[Federal Register Volume 63, Number 134 (Tuesday, July 14, 1998)]
[Rules and Regulations]
[Pages 37790-37792]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-18037]



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FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 76

[MM Docket No. 92-264; FCC 98-138]


Horizontal Ownership Limits

AGENCY: Federal Communications Commission.

ACTION: Final rule; announcement of effective date.

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SUMMARY: In the Second Memorandum Opinion and Order on Reconsideration 
(Second Order on Reconsideration), the Commission maintains the current 
30% cable television horizontal ownership limit and generally denies 
the motion to lift the voluntary stay on enforcement of that limit. 
However, the Commission lifts the stay and announces the effective date 
for information reporting requirements. A companion Further Notice of 
Proposed Rulemaking seeks comment on possible revisions of the 
horizontal ownership rules and the method by which horizontal ownership 
is calculated.

DATES: Section 76.503(c) published at 58 FR 60141 (November 15, 1993) 
is effective August 13, 1998.

FOR FURTHER INFORMATION CONTACT: John Norton, Cable Services Bureau, 
(202) 418-7200.

SUPPLEMENTARY INFORMATION: This is a synopsis of the Commission's 
Second Order on Reconsideration, MM Docket No. 98-138, adopted June 23, 
1998, and released June 26, 1998. The full text of this decision is 
available for inspection and copying during normal business hours in 
the FCC Reference Center (Room 239), 1919 M Street, NW, Washington, 
D.C. 20554, and may be purchased from the Commission's copy contractor, 
International Transcription Service, (202) 857-3800, 1231 20th Street, 
NW, Washington, D.C. 20036.

Synopsis of the Second Order on Reconsideration

    1. This Second Order on Reconsideration addresses petitions for 
reconsideration of the Second Report and Order in MM Docket No. 92-264, 
58 FR 60135, November 15, 1993 (``Second Report and Order''). Among 
other things, the Second Report and Order promulgated rules pursuant to 
section 613 of the Communications Act (47 U.S.C. Sec. 533(f)(1)(A)), 
which requires the Commission to ``prescribe rules and regulations 
establishing reasonable limits on the number of cable subscribers a 
person is authorized to reach through cable systems owned by such a 
person, or in which such a person has an attributable interest'' 
(``horizontal ownership rules''). Section 613(f)(2) directs that, in 
addition to other public interest concerns, the Commission must 
consider and balance seven particular public interest objectives in 
establishing the horizontal ownership rules: (1) To ensure that no 
cable operator or group of cable operators can unfairly impede the flow 
of video programming from the programmer to the consumer; (2) to ensure 
that cable operators do not favor affiliated video programmers in 
determining carriage and do not unreasonably restrict the flow of video 
programming of affiliated video programmers to other video 
distributors; (3) to take account of the market structure, ownership 
patterns, and other relationships of the cable industry, including the 
market power of the local franchise, joint ownership of cable systems 
and video programmers, and the various types of non-equity controlling 
interests; (4) to take into account any efficiencies and other benefits 
that might be gained through increased ownership or control; (5) to 
make rules and regulations that reflect the dynamic nature of the 
communications marketplace; (6) to impose no limitations that prevent 
cable operators from serving previously unserved rural areas; and (7) 
to impose no limitations that will impair the development of diverse 
and high quality programming. The Commission's horizontal ownership 
rules established in the Second Report and Order provide that ``no 
person or entity shall be permitted to reach more than 30% of all homes 
passed nationwide through cable systems owned by such person or entity 
or in which such person or entity holds an attributable interest.''
    2. In the Second Report and Order, the Commission voluntarily 
stayed the effective date of the horizontal ownership rules pending 
final judicial resolution of the District Court decision in Daniels 
Cablevision, Inc. v. United States (835 F. Supp. 1, 10 (D.D.C. 1993), 
aff'd in part, rev'd in part, Time Warner Entertainment Co., L.P. v. 
FCC, 93 F.3d 957 (D.C. Cir. 1996)) which held that the underlying 
statute violates the First Amendment. The Daniels court stayed further 
court proceedings, including determination and imposition of relief for 
the plaintiffs, pending appeal. On December 15, 1993, petitions for 
reconsideration of the stayed rules and a motion to lift the 
administrative stay were filed with the Commission. The following 
month, the stayed rules were challenged in Time arner Entertainment 
Co., L.P. v. FCC (No. 94-1035 (D.C. Cir. 1994)). In August 1996, the 
D.C. Circuit Court consolidated the Daniels appeal regarding the facial 
validity of the statute and the Time Warner challenge to the 
Commission's rules, and determined to hold court proceedings in 
abeyance while the Commission reconsidered the horizontal ownership 
rules (Time Warner Entertainment Co., L.P. v. FCC, 93 F.3d 957, 979-80 
(D.C. Cir. 1996)).
    3. The Second Order on Reconsideration disposes of both the 
reconsideration petitions, which seek to lower the 30% horizontal 
ownership limit and revise the calculation factors, and the motion to 
lift the voluntary stay on enforcement of the horizontal ownership 
rules. In the Second Order on Reconsideration, the Commission maintains 
the current 30% horizontal ownership limit and denied the motion to 
lift the voluntary stay on enforcement of that limit. We note that, 
while the most established programmers can obtain favorable terms from 
even large cable multiple system operators (``MSOs''), the cable 
horizontal ownership rules remain necessary to prevent MSOs from 
exercising market power against new, independent, and less prominent 
programmers. In order to facilitate monitoring of cable ownership 
interests, the Commission lifts the voluntary stay insofar as it 
applies to the information reporting requirements of 47 CFR 76.503(c). 
Prior to acquiring attributable interests in any additional cable 
systems, a person holding an attributable interest in cable systems 
reaching 20% or more of homes passed nationwide by cable will be 
required to notify the Commission of the incremental change the 
acquisition makes in terms of the 30% of homes passed standard, i.e. 
specifying the ownership in terms of homes passed before and after the 
acquisition is complete.
    4. The arguments raised against the Commission's 30% limit fall 
into five broad categories--consideration of diversity issues; 
alteration of the status quo; divestiture by Tele-Communications, Inc. 
(``TCI''); current levels of horizontal concentration; and impact of 
other statutes and rules.
    5. With respect to diversity of ownership, the Second Report and 
Order finds that the 30% horizontal ownership limit provides 
considerable protection for diversity concerns. As required by section 
613, the Commission balances those diversity concerns with many other 
public interest factors, some of which support the growth of cable 
MSOs. In the Second Order on Reconsideration, the Commission finds that 
it properly

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concluded that a 30% limit is generally appropriate to prevent the 
largest MSOs from gaining excessive leverage, and also ensures that the 
majority of MSOs continue to expand and obtain the economies of scale 
necessary to encourage investment in new video programming services and 
the deployment of advanced cable technologies.
    6. In addition, petitioners contended that Congress sought to 
change the status quo in the 1992 Cable Act because existing levels of 
horizontal concentration were too high, and that the 30% horizontal 
ownership limit is too high because it does not alter the status quo. 
In the Second Order on Reconsideration, the Commission finds that the 
statute does not direct the Commission to alter the status quo by 
ordering divestiture by any cable MSO. Instead, Congress required that 
the Commission set ``reasonable limits'' and left the parameters of 
what ``reasonable limits'' would be to Commission discretion. The 
statute and the legislative history make clear that the Commission was 
not required to alter current industry structure, but to consider the 
potential public interest concerns associated with the industry 
structure. In the Second Order on Reconsideration, the Commission finds 
that it fully considered such interests.
    7. Petitioners also asserted that the Second Report and Order was 
too concerned about avoiding divestiture by TCI and was not focused on 
consumer welfare. In the Second Order on Reconsideration, the 
Commission finds that inquiry into the impact divestiture would have 
upon subscribers, programmers and industry investment are legitimate 
public interest objectives that the Commission is entitled to consider. 
We also noted that, in both First Report and Further Notice and the 
Second Report and Order, the Commission considered arguments for low 
limits that would require divestiture. The Commission expressly 
confronted the divestiture issue and determined that, in the absence of 
definitive evidence that existing levels of ownership are sufficient to 
impede the entry of new video programmers or have an adverse effect on 
diversity, existing arrangements should not be disrupted. In the Second 
Order on Reconsideration, we find that the Commission properly 
considered whether the substantial structural change that divestiture 
would entail was warranted. The Commission based its final decision in 
the Second Report and Order not solely on a determination to avoid 
divestiture, as petitioners suggested, but, more importantly, upon the 
public interest requirements of section 613.
    8. With respect to current levels of horizontal concentration, 
petitioners asserted that the Second Report and Order did not 
sufficiently address the evidence that existing levels of horizontal 
concentration are too high and that TCI, the largest MSO, already uses 
its market power to disadvantage competing program services. All other 
cable operators filing comments strenuously opposed the argument that 
current levels of horizontal concentration are ``too high'' and cited 
the benefits of horizontal concentration, including MSOs' ability to 
achieve economies of scale in research and development of transmission 
and distribution technology, savings in administrative costs such as 
billing operations, advertising, marketing, and management, and 
reduction in the costs of negotiating with programmers.
    9. The Commission found in the Second Report and Order that 30% was 
an appropriate horizontal ownership limit ``in the absence of 
definitive evidence that existing levels of ownership are sufficient to 
impede the entry of new video programmers or have an adverse affect on 
diversity . . .'' The Second Report and Order concluded that a 30% 
limit was ``appropriate to prevent the nation's largest MSOs from 
gaining enhanced leverage from increased horizontal concentration,'' 
and is ``reasonable to prevent the types of anti-competitive conduct 
which concerned Congress, particularly when coupled with the behavioral 
restrictions contained in [the program access and program carriage 
provisions] * * *.'' In the Second Order on Reconsideration, the 
Commission finds that no one has proffered any new evidence that 
requires the Commission to alter this finding, and that the 30% limit 
complies with the intent of Congress and satisfies the criteria 
specified in section 613.
    10. In the Second Order on Reconsideration, the Commission finds 
that the 30% limit adequately constrains the extent to which either a 
large cable MSO acting unilaterally or a group of cable MSOs acting in 
concert could exercise market power in the purchase of programming to 
reduce the diversity of programming or to coerce nonaffiliated 
programmers into denying programming to alternative MVPDs. In addition, 
the 30% ceiling limits the extent to which large cable MSOs can merge 
and result in one or two MSOs controlling local cable markets 
nationwide, thereby helping to preserve opportunities for entry by 
overbuilders or other MVPDs and reduce the likelihood that large MSOs 
can coordinate their behavior by mutually forbearing from overbuilding 
each other's service territories. The Commission found that the 30% 
limit also reduces the likelihood of coordinated activity between large 
cable MSOs in areas such as program purchasing and equipment 
purchasing. Accordingly, in the Second Order on Reconsideration, the 
Commission finds that the 30% limit simultaneously guards against the 
potential anticompetitive effects of horizontal concentration and 
allows cable MSOs to realize the benefits of clustering in order to 
gain efficiencies related to economies of scale and scope in 
administration, deployment of new technologies and services, extension 
into previously unserved territories, etc.
    11. In the Second Order on Reconsideration, the Commission also 
concludes that the gradual but continuous growth and expansion in both 
cable-affiliated and independent programming sources and programming 
networks over the past several years tends to suggest that current 
levels of horizontal concentration have not significantly hampered new 
video programmers' entry, and that the Commission's 30% limit properly 
struck a reasonable balance between concentration and diversity 
concerns.
    12. With respect to the impact of other statutory provisions and 
rules, one petitioner argued that the Commission's reliance in the 
Second Report and Order upon existing statutes and regulations to 
support the 30% ownership limit was improper. In the Second Order on 
Reconsideration, the Commission finds that the Second Report and Order 
properly considered the impact of other statutes and regulations, given 
the requirements of Section 613 that the Commission examine the 
marketplace as it currently operates. The Commission finds that 
statutes and rules such as the program access, program carriage, 
channel occupancy limits, and must-carry requirements all affect the 
way the cable television industry currently operates and have a 
profound effect on current industry structure and performance. In the 
Second Order on Reconsideration, the Commission finds that, because 
these provisions have real and substantive impact upon the market, the 
Commission properly considered the impact of these provisions in 
alleviating some of the public interest and anticompetitive concerns 
about horizontal concentration.
    13. In addition to requesting the lowering of the 30% ownership 
limit, petitioners proposed that the

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Commission revise the calculation factors. One petitioner argued that 
the 30% limit should include households served by a telephone company 
that is affiliated with an MSO. In the Second Order on Reconsideration, 
the Commission finds that, where the use of a telephone company's lines 
is limited to the provision of local exchange services, the telephone 
company does not operate as a ``cable system'' and its telephone 
subscribers should not be counted toward the number of subscribers 
served by an MSO affiliated with the telephone company. Likewise, the 
Commission states that the cable horizontal ownership limit does not 
apply to subscribers of a telephone company that offers multichannel 
video programming distribution service solely through means other than 
a ``cable system.'' However, the Second Order on Reconsideration 
emphasizes that telephone companies offering MVPD service through cable 
systems are subject to the cable horizontal ownership limits.
    14. One petitioner argued that homes in franchise areas facing 
``effective competition'' should not be included in calculating the 30% 
limit because horizontal ownership limits are only required to combat 
the local monopoly and ``gatekeeper'' power of cable systems, so that 
the justification for these limits disappear where local distribution 
markets are competitive. Rejecting this argument in the Second Order on 
Reconsideration, the Commission finds that, had Congress intended to 
eliminate all cable regulations where the ``effective competition'' 
standard applicable to rate deregulation is satisfied, the ``effective 
competition'' exemption would have been drawn much more broadly. The 
Commission observes that the ``effective competition'' standard 
determines when there is sufficient local competition to prevent an 
incumbent cable operator from exercising market power in setting local 
rates for cable services sold to local subscribers. In contrast, the 
horizontal ownership limit was designed to ensure that no cable MSO 
acquires a sufficiently large share of subscribers nationwide to 
exercise undue market power at the national level in its purchase of 
programming from networks, which generally sell their programming 
nationwide. The Second Order on Reconsideration concludes that the 
``effective competition'' exemption is expressly limited to cable rate 
regulation and is not sufficient to address all the concerns expressed 
by Congress in enacting Section 613.
    15. In the Second Order on Reconsideration, a petitioner also 
requested that the Commission tighten its attribution rules by 
eliminating the single majority shareholder exception, which provides 
that minority interests will not be attributed where a single 
shareholder owns more than 50% of the outstanding voting stock. The 
petitioner argued that this exception to the attribution rules is 
``unduly mechanistic'' and ignores the minority shareholder's ``ability 
to influence the actual operation of the property'' even when a 
majority shareholder is present.
    16. In the Second Order on Reconsideration, the Commission finds 
that there was not enough evidence in this docket to justify 
eliminating the single majority shareholder exception. The single 
majority shareholder provision of the rules is currently under review 
in the broadcast context in MM Docket Nos. 94-150, 92-51 and 87-154. In 
that proceeding, the Commission sought comment on the nature of 
``influence'' and ``control'' and the connection between equity 
ownership and such influence and control. The Commission is also 
issuing a Notice of Proposed Rulemaking seeking comment on whether and 
how the cable attribution rules, including the single majority 
shareholder exception, should be revised. In the Second Order on 
Reconsideration, the Commission notes that its determination regarding 
the cable attribution rules applies to both the horizontal ownership 
rules and channel occupancy limits.
    17. A motion also was filed with the Commission to lift the 
Commission's voluntary stay on enforcement of the cable horizontal 
ownership rules. In the Second Report and Order, the Commission had 
voluntarily stayed the effective date of these rules pending final 
judicial resolution of the District Court decision in Daniels that the 
underlying statute violates the First Amendment. While the Daniels 
Court had stayed further District Court proceedings pending 
interlocutory appeal of its judgment, it had not enjoined the 
Commission from adopting and enforcing horizontal ownership rules under 
the statute. In August 1996, the D.C. Circuit Court consolidated the 
Daniels appeal regarding the facial validity of the statute and the 
Time Warner challenge to the Commission's rules, and determined to hold 
court proceedings in abeyance while the Commission reconsidered the 
horizontal rules.
    18. In the Second Order on Reconsideration, the Commission retains 
the voluntary stay of the 30% horizontal ownership limit at this time, 
in light of the continuing pendency of the judicial proceedings 
relating to the underlying provision. In order to facilitate monitoring 
of MSOs' ownership interests, the Commission lifts the stay insofar as 
it applies to the information submission provisions of 47 CFR 76.503(c) 
that are applicable when any person or entity holding an attributable 
interest in cable systems reaching 20% or more of homes passed 
nationwide acquires additional cable systems. The existing rules 
require a certification that no violation of the 30% limit will occur 
as a result of such acquisition. In the Second Order on 
Reconsideration, the Commission finds that, in light of the 
continuation of the stay, the certification should only specify the 
incremental change the acquisition makes in terms of the 30% of 
household passed standard, i.e. specifying the ownership in terms of 
homes passed before and after the acquisition is complete. The Second 
Order on Reconsideration also states that affected parties will be 
required to come into compliance with the horizontal ownership rules 
within 60 days of the appellate court's issue of a mandate upholding 
section 613(f)(1)(a) and the rules, unless the Commission determines as 
part of this ongoing proceeding to lift the stay at an earlier date. 
Interested parties, including in particular parties that are now 
entering into business arrangements that would violate the rules but 
for the existence of the stay, should be well aware of the existence of 
the rules and thus have a full opportunity to be prepared to comply 
with them.

Ordering Clauses

    19. Accordingly, it is ordered that the petitions for 
reconsideration filed in this proceeding are denied.
    20. It is further ordered that the Motion to Lift Stay filed 
December 15, 1993 by the Center for Media Education and Consumer 
Federation of America is granted as to the Commission's voluntary stay 
on enforcement of 47 CFR 76.503(c), and is denied as to the 
Commission's voluntary stay on enforcement of 47 CFR 76.503(a), (b), 
(d), (e) and (f).

List of Subjects in 47 CFR Part 76

    Cable television.

Federal Communications Commission.
Magalie Roman Salas,
Secretary.
[FR Doc. 98-18037 Filed 7-13-98; 8:45 am]
BILLING CODE 6712-01-P