Thoughts on the 15th Cable Competition Report…

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Two weeks ago, the Federal Communications Commission released its Fifteenth Report on the assessment of competition in the market for the delivery of video programming.  As both George and I were members of the core team of FCC staffers who wrote the very First Cable Report (and its insightful Appendix H) way back in 1995, I could not help but marvel at the growth and development of the industry over the last eighteen years.

Of particular note to me were the FCC’s findings that not only do nearly 131 million (approximately 99%) of American homes have access to three multichannel video programming distributors or “MVPDs” (one terrestrial cable and two satellite providers), but that an amazing 46.8 million homes (approximately 35.3%) have access to four MVPDs (two terrestrial and two satellite).  As a result, the FCC’s data reveal that we are a very long way from the monopoly world that existed when Congress enacted the 1992 Cable Act.  Indeed, as the Commission wryly states in the Fifteenth Report, “since the Commission’s first report on the status of competition in 1995, almost no subscriber has fewer MVPD choices and most subscribers have more MVPD choices.”  (Fifteenth Report at ¶ 37.)  For someone who sat through many meetings at the time where even the mere possibility of competition was questioned, the impressive competitive evolution of the multichannel video market is truly remarkable.

While this significant growth in MVPD competition has benefitted consumers tremendously, this change in market structure also provides an opportunity to clear some regulatory underbrush.  I list just two opportunities below.

First, in light of such healthy facilities-based competition and competition from over-the-top services like Netflix, there is no plausible case for the continued price regulation of basic cable rates.  Indeed, under Section 623(l) of the Communications Act, the presence of just ONE HALF of a facilities-based competitor (i.e., a competitor is deployed to at least 50% of a franchise area and serves just 15% of the customers in that cable franchise) is sufficient to find a market “efficiently competitive” for purposes of price deregulation.  As both the courts and the Commission have long-recognized that price regulation is “far from an exact science” and can often have market-distorting effects, continuing the charade of regulating basic cable tiers on a franchise-by-franchise basis is hardly an effective use of the Commission’s scarce resources.  What residual of basic cable rate regulation remains is more trouble than it’s worth.  Perhaps it’s time for the agency to be proactive, formally declaring that all cable markets satisfy the deregulatory standards and put an end to cable price regulation.  There appears to be nothing to lose by doing so.

Second, given the evidence presented in the Commission’s new report on MVPD competition, it’s clear that it’s time to sunset Section 629’s ill-formed attempt to create a retail market for set-top boxes.  (See Wobbling Back to the Fire:  Economic Efficiency and the Creation of a Retail Market for Set-Top Boxes, 21 CommLaw Conspectus 1 (2012).)  Under the express terms of the statute, the Commission must sunset Section 629 when, inter alia, the MVPD market is “fully competitive.”  (For our legal and economic analysis of how the other two requirements of Section 629(e) are now met, please read the full paper.)  Unfortunately, however, the term “fully competitive” is defined nowhere in the statute.  Plainly, in light of the evidence, the Commission can make the case that the multichannel video market is “fully competitive,” since, as we argue, the agency could do so by a direct appeal to the statutory definition of “effectively competitive” as contained in Section 623 of the Act above.  Sunsetting Section 629—and its billion dollar policy dud, CableCard—is a deregulator’s low hanging fruit, particularly since the agency again concedes in the Fifteenth Report that its efforts on Section 629 have “not matched the Commission’s expectations” (Id. at ¶ 362).  It’s time to stop pushing the boulder up the hill and sunset a statute which has, in former FCC Commissioner Rob McDowell’s words, kept the agency in “the Valley of Unattained Goals.

Of course, all the FCC’s Cable Reports provide (just as its CMRS Reports and Section 706 Reports provide) is nothing more than a yearly snapshot of a constantly evolving market.  Indeed, just as circumstances have changed radically in the cable industry since 1995, it is also not unreasonable to expect that the industry will go (and is going) through further transformation in the coming years.  For example, just this week, the Wall Street Journal quoted Cablevision CEO James Dolan as noting that “there could come a day” when his company stops offering television service and instead make broadband its primary offering.  As we outlined in our 2011 paper entitled Shocks to the Broadband Ecosystem:  Implications for Competition and Market Structure, this commoditization of broadband could have significant implications for public policy, but that is a discussion that reaches beyond an analysis of the narrow scope of the Commission’s statutorily defined inquiry for its annual Cable Reports.  However, if the Obama Administration is serious about removing rules and regulations that have outlived their usefulness”, then given the FCC’s new data, there’s a solid case for the agency to show some initiative and start to sunset all basic cable rate regulation and Section 629 immediately.