APPEALS COURT SAYS FCC DIDN'T JUSTIFY CABLE OWNERSHIP LIMITS

FCC’s limits on cable horizontal and vertical ownership don’t meet the requirement of burdening speech as little as necessary, unanimous U.S. Appeals Court, D.C., said in reversing and remanding limits to Commission. FCC rules say no MSO can own cable systems with more than 30% of national cable subscribers, and programming in which MSO has attributable interest can fill no more than 40% of channels on cable system. Appeals court also said FCC should consider growth of DBS in setting ownership limits.

Unless decision is overturned on appeal, it would appear to end need for AT&T to divest either its 25.5% of Time Warner Entertainment (TWE) or cable systems with 9.7 million subscribers in order to get under limit (CD June 6 p1). TWE also had hoped to overturn attribution rules (CD Oct 18 p1). Spokesman would say only that “it’s a very good day for cable operators’ First Amendment rights.” AT&T issued statement saying it was “pleased” with decision but planned no further comment until it had reviewed opinion.

Senior FCC official said no decision had been made on whether to appeal decision: “It’s much too early. We're still digesting it, but I am sure it will be the subject of many debates and meetings.” Next step for FCC should be to open rulemaking on overall ownership issue, FCC Comr. Furchtgott-Roth told us. He said comments were needed because “clearly what we have done in the past is not adequate. The courts often get it right, and this is one of those times.” Furchtgott-Roth said appeals court “is telling the Commission that there is a heavy burden” to defend ownership limits.

In decision Fri. on Time Warner vs. FCC, court concluded that 30% horizontal limit exceeded FCC’s statutory authority because Commission didn’t show that number was minimum needed to assure that new programmers could get adequate carriage. It agreed with Commission that ability to reach 40% of national audience was enough to make cable network successful, but rejected agency’s premise that 30% limit was needed so network success would be possible even if 2 MSOs, each with 30% of national audience, colluded. Opinion said there was no sound evidence in record of likelihood of such collusion: “The only justification that the FCC offers in support of its collusion hypothesis is the economic commonplace that, all other things being equal, collusion is less likely when there are more firms.” Opinion seemed to indicate that 60% ownership limit might be acceptable.

If FCC revisits horizontal ownership rules, “it seems clear that… the Commission will have to take account of the impact of DBS on market power,” court said. Cable had claimed that it was arbitrary and capricious for FCC to discount competitive effect of DBS. Court said it was significant that DBS was able to “pass every home in the country.”

On 40% vertical limit on cable network carriage, court said FCC “seems to have plucked the 40% limit out of thin air.” Opinion cited agency conclusions that MSOs didn’t seem to have favored their own programming and that vertical relationships with programmers had improved quality and quantity of programming. “Yet the Commission seems to ignore its own conclusions about the cable companies’ incentives and constraints, and the dynamics of the programming industry,” court said.

Court did uphold FCC’s attribution rules for cable ownership of programming services, which are based on broadcast TV attribution rules. Rules say person or entity has attributable ownership if it has 5% of voting stock or 33% of combined debt and equity. Court said FCC’s justification for those figures was “adequate.”

Opinion was written by Judge Stephen Williams, joined by Judges Raymond Randolph and David Tatel.

Decision “is an enormous loss and a devastating blow to consumers,” said Consumers Union Washington head Gene Kimmelman. He said it “creates a greater incentive for cable companies to limit programming choices.” Consumer groups will ask FCC to “move as quickly as possible” to set new ownership limits, Kimmelman said. NCTA Pres. Robert Sachs said his association wasn’t party to case but “in general [it] favors the use of antitrust rules” rather than “artificial caps” on ownership.