[Federal Register Volume 60, Number 84 (Tuesday, May 2, 1995)]
[Rules and Regulations]
[Pages 21464-21467]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-10719]



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FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 76

[MM Docket 92-264; FCC 95-147]


Cable Television Act of 1992--Vertical Ownership Rules

agency: Federal Communications Commission.

action: Order on reconsideration.

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summary: On reconsideration of the cable television vertical ownership 
(or channel occupancy) rules adopted in its Second Report and Order, 
the Federal Communications Commission (the ``Commission'') has adopted 
a Memorandum Opinion and Order on Reconsideration of the Second Report 
and Order (``Reconsideration Order''). The Reconsideration Order denies 
petitions for reconsideration filed by the Center for Media Education/
Consumer Federation of America (collectively ``CME'') and Bell Atlantic 
Corporation (``Bell Atlantic''). Specifically, the Reconsideration 
Order: Denies CME's petition requesting that the Commission; reduce the 
percentage of activated channels that a cable operator may devote to 
video programming in which it has an attributable interest from 40% to 
20%; reverse the Commission's decision to include over-the-air 
broadcast, public, educational, governmental (``PEG''), and leased 
access channels when calculating total channel capacity; reverse the 
Commission's decision to exempt local and regional networks from the 
channel occupancy limits; reverse the Commission's decision not to 
apply channel occupancy limits beyond a system's first 75 channels; and 
reverse the Commission's decision to grandfather all vertically 
integrated programming services being carried as of the effective date 
of the 1992 Cable Act. The Reconsideration Order also denies Bell 
Atlantic's petition asking that the Commission reconsider its decision 
to apply the vertical ownership limits to cable systems facing actual 
head-to-head competition.

effective date: April 6, 1995.

for further information contact: Rick Chessen, Cable Services Bureau, 
(202) 416-0800.

supplementary information: This is a synopsis of the Memorandum Opinion 
and Order on Reconsideration of the Second Report and Order 
(``Reconsideration Order'') in MM Docket 92-264, adopted April 5, 1995 
and released April 6, 1995. This Reconsideration Order responds to 
petitions for reconsideration filed in response to the Commission's 
Second Report and Order, 58 FR 60135 (November 15, 1993). The Second 
Report and Order was established pursuant to section 11(c)(2)(B) of the 
Cable Television Consumer Protection and Competition Act of 1992 
(``1992 Cable Act''), Public Law 102-385, 106 Stat. 1460 (1992).
    The complete text of this Reconsideration Order is available for 
inspection and copying during normal business hours in the FCC 
Reference Center (room 239), 1919 M Street, NW., Washington, DC, and 
also may be purchased from the Commission's copy contractor, 
International Transcription Services, Inc. (``ITS, Inc.'') at (202) 
857-3800, 2100 M Street, NW., Suite 140, Washington, DC 20037.

Synopsis of the Memorandum Opinion and Order on Reconsideration of the 
Second Report and Order

A. Background

    Pursuant to section 11(c)(2)(B) of the Cable Television Consumer 
Protection and Competition Act of 1992 (``1992 Cable Act''), Pub. L. 
102-385, 106 Stat. 1460 (1992), the Commission's Second Report and 
Order, 58 FR 60135 (November 15, 1993), established cable channel 
occupancy rules, including the following rules relevant here: (1) Cable 
operators generally may devote no more than 40% of their activated 
channels to the carriage of programing services in which they have an 
attributable interest; (2) all activated channels will be included in 
calculating channel capacity, including broadcast, PEG and leased 
access channels; (3) channal occupancy limits will apply only to 
``national'' programming services (i.e., local and regional programming 
services are exempt); (4) channel occupancy limits will apply to a 
maximum of 75 channels per system; (5) all vertically integrated 
programming services carried as of the effective date of the 1992 Cable 
Act (December 4, 1992) could continue to be carried; and (6) channel 
occupancy limits will not be eliminated in communities where actual 
head-to-head competition exists.

B. Petitions for Reconsideration

    The Center for Media Education and the Consumer Federation of 
America (collectively ``CME'') filed a joint Petition for 
Reconsideration asking the Commission to reconsider several issues 
decided in the Second Report and Order. Specifically, CME asked the 
Commission to: (1) Reduce the channel occupancy limit from 40% to 20%; 
(2) require that broadcast, PEG, and leased access channels be 
subtracted from the number of activated channels before calculating 
total channel capacity; (3) eliminate the exemption for local and 
regional networks; (4) apply channel occupancy limits beyond a system's 
first 75 channels; and (5) reverse the decision to grandfather all 
vertically integrated programming services carried as of December 4, 
1992.
    After consideration of the various submissions, the Commission 
declines to modify the 40% channel occupancy limit. In requiring the 
Commission to establish ``reasonable'' channel occupancy limits, 
Congress directed the Commission to balance the risks of vertical 
integration against benefits such as the development of diverse and 
high quality video programming. The Commission continues to believe 
that the 40% limit strikes the appropriate balance between these 
competing objectives.
    Moreover, CME may have overstated the practical effect of must-
carry, PEG and leased access requirements on unaffiliated programmers' 
ability to obtain carriage. In the absence of record evidence on this 
point, the Commission examined an unscientific sampling of 25 Tele-
Communications, Inc. (``TCI'') and Time Warner Entertainment Company, 
L.P. (``Time Warner'') cable systems (those being the most vertically 
integrated cable operators) in order to determine whether, in fact, 
broadcast, PEG and leased access channels occupied all, or nearly all, 
of the systems' unaffiliated programming channels. Generally, the 
Commission found that, even after excluding broadcast, PEG and leased 
access channels (and even assuming the presence of two local or 
regional networks), all of the systems had capacity remaining for 
additional unaffiliated programming.
    Next, CME claims that the Commission overstated the benefits of 
vertical integration. As proof, CME states that the Cable News Network, 
Inc. (``CNN''), Black Entertainment Television, Inc. (``BET''), and 
Nickelodeon were successful prior to their relationship with cable 
operators, and that ``there has been no successful launch of an 
unaffiliated video programmer since the cable industry began the trend 
toward vertical integration.'' Whether or not CNN, BET and Nickelodeon 
achieved some initial independent success, there is evidence in the 
record that these and other programmers would have had difficulty 
[[Page 21465]] sustaining their success had it not been for cable 
operator investment (see, e.g., Comments of Turner Broadcasting System, 
Inc., filed February 9, 1993, at 12 (at a time when TBS's 
``independence was very much at stake,'' cable operators were willing 
to provide long-term equity under terms others were not); Opposition of 
Black Entertainment Television, Inc. to Comments of Viacom 
International, Inc., filed February 22, 1994, at 2 (``[C]able 
investment has been crucial to establishing BET as a viable and 
valuable programming service.''). Likewise, CME's assertion that there 
has been no successful launch of an unaffiliated programmer since 
vertical integration has taken hold was disputed by TBS, citing the 
recent successes of ESPN2, FLIX and the SciFi Channel.
    Similarly, there is no evidence in the record to substantiate CME's 
claim that the 40% limit will deter independent investors from 
investing in video programming, or that independent investors are 
currently deterred from investing in cable programming by the 
Commission's channel occupancy limits.
    Finally, the Commission disagrees with CME's assertion that the 
Senate Report ``suggested'' a 20% channel occupancy limit. The Senate 
Report stated: ``For example, the FCC may conclude that each MSO should 
control no more than 20 percent of the channels on any cable system * * 
*.'' Thus, the Report used the 20% figure for illustrative purposes 
only, while clearly acknowledging that the Commission was free to 
choose a different limit. This interpretation is supported by the 
actual wording of the statute, which simply requires the Commission to 
establish ``reasonable'' channel occupancy limits.
    The Commission also denies CME's petition to reconsider the 
treatment of broadcast, PEG and leased access channels. CME correctly 
notes that the channel occupancy limits are intended to keep cable 
operators from filling every available channel with their own 
programming. But from this premise, CME draws the conclusion that 
channel occupancy limits must therefore be intended to give 
``independent commercial programmers a chance to get on the wire.'' The 
statute, however, does not distinguish between ``independent'' 
unaffiliated programmers and other types of unaffiliated programmers. 
Section 11 simply ensures that subscribers will have access to some 
kind of unaffiliated programming on a prescribed number of channels. 
CME does not dispute that broadcast, PEG and leased access channels are 
``unaffiliated'' with cable operators, or that the 1992 Cable Act 
requires cable operators to reserve channel space for such unaffiliated 
programming. Thus, the Commission reaffirms its holding in the Second 
Report and Order that it would be unreasonable to subtract such 
channels before calculating the system's channel capacity, since they 
provide the type of diverse, unaffiliated programming contemplated by 
the 1992 Cable Act. Further, as the Commission noted in the Second 
Report and Order, it would be unfair to penalize those cable operators 
who carried the widest array of broadcast, PEG and leased access 
channels by decreasing the number of channels available for affiliated 
programming.
    Moreover, there is no evidence in the record that ``independent'' 
commercial programmers (i.e., those with no cable ownership interests 
at all) are unable to obtain carriage because of the Commission's 
treatment of broadcast, PEG and leased access channels. To the 
contrary, in the Commission's sampling of 25 TCI and Time Warner cable 
systems described above, the Commission found that all of the systems 
carried some ``independent'' unaffiliated programmers, with most 
systems carrying between 7 and 11 such channels.
    In addition, although the Senate Report's sample calculation 
excluded broadcast and access channels in calculating channel capacity, 
CME's reliance on it as an expression of Congressional intent is 
misplaced. As the Commission stated in the Second Report and Order:

    The Senate Report language (* * *) appears to be included merely 
as an example to illustrate how the Commission may decide to 
calculate channel occupancy limits and therefore does not prohibit 
the Commission from adopting an alternative approach if it finds 
such an approach to be reasonable to promote the legislative 
objectives. In any event, this language is not included in the 
statute itself.

    Finally, the Commission does not believe that it is weakening 
Congress' statutory scheme by considering the impact of other 
provisions of the 1992 Cable Act in establishing channel occupancy 
limits. Section 11 expressly gives the Commission broad discretion to 
fashion ``reasonable'' channel occupancy limits. In the Commission's 
view, establishing ``reasonable'' limits requires it to consider all 
factors bearing on the dangers or benefits of vertical integration. 
Thus, for instance, the Commission believes that not only should it 
take into account the impact of broadcast, PEG and leased access 
channels, but also the impact of sections 12 and 19 in deterring the 
type of discriminatory conduct that may be caused by vertical 
integration. Only by considering the whole of Congress' scheme can the 
Commission determine the level of vertical structural limits that are 
``reasonable.''
    The Commission also denies CME's petition to reconsider the 
exception for local and regional programming. CME's approach overlooks 
Congress' direction that the Commission consider the benefits as well 
as the dangers of vertical integration in establishing ``reasonable'' 
channel occupancy limits. As the Commission stated in the Second Report 
and Order, the exception for local and regional networks was ``an 
important means of encouraging continued MSO investment in the 
development of local cable programming, which is responsive to the 
needs and tastes of local audiences and serves Congress' objectives of 
promoting localism.'' (Second Report and Order at 78.) CME does not 
challenge the value of local and regional programming, or the 
Commission's conclusion that given the cost and limited appeal of such 
programming, an exception may be necessary to encourage continued MSO 
investment. The Commission continues to believe that consideration of 
these benefits of vertical integration more accurately reflects 
Congressional intent, and fully justifies the exception.
    On reconsideration, the Commission also declines CME's invitation 
to eliminate the 75-channel cap. There is no evidence in the record to 
support CME's claim that ``there is a strong likelihood that all of the 
newly available channels will be filled by services affiliated with the 
MSO.'' Indeed, the Commission notes that in its informal survey of 25 
TCI and Time Warner cable systems, none of the systems were approaching 
the current 40% channel occupancy limit for affiliated programming. 
However, even if there were some basis for CME's prediction, the 
Commission still believes that the vast expansion of channel capacity 
may obviate the need for a rigid occupancy limit. As the Commission 
noted in the Second Report and Order, although information on how 
multichannel video distributors will use the additional capacity ``is 
necessarily somewhat speculative,'' the record indicates that the 
capacity will likely be used to deliver targeted ``niche'' video 
programming services aimed at correspondingly smaller audience sizes, 
such as pay-per-view and ``multiplexed'' channels. (Second Report and 
Order at 83-84.) Occupancy limits in these 
[[Page 21466]] circumstances do not parallel occupancy limits for more 
restricted capacity systems where most services are distributed on 
discrete channels to a significant portion of a system's 
subscribership. Accordingly, the occupancy limits can be relaxed.
    In sum, the Commission continues to believe that the introduction 
of advanced technologies such as signal compression and fiber optics 
will reduce the need for structural occupancy limits in order to ensure 
programming diversity and access for unaffiliated programmers. 
Nevertheless, as the Commission noted in the Second Report and Order, 
the 75-channel cap will be subject to periodic review and will be 
eliminated if developments warrant.
    The Commission also denies CME's request to reconsider its decision 
to grandfather all vertically integrated programming services carried 
as of December 4, 1992 (the effective date of the 1992 Cable Act). The 
Commission still believes, as it held in the Second Report and Order, 
that the public interest would be disserved by requiring cable 
operators to delete vertically integrated programming services to 
comply with the channel occupancy caps. The Commission continues to 
believe that grandfathering existing arrangements will limit consumer 
confusion and the disruption of existing programming relationships, and 
is consistent with Congress' direction that our channel occupancy 
limits ``take particular account of the market structure, ownership 
patterns, and other relationships of the cable television industry.'' 
(Communications Act, section 613(f)(2)(C).)
    The Commission also rejects CME's contention that the decision to 
grandfather existing vertical arrangements ``has rendered impotent'' 
the intent of Congress to limit excessive vertical integration. First, 
the Commission reiterates that Congress directed it to establish 
``reasonable'' channel occupancy limits based on competing interests; 
if Congress wished to require the divestiture of existing channels it 
could have done so. More importantly, the Commission did not 
grandfather non-compliance in perpetuity. Rather, the Second Report and 
Order provided that when a grandfathered cable system adds channel 
capacity, it cannot add an affiliated programming service until its 
system is in full compliance with the Commission's channel occupancy 
rules. Thus, the difference is more one of timing than of ultimate 
objectives. While CME suggests immediate divestiture of existing 
services to bring systems into compliance, the Commission's approach is 
to grandfather existing services and remedy non-compliance 
prospectively. The Commission continues to believe that its approach 
better reflects the various interests at stake, and thus better 
reflects Congress' intent.
    Bell Atlantic filed a Petition for Limited Reconsideration 
requesting that the Commission reconsider its decision to apply the 
channel occupancy limits to cable systems that face actual head-to-head 
competition. On reconsideration, the Commission declines to modify its 
decision to enforce channel occupancy limits in systems which face 
actual head-to-head competition. With respect to Bell Atlantic's 
argument that channel occupancy limits are even less necessary in 
markets where competition exists and one of the competitors is a video 
dialtone service, the Commission cannot find, at this time, that video 
dialtone will completely eliminate the problems caused by vertical 
integration. Under video dialtone, a telephone company must provide 
sufficient capacity to serve multiple video programmers, and must 
expand capacity as demand increases to the extent technically feasible 
and economically reasonable. At this point, there are only eight 
commercially licensed video dialtone services in the country. None of 
these systems is yet operational; until that time, it is unclear 
whether a video dialtone system will fully address the concerns raised 
by channel occupancy limits. In addition, the practical effect of 
several recent court cases is that certain telephone companies may now 
provide their own programming to subscribers in their service areas. 
Thus, the Commission does not believe that video dialtone in its 
current state can provide sufficient justification to reconsider the 
decision to enforce channel occupancy limits in systems which face 
actual head-to-head competition.
    The remaining arguments raised by Bell Atlantic's Petition have 
already been considered and rejected in the Second Report and Order. In 
the Second Report and Order, the Commission concluded that it should 
not eliminate channel occupancy limits in communities where effective 
competition exists because the Commission found that the effective 
competition standard was not adopted for this specific purpose and 
because it is not clear that the presence of effective competition for 
any cable system will address all of the relevant concerns that 
Congress expressed in enacting section 11 of the 1992 Cable Act. For 
example, the Commission noted that if a competing multichannel 
distributor is also vertically integrated, without channel occupancy 
limits, unaffiliated programming services may continue to be denied 
access from either outlet, thus frustrating the diversity and 
competition objectives of the 1992 Act.
    Finally, the Commission also agrees that the statutory exemption 
from regulation for cable systems subject to effective competition is 
very limited: Congress explicitly stated in the statute that, in 
systems which faced effective competition, rate regulation would not be 
necessary. Thus, it is reasonable to assume that had Congress intended 
for all cable regulations to be eliminated where systems became subject 
to actual head-to-head competition, this statutory exemption would have 
been drafted much more broadly. Nowhere in either the language of 
section 11 or its legislative history does it state that the presence 
of actual head-to-head competition will render the channel occupancy 
limits unnecessary.
    The Commission therefore concludes that there is insufficient 
evidence in the record before it to warrant elimination or modification 
of the channel occupancy limits in systems that face actual head-to-
head competition. However, as the Commission indicated in the Second 
Report and Order, it remains aware that Congress has indicated that a 
primary objective of the 1992 Act was to rely on the marketplace to the 
maximum extent possible, 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, as 
competition develops and the Commission gains more experience with the 
rules, the Commission will further analyze its rules and the industry 
as a whole to see whether vertical ownership limits should be phased 
out.

Administrative Matters

Regulatory Flexibility Act Analysis

    Pursuant to sections 601-602 of the Regulatory Flexibility Act, 
Public Law 96-354, 94 Stat. 1164, 5 U.S.C. 601 et seq. (1981), the 
Commission's final analysis is as follows:
    Need and Purpose for Action: This action is being taken to address 
petitions for reconsideration of the channel occupancy rules adopted by 
the Commission to implement section 11(c) of the 1992 Cable Act.
    Summary of Issues Raised by the Public Comments in Response to the 
Initial Regulatory Flexibility Analysis: There were no comments 
received in [[Page 21467]] response to the Initial Regulatory 
Flexibility Analysis.
    Significant Alternatives Considered: We have analyzed the comments 
submitted in light of our statutory directives and have, to the extent 
possible, minimized the regulatory burden on entities covered by the 
ownership provisions of the 1992 Cable Act.

Ordering Clauses

    Accordingly, it is hereby ordered That pursuant to the authority in 
sections 1, 4 and 613 of the Communications Act of 1934, as amended, 47 
U.S.C. 151, 154, and 533, the petitions for reconsideration filed in 
this proceeding by the Center for Media Education/Consumer Federation 
of America and Bell Atlantic Corporation are denied.

Federal Communications Commission.
William F. Caton,
Acting Secretary.
[FR Doc. 95-10719 Filed 5-1-95; 8:45 am]
BILLING CODE 6712-01-M