V for Vendetta

National Cable & Telecommunications Association President Kyle McSlarrow has taken off the gloves.

The face of the nation's biggest cable operators says flatly that FCC Chairman Kevin Martin is on a vendetta to hurt the cable industry. That's not the sort of rhetoric lobbyists usually direct toward powerful government officials who control their fates. But McSlarrow says the chairman is continuing to push an anti-cable agenda with “hyper-regulatory zeal” and no rational justification.

Martin recently teamed with consolidation opponents on the commission to cap cable subscriptions at 30%, a move telegraphed since at least last March. See you in court, says McSlarrow, where he threatens to take other Martin proposals if approved.

But while McSlarrow has been talking loudly about the chairman, he has also been talking quietly with the unlikeliest of fellow trade lobbyists: David Rehr, the head of the National Association of Broadcasters.

These strange bedfellows have met about how to work together in the digital age in order to find a win-win blueprint for delivering TV service. McSlarrow's goal is to keep chairman Martin and the FCC out of that equation.

McSlarrow sat down with B&C's John Eggerton to discuss the FCC, cable stocks and a new approach to cable's relationship with broadcasters not tied to bandwidth constraints of old battles.

You have said you won't make this fight personal. Does the FCC chairman's regulatory attack on cable TV feel personal to you?

It is directed at the cable industry. It is clearly a different agenda for the cable industry than almost any other industry and in some cases so inconsistent as to defy belief. I think ownership issues are the paradigm.

If you look at what has been the agenda for the FCC under this chairman for the last three years, there are two very clear trend lines. Trend line number one: Everything AT&T wants, it gets. Trend line number two: Everything that could be conceived and proposed that would somehow hurt the cable industry has been pursued.

In ownership, all of those issues come together because, under this chairman, we have had three mega-mergers by the Bells creating AT&T—by itself four times larger than Comcast, the largest cable company.

We did not oppose those mergers, by the way. You have the cross-ownership cap in the newspaper and broadcast space, where he is proposing deregulation. And on the very same day he proposes to do that, in one industry and one industry alone, he proposes to go with a rule that was already rejected by the D.C. circuit [court].

Do you believe the FCC chairman has an agenda to hurt cable?

I think in our case, the additional agenda is to continue this pattern of applying pressure to the industry with proposal after proposal going after our marketplace, our business practices, designed to get us to voluntarily do à la carte or something like it, or actually reshape the environment in a way where we are put at a disadvantage.

Whenever I hear those words come out of my mouth, I find it almost impossible to believe that someone could be that biased and have that much of a vendetta toward an industry. And yet the facts are very clear. There is no rational, philosophical, consistent explanation for how he treats this industry compared to how he treats any other. None.

An FCC majority has already voted to impose a 30% cap on the number of cable subscribers one cable company can claim. What's the industry response?

We haven't made a final decision, but the probability of litigation is extremely high.

The FCC has asked the cable industry for more information on whether it has reached the 70/70 threshold (70% household penetration/70% subscriptions). If you did meet the threshold, would that give the FCC greater authority over the cable TV industry?

Even if the FCC says we meet that threshold, it has a much narrower impact than Chairman Martin suggested. Our read of the statute and legislative history is very clear on this: It was a grant of additional authority in the context of leased access only.

If one goes by the reports, and I think they are right, the chairman seemed to think it was roving authority, ranging from ownership caps, to à la carte, to unbundling, to multicasting, to essentially his pet pro

ects, which is a fairly wide list.

Are there any of those issues that appear more troublesome than others?

I think the troublesome proposition is when you start using 70/70 as support for authority to engage in sort of rearranging the marketplace, whether it is à la carte on the retail side or wholesale unbundling. Multicast must-carry is within the confines of the statute on must-carry, but it's very clear to us that it is unconstitutional.

But again, if you try to bootstrap some kind of 70/70 finding to provide some additional authority, at the end of the day it's all about giving himself additional jurisdictional authority in court on a variety of issues that will undoubtedly be litigated to say, “Well, Mr. Judge, there is this open-ended authority that even if you don't agree with our assertions of authority over there, here is this open-ended authority over here.”

What is that driven by?

I think at its core it started as a content concern. Certainly his explanation, both as a commissioner and early in his tenure as chairman, was focused on content, but I am not sure that at this stage we're not beyond that.

We are in a very muddled philosophical space where, despite all the evidence of real competition in the marketplace, we have a chairman who is proposing to micromanage that marketplace with more government mandates and regulation.

What is your response to the chairman's frequent invocation of doubling cable rates for consumers?

First, his invocation of cable prices increasing by 100% over 10 years is false. It is apparent to me that this is a chairman who has “trouble,” shall we say, with data.

He doesn't even bother to do the obvious—which is somewhat insulting to everybody else in the public—which is that he doesn't even adjust for inflation. That is just so basic that one would expect a government official to know to do that. But even if you assume, and I think it is correct, that price increases for something called video programming have increased above the rate of inflation, what is it that you are comparing? You are comparing 10 years ago, an average of 44 or 45 analog channels with a certain type of programming, to today's 75 or 80 analog channels. And, oh, by the way, the program networks have invested tens of billions of dollars to provide even better, more compelling programming such that they are winning all kinds of Emmys that they weren't 10 years ago. It's apples and oranges. It's like saying you bought the lowest-priced Ford today and tomorrow you buy the higher-end Ford and say, “Well, look, the price of cars just doubled in 24 hours.” They're not the same thing.

Cable stocks have taken a hit lately. Why?

I'm no expert in stocks, but I think the combination of the Wall Street concerns about the fact that we live in a competitive reality overlaid with the regulatory risk probably has some impact. But I am not going to presume to analyze it.

I can say that we have the wherewithal to either defeat outright really onerous regulation, or to win in court based on very fundamental and compelling constitutional arguments in almost every case. This industry, if left alone to compete, has a business plan that is going to be a great business for a long time.

The chairman is starting to get some pushback from Republican as well as Democratic commissioners. Do you see some change in fortunes in terms of his being able to muster a majority?

There is no question that there was great unhappiness in how the agenda for the last meeting was handled. But I always go into every proposal looking for three votes. I start sort of knowing where Chairman Martin is, and that leaves me four other offices in which to find three votes, which is tough.

But I will say that in every instance and on every issue the other four have always been accessible and thoughtful and have taken the time to listen to our arguments. It doesn't mean we are always going to win, but we always have a fighting chance.

And the chairman?

No, it would be ridiculous for me to say that. He has a clear agenda designed to harm this industry.

DBS operators are picking up subscribers; does that concern you and how do you fight back?

The key is, is the industry growing in its entirety across the board? It is a false view to look at it through video only. There are a lot of services we are providing and, even in video, there is a real migration from analog to digital customers. Obviously you want to grow basic subscribers. That's better than losing them.

But I think it is also true that even as there has been a net loss of 200,000 basic video subs, we are also growing along the other lines of the business. As long as we continue to provide more robust HD, and a competitive differentiator with video on demand and services like interactive advertising, I think we can start gaining some of those basic subs back.

But I also recognize that with satellite, cable and now telephone, it is a red-hot competitive environment and we are going to be scrapping for every customer. We have to be realistic that for the video customer alone it is going to be a very competitive marketplace. But I believe we have an offering in a bundle that strengthens that. I don't think it is a foregone conclusion that we are going to continually have slight erosion every year. I think we can actually start adding net subscriber growth on the video side.

The cable industry has talked about bandwidth issues when fighting against mandatory digital multicast must-carry. Is switched digital the answer to those bandwidth constraints?

It is a pretty important solution. Two things have to take place. Either one provides most of a solution, but together I really think they do the job. That is the continued migration and use of analog channels to some other purpose, and the other is the switched architecture.

Particularly with the digital transition coming up, which even though it is a broadcaster transition, I think will have a psychological effect on consumers in terms of wanting all things digital. I think it will provide a boost to our digital customer relationship. We already have over 50% digital customers in video. As Comcast and Time Warner roll out switched digital, I think it gets a lot easier at that point to manage the bandwidth.

But I think people forget that because you are able to use your bandwidth more efficiently and deliver all the HD programming a customer could possibly want, that doesn't mean it is an excuse for going back and loading up all those reclaimed channels with [content] customers don't want. The real opportunity is in wideband, which [Comcast's] Brian Roberts was talking about at our last show. He showed bonding up to 24 channels for high-speed Internet so we can deliver more, faster.

Once you have the bandwidth, would it make sense politically to offer commercial broadcasters the same sort of deal you made with noncommercial broadcasters on carriage of digital multicast signals?

That is an interesting question. I am not prepared to say today. I have often thought, and had conversations with my friends in the broadcasting community, that there is a symbiotic relationship between these two industries.

There has been a tendency in the past—maybe part of it has been bandwidth constraints, part of it has been the regulatory reality and history—that's driving us to sort of fight each other. It doesn't necessarily require Congress or the FCC, but we should be looking for ways as this evolution is taking place that we can produce a win-win for both industries.

I have been talking to [NAB President] David Rehr. I'm not going to get into specifics, but generally speaking, we recognize there are going to be major changes taking place over the next couple of years in both industries and this is an opportunity to have that kind of discussion. It's not something that will be done in the next six months. But I have seen willingness on the broadcast side to think differently about the future. What that means, I don't know.

Is this also a way to get the FCC out of the equation?

That's always my goal. If I hadn't already had the experience of the current FCC with the current chairman, I would have just instinctively arrived at a place where it is always better in the marketplace, voluntarily, to reach a point where you can produce a win-win.

But I think with the experience of the last couple of years it just drives the point home. The customer should not be subject to the whim and caprice of whoever happens to be sitting in the chairman's seat at the FCC.

But many in your industry would argue that you haven't been left alone to compete.

You have to look at the practical impact. Certainly, I have been kept busy for three years. But when you step back and look at the variety of things Chairman Martin has proposed doing, in most cases he hasn't actually been able to succeed.

Take for example, two months ago, the last infamous FCC meeting on Sept. 11. He had proposed two really bad things. One was permanent dual carriage and one was completely anti-innovation, the so-called carry-all bits proposal, which would have either eliminated or seriously precluded operators from using compression technology to use our bandwidth more efficiently.

Well, the last proposal was defeated outright and the first was defeated. In its place was something we had already said we would do voluntarily for three years because we believed it was important to make the digital transition as seamless for our customers as possible.

You can go back and look at these cases and we have either won or the practical impact on the business side is likely to be minimal, or we are going to have very strong legal challenges.

John Eggerton

Contributing editor John Eggerton has been an editor and/or writer on media regulation, legislation and policy for over four decades, including covering the FCC, FTC, Congress, the major media trade associations, and the federal courts. In addition to Multichannel News and Broadcasting + Cable, his work has appeared in Radio World, TV Technology, TV Fax, This Week in Consumer Electronics, Variety and the Encyclopedia Britannica.