FCC Lets Expire Its Per Se Ban on Exclusive Program Distribution Contracts

October 5, 2012. The Federal Communications Commission (FCC) adopted and released an item [146 pages in PDF] that, among other things, allows the exclusive contract prohibition section of the FCC's program access rules to expire.

The FCC unanimously adopted this Report and Order (R&O), Further Notice of Proposed Rulemaking (FNPRM), and Order on Reconsider (OR). It is FCC 12-123. The R&O portion of this item ends the per se prohibition of exclusive contracts (MB Docket No. 12-68). The FNPRM portion of this item seeks comments on establishing several rebuttal presumptions in case by case consideration of exclusive contracts (MB Docket Nos. 07-18 and 05-192). The OR portion of this item is in MB Docket No. 07-29.

The Cable Act of 1992 contained a ten year ban on these exclusive contracts, gave the FCC rulemaking authority, and allowed the FCC to extend the ban if it found that the ban was "necessary to preserve and protect competition and diversity in the distribution of video programming".

The FCC extended the per se ban in 2002 for five years. It again extended the per se ban in 2007. The U.S. Court of Appeals (DCCir) upheld the 2007 extension order, but suggested that it would not do so if the FCC made yet another extension.

The just released item is likely the product for three modes of analysis at the FCC. First, it reflects the FCC's policy and market analysis; that is, the FCC concluded that changes in the multichannel video programming distribution (MVPD) market warranted a change in its rules. Second, this reflects the FCC's consideration of the lobbying and rent seeking activities of organized interests. Third, this item reflects the FCC's recognition that any attempt to further extend the ban would have been an exercise in regulatory futility, because the Court of Appeals suggested in its review of the last extension that it would overturn a further extension.

This R&O ends the FCC's blanket ban, or per se ban, on exclusive contracts. What remains will be FCC case by case analyses of exclusive contracts in complaint proceedings and antitrust merger reviews (nominally license transfer proceedings). That is, MVPDs can still file complaints with the FCC alleging that exclusive contracts violate the 1992 Act.

However, this R&O creates a presumption that an exclusive contract involving a cable affiliated regional sports network (RSN) has the purpose or effect prohibited by the 1992 Act.

See, related story in this issue titled "FCC Adopts Report and Order on Program Access Rules".

The National Cable & Telecommunications Association (NCTA) and large cable operators (Comcast, Time Warner Cable, and Cablevision) have long advocated ending the per se ban, and now oppose creating certain presumptions for future case by case reviews. See for example, NCTA letter to FCC of October 3.

The USTelecom, American Cable Association (ACA), satellite providers (DirecTV and Dish Network), AT&T, National Telecommunications Cooperative Association (NTCA), Western Telecommunications Alliance (WTA) and others support creating certain presumptions.

See for example, Barbara Esbin's (Cinnamom Mueller) October 2 letter and September 26 letter to the FCC on behalf of the ACA, which represents smaller cable companies. See also, William Wiltshire's (Wiltshire Grannis) September 21 letter to the FCC on behalf of DirecTV, and Kevin Rupy's (USTelecom) September 20 letter to the FCC.

Google, which is deploying Google Fiber in the Kansas City area, wants "access to must-have live regional sports programming". See, September 26 letter to the FCC.

The FNPRM portion of this item seeks comments on proposals for rebuttable presumptions advocated by the large cable operators' competitors. See, related story in this issue titled "FCC Adopts NPRM on Case by Case Analysis of Exclusive Contracts".

FCC Chairman Julius Genachowski wrote a two sentence statement to accompany this item. "The FCC is focused on promoting competition and protecting consumers in the evolving video market. Today’s unanimous decision enables the FCC to continue preventing anticompetitive video distribution arrangements through a legally sustainable, expeditious, case-by-case review."

FCC Commissioner Robert McDowell wrote in his statement that "the marketplace has evolved substantially since Congress last spoke on this subject a generation ago. The exclusivity ban served its purpose, but now the facts justifying its existence have changed in favor of consumers. Accordingly, this creaky relic must be shown the door."

However, he added that "vertical integration between cable operators and programmers could raise concerns in certain instances, especially for non-replicable programming, such as regional sports networks", and that the FCC "can perform a case-by-case review of exclusive contracts under the remaining program access rules using established complaint processes to ensure that anticompetitive effects do not occur, consumers are not harmed and the marketplace continues to flourish".

McDowell also criticized the FNPRM's inquiry into whether the FCC should create certain rebuttable presumptions, and suggested that they are a "back-handed attempt to resurrect the exclusivity ban for certain exclusive contracts".

He also argued that the presumption regarding access to RSNs may be an unconstitutional content based regulation of speech.

FCC Commissioner Jessica Rosenworcel (at right) wrote in her statement that the FCC "must keep a watchful eye on the evolving marketplace and be ready to take action if the processes we adopt today do not provide consumers with the safeguards they need and deserve."

FCC Commissioner Ajit Pai wrote in his statement that "Some have expressed concern that cable operators may use exclusive contracts to harm competition and impede entry into video distribution markets. However, as cable’s market share has fallen, cable-affiliated programmers are earning an ever-larger share of revenues from licensing content to non-cable MVPDs. This reduces their incentives to forgo licensing fees for programming in the hope of inducing rivals' customers to switch providers. In short, there just won't be a business case for many cable-affiliated programmers to withhold content."

Pai added that "More significantly, exclusivity can promote competition. It can provide non-cable MVPDs with the incentive to develop content to compete with cable, just as it enhances cable operators' incentive to further develop their programming."

(Published in TLJ Daily E-Mail Alert No. 2,460, October 6, 2012.)