Round two: must carry issue must rise again – Business

David Connell

When the Satellite Broadcasting and Communications Association (SBCA), DirecTV and EchoStar Communications filed a lawsuit against the Federal Communications Commission, its commissioners and the U.S. Copyright Office over must carry rules, those in the cable industry could be forgiven if their initial thoughts were of “deja vu all over again.” After all, the cable industry brought a must carry suit all the way to the U.S. Supreme Court, only to lose by a narrow 5-4 vote.

However, the collective thoughts of the industry have quickly turned to, “How will this affect us?” For most in the industry, including the National Cable Television Association (NCTA), the jury is still out on this question, and cable interests are taking a wait-and-see attitude on how they should move on the issue.

“We have essentially wished (the satellite TV industry) well on the constitutional challenge,” NCTA spokesman David Beckwith says. “We haven’t decided (whether or not to get involved), and that’s basically where it sits at the moment.”

However, the lawsuit could have a profound effect on how must carry rules are applied to the cable industry in the future. The Supreme Court’s narrow decision in the Turner case relied largely on the fact that cable was seen as an entrenched monopoly. The satellite TV interests insist their ace in the hole will be their status as a competitor to cable.

“Satellite carriers occupy a small percentage of the market for delivery of video programming vis-a-vis cable,” the industry said in its original filing in the case. “Satellite carriers compete vigorously with cable systems and other multichannel video programming distributors.”

If the satellite TV interests win the case based partly on the fact that they compete with cable operators, what does that say about the tenants of the Turner case, which based must carry on the lack of competition? According to Pegasus Communications Chairman Mark Pagon, it means must carry stands a very good chance of being overturned.

“When you look at the Supreme Court decision from a legal standpoint, if must carry gets back there, it probably won’t stand,” Pagon, whose company owns several broadcast stations and is the largest re-seller of DirecTV systems, says. “A lot of the rationale (from the original decision) was based on cable being a monopoly provider. If they used the same criteria now, there’s a pretty good chance it’d be overturned. So, as a broadcaster, I guess I should be worried.”

Right now, Pagon’s line of reasoning hasn’t been stated publicly by the cable industry, but it may be something they are discussing. “It’s a complicated situation,” Beckwith says. “There are alternative scenarios as to how this could turn out. We’re studying how (the DBS suit) could affect must carry in the near future and long-term.”

It’s also unclear how the suit could affect the fight over digital must carry, but cable hands seem to agree it is unlikely the case will play a large role in the FCC’s final decision on the issue.

“The controversy at the FCC is not going to be about the must carry of primary signals,” Beckwith says. “We have tacitly acknowledged that we will carry the broadcasters’ primary signals after the digital conversion is complete. The concern here is over the double-dose of must carry, which is much different than the SBCA lawsuit.”

Rural blues

The American Cable Association’s (ACA) Matt Polka agrees with Beckwith’s assessment, saying that once the satellite TV industry suit is completed, the FCC’s decision on must carry will have likely been rendered moot.

Unlike the NCTA position, the ACA is certainly not considering filing in favor of the satellite TV industry’s lawsuit and will work on the Hill to make sure satellite TV companies must conform to must carry rules.

However, Polka says he doesn’t expect the association to become involved in the lawsuit.

Compared to larger MSOs, the smaller, rural cable companies represented by the ACA have been hit hard by the expansion of the satellite TV industry, Polka says, and need the protection of satellite TV must carry in order to ensure competition remains on a level playing field.

“We’ve been dealing with this competition from satellite for a lot longer than the urban areas,” Polka says, “At the same time, our members have done very well; they know these markets better than anybody. (Satellite TV must carry) is something we’ve been talking about for years– from the original Satellite Home Viewer Act, to the Satellite Home Viewer Improvement Act and now the rural loan bill. Our position has always been: If we’re essentially providing the same service, then the rules should be the same.”

Polka adds that his members have “accepted” the existence of must carry rules and have learned to deal with the capacity constraints they put on their cable systems. All he asks of the satellite TV industry is that they do the same. He adds that the industry is now going back on a deal it made with Congress to deliver local signals and abide by must carry rules.

“They knew what the rules meant. This is just an attempt to seek a regulatory advantage,” Polka says, “I think it’s pretty disingenuous for the SBCA to be filing this lawsuit. They want to have their cake and eat it, too.”

Polka doesn’t buy the argument that satellite TV providers should be excused from must carry rules because of their capacity constraints either. He contends that DirecTV and EchoStar have plenty of money to invest in upgrading their systems if they want to deliver more local channels to their subscribers.

“We’re talking about companies with $20 billion in market caps,” he says. “They’re the ones who picked their business and distribution models. They need to make it work.”

Polka adds that any relief granted to the satellite TV industry should be passed on to the cable industry.

“Our view in two words is: regulatory parity,” Polka says.

Constraining capacity

While the NCTA continues to sit on the fence in DBS’s fight against must carry, and the ACA is coming down clearly against the satellite TV interests, cable programmers also must consider the implications of the lawsuit. DirecTv and EchoStar’s DISH Network have both said that, under the current must carry regime, they would have to give up 400 channels to local stations in the top 37 markets alone. While this might not force the companies to drop any existing channels from their programming line-ups, DirecTV spokesman Bob Marsocci says it “would certainly preclude us from adding any new national stations or regional sports networks.”

Due to the extreme capacity constraints the must carry rules could place on the DBS companies, sources in the cable industry have said many programmers are considering filing on behalf of the satellite TV industry. In fact, sources said, C-SPAN is close to agreeing to file on behalf of the industry. C-SPAN is often cited as public interest programming provided by cable and satellite TV companies that could be cut if must carry rules become too burdensome.

One group that will certainly not be sitting on the fence in this fight are the broadcasters. In fact, the National Association of Broadcasters, the Association for Local Television Stations (ALTV) and Univision Television Group have filed a brief with the U.S. District Court for the Eastern District of Virginia to become a co-defendant in the case. This is a move that the satellite TV industry expected, according to Andrew McBride, the SBCA’s lawyer in the case.

The broadcaster’s involvement in the suit is based largely on the fact that they have a large and obvious economic interest in the outcome of the case. They also say their interests will not be adequately represented by the government. However, McBride says their participation in the case is not guaranteed, and the satellite TV industry may fight their move to become a co-defendant.

One of the broadcasters’ main arguments in the case is that Congress gave DBS providers a compulsory license that does not charge full copyright fees for retransmission consent. If DirecTV and EchoStar use that compulsory license, then they must comply with must carry. If they attempt to negotiate their own copyright fees with individual companies — a prospect that is as unlikely as it is impractical — the satellite TV companies call avoid the must carry rules.

“The federal government gave the satellite TV industry a tremendous gift,” ALTV president James Hedlund says. “Satellite TV providers could avoid full copyright fees and retransmit local broadcast signals back into the station’s local market — without a copyright payment — pursuant to a compulsory license. Under the law, those satellite TV providers who voluntarily decide to make use of this compulsory license cannot discriminate in the selection of local stations that will be carried as part of their local to local service.”

“The broadcasters also claim that lobbyists for the SBCA, DirecTV and EchoStar helped broker the language in SHVIA and were well aware of what they were signing. In their view, the industry made their bed, and now they have to lie in it.

This is a view shared by some, but not all, lawmakers on Capitol Hill.

“I fought hard for them to have a chance of being a competitive industry to cable,” Rep. Billy Tauzin, R-La., told Cable World in an interview last month. “But, the quid pro quo is that they have got to keep their word to us on carriage. They made a very definite commitment to being capable of meeting must carry requirements by date certain, and I expect them to live by that. It’s not a question of a lot of wiggle room here. There were very clear commitments made.”

In addition to Tauzin’s remarks, Sen. Orrin Hatch, R-Utah, who was instrumental in drafting SHVIA as the Chairman of the Senate Judiciary Committee, also wrote a letter to some in the industry expressing his disapproval of the suit.

However, there are some on the Hill who argue the industry didn’t make any deals and, in fact, objected to the must carry provisions all along.

“They never made a deal with Congress,” Rep. Rick Boucher, D-Va., told Cable World. “When the legislation was adopted, the satellite TV industry did not receive all the benefits it should have in the legislation. There was never an endorsement of the legislation by the industry, so there was no deal to break.”

Boucher added that there were some in Congress, including him, who argued that must carry, as applied to satellite TV, is unconstitutional. However, they lost that argument when the bill went to conference committee.

Kiss and make up

Although multichannel video providers and broadcasters have been arguing about must carry for years, there are some who believe it is time to bury the hatchet — at least between the DBS industry and broadcasters — and work together to the benefit of both industries.

Of this camp, Mark Pagon has perhaps one of the loudest voices. Pegasus, which he runs, owns 10 broadcast networks — most of which are affiliates of UPN and The WB — is the largest re-seller of DirecTV systems and, until recently, held some cable interests in Puerto Rico. If anyone could benefit from broadcasters and DBS providers working together, it’s Pagon.

“The first place we have to start is local into local,” Pagon says. “Offering local channels is the most valuable thing DBS providers can give their customers. For broadcasters, local into local creates competitive pressure on retransmission consent. If you have two viable multichannel video providers in your market, you can get better deals. It’s improving your competitive position. Rather than fighting with broadcasters over must carry, we should be linking arms and working together. This suit is misguided.”

Pagon also notes that cable companies continue to roll out more local content in order to compete with DBS through local all-news channels and broadband Internet content. If DirecTV and EchoStar hope to keep up, he says, they must forge strong ties with broadcasters who produce large amounts of local programming.

“DBS providers are almost completely lacking in local content,” he says. “If you build a relationship with broadcasters that is long lasting, you’ll get that local content.”

While most broadcasters and multichannel video providers are forced to look at the must carry debate in terms of black and white, Pagon, because of his business plan, views the issue in shades of gray, and his view may make sense to those trying to find a compromise on the issue.

“I tend to look at (the issue) a little more pragmatically,” Pagon says. “In most markets, except for the largest markets, must carry is not that much of a burden. In most markets there are three to five broadcast stations that get good ratings, and they’re stations you want to carry. That’s the rule rather than the exception, and the issue of must carry is really only an issue in markets such as New York and Los Angeles”

He also points out that, for the most part, the retransmission fees cable providers face for medium and small market broadcast networks are minimal compared with the fees they pay for some cable networks.

“It’s not a bad trade off,” Pagon says. “Especially in a world where broadcasters get nothing in retransmission consent fees. Cable companies should be more upset about ESPN, which charges more than $1.50 a month.”

Regardless of the outcome of the satellite TV industry’s fight against must carry, Pagon concedes the issue may be a moot point in the relatively near future. He notes that — especially if George W. Bush is elected — the ownership caps faced by major station operators may be overturned. This, he says, will allow the networks to increase the amount of owned-and-operated stations they have, consolidate their distribution arm and increase their leverage when negotiating retransmission consent deals with multichannel video providers.

He also says that, as a result of the digital transition, broadcasters will begin to initiate business models based on wireless services and delivering data to portable devices and home computers.

“The bottom line,” Pagon says, “is the importance of must carry to broadcasters will decrease in the next five to six years.”

There are other reasons to begin sounding the death knell for must carry, especially with the dawn of the digital age. With any luck, the 8VSB digital standard will be perfected to the point where consumers will actually be able to receive a local station using an indoor antenna. This would finally fulfill the broadcasters’ claim of providing “free over-the-air” television and eliminate the need for cable carriage.

Pagon also notes that, in the wake of the America Online/Time Warner merger, many broadcasters may seek to secure a stake, or buy outright, satellite TV providers, thus solidifying a national distribution channel for their services. Already, Walt Disney, News Corp. and Viacom — all broadcast station owners — have been placed on the short list of possible bidders for DirecTV. On a smaller scale, Capitol Broadcasting is continuing to pitch its fledgling Local TV on Satellite system and seek legislative help in getting it off the ground. LTVS hopes to deliver local stations via satellite to up to 65 markets, cutting the need for DirecTV and EchoStar to deliver local channels to those markets.

As the television industry begins to usher in a new age of digital transmission and corporate consolidation, there will likely be less and less need for must carry rules. Perhaps it will be a change broadcasters embrace rather than fear.

COPYRIGHT 2000 Copyright by Media Central Inc., A PRIMEDIA Company. All rights reserved.

COPYRIGHT 2003 Gale Group

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