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III. Cable Television Today

A. Cable Television and Market Power

Cable television today has changed significantly from the time the Cable Act was passed. Cable now makes multi-channel video service available to about 90 percent of U.S. television homes.78 Advertising revenues exceed two billion dollars a year.79 Cable penetration (homes subscribing) is roughly 60 percent of all television homes80 and about 90 percent of cable subscribers receive at least 30 channels.81 For many subscribers, cable is the only video conduit into the home, since cable alleviates the need to erect or maintain over-the-air reception antennas.82

As described earlier, in promulgating its early rules regarding leased access, the FCC was aware of the possibility that a cable system operator might act anticompetitively, especially insofar as it had discretion to set rates and control channel capacity.83 Of course, at that time, the cable industry did not have market power, nor was the industry significantly vertically integrated.

Likewise, in 1982, when an economic assessment was made by the Rand Corporation of the mandatory leased access concept, the authors found that vertical integration was not then an actual problem and that, additionally, no MSO had a large enough market share to extend its market power into the program packaging market.84 Even scholars who foresaw the problems which would develop with cable -- a monopolist controlling both content and conduit of video programming -- admitted that such problems were not yet salient in 1983 since cable was still only a marginally improved broadcast television delivery system.85 The situation has changed dramatically. 87

In its 1990 Cable Report, the FCC found that not only is cable almost exclusively a monopoly within its service area,88 cable has monopsony power (when the sellers of a product or service face only one possible buyer) vis-a-vis the specialized basic cable networks so that is the cable system refuses to carry a service or imposes conditions upon the independent program seller, the programmer is pressured to concede or be denied access to the audience.89 The FCC detailed several examples where program services have had difficulty obtaining access to cable and where MSOs have limited and otherwise impeded national distribution of independent program services which compete with the MSOs' vertically integrated services.90 In testimony before the Senate Subcommittee on Communications on media concentration in 1989, it was put bluntly:

Cable system owners have taken minority equity interest in virtually every new programming channel that has started in the past two years. As a practical matter, it is almost impossible in the present environment to start a new cable system service without surrendering equity to the owners of the monopoly cable conduits.91
It has been said that without the cooperation of TCI (the largest MSO, serving about 22 percent of the cable market), a program service is doomed.92 In fact, given the natural business tendency to maximize profits by any means,93 it is fair to conclude that such market pressure is widespread and often unacknowledged, with programmers preferring to accede to conditions rather than create ill will with the cable industry.

Perhaps the best publicized example of such cable market power is the situation which arose when NBC, which spends $250-$300 million a year on news, decided in 1985 to begin an all-news program service for cable so as to make use of its enormous news operation.94 The network specifically desired to compete with Ted Turner's Cable News Network (CNN) and to take advantage of cable operator dissatisfaction with rate hikes at CNN.95 While NBC recognized that you "don't take the first step until the industry has signed enough contracts to put it on the air,"96 it did begin negotiating the terms for carriage with the major MSOs (such as price per subscriber) as many in the cable industry (especially TCI, the largest MSO) showed interest in a service that would be competitive to CNN.97

As a result of the ongoing negotiations and the threat of a competing all-news channel, in late 1985 Turner lowered his prices substantially. As TCI executives put it, Turner showed himself to be "cable friendly," and TCI subsequently backed out of negotiations with NBC regarding a competing news channel, effectively killing the proposed service.98 Several months later, TCI's president agreed to join the board of directors of Turner Broadcasting.99 At that point, the original idea of an all-news competitor to CNN was doomed and the negotiations did in fact cease. Thereafter, Turner offered to sell the major cable MSOs equity participation in his cable services and currently nearly 50 percent of the equity in CNN is held by MSOs, including TCI, Time Warner, and Viacom.100 Clearly, the cable industry, as equity participants in CNN, were no longer interested in competition from NBC.

From a First Amendment diversity standpoint, a second 24-hour news service is highly desirable just as it is preferable to have three nightly national broadcast news programs rather than only one. If leased access was a truly effective and workable alternative, NBC clearly would have turned to it as they had a strong interest in using their great news expertise to enter the cable programming area. Yet, it was not even considered. Significantly, instead of turning to leased access channels as an alternative, NBC re-configured the program service into the Consumer News and Business Channel (CNBC) -- instead of a general news service which would compete with CNN, it was turned into a service acceptable to the large cable MSOs. In return for cable carriage, CNBC was required to stipulate in its carriage contracts that "[i]t is understood and agreed that it is not the intent of [CNBC] to allow [the service] to become, and the CNBC Service or no segment thereof shall become, a general news service covering events unrelated to [business, financial, consumer, and other specified news events]."101

Basically, NBC "agreed to a provision that deprives the public of the competition that would otherwise come if they had not been forced to agree not to compete."102 While the cable companies attempt to defend such restrictions as simply being descriptive of the program services, the effect, as noted by the FCC, is to protect CNN from competition. Significantly, no such "descriptive" prohibition exists with respect to unaffiliated (i.e., independent of cable ownership) program service such as Financial News Network (FNN) or ESPN.

Another type of contractual restriction which has resulted from the cable industry exerting its might is the provision for "deletion rights" by the cable operator in contracts with unaffiliated programmers. Under these provisions, cable operators have the right to discontinue carriage of a program service if it modifies the program content from the description set forth in the agreement.103 What is significant is that such "deletion rights" provisions do not usually appear in affiliation agreements between vertically integrated MSOs and their own programming services. Clearly, the MSOs are acting to give preferential treatment to those services in which they hold equity interest.

The ability of vertically integrated MSOs to limit competition does not only manifest itself in provisions inserted in the affiliation contracts. In fact, there have been several instances in which a vertically integrated MSO has refused to carry a competitor, forcing the competitor to litigate in order to get access, something a small or new programmer is not likely to undertake. Thus, Time Warner's Manhattan Cable was sued when it refused to carry Showtime, Viacom's competitor to HBO (owned by Time Warner) on the grounds that it had insufficient capacity although it later found room for Cinemax (also affiliated with Time Warner).104 Similarly, a Jones Intercable system was sued because it eliminated the USA Network channel in favor of TBS's Turner Network Television (in which it had an equity interest), even though the USA channel cost less and was highly viewed on the cable system.105 The court ruled in USA Network's favor and stated that Jones's intentions were "anything but benign." Likewise, a Cablevision system in New York removed the more popular Madison Square Garden channel in favor of its own Sports Channel. A class action suit was brought by a group of dissatisfied viewers and the case is now on appeal.106

Vertical integration can also provide a disincentive for cable operators to increase channel capacity because at some point the revenue earned from additional program services will not outweigh the lost advertising (owned by the MSO) due to increased audience fragmentation.107 Certainly this is so if the additional capacity might trigger a requirement that compels a cable system to lease capacity to a competitor.108

The increased horizontal concentration in the cable industry also permits the large MSOs to insist upon bulk discounts from cable programmers which are not available to smaller systems.109 Since the prices charged to subscribers are usually comparable, whether from a small or large cable operator, it is clear the discounted differences are being retained by the MSOs as "monopoly rents" rather than being passed on to the consumer.110 As the FCC noted, cable is not only becoming increasingly concentrated but it is also enjoying monopoly status in its area.111 As a result of the tremendous increase in local concentration,112 MSOs are often able to act anticompetitively.

Similarly, since cable is the monopoly video gateway into the majority of U.S. homes, it can dictate the terms and conditions of carriage. For instance, in order to retain cable carriage, the Christian Broadcasting Network was required to scramble its signal even though it preferred an unscrambled signal which could reach any viewer with a home satellite dish. By having a scrambled signal, the cable industry could control the signal and receive subscriber fees rather than allowing satellite dish owners to pick up the signal free of charge.113 This type of pressure can be exerted because such unaffiliated programmers have no alternative and it is better as a matter of practical business strategy not to complain than to anger the only truly effective outlet now available to reach the audience.

The point is not that vertical integration and horizontal concentration are evils in themselves, for they certainly have provided the U.S. public with a rich diversity of programming fare.114 What is significant is that, unchecked, such increased concentration can and does lead to anticompetitive abuses. The record is clear: "[M]ost cable operators have the ability to deny or unfairly place conditions on a programming service's access to the cable communities they serve...."115 As the Senate recently stated in its Report accompanying S. 1880, the proposed Cable Television Consumer Protection Act of 1990,116 given this demonstrated market power, "the leased access provision takes on added importance....It can act as a safety valve for programmers who may be subject to a cable operator's market power and who may be denied access or be given access on unfavorable terms."117 What is needed, however, is effective leased access and to accomplish this the tremendous advantage which was granted to cable operators under the Cable Act must be altered.

B. Leased Access in Action

One fact that has emerged undisputed from the last several years of regulation under the Cable Act is that the leased access provisions of Section 612(g) have been rarely used.118 In fact, in its recent comprehensive cable inquiry, the FCC was not presented with any examples of a major cable programming service or a local broadcaster denied cable access using the leased access channels to gain access to cable subscribers.119 Instead, when a cable program service seeks to gain access, it will negotiate an affiliation agreement on whatever terms it can get or even change the nature of its programming so as to be acceptable to existing cable interests.120

The reasons offered for the lack of use of leased channels vary. Cable operators point to the low demand for leased access facilities and state that this is evidence that "it has not been needed -- that the statutory goal of ensuring that the public has access to programming from diverse and antagonistic sources is being satisfied without resort to leased access."121 In addition, they state that the economics of cable are such that the current model of program provision by affiliation agreement works better than leased access channels.122

Others, however, feel that lack of leased channel use is a result of the fact that cable operators are accorded almost total discretion under the Cable Act.123 As a group of program producers stated it, the leased access requirements have proved impractical because "[t]hey place vast discretion in the cable operator and require that the would-be lessee seek judicial intervention, and bear a nearly insuperable burden of proof, should the operator not deign to grant access."124 Examples of unreasonable terms required for access have been documented.

Group W Cable of Chicago has required that potential channel lessees secure a broadcasters' errors and omissions insurance policy for at least one million dollars.125 In Charlotte, North Carolina, an ATC cable system requires that any potential lessees pay the rate of $10,000 per month on a full-time basis for at least the initial contract term of one year.126 Recently, a cable programmer in Manhattan was proffered a contract for a channel lease which would have given the cable operator complete discretion to cancel the agreement if there was any change in programming, required advance submission of each program so that the cable company could "prescreen" the material, required the lessee to disclose all program revenues, and would have absolved the cable company from all liability for breach of its obligations under the agreement.127 In addition, some operators have set up rates which differ depending upon whether the programming may compete with the cable operator's offerings.128

One difficulty is that, under the Cable Act, discrimination is permitted based upon whether the financial condition of the cable operator will be affected. If the goal is to assure that cable continues to grow and prosper, this is an appropriate provision. If the goal is to assure that leased channels provide an effective alternative to diverse sources of information, however, it is not. Economist Stan Besen testified as to this basic conflict in statutory goals -- diversity of information sources but with no economic harm to the cable operator -- prior to the passage of the Cable Act:

It seems to me that any scheme for mandated leased access, if effective, will reduce the profits of the cable operator. If it did not, he would already be doing what it is you are requiring him to do.129
In other words, the interests of the potential programmer and the cable operator already clash. If they did not, the program service would likely be carried on regular cable channels. As the Senate has recognized, "To then permit the operator to establish the leased access rate makes little sense."130

When the Cable Act was passed in 1984, it was stated that the leased access provisions were not intended to remedy "the cable operator's exercise of any economic power, but his exercise of editorial control...."131 What has become apparent in the interim, however, is that the "bottleneck" aspect of the cable television monopoly presents just as serious a concern in terms of diversity under the First Amendment. There are significant profits to be earned by restricting access. In fact, the impetus for reexamining the leased access requirements in 1990 by both Congress and the FCC was the growing market power of the cable industry.132

Moreover, the ability of the cable operator to discriminate based on the nature of the proposed programming may present free speech concerns. Although Congress intended that the extent to which content may be considered by the cable operator was to be quite limited,133 it also recognized that there was a chance that a particular program supplier's offering would not be made available because it "represents a social or political viewpoint that a cable operator does not wish to disseminate...."134 Clearly, if the goal of access by independent third parties is to increase the diversity of information sources, that access must be nondiscriminatory.135

Other serious problems exist. For instance,

the cable operator is not required to provide billing and collection services for the program service leasing capacity. As a practical matter, without such services, the advertiser-based channel lessee may be effectively foreclosed from making cable customers aware of its program service. Moreover, requiring separate billing is unlikely to result in channels being leased by major program services which seek to compete with popular cable fare. On this point, both the cable industry and the programming industries agree.136 Similarly, there is no requirement that any of the leased channels, such as advertiser-based services, be placed on the lowest price tier.

Additionally, the leased capacity applies only to video programming, programming which is similar to traditional broadcast and cable fare. As was noted in the debate preceding passage of the Cable Act, this limits the potential uses substantially.137 Certainly such a restriction does nothing to further the diversity available to the American public.

Further, there is a substantial issue as to how to determine when the threshold level of the number of "activated channels"138 is triggered. As a practical matter, it is unclear who makes the determination. Is the potential lessee required to take the cable operator's word as to the number of channels? In a case now pending, a programmer whose lease had expired was told that the system did not have 36 "activated channels."139 The programmer, a commercial station which had been programming the only local news in the county for nine years, went to court to enjoin the cable system (which is the only means of receiving video services in the geographically remote community) from eliminating the station.140 The Court granted the injunction and has appointed an independent expert to examine the cable headend to determine how many "activated channels" exist. While the FCC has stated that a cable system which "deliberately configures itself technically to preclude commercial access...could result in [court] sanctions,"141 the question of how to prove a cable system's intent to thwart Congressional policy has not been addressed. Moreover, to require potential programmers, many of whom are small, to engage in this type of court proceeding merely to determine if the cable system even requires access is extremely onerous.

Similarly, in a case now pending, one program lessee is suing contending that the cable operator's failure to make the requisite number of leased channels available has resulted in unfavorable lease terms due to lack of other access channels.142 And, on a related issue, the question of how to apply the threshold requirements in systems that are in the process of rebuilding remains unanswered. If a portion of the system has 30 channels but another portion has been upgraded to 54 channels, how many leased channels (if any) must be made available, and must they be made available to the entire franchise area? The difficulties in this area stem from the very situation that the leased access provisions are designed to cure -- that the cable operator has bottleneck control of the system and the lessee is wholly without information as to the cable system. Without some negotiating leverage, such as the right to immediate access, the potential lessee largely remains dependent upon the cable operator.

Perhaps the greatest deterrent to the provision of effective leased access is the enforcement procedure which was set up under the Cable Act. Under Section 612(d), if a party is denied access or offered access on unreasonable terms, the only remedy available initially is to go to court and sue. As if that were not enough of a hurdle,143 the aggrieved party is then charged with the legal burden of proof to show by "clear and convincing evidence" that the cable operator acted unreasonably, since the cable operator is "presumed" under the Act to have acted reasonably.144 This is certainly a difficult presumption to overcome when the reviewing court is expressly barred from considering any price, term, or condition which is established between a cable operator and its programming affiliate.145

Even assuming that a service provider were to go to court, the Act is still highly skewed in the cable operator's favor. The court may eventually require access under prescribed terms but the advisability of putting a federal court in the position of writing a contract between cable programmer and operator is questionable, especially when it is barred from examining cable system/affiliate agreements. And with respect to damages, the court is limited to awarding actual rather than punitive damages regardless of the intent and conduct of the cable operator. Unfortunately, actual damages may be speculative and impossible to prove. At most, the cable operator will be required to offer leased channel space, which it ought to have been doing all along. Only after three or more adjudicated violations may a cable operator be subjected to additional terms imposed by the FCC.146 Although it is possible that this could happen, the message here is clearly that the cable operator is free to do as it wishes.

As a legal matter, the burden on the aggrieved programmer is difficult to fulfill. As a practical matter, it is likely that no program service provider truly interested in having its product aired would engage in such a proceeding. Fast access to the cable system is imperative -- the program service will easily die without it. Further, not only is the likelihood of success in the legal proceeding slim, but the programmer risks creating such ill will with the cable industry that any future relationship would be unworkable. While Congress did give the FCC authority under Section 612(g) of the Cable Act to promulgate additional; rules regarding leased access when the 70/70 criteria are met,147 we are far from those levels of cable development.148 In these circumstances, it could only be expected that the commercial access provisions of the Act would go largely unused, and this in fact has happened.

C. Constitutional Considerations

First Amendment principles of free speech and free press have been at the heart of the cable regulatory structure from the beginning, although what they dictate is the subject of great debate. Proponents of structural regulation (including leased channel requirements) state that such regulations, like broadcast regulations, further First Amendment principles.149 The cable industry, on the other hand, argues that any restriction on what cable may do is prohibited because cable is akin to an electronic newspaper, with full First Amendment freedoms.150 While the lower courts that have considered the issue have been divided,151 the arguments supporting the constitutionality of leased access provisions reached recently by the Congress appear legally sound.152

The initial inquiry is what is the proper standard for reviewing the leased channel requirements. In United States v. O'Brien,153 the Supreme Court established the standard by which to judge governmental restrictions on speech. If a restriction on speech is "incidental, or unrelated to the suppression of protection of a particular set of ideas,"154 the restriction is permissible only if it furthers an important or substantial governmental interest, is unrelated to the suppression of free expression, and is no greater than essential (narrowly drawn).155

When it passed the Cable Act, the House Committee noted that the leased access requirements "establish a form of content-neutral structural regulation which will foster the availability of a `diversity of viewpoints' to the listening audience."156 While the leased access regulations do have an impact on speech by the cable operator, they are not directed at the content of the speech157 but at the communication conduit, which is controlled by a monopoly. In this regard, the analogy is closer to the telephone system rather than the print or broadcast media.158 In any case, since the commercial leased access provisions are not directed at content, the requisite standard is whether there is a substantial governmental interest and whether the provisions are narrowly drawn to further that interest.159

The leased access provisions are premised on the public's First Amendment right to a "diversity of sources" -- the Associated Press principle.160 The importance of this interest has been recognized repeatedly. The Supreme Court has found that "[i]t is the purpose of the First Amendment to preserve an uninhibited marketplace of ideas in which truth will ultimately prevail, rather than to countenance monopolization of that market."161 Moreover, the Supreme Court recently stated that "the American public will benefit by having access to a wider diversity of information sources."162 Significantly, even those concluding that leased access provisions are impermissible acknowledge the substantiality of the governmental interest.163

Under O'Brien, the question is whether the regulations are narrowly drawn to further the interest in a diversity of information sources. It is important to consider that the Cable Act's leased channel provisions require only that a cable operator give up a small proportion (10 to 15 percent) of its capacity and only on systems with over 36 channels. The cable operator is still permitted to program the remaining channels at its own discretion.

Given the strong governmental interest in promoting the diversity of sources of information, on balance, this small diminishment seems reasonable. In evaluating the balance, the Senate recently found that such allocations were reasonable.164 In fact, the O'Brien test has been described as a balancing test with some deference paid to the government's choice of means to advance legitimate ends.165 As the court in Quincy said: "The task of evaluating the constitutional sufficiency of the congruence between the government's means and ends is a delicate one" in which the court must be "careful not to lose sight of [its] proper role in the constitutional scheme."166 The leased commercial access provisions promote First Amendment rights of the public and protect the First Amendment rights of cable operators as well.