The FCC last night, after a daylong struggle to reach consensus, took several actions of significance to cable operators and programmers.  First, the FCC adopted rules that it characterized as necessary to ensure that cable subscribers with analog televisions will be able to view local broadcast signals after the February 17, 2009 digital transition and a related further notice of rulemaking to address the economic impact of these rules on small cable operators.  Second, the agency also approved an order that extended for five years the ban on exclusive affiliation agreements involving satellite-delivered, vertically integrated programming and modified certain procedural rules for resolving program access complaints.  Third, the FCC announced a new rulemaking proceeding to consider further substantive and procedural changes to the program access rules, such as closing the so-called “terrestrial loophole” and barring broadcasters and cable programmers from “tying” two networks (i.e., forcing an MVPD to agree to carry one network in order to obtain the right to carry another network or broadcast station).   Although the Commission had been expected also to adopt an order extending to incumbent cable operators certain of the franchise reforms that were adopted for new entrants late last year, action on that item was postponed.

I. DUAL CARRIAGE

According to the FCC, analog-only cable subscribers constitute approximately 35 percent of the nation’s television homes (i.e., do not have a television or cable converter capable of receiving a digital signal).  Citing statutory provisions that were adopted prior to the development of digital television that require cable operators to provide subscribers with “viewable” local broadcast signals, the FCC adopted rules under which local broadcast signals are entitled to both analog and digital carriage unless the cable operator goes “all digital” prior to the transition deadline.  This “dual carriage” obligation will sunset in three years (February 18, 2012) unless the FCC acts affirmatively to extend it. 

In addition, the FCC provided potential relief to systems with limited channel capacity (552 MHz or less) by allowing them to request a waiver of the viewability requirement.  This action prompted a dissent from Commissioner Adelstein, who argued that limited capacity systems should have been automatically exempted from the rules.  The FCC also confirmed that cable systems must carry high definition (“HD”) broadcast signals in HD format and reaffirmed the current “material degradation” standard under which the picture quality of retransmitted broadcast signals must be equal to or better than the quality of non-broadcast video programming carried by the system.

The FCC’s action on dual carriage is generally regarded as a victory for the cable industry in that the proposal pushed by Chairman Martin would have established a permanent “dual carriage” obligation and would not have provided any relief for limited capacity systems.  Chairman Martin’s proposal also called for the adoption of a material degradation standard under which cable operators would have had to retransmit all of the “bits” in a broadcast digital signal – a requirement that would have prevented operators from using bandwidth-conserving compression technologies and could have easily been stretched into a multicast carriage obligation.

Finally, the FCC indicated that it would issue a further notice of rulemaking seeking comment on additional ways of minimizing the economic impact of the dual carriage requirement on small cable operators.  This further notice may also raise other questions.  It is not clear how long it will be before the staff releases the full text of the dual carriage order and further rulemaking, since changes were being made up until the last minute.

II. PROGRAM ACCESS

Section 628 of the Communications Act bars cable operators from entering into exclusive distribution agreements with vertically-integrated, satellite-delivered programming networks.  This prohibition originally was scheduled to “sunset” in 2002, but was extended for five years.  As was expected, the FCC yesterday decided to extend the exclusivity ban for another five years, finding that despite the growth of competition, cable operators continue to have the ability and incentive to withhold “essential” programming from other multi-channel video distributors. 

The FCC also adopted certain modifications to its program access complaint procedures, particularly with respect to the production of information relevant to the resolution of a complaint.  Although the FCC indicated that it would take steps to ensure that the confidentiality of sensitive business information is protected, Commissioners Adelstein and Copps expressed concern that this expanded “discovery” provision could go too far in requiring cable operators and programmers to provide complaining multichannel video providers with extensive information about other program affiliation agreements.

The new rulemaking that the FCC started in connection with the program access rules seeks comment on a pair of procedural issues: (1) whether the filing of a program access complaint in connection with proposed changes to an existing contract should trigger an automatic stay of the new provisions and (2) whether an arbitration-type step should be added to the complaint resolution process. 

Even more significantly, the notice of proposed rulemaking also addresses substantive issues, including whether the FCC can and should apply the program access rules to DBS, whether program access restrictions should apply to vertically-integrated services that are distributed terrestrially as well as to satellite-delivered services, whether the FCC should require programmers to deal with entities that provide service through a shared headend, and whether broadcasters and cable programmers should be required to offer their services on a “stand-alone” basis rather than forcing multichannel video distributors to purchase “undesired” programming in return for the right to carry desired programming.  As described, this latter proposal is directed at the wholesale distribution of programming and does not directly propose to require programmers to make their services available for retail distribution on an a la carte basis.

III. INCUMBENT CABLE OPERATOR FRANCHISE REFORM AND OTHER ISSUES.

Late last year, as part of the order adopting franchise reforms for new video entrants, the FCC commenced a proceeding to extend similar reforms to incumbent operators.  At the time, statements were made promising that action on this proceeding would be completed by September 2007.  And in fact, consideration of an order in the franchise reform proceeding originally was originally included on the agenda for yesterday’s meeting.  However, the franchise reform item was pulled from the agenda and, while it still could be adopted before the end of the month, its exact status is uncertain.  In addition, two other items of interest to cable are circulating among the Commissioners and could be decided in the near future.  One is an order that reportedly would deny a request by Comcast for a declaratory ruling that The America Channel is not a regional sports network for purposes of applying certain conditions imposed on Comcast and Time Warner as part of the FCC order approving the Adelphia transactions.  The other pending item is an order that would ban existing and future exclusive contracts between cable operators and the owners of multiple dwelling unit buildings.  This item raises several difficult legal issues (including whether the FCC has jurisdiction to void such contracts and whether it can only bar such contracts prospectively). 

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