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Cable, DBS Debate Power at FCC

Did federal regulators doze through the last decade? From Cablevision System Corp.'s perspective, officials at the Federal Communications Commission must have been napping, because they missed an important trend in the pay TV market.

"In today's video and broadband markets, cable is no longer dominant or first among equals. It is one of several providers competing for market and mindshare, warranting no special burdens," Cablevision said in an Aug. 30 FCC filing.

Every year, the FCC prepares a cable competition report for Congress. It is typically used by incumbent cable operators as a forum to preach deregulation and by cable competitors as a platform to complain that MSOs possess menacing market power that regulators need to curb.

Like many MSOs, Cablevision argues that cable operators must comply with reams of regulations that might have made some sense a decade ago but today have clearly outlived their usefulness.

Cable operators need a local license, must pay franchise fees and are required to provide channels to local TV stations, local governments and renters of commercial time. Operators with programming interests must sell their satellite-delivered networks to all competitors. And price regulation remains in force over many cable systems' basic programming tier.

Where's the Equity?

Cablevision said its business profile demonstrates that regulation has not kept pace with market developments.

The MSO, which serves about 3 million subscribers in the New York City area, ranks behind DirecTV Inc. (8.9 million subscribers) and EchoStar Communications Corp. (7.4 million subscribers). Yet it is Cablevision that has to sell its programming to DirecTV and EchoStar and make room on its systems for local TV stations that are affiliated with media conglomerates that dwarf Cablevision's $1.4 billion market capitalization.

In June, the FCC extended the program access rules for five years. Now the agency is considering requiring cable operators to share bandwidth with unaffiliated Internet-service providers and set aside channels for digital television stations.

With cable losing a couple of points of market share each year — and at a time when cable stocks are generally down about 40 percent —the FCC should refrain from imposing new regulatory burdens on cable operators, said Cablevision.

"In this marketplace, maintenance or expansion of rules that tilt the table against cable and for its rivals cannot be justified. Reliance on the marketplace is the appropriate course, not more regulation," Cablevision said.

DirecTV and EchoStar are proposing to merge. The new DBS company would serve 16.3 million subscribers and would become the second-largest pay TV provider in the country. The No. 1 pay TV provider would be AT&T Comcast Corp., with about 22 million subscribers, assuming the pending cable merger of AT&T Broadband and Comcast Corp. is approved.

Echostar: Here's Proof

Despite DBS's impressive growth, EchoStar said the FCC shouldn't be taken in by Cablevision's analysis. Nationally, cable operators control about 76 percent of all pay TV subscribers, own marquee cable networks and have a history of raising rates faster than inflation.

"These rate hikes are dispositive proof both of the continuing [and increasing] cable dominance and of DBS's current inability to discipline cable," EchoStar said in an FCC filing.

Nevertheless, EchoStar said that the introduction of local TV service by DBS carriers has exerted "significant downward pressure on cable prices." Relying on a study it commissioned, EchoStar said expanded-basic cable rates drop $1.03 in the first year and $1.57 in the second year in markets where DBS carriers provide local TV signals.

"Thus, in markets in which DBS does not offer local service — and roughly 160 out of 210 DMAs lack local service from DBS — the available evidence suggests that DBS does not impose a competitive constraint on cable."

In touting his company's merger with DirecTV, EchoStar chairman and CEO Charlie Ergen has pledged to launch local TV service in all 210 markets within two years.