STUDY WILL PLAY ROLE IN FCC PROCEEDING ON CABLE OWNERSHIP

When Media Bureau Chief Kenneth Ferree first announced that Commission would try using abstract study methodologies to examine cable company consolidation, he said there was possibility study (CD Nov 8 p3) would be found useless and FCC would “throw it out the window.” Despite Commission’s admission that study contained computational errors -- which it said have since been corrected -- and abundance of criticism, even from sworn enemies in telecom industry, FCC insists study has some merit. How much merit it should be given, however, when Commission makes determinations about cable concentration continues to be subject of debate. Staff members we spoke with said privately that study, Horizontal Concentration in the Cable Television Industry: An Experimental Analysis, would be given little weight, if only because it was merely one piece of evidence in proceeding on cable ownership limits.

Ferree put diplomatic face on question of how much weight study should be given. “It will be more than zero and less than definitive, but I'm not sure how I handicap where it is in that range,” he said with laugh. “To be fair, yeah, we detected some computational errors but we corrected those. To be fair, some of the criticisms that have been leveled at it were valid criticisms and we recognize those. On the other hand, at least our economists think that some of the criticisms… were themselves rife with errors and problems.” Ferree said he never expected experimental study to be “the silver bullet that would answer all of our questions.”

Study found that horizontal concentration in cable industry could translate into problems for some programming networks because scenario could send “the wrong price signals regarding the value society places on particular types of programming” (CD June 4 p3). But weeks later FCC said it had found several errors in 117-page study, particularly on most- favored-nation pacts, under which programmer guarantees cable MSO at least as good deal as its best with other MSOs. Originally, study said such pacts offered uniformly lower efficiency levels in market, but revision said they offered similar efficiency levels as marketplace without them.

Industry players were less generous than Ferree about worth of study, which was collaboration of FCC’s Office of Plans & Policy (OPP) and Pa. State U. and used variety of computer models to determine how companies behaved under certain controlled conditions. Included in simulated market environment were buyers representing cable and DBS and sellers representing programming networks. Each was studied as they negotiated for programming and affiliate fees. AT&T, which is attempting to join its broadband unit with Comcast in largest cable industry merger to date, called study’s model “irrational” and said in comments to FCC that it bore “no resemblance to the real world in which experienced cable and network representatives, reacting to myriad dynamic market constraints, negotiate complex, multiyear carriage contracts.” FCC had asked parties to comment on worth of study in context of pending proceeding to determine limits on cable ownership, particularly in pending merger of AT&T Broadband and Comcast. Comcast, in its comments, said study was “unrealistic” and should be dismissed from further consideration.

Time Warner Cable (TWC) said any Commission decision relying on study even in part “would inevitably be set aside as arbitrary and capricious” by federal courts because it “mistakenly assumes that the test scores of [Pa. State] college students conducting 6-min. trading sessions will closely approximate the real-live track records of professional buyers and sellers hammering out agreements in drawn-out negotiations.” Study should be given “no weight,” TWC said. In supplemental comments, TWC said study’s design was flawed and its results “statistically suspect.” At one point, TWC even compared students who took part in study to chimpanzees, saying students -- like apes -- “simply did not understand the game.”

NCTA commissioned research of its own by Prof. Carl Shapiro of U. of Cal., Berkeley, and John Woodbury of Charles River Assoc., that concluded that “one cannot reach any reliable conclusions about appropriate ownership limits” based on FCC study. Shapiro and Woodbury urged FCC not to use study “as the basis for any rulemaking.” NCTA’s researchers said economic theory offered little reason to believe that in and of itself, larger size of cable MSO would harm cable consumers and that FCC study’s results simply were unreliable.

SBC Communications, no friend of cable industry, said FCC’s working paper “fails to reflect the real world and, as a result, is of no practical use, particularly as related to the proposed AT&T/Comcast transaction.” SBC said study didn’t reflect “real world,” failing to recognize differences in programming and failing to consider vertical integration of programming networks and multichannel video programming distributors (MVPDs). Cable overbuilder RCN Inc. was only entity to contend study had some merit, saying it confirmed empirical reality that “incumbent cable operators’ monopoly and monopsony power affects the ability of competing multichannel video programming distributors to obtain access to video programming at fair market prices.” However, even RCN said study contained several deficiencies in its underlying methodologies. It said study failed to recognize that some cable operators owned programming. Nevertheless, RCN said FCC should use study “as support for retaining reasonable ownership limits” on cable MSOs and as support for imposing conditions on AT&T Comcast. RCN is seeking condition requiring merged company to make all of its programming, including its terrestrially delivered content, available to competitors.

Ferree said he didn’t believe Commission would discard field of experimental economics after this and he had expected criticisms. “I wouldn’t throw experimental economics out the window based on one study,” he said. “And hopefully, next time we do it even better. You learn every time you do it.” In fact, Commission has half-dozen studies, not necessarily all experimental in nature, pending in context of broadcast ownership. Ferree said he expected to release those -- some of which were done in-house and others performed by outside entities -- for public comment as package in late Sept. They include consumer study of media consumption habits and historical look at changes among major TV networks since 1970.