September 2006 - Legal File

Unbundling Cable TV and Unintended Consequences

By Jeffrey D. Knowles and Frederick “Rick” M. Joyce

“Why don’t they pass a constitutional amendment prohibiting anybody from learning anything? If it works as well as prohibition did, in five years Americans would be the smartest race of people on Earth.”-Will Rogers

In many ways, not much has changed in this country since Will Rogers’ contrarian wit kept politicians on their toes. Mankind’s natural good occasionally struggles to prevail over its bad, and, we can always count on regulators and politicians to try to tell us which is which. While there are many things in America today that would be unrecognizable to Will Rogers, political and regulatory debates over matters, such as the need to make the media more “family friendly” would surely sound familiar to him.

Right now, the Federal Communications Commission (FCC), the Federal Trade Commission (FTC) and Congress are all taking a hard look at media and advertising content regulation, amid concerns about the impact of media on our children, with a view toward adopting new laws and regulations aimed at promoting more “family friendly” content. Perhaps these regulatory and legislative proposals are well-intended and will be more successful than the 18th Amendment, but, they could also pose problems for electronic retailers and lead to outcomes at odds with what their proponents had in mind.

Earlier this year, FCC Chairman Martin released a 60-page report entitled “Further Report on the Packaging and Sale of Video Programming Services to the Public.” The report concluded that “unbundling” cable and satellite TV channels could save consumers money and lead to wider programming choices. The report received a fair amount of attention at the time for a number of reasons, including the fact that its core conclusions were the opposite of those found in a similar report prepared by prior FCC Chairman Michael Powell just one year before the Martin report.

On its face, the Martin report appears to be a dry, economics-grounded analysis of the costs and benefits of “bundled” programming, as opposed to “a la carte” video pricing. But, the fact that former FCC Chairman Powell and current Chairman Martin are both Republican appointees, and avowed “free marketers,” makes the clashing conclusions in their respective cable unbundling reports all the more confusing.

For its part, the Martin Report stated that Powell’s previous conclusion-that consumers are better served by “bundled networks”-was based on unproven or even faulty data about the number of programming channels available in a typical household and the prices paid by typical cable customers. It’s not apparent what sort of information Martin’s team could have uncovered in just one year that would have led them to so strongly question the accuracy of Powell’s data. Still, given that the United States has never really had “a la carte” pricing for cable or satellite services, it’s hard to see how the FCC could ever find any empirical evidence that would conclusively prove that unbundled programming is inherently cheaper and better for consumers than the status quo.

In the middle of these dueling conclusions, many have noticed that this recent regulatory tilt toward unbundled programming dovetails nicely with Chairman Martin’s oft-expressed disdain for violent and adult-oriented programming on cable and satellite TV. Indeed, the Parents’ Television Council and other family values groups have publicly come out in favor of unbundled programming as a means of enabling consumers to avoid purportedly “indecent” cable channels. Although it’s not clear that the FCC has statutory authority to force multichannel operators to unbundle their programming tiers, one view is that if the FCC raises enough public sentiment in favor of the idea, it might find a way to persuade multichannel operators to voluntarily offer a low-cost, basic suite of channels that includes only what the FCC deems to be “family friendly.”

It’s worthwhile noting that Presidential hopeful Senator McCain has jumped on this family friendly wagon, and proposed legislation that would mandate some of the unbundling ideas mentioned in the Martin report. Another legislative proposal pending in Congress would require all multichannel operators, cable and satellite, to offer a “family friendly” programming tier with a minimum of 14 family friendly channels.

Apart from the debatable economic underpinnings of the FCC’s recent unbundling report, common sense suggests that if this proposal becomes a reality, many cable channels will be driven off the air, particularly the “niche” programming channels that have enjoyed working with electronic retailers.

At its extreme, if the nation went to a purely “a la carte” programming proposal, it’s a cinch that most consumers would not want to pay extra for cable programs that feature a high percentage of commercial advertising. Even if the extra charge per channel were as low as 50 cents or a dollar, consumers are going to think long and hard before forking over extra cash each month to watch video programs that they now obtain essentially for free as part of their basic program tier.

As of this writing, the FCC has not released a formal rulemaking to put any of these unbundling ideas into action. However, given the almost uniform interest among all five FCC commissioners in stamping out “indecent” media and promoting “family friendly” programs, electronic retailers need to pay particularly close attention to this issue.

In addition to unbundling cable programming, the FCC has lately begun looking for additional ways within its existing statutory authority to expand its regulation of media content. Democratic FCC Commissioner Michael Copps recently stated that he wants the FCC to impose additional constraints on interactive TV ads aimed at children, including a possible ban on the display of websites during children’s programming. Democratic Commissioner Adelstein has gone one step further and recommended an outright ban on interactive commercial ads during any programs aimed at children.

This is a bi-partisan issue at the FCC. GOP Commissioner Tate hasn’t gone quite as far as Adelstein and Copps as yet, but, she has publicly invited programmers and service providers to do something about providing more “quality programming” for children, which may also entail additional constraints on interactive TV.

Regulatory prohibitions and constraints on advertising, including certain forms of interactive advertising, are not new to the FCC. The FCC has had “host selling” restrictions on its books for years under authority granted to it by the Children’s Television Act. In the past year or two, the agency expanded the scope of those restrictions to include prohibitions against the display of commercial websites during children’s programming.

In the past few months, the FCC has handed down several fines, and delayed renewing broadcast licenses, in response to violations of its host selling and website display restrictions. The FCC was not swayed toward leniency by arguments that a licensee had “inadvertently overlooked” the fact that a program-related product was advertised during a children’s program, thereby triggering the agency’s program-length commercial rule. Nor were licensees able to pin the blame on the program distributor.

Given these regulatory actions, and recent comments by a majority of FCC Commissioners about their desire to increase regulatory constraints on interactive ads and children’s programming, it’s a safe bet that electronic advertising is going to be under careful scrutiny by the FCC in the coming months. Indeed, if these recent enforcement actions by the FCC are any indication, we might expect to see stepped up enforcement of the FCC’s advertising and children’s programming regulations in the near term.

We don’t know if it was Will Rogers who said, “everybody talks about the weather, but nobody does anything about it,” but, it sounds like something he would have said. Unlike the weather, you don’t have to leave your business’ fate to chance, or to the latest ideas being hatched by Congress and the FCC. There’s no time like the present to get involved in these debates, analyze the proposals, suggest better alternatives, and then make your opinions known at the FCC, the FTC and on Capitol Hill.

Jeffrey Knowles manages Venable LLP’s Government Division and heads the firm’s Advertising and Marketing Practice Group. He is also a member of Venable’s Executive Committee. He focuses on national television advertising, direct-to-consumer marketing and e-commerce. He can be reached at (202) 344-4860. Frederick “Rick” M. Joyce is chair of the Communications Group at Venable LLP law firm in Washington, D.C. He can be reached at (202) 344-4653.


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