Opinion ID: 187444
Heading Depth: 2
Heading Rank: 2

Heading: The 30% Subscriber Limit

Text: We may set aside the Commission's decision only if [it] was `arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.' Mission Broad. Corp. v. FCC, 113 F.3d 254, 259-60 (D.C.Cir.1997) (quoting 5 U.S.C. § 706(2)(A)). We will not do so if the agency examined the relevant data and articulated a satisfactory explanation for its action. Fresno Mobile Radio, Inc. v. FCC, 165 F.3d 965, 968 (D.C.Cir.1999) (internal quotation marks omitted). [] Whether a cable operator serving more than 30% of subscribers can exercise bottleneck monopoly power, Turner Broad. Sys. v. FCC (Turner I ), 512 U.S. 622, 661, 114 S.Ct. 2445, 129 L.Ed.2d 497 (1994), depends, as we observed in Time Warner II, not only on its share of the market, but also on the elasticities of supply and demand, which in turn are determined by the availability of competition. 240 F.3d at 1134. A cable operator faces competition primarily from non-cable companies, such as those providing DBS service and, increasingly, telephone companies providing fiber optic service. As Comcast points out, DBS companies alone now serve approximately 33% of all subscribers. Recognizing the growing importance particularly of DBS, in Time Warner II we said in no uncertain terms that in revisiting the horizontal rules the Commission will have to take account of the impact of DBS on [cable operators'] market power. Id. Of the three aspects of the Commission's open field model  minimum viable scale, total number of subscribers, and penetration rate  only the total subscribers measure fully takes account of the competition from DBS companies and companies offering fiber optic services. As Comcast points out, the measure of minimum viable scale relies upon data from 1984-2001 and, as a result, fails to consider the impact of DBS companies' growing market share (from 18% to 33%) over the six years immediately preceding issuance of the Rule, as well as the growth of fiber optic companies. The penetration rate calculation, by the Commission's own admission, leaves out data regarding DBS penetration  an omission the FCC attempts to justify with the question-begging assertion that such data would not have materially changed the penetration rate. Comcast argues the Commission has offered no plausible reason for its failure to heed our explicit direction in Time Warner II to consider the competitive impact of DBS companies. Instead the Commission made the four non-empirical observations we enumerated above. As for the first, transaction costs undoubtedly do deter some cable customers from switching to satellite services, but Comcast points to record evidence that almost 50% of all DBS customers formerly subscribed to cable; in the face of that evidence, the Commission's observation that cost may deter some customers from switching to DBS is feeble indeed. With regard to the second  that some cable consumers may be reluctant to switch to a satellite television service because, unlike cable companies, DBS companies do not offer internet and telephone services  the Commission does not point to any evidence tending to show these inframarginal customers are numerous enough to confer upon cable operators their supposed bottleneck power over programming. Moreover, as Comcast points out, both DirecTV and Dish Network have partnered with telephone companies to offer bundled DBS and telephone services. The Commission's third justification  that consumers will not switch providers to access new programming because they cannot know the quality of the programming before consuming it  warrants little discussion. As Comcast points out, there is no record support for this conjecture. In any event, it is common knowledge that new video programming is advertised on other television stations and in other media, and can be previewed over the internet, thus providing consumers with information about the quality of competing services. The FCC's fourth reason  that without its subscriber cap an upstart network will have trouble securing financing unless it has a contract with a cable company serving more than 30% of the market  is no more convincing than the other three when one recalls DBS companies already serve more than 30% of the market. Finally, we note the Commission's observation that assessing competition from DBS companies is difficult  possibly true even if unexplained  does not justify the agency's failure to consider competition from DBS companies in important aspects of its model. That a problem is difficult may indicate a need to make some simplifying assumptions, see Chem. Mfrs. Ass'n v. EPA, 28 F.3d 1259, 1264 (D.C.Cir.1994), but it does not justify ignoring altogether a variable so clearly relevant and likely to affect the calculation of a subscriber limit  not to mention one the court had directed the agency to consider. Comcast, on the other hand, points beyond DBS companies' growing market share to their exclusive arrangements with certain highly sought after programmers as evidence that competition has led and will likely continue to lead subscribers to switch services. Indeed, Commissioner McDowell pointed out in dissent that, as of the date of the Fourth Report, DirecTV and Dish Network each served more customers than any cable company save Comcast itself. Fourth Report, 23 F.C.C.R. at 2228. Comcast also points to evidence that the number of cable networks has increased by almost 500% since 1992 and has grown at an ever faster rate since 2000, and that a much lower percentage of cable networks are vertically integrated with cable operators than was the case when the Congress passed the 1992 Act. There can be no doubt that consumers are now able to receive far more channels than they could in 1999, let alone 1992. In sum, the Commission has failed to demonstrate that allowing a cable operator to serve more than 30% of all cable subscribers would threaten to reduce either competition or diversity in programming. First, the record is replete with evidence of ever increasing competition among video providers: Satellite and fiber optic video providers have entered the market and grown in market share since the Congress passed the 1992 Act, and particularly in recent years. Cable operators, therefore, no longer have the bottleneck power over programming that concerned the Congress in 1992. Second, over the same period there has been a dramatic increase both in the number of cable networks and in the programming available to subscribers. In view of the overwhelming evidence concerning the dynamic nature of the communications marketplace, 47 U.S.C § 533(f)(2)(E), and the entry of new competitors at both the programming and the distribution levels, it was arbitrary and capricious for the Commission to conclude that a cable operator serving more than 30% of the market poses a threat either to competition or to diversity in programming. Considering the marketplace as it is today and the many significant changes that have occurred since 1992, the FCC has not identified a sufficient basis for imposing upon cable operators the special obligations, Turner I, 512 U.S. at 641, 114 S.Ct. 2445, represented by the 30% subscriber limit. We conclude the Commission has failed to examine[] the relevant data and articulate[] a satisfactory explanation for its action, Fresno Mobile, 165 F.3d at 968, and hold the 30% subscriber cap is arbitrary and capricious. []