof,  for  small  entities.  22 
 14.  The  cable  ownership  limits  are  intended  to  prevent  large  cable  entities  from  unfairly  impeding  the  flow  of  video  programming  to  consumers  through  their  horizontal  reach  and/  or  their  vertical 
 integration.  Any  horizontal  or  vertical  limits  adopted  by  the  Commission  would  directly  impact  large  cable  entities,  and  we  anticipate  that  they  will  have  little  adverse  impact  on  small  entities.  The  Second 
 Further  Notice  discusses  several  potential  scenarios  in  which  small  entities  may  suffer  harm  from  large  entities,  either  through  their  horizontal  reach,  their  vertical  integration,  or  both,  and  seeks  comment  on 
 crafting  rules  that  prevent  harms  to  small  entities,  which  could,  in  turn,  protect  the  flow  of  programming  to  consumers. 


 F.  Federal  Rules  Which  Duplicate,  Overlap,  or  Conflict  with  the  Commissions  Proposals 
 15.  None. 


 22  5  U.  S.  C.    603(  c). 
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 JOINT  STATEMENT  OF  COMMISSIONERS  MICHAEL  J.  COPPS  AND  JONATHAN  S.  ADELSTEIN 
 Re:  Implementation  of  Section  11  of  the  Cable  Television  Consumer  Protection  and  Competition  Act  of  1992,  et  al.,  Second  Further  Notice  of  Proposed  Rulemaking,  CS  Docket  No.  98-  82  et  al. 
 It  is  with  some  disappointment  that  we  vote  to  approve  todays  Second  Further  Notice  of  Proposed  Rulemaking.  After  the  D.  C.  Circuit  reversed  our  prior  rules,  the  Commission  sought  public  comment,  in 
 September  2001,  on  how  to  fashion  new  standards,  consistent  with  the  courts  opinion.  Now,  almost  four  years  later,  we  still  do  not  resolve  these  issues  and  provide  much-  needed  certainty,  but  instead  seek 
 another  round  of  comments.  The  record  we  adduced  before,  limited  though  it  was,  has  grown  stale,  and  needs  to  be  refreshed  and  updated. 


 Once  the  new  record  is  compiled,  we  hope  the  Commission  will  prioritize  this  proceeding  and  move  to  a  decision.  Toward  that  end,  were  pleased  that  todays  item,  even  if  it  does  not  establish  new  numerical 
 limits,  does  resolve  some  issues.  Most  importantly,  the  item  puts  to  rest  the  notion  that  the  Commission  could  simply  decide  that  horizontal  and  vertical  limits  of  some  kind  arent  necessary.  The  item  reiterates 
 the  clear  language  of  the  law:  the  Commission  shall  .  .  .  prescribe  rules  and  regulations  establishing  reasonable  limits  for  a  cable  operators  subscriber  reach,  as  well  as  the  number  of  its  own  channels  it  can 
 run  on  its  system.  Against  this  backdrop,  we  hope  cable  operators  and  other  parties  do  not  argue  that  there  should  be  no  numerical  limits,  but  instead  provide  appropriate  and  necessary  information  to  help  us 
 implement  the  clear  command  of  the  statute.  Given  that  the  mandate  dates  back  not  to  the  now  almost  ten-  year-  old  Telecommunications  Act  of  1996,  but  even  worse,  the  Cable  Television  Consumer 
 Protection  and  Competition  Act  of  1992,  we  need  to  work  efficiently  and  productively  to  establish  numerical  limits  which  satisfy  the  statutory  purposes  expressed  in  section  613(  f)(  2)  of  the  Act  as  soon  as 
 possible. 
90