Judges Skeptical of Cable Caps During Oral Arguments

Miguel Estrada, representing the company, said the math behind the cap was simplistic by, among other things, not taking into account that viewers can switch to DBS or telco TV service if they want to watch a network not carried on cable. Comcast has spent billions of dollars on new services in part to retain customers, he said. But Judge Douglas Ginsburg wondered if features like VoD and HD were so “you can charge more.” The addition of millions of video customers by telcos came “after the close of the record,” he said. “One of the problems in this whole area is it’s a moving target,” said Judge Raymond Randolph. “You're importing more precision to the statute than on the face of it what it requires.”

Estrada replied that there’s legislative “guidance,” and the caps’ impact on speech “is no small potatoes.” Randolph also said “the statue doesn’t give us any instruction” in some areas. Although subscribers may switch pay-TV providers “because the service is terrible,” that’s “a very different question” of whether they'd switch because they can’t watch a particular network, said the judge. Ginsburg said the FCC’s 2007 order (CD Nov 19 p1/07) noted that satellite providers often have contracts, which can make it harder to cut service. The commission treats an average pay-TV subscriber as the Unabomber without access to anything but service from Comcast, replied Estrada.

James Carr, the FCC’s lawyer, said subscribers may switch if they can get “double the number of channels even if they don’t know what they are,” as “you know how men are with the remote.” But Judge Brett Kavanaugh noted that the NFL Sunday Ticket, on DirecTV, is popular enough that some people buy service from that satellite company for that package. “That’s probably the exception that proves the rule,” replied Carr.

Estrada and the jurists discussed whether the FCC was wrong to only count cable networks in coming up with the limit. “Doesn’t [the law] refer to video programming in a way that suggests networks?” asked Kavanaugh. Not in a relevant way, responded Estrada. If the FCC’s judgment that a network needs about 19 million pay-TV viewers within five years of starting is wrong, “what is the right cutoff,” asked Ginsburg. Estrada said he didn’t know but that “a simple misreading of a basic input shows that the cap is hopelessly” wrong.

Kavanaugh wondered if the court should apply “strict scrutiny” to judging whether Comcast’s First Amendment rights are violated by the cap, which Ginsburg said precluded the company from expanding through acquisitions. Carr replied that he didn’t think that “would cross the line from intermediate scrutiny” since the cable industry still has a two-thirds market share of pay-TV customers and there’s not “elasticity” for new networks. “That subscriber is not going to go to DirecTV,” the FCC lawyer said. Randolph asked “what evidence is there that the rule has had any appreciable benefit to consumers,” given the last time the FCC set a limit it was the same: “It’s been 30 percent, 30 percent, 30 percent.”

It may not be OK to restrict speech since “there’s just been a huge increase in programming diversity,” said Kavanaugh. Carr said there’s still a need for “good programming,” which Randolph said always will be the case. Would it be fair to limit Barnes and Noble to carrying 30 percent of all books or a newspaper’s subscribership, Kavanaugh asked. “Since we're on the First Amendment, how can it possibly be non-content based,” said Randolph. “The whole thing is content based.”

Ginsburg wondered whether the 17 million subscribers the FCC found a network needs is “just a simple average.” Carr said the survival study the commission used to come up with that number is sophisticated, so much so “it is literally Greek to me,” he added. “This kind of survival analysis is an accepted technique in economic and other technical fields” and isn’t simply “a matter of averaging,” Carr said. Referring to the studies’ use in other ways to determine life expectancy, Randolph asked tongue-in-cheek how the study applies to cable networks: “The older the network, the more likely it is to fail?” Ginsburg joined in, noting “the likelihood of surviving is zero” since everyone must die.

Ginsburg homed in on the FCC’s decision not to count the reach of broadcast networks in coming up with the survival rate: “As far as the eyeballs are concerned, it really doesn’t matter if it’s a local channel or a cable channel.” Carr said Congress had in mind channels not protected by must-carry, which covers broadcasters. “That is not inconsistent with counting the broadcasters in your calculation,” responded Ginsburg. “It’s something. And you are counting it as nothing.”

Two analysts who sat in on the hearing said Comcast probably will prevail, and another wrote just beforehand that the company has “the edge.” (See separate report in this issue.) Stifel Nicolaus’ David Kaut and Jessica Zufolo of Medley Global Advisors gave better than even odds for the rules to get thrown out. “The FCC seems like it has an uphill battle” in keeping the cap, said Zufolo. A remand also is a possibility, though less likely, said Kaut. But “after 16 years and bouncing back between the courts three times, at some point relief delayed would be relief denied,” auguring for the limit to be vacated, he said. “I thought the pushback against the FCC went more to their central justifications whereas the pushback against Comcast was more on the margins.”