FCC Adopts Post-Digital Transition “Must-Carry” Rules, Extends Ban on Exclusive Programming Contracts, and Opens Inquiry Into “Tying” Agreements

On Sept. 11, 2007, the FCC adopted an order setting rules governing the carriage of broadcast signals by cable operators for a period of at least three years after the Feb. 17, 2009 transition from analog to digital broadcasting. Under new rules reflecting a compromise position offered by the National Cable & Telecommunications Association, cable operators whose systems are not all-digital will be required to carry two, and possibly three, streams of each signal of every local broadcaster that elects “must-carry” carriage—one stream in digital and one stream in analog format, and possibly a third stream in high-definition as well. However, the FCC rejected a proposed requirement that cable operators “pass-through” all of the “bits” in digital broadcast streams in favor of maintaining the existing requirement to carry signals with “no material degradation,” i.e., with picture quality as good as any other programming carried by the operator.

At the same meeting, the FCC voted, as expected, to again extend for five years the existing prohibition on exclusive distribution agreements between cable operators and cable-owned programming networks, and to require disclosure to program-access complainants of certain network affiliation contracts. The FCC also adopted a Notice of Proposed Rulemaking (NPRM) commencing an inquiry into the alleged wholesale “tying” of marquee programming with less desirable or unwanted program services, which some think may also provide a segue into the issue of a retail “à la carte” programming mandate for cable operators.

The new rules were adopted at a meeting that was delayed 12 hours while the commissioners negotiated the details of the final decision. The full text of the Commission’s action has not been released, and it may be weeks before it becomes publicly available. The text of the final order undoubtedly will reveal details of the actions that are not evident now. However, based on the FCC’s formal news release and the statements made by the commissioners at the meeting and in their accompanying press releases, we can provide the following summary of these important FCC actions.

Digital Must-Carry Rules

The Communications Act requires that cable operators carry the primary video signal of all local broadcasters that elect must-carry. With the ongoing transition to digital broadcasting, in order to ensure that cable subscribers without digital televisions or set-top boxes would not lose their ability to view local television signals, many cable operators whose systems were not all-digital already had begun carrying both the analog and digital signals of the most popular broadcast stations. These operators had been planning to continue such carriage after the 2009 digital transition. However, cable operators opposed the FCC’s proposed dual-carriage mandate, preferring instead to carry both analog and digital signals voluntarily according to marketplace demand; the cable industry already had reached a dual-carriage agreement with non-commercial broadcasters. In contrast, commercial broadcasters argued that a federal mandate was necessary to ensure that their signals would remain viewable to all cable subscribers after the digital transition.

The order finally adopted by the FCC embraced a compromise position offered by the National Cable & Telecommunications Association and imposes less drastic requirements on the cable industry than initially proposed by the Commission. Under the FCC’s initial proposal, dual-carriage of broadcast signals would have been required indefinitely until a cable system was fully converted to digital, so that all subscribers could view digital signals with set-top boxes; all-digital systems would be required only to carry the digital signal, so long as they provided necessary set-top boxes to subscribers. Instead, the FCC imposed only a three-year dual-carriage requirement on non-digital cable systems, although it is subject to renewal by the Commission at the end of that period. As initially proposed, the Commission also adopted a requirement that, post-transition, cable operators carry the high-definition broadcast streams of must-carry broadcasters’ signals, which therefore may result in some cable systems being subject to a triple-carriage requirement.

Cable systems with less than 552 MHz of capacity may request a waiver of the Commission’s dual-carriage requirements. While the cable industry had requested a blanket waiver for these systems, the FCC will instead review the waivers on a case-by-case basis. This decision prompted a dissent from Commissioner Jonathan S. Adelstein, who favored the blanket waiver so that small systems could spend their money on operations rather than on pursuing waiver requests. The Commission also will issue a Further Notice of Proposed Rulemaking seeking ways to minimize the economic impact on small cable operators of complying with the new obligations.

The Commission also had proposed in its NPRM a requirement that cable operators pass-through all of the bits in a digital broadcast stream, which the cable industry had viewed as a back-door attempt to impose a “multicast must-carry” rule that essentially would require carriage of several streams of different content from each broadcaster encompassed within all of the bits in a digital broadcast stream; the FCC had twice before rejected such proposals. Cable operators also contended that such a requirement would have prevented them from using digital compression technologies to conserve bandwidth that could be better used for carriage of non-broadcast networks or other services, such as high-speed Internet and VoIP telephone. The “all-bits” proposal was rejected by the FCC, which chose instead to maintain the existing requirement that signals be carried with “no material degradation,” i.e., with a picture quality as good as that of any other programming carried by the cable system.

Program Access and “Tying” of Program Services

The prohibition on exclusive cable network programming agreements, enacted as part of the 1992 Cable Act, was originally scheduled to sunset on Oct. 5, 2002. However, Congress authorized the FCC to extend the prohibition upon a finding that it “continues to be necessary to preserve and protect competition and diversity in the distribution of video programming.” In 2002, the FCC extended the prohibition for five years until Oct. 5, 2007, and with yesterday’s unanimous vote, the ban is extended another five years, to Oct. 5, 2012.

Section 628(c)(2)(D) of the Communications Act and Section 76.1002(c) of the FCC’s rules generally prohibit exclusive contracts for satellite cable programming between vertically integrated programming vendors and cable operators in areas where a cable operator is providing service. Thus, the rules require that any satellite cable programming service in which a cable operator has an attributable ownership interest (defined as five percent or more) must make that programming service available to “alternative” multichannel video program distributors (MVPDs), including DBS providers, ILECs providing cable service, SMATV systems and wireless cable operators that compete with the vertically integrated program network’s cable operator affiliates.

Despite the significant industry developments that have occurred since 2002—including continued subscriber growth by DBS providers, DBS “exclusive” programming, and the increase in the provision of competing MVPD service by ILECs, most notably, Verizon and AT&T—the FCC found that the ban “remains necessary for viable competition in the video distribution market.” The Commission concluded that vertically integrated programming “is some of the most popular programming available today, for which there are not good substitutes.” The Commission also voted to amend its program-access complaint procedures, to require disclosure to complaining parties of the affiliation agreements of vertically integrated program networks against whom they file program-access complaints.

The FCC also issued an NPRM seeking comment on two further, significant changes to its program access complaint procedures. First, the FCC is requesting comment on whether to allow complainants to seek a temporary stay of any proposed changes to existing contracts that are the subject of a program-access complaint. Such a rule, if adopted, would allow the Commission to order MVPDs and program networks engaged in a dispute to maintain the status quo during the pendency of a complaint proceeding. Second, the NPRM seeks comment on creating an arbitration-type step in the complaint process, whereby the Commission may request that the parties submit their “best and final” offer proposals for the rates, terms and conditions under review.

The NPRM also seeks comment on whether it should extend the Commission’s program-access rules, including the exclusive contract ban, to terrestrially delivered cable programming, as the DBS industry, ILECs and other alternative MVPDs have advocated. The cable industry and cable networks have opposed rule extension on the ground that it would exceed the FCC’s authority under the governing statute.

Finally, the NPRM opens an inquiry into whether the FCC should prohibit wholesale “programming tying arrangements,” which are defined as “the practice of some programmers to require MVPDs to purchase and carry undesired programming in return for the right to carry desired programming.” The NPRM asks whether the Commission should require “all programming services to be offered on a stand-alone basis to all MVPDs.” Such a rule would have broad implications for the television programming industry, and would significantly alter the economic relationship between MVPDs and program networks. Language used in Chairman Kevin J. Martin’s accompanying statement also suggests the possibility that he may intend to extend this inquiry to a possible retail à la carte requirement, an approach he has long championed and that cable operators and program networks have strenuously resisted. The FCC under then-Chairman Michael Powell conducted an inquiry into à la carte and issued a report concluding that it would not benefit most consumers and would harm program diversity. After his ascension to chairman, Kevin Martin requisitioned a “Further Report” on à la carte that disputed some of the prior report’s conclusions, though it did so without soliciting additional comment or adducing any new evidence. The new NPRM may be an attempt to build a record more supportive of Chairman Martin's interest in advancing à la carte options.