Martin’s Compromises Paved Way for 5-0 DTV Order Vote

All four commissioners wanted changes in Martin’s draft on forcing cable operators to carry all broadcaster program bits, or to the core of the order for all cable systems to give analog customers must-carry stations, agency sources said. Some commissioners wanted changes on both, the sources said. They said eighth-floor concerns about what cable operators call dual carriage in part led the commission to say it will weigh waiver requests from systems with capacities of 552 MHz or less. The FCC can exempt companies from many rules, but the 552 MHz threshold went into the order after the American Cable Association asked that all systems of that size automatically get exemptions. That group has about 1 million customers, NCTA President Kyle McSlarrow said.

NCTA was calmed by Martin’s compromise, which includes a three-year sunset on the dual-carriage rule. The order reflected many of that group’s proposals, as expected (CD Sept 11 p2). “Every office including the chairman’s office dealt with this constructively and fairly,” NCTA President Kyle McSlarrow told us. “Obviously the chairman is critical to the outcome of any decision like this,” he said. “It probably helped that we put a proposal on the table.” NCTA asked commissioners to let it voluntarily adopt a form of dual carriage for three years. But commissioners wanted to require it via an order and the group didn’t object, McSlarrow told media. NCTA said it won’t sue the FCC over the order, after calling earlier versions of Martin’s dual carriage proposal unconstitutional. “What we asked for we got,” said McSlarrow. “We had hoped the FCC would include a more explicit exemption for small systems and very low capacity systems, which is something I think they could have easily done.”

Commissioners joked that they and aides were “wearing out the carpet” shuttling among offices on the FCC’s top floor as discussion of the order stretched into the evening. Tuesday’s meeting began 11 hours behind schedule, ending after 10 p.m. Last-minute carriage order talks delayed the start, said an FCC official. Commissioners were awaiting a redrafted order, with changes taking time because the final version differed significantly from Martin’s original, the official said.

Martin said it’s important that he reach compromises, and that analog cable customers will benefit from the order, since they'll keep getting signals after Feb. 17, 2009. But he reprised what some FCC and industry officials call his tirade against cable. “If the cable companies had their way, you, your mother and father, or your next door neighbor could go to sleep one night after watching their favorite channel and wake up the next morning to a dark fuzzy screen,” Martin said. Martin stressed that he’s open to other commissioners’ ideas. “It’s always important to end up trying to reach a compromise with all the commissioners,” he said.

Not everyone endorsed Martin’s DTV compromise. The American Cable Association is “disappointed” that commissioners didn’t agree to a blanket exemption for small systems, it said. “This offers little meaningful relief, requiring these systems to engage in, and pay for, yet another process at the FCC, with the outcome far from certain.” Commissioner Jonathan Adelstein said small cable operators will have a harder time selling more broadband under the order. Unlike large operators and Bells, “small system operators face serious financial and technological resource constraints,” he said in his partial dissent. “It is not fair to ask these tiny rural systems to engage lawyers in Washington when a simple exemption would have sufficed.”

Cable systems may have to curtail VoIP, digital cable and broadband service if they can’t get waivers, ACA President Matt Polka said Friday in an interview. The systems lack the room to carry analog and digital broadcasts of TV stations electing to forgo compensation from cable systems in lieu of guaranteed carriage, he said. “If you take bandwidth and give it to digital broadcasts, it has to come from somewhere else,” said Polka. “There may be no choice except to take away a VoIP service or to downgrade a broadband offering.” Help may come for small cable operators in the form of a further order addressing the financial effect on them, which Commissioner Michael Copps said Tuesday that his colleagues agreed to issue in six months. As a prelude to the order, commissioners agreed Tuesday to issue a rulemaking notice examining issues raised by ACA. The notice will solicit comment on how dual carriage affects the capacity of small cable systems, an FCC official said.

Wall Street analysts said the last-minute revisions to the DTV order blunted its effect on cable operators. “The agreed-upon regulation is a compromise from Chairman Martin’s original, much more draconian proposal,” wrote Sanford Bernstein’s Craig Moffett in a bulletin titled “Cable Dodges a Bullet in FCC Votes.” System capacity won’t be sapped, since the order lets cable continue compressing broadcast signals, as long as they don’t degrade them. Martin wanted to change that rule, but commissioners opposed doing so. The order gave cable operators several wins, although overall it’s negative for them, analysts said. “The three-year sunset provision on the must carry-ruling is a key concession by the FCC,” wrote Bank of America’s Robert Dezego. That clause “was in line with what the cable industry was offering and importantly was not in FCC Chairman Martin’s original proposal.” The FCC can extend the rules so they don’t expire Feb. 17, 2012. Broadcasters lobbied for the carriage rules, which they and Martin called a “viewability” provision. NCTA spoke with NAB about its carriage compromise plan, McSlarrow said.

Broadcasters see an opportunity to raise the program bits issue again nearer the DTV transition, though they generally like the modified carriage order, said David Donovan, president of the Association for Maximum Service TV. Broadcasters would rather use an objective standard, such as the number of bits retransmitted, to gauge material degradation of picture quality. That’s because stations send signals using much more bandwidth than cable networks typically take up from operators. Consumers increasingly will see that difference, Donovan said. “As this digital transition rolls out, consumers will come to realize that and will demand that the same high quality signals be retransmitted on cable system,” he said. “At that time, I think you're able to look at that in the context of a federal rule.”

The FCC is the logical place to start pushing for such a rule change, but debate could move to Congress, Donovan said. “In time the signal degradation issue will become more important and the government will address it.” NAB said provisions in the FCC order will protect consumers from material degradation. “Broadcasters have embarked on a monumental effort to bring Americans the most pristine television pictures ever witnessed by the human eye,” said NAB President David Rehr. “Yesterday’s FCC rulings ensure that cable operators not be allowed to thwart that mission.”

Cable may see this as a win, but operators still will have to spend heavily to accommodate the FCC action, an NAB spokesman said. “If cable is trying to spin this as a big win for NCTA, they must be smoking something very funny,” he said. “In reality, it’s a win for niche and Spanish-language TV stations that cable operators have been trying for 15 years to knock off their systems.” A cable proposal to limit the industry’s viewability obligations to the five highest- rated must-carry stations in each market stalled at the FCC, a broadcast source said. Such a provision would have hurt larger-market stations the most, the source said. ACA said cable operators will spend up to $150,000 in equipment and labor to comply with the order.

The DTV order and another one extending program access rules for five years are bad for the cable industry, Stifel Nicolas analysts wrote. But getting the “all program bits” language removed from the carriage order was a big cable victory, they said. Wall Street expected worse rules for cable, Dezego wrote. “This could have been a multi-billion- dollar capex spend in the industry in the coming years,” he said. “Cable appears to have kept control of the timing of the transition of analog subscribers to digital and maintained flexibility to use capacity for more popular HD programming.” The waiver for systems of less than 552 MHz capacity is a particular boon for Mediacom and Charter, with large amounts of 550 MHz plant, Dezego wrote. Many telecommunications, satellite and other companies cheered the FCC extension of a ban on cable operators withholding their own programming from other pay-TV companies. The order will spur video competition, USTelecom said. EchoStar and AT&T also hailed the rules.

The next FCC vote affecting cable likely will be on franchise deregulation, FCC officials said. They voiced optimism for a quick vote, though Martin said Tuesday he has no timetable for issuing the order to let cable operators debit some payments to cities from a 5 percent FCC franchise fee cap when contracts come up for renewal. A vote could come this week, said several FCC officials, predicting a 3-2 outcome with Adelstein and Copps dissenting. McSlarrow predicted action sooner rather than later. “I think the votes were already set,” he said. “We're going to get the relief that was committed to us.” - Jonathan Make, Josh Wein