Daily Rules, Proposed Rules, and Notices of the Federal Government
This is a summary of the Commission's
1. In this
2. We find that a preemptive prohibition on exclusive contracts is no longer “necessary to preserve and protect competition and diversity in the distribution of video programming” considering that a case-by-case process will remain in place after the prohibition expires to assess the impact of individual exclusive contracts. In upholding the Commission's last extension of the prohibition in 2007, the United States Court of Appeals for the DC Circuit (“DC Circuit”) noted changes in the marketplace since 1992 and stated its expectation that if the market continued to evolve in this manner, “the Commission will soon be able to conclude that the prohibition is no longer necessary to preserve and protect competition and diversity in the distribution of video programming.” As discussed below, because the current market presents a mixed picture (with the cable industry now less dominant at the national level than it was when the exclusive contract prohibition was enacted, but prevailing concerns about cable dominance and concentration in various individual markets), we find that extending a preemptive ban on exclusive contracts sweeps too broadly. Rather, this mixed picture justifies a case-by-case approach in applying our program access rules (consistent with the case-by-case inquiries we undertake in the terrestrial programming and program carriage contexts), with special account taken of the unique characteristics of Regional Sports Network (“RSN”) programming. In addition to allowing us to assess any harm to competition resulting from an exclusive contract, this case-by-case approach will also allow us to consider the potentially procompetitive benefits of exclusive contracts in individual cases, such as promoting investment in new programming, particularly local programming, and permitting MVPDs to differentiate their service offerings. Accordingly, consistent with Congress's intention that the exclusive contract prohibition would not remain in place indefinitely and its finding that exclusive contracts can have procompetitive benefits in some markets, we decline to extend the preemptive prohibition beyond its October 5, 2012 sunset date.
3. We recognize that the potential for anticompetitive conduct resulting from vertical integration between cable operators and programmers remains a concern. For example, in some markets, vertical integration may result in exclusive contracts between cable operators and their affiliated programmers that preclude competitors in the video distribution market from accessing critical programming needed to attract and retain subscribers and thus harm competition. While the amount of satellite-delivered, cable-affiliated programming among the most popular cable networks has declined since 2007, some of that programming may still be critical for MVPDs to compete in the video distribution market. Congress has provided the
4. In addition to case-by-case adjudication, we expect that additional factors will mitigate the risk of any potentially adverse impact of the expiration of the exclusive contract prohibition on consumers and competition. First, approximately 30 satellite-delivered, cable-affiliated, national networks (accounting for 30 percent of all such networks) and 14 satellite-delivered, cable-affiliated, RSNs (accounting for over 40 percent of all such RSNs) are subject to program access merger conditions adopted in the
5. We also take related actions herein to amend our rules pertaining to subdistribution agreements, common carriers, and Open Video Systems (“OVS”) to reflect the expiration of the exclusive contract prohibition. Further, we modify merger conditions pertaining to exclusive contracts adopted in the
6. In the
7. In areas served by a cable operator, section 628(c)(2)(D) generally prohibits exclusive contracts for satellite cable programming or satellite broadcast programming between any cable operator and any cable-affiliated
8. Congress also provided that the exclusive contract prohibition would sunset after ten years (on October 5, 2002), unless the Commission found that it “continue[d] to be necessary to preserve and protect competition and diversity in the distribution of video programming.” On two previous occasions, first in 2002 and again in 2007, the Commission found that the prohibition remained necessary and thus renewed it for an additional five-year term on each occasion, with the latest extension expiring on October 5, 2012. In issuing the latest extension, the Commission recognized that “Congress intended for the exclusive contract prohibition to sunset at a point when market conditions warrant” and specifically “caution[ed] competitive MVPDs to take any steps they deem appropriate to prepare for the eventual sunset of the prohibition, including further investments in their own programming.” The DC Circuit upheld the Commission's decision, characterizing the developments in the marketplace as a “mixed picture” and deferring to the Commission's analysis. The court expressed an expectation, however, that at the next review “the Commission will weigh heavily Congress's intention that the exclusive contract prohibition will eventually sunset.”
9. On March 20, 2012, the Commission adopted and released an
10. For the reasons discussed below, we decline to extend the exclusive contract prohibition beyond its October 5, 2012 sunset date. First, we review marketplace developments since 2007 and conclude that, because the current market presents a mixed picture (with the cable industry now less dominant at the national level than it was when the exclusive contract prohibition was enacted, but prevailing concerns about cable dominance and concentration in various individual markets), a preemptive ban on exclusive contracts sweeps too broadly and is no longer “necessary to preserve and protect competition and diversity in the distribution of video programming” considering that a case-by-case process will remain in place after the prohibition expires to assess the impact of individual exclusive contracts. Second, we describe the case-by-case process that will remain after sunset of the preemptive ban to address competitive harms that may arise in connection with exclusive contracts, including a 45-day period for answering a section 628(b) complaint and the establishment of a rebuttable presumption that an exclusive contract involving a satellite-delivered, cable-affiliated RSN has the purpose or effect prohibited in section 628(b). We also explain how addressing exclusive contracts on a case-by-case basis comports with the First Amendment. Third, we describe necessary amendments to our rules pertaining to subdistribution agreements, common carriers, and OVS and to merger conditions pertaining to exclusive arrangements adopted in the
11. Congress provided that the exclusive contract prohibition would expire on October 5, 2002, unless the Commission found that it continued to be “necessary” to preserve and protect competition and diversity in the distribution of video programming. The Commission has previously determined that the exclusive contract prohibition continues to be “necessary” if, in the absence of the prohibition, competition and diversity in the distribution of video programming would not be preserved and protected. The DC Circuit has upheld the Commission's interpretation of the term “necessary” and has also ruled that the Commission's analysis of the prohibition is appropriately focused on harm to competition and consumers, not harm to competitors.
12. The Commission has also explained that the sunset provision “creates a presumption that the rule will sunset” unless the Commission finds that it continues to be necessary.
13. In evaluating whether the exclusive contract prohibition continues to be necessary, the Commission has previously examined data on the status of competition in the video programming market and the video distribution market. The Commission presented extensive data in the
14. Based on similar data and other record evidence, the Commission in past extension decisions has analyzed whether, in the absence of the exclusive contract prohibition, cable-affiliated programmers would have the incentive and the ability to harm competition and diversity in the distribution of video programming by entering into exclusive contracts. We undertake the same analysis here. Below, we consider the “incentive” element followed by the “ability” element.
15. In evaluating whether cable-affiliated programmers retain the incentive to enter into exclusive contracts, the Commission analyzes whether there continues to be an economic rationale for exclusivity. The Commission has explained that, if a vertically integrated cable operator enters into an exclusive arrangement for affiliated programming, it can recoup profits lost at the upstream level (
16. As discussed below, the record here shows a mixed picture, indicating that vertically integrated cable programmers may still have an incentive to enter into exclusive contracts for satellite-delivered programming in many markets. As the Commission explained previously, the profitability of exclusivity increases as the number of subscribers controlled by the vertically integrated cable operator increases. In past extension decisions, the Commission has analyzed the aggregate market share of cable operators on a national and regional basis to assess the profitability of exclusivity. In the
17. On a regional basis, however, there remain markets where cable operators have a substantial share of subscribers. In the
18. Moreover, we note that data submitted in the record by cable operators indicate that clustering has increased since 2007. The Commission has, in past orders, observed that clustering may increase a cable operator's incentive to enter into exclusive contracts for regional programming. In the
19. In addition to this data, we note that real-world evidence indicates that in some markets cable-affiliated programmers may have an incentive to enter into exclusive contracts that can harm competition. As noted in the previous extension decisions as well as in the
20. Because the record before us indicates that there may be certain region-specific circumstances where vertically integrated cable operators may have an incentive to withhold satellite-delivered programming from competitors,
21. In addition to an incentive to enter into exclusive contracts, we also assess the “ability” of vertically integrated cable operators to use exclusivity to harm competition and diversity in the distribution of video programming. In this regard, the Commission considers whether satellite-delivered, cable-affiliated programming remains programming for which there are no good substitutes and are necessary for competition. In previous extension orders, the Commission found that there were no good substitutes for a significant amount of satellite-delivered, cable-affiliated programming, and that such programming remained necessary for viable competition in the video distribution market. Accordingly, the Commission concluded that cable-affiliated programmers retained “the ability to favor their affiliated cable operators over competitive MVPDs such that competition and diversity in the distribution of video programming would not be preserved and protected absent the rule.” In reaching this conclusion, the Commission explained that “[w]hat is most significant to our analysis is not the percentage of total available programming that is vertically integrated with cable operators, but rather the popularity of the programming that is vertically integrated and how the inability of competitive MVPDs to access this programming will affect the preservation and protection of competition in the video distribution marketplace.”
22. We recognize that some commenters contend that the data in the
23. First, as explained in the
24. Some commenters contend, however, that the Commission must consider the Comcast-controlled networks as if they would be impacted by a sunset of the exclusivity prohibition. They claim that, if the Commission declines to extend the prohibition based on an analysis of the market that ignores the Comcast-controlled networks, the Commission will have no vehicle to consider whether the prohibition remains necessary after the Comcast merger conditions expire. We reject these claims. The Commission may exercise its broad rulemaking authority under section 628(b) to adopt rules prohibiting certain exclusive contracts involving cable-affiliated programming if it becomes necessary after these merger conditions expire, based on an assessment of the marketplace at that time.
25. Second, after the Commission released the
26. Third, in both the
27. Fourth, in the
28. Based on the four developments noted above, the record indicates a decrease since 2007 in the amount of satellite-delivered, cable-affiliated programming among the most popular cable networks. In particular, the number of Top 20 national cable networks as ranked by average prime time ratings that are cable-affiliated has fallen from seven in 2007 to one today
29. In light of the mixed picture presented by the current MVPD market (including the decline in the amount of satellite-delivered, cable-affiliated programming among the most popular cable networks), we find that a broad, preemptive ban on exclusive contracts is no longer necessary to prevent cable-affiliated programmers from harming competition, considering that a case-by-case process will remain in place after the prohibition expires to assess the impact of individual exclusive contracts. We recognize that some satellite-delivered, cable-affiliated programming, such as certain RSNs, remains necessary for competition and has no good substitutes. However, we do not believe this warrants extension of a preemptive ban on exclusivity when a case-by-case approach can address competitively harmful exclusive contracts on a more targeted basis.
30. Based on the foregoing, we can no longer conclude that the exclusive contract prohibition remains necessary to preserve and protect competition and diversity in the distribution of video programming considering that a case-by-case process will remain in place after the prohibition expires to assess the impact of individual exclusive contracts. While the record indicates that vertically integrated cable operators may still have the ability and incentive to withhold satellite-delivered, cable-affiliated programming in some markets with the effect of harming competition and diversity, the record also demonstrates a decline since 2007 in the amount of satellite-delivered, cable-affiliated programming among the most popular cable networks. To be sure, absent the prohibition, there may be instances where cable operators enter into exclusive contracts for satellite-delivered, cable-affiliated programming that is necessary for competition and has no good substitutes. But Congress has provided the Commission with the authority to address such contracts on a case-by-case basis after the expiration of the prohibition. Specifically, sections 628(b), 628(c)(1), and 628(d) of the Act grant the Commission broad authority to prohibit “unfair acts” of cable operators and their affiliated programmers that have the “purpose or effect” of “hinder[ing] significantly or prevent[ing]” any MVPD from providing “satellite cable programming or satellite broadcast programming to subscribers or consumers.” In addition, the Commission has authority (i) pursuant to section 628(c)(2)(B) of the Act to prohibit discrimination in the prices, terms, and conditions for sale of satellite-delivered, cable-affiliated programming among MVPDs; and (ii) pursuant to section 628(c)(2)(A) of the
31. As some commenters note, however, the Commission in previous extension decisions characterized a case-by-case process for addressing exclusive contracts as an inadequate substitute for the “particularized protection” afforded by the exclusive contract prohibition. But the Commission reached that conclusion on a much different factual record. Here, based on the decline during the past five years in the amount of satellite-delivered, cable-affiliated programming among the most popular cable networks, we can no longer conclude that a case-by-case process is insufficient to protect MVPDs from the potential anticompetitive impact of exclusive contracts or that a preemptive ban continues to be warranted.
32. Some commenters note that Congress has already established a case-by-case approach for assessing exclusive contracts involving satellite-delivered, cable-affiliated programming. Specifically, pursuant to section 628(c)(4), a cable operator or a satellite-delivered, cable-affiliated programmer may submit a “Petition for Exclusivity” to the Commission for approval to enforce or enter into an exclusive contract by demonstrating that the contract serves the public interest. Some commenters claim that the Commission could streamline this procedure rather than requiring MVPDs to pursue complaints. We reject this contention. Given the decline during the past five years in the amount of satellite-delivered, cable-affiliated programming among the most popular cable networks, we find no basis to continue to preemptively ban exclusive contracts and to place the burden on cable operators or their affiliated programmers to demonstrate that an exclusive contract serves the public interest before entering into or enforcing the contract. Indeed, relying on the Petition for Exclusivity process to avoid the expiration of the prohibition would mean that the prohibition would never expire, contrary to Congress's direction.
33. We recognize the possibility that the expiration of the exclusive contract prohibition may result in cable operators acquiring additional programming, including “must have” programming, and then entering into exclusive contracts for such programming. We also recognize the possibility that some existing satellite-delivered, cable-affiliated programming may increase in popularity in the future. The record, however, provides no basis on which to predict the likelihood of these developments or their impact on competition. Indeed, such developments seem contrary to current market trends, as discussed above. Given this, extending the prohibition based simply on the chance of a reversal in industry trends would be at odds with Congress' inclusion of a sunset provision. Moreover, even if a marketplace reversal were to occur, the Commission has the tools in place to address these developments, either on a case-by-case basis in response to complaints, which include a rebuttable presumption of “significant hindrance” for RSNs, or by adopting rules pursuant to section 628(b) that prohibit certain types of exclusive contracts involving cable-affiliated programming.
34. We find additional factors also weigh in favor of our decision to decline to extend the prohibition beyond its sunset date. First, as both Congress and the Commission have specifically recognized, exclusive contracts may result in the procompetitive benefit of increasing investment in programming in some cases, thereby promoting competition and diversity in the video programming market. Vertically integrated cable operators and cable-affiliated programmers note that expiration of the prohibition will provide cable operators with an incentive to increase their investment in programming ventures, particularly local and regional programming. They also claim that exclusivity is critical to programmers for the following reasons: (i) A new service with limited interest may be able to gain carriage only if it can provide a distributor with exclusive carriage; (ii) exclusivity may be critical for a niche network that targets a particular audience; (iii) a programmer may wish to enter into an exclusive arrangement to reduce or share the risks with a cable operator; and (iv) exclusivity enhances the incentive of the cable operator to market and publicize the network. Moreover, expiration of the exclusive contract prohibition may also encourage other MVPDs or non-MVPD-affiliated programmers to create programming to counteract any exclusives involving cable operators, thereby leading to more competition and diversity in the video programming market. The Commission recognized this benefit in the
35. Some MVPDs question the potential for procompetitive benefits resulting from exclusive contracts involving satellite-delivered, cable-affiliated programming, noting that exclusive contracts involving non-cable-affiliated programmers are rare and that the Commission previously noted an increase in programming networks over time despite the exclusive contract prohibition. Nevertheless, Congress specifically recognized the benefits of exclusive contracts in some cases, as demonstrated by its mandate that the Commission allow the exclusive contract prohibition to expire when it is no longer “necessary” to preserve and protect competition and diversity in the video distribution market.
36. Second, the Commission has recognized that exclusive contracts may result in the procompetitive benefit of allowing MVPDs to differentiate their service offerings.
37. Third, declining to extend the exclusive contract prohibition beyond its sunset date and relying instead on a case-by-case process is consistent with our First Amendment obligations and promotes the goals of Executive Order 13579 and the Commission's plan adopted consistent with the Executive Order, whereby the Commission analyzes rules that may be outmoded, ineffective, insufficient, or excessively burdensome and determines whether any such regulations should be modified, streamlined, or repealed. In today's marketplace, a nuanced, narrower, case-by-case approach that meets the statutory objectives is more appropriate than the blunt regulatory tool of a prohibition that preemptively bans all exclusive contracts and places the burden on the proponent of exclusivity to demonstrate how the exclusive contract serves the public interest before entering into or enforcing the contract.
38. Fourth, our action here promotes regulatory parity by treating satellite-delivered and terrestrially delivered programming similarly. Specifically, we will now consider all exclusive contracts involving cable-affiliated programming on a case-by-case basis in response to complaints, regardless of whether the programming is satellite-delivered or terrestrially delivered. Nothing in the record here establishes any basis for continuing to apply a preemptive prohibition to exclusive contracts involving satellite-delivered, cable-affiliated programming while assessing exclusive contracts involving terrestrially delivered, cable-affiliated programming on a case-by-case basis. Achieving parity in treatment between these two types of programming will remove any uncertainty and confusion surrounding which regulatory approach (preemptive prohibition or case-by-case) applies. In addition, parity in regulatory treatment will help to ensure that business reasons, rather than regulatory distinctions, drive the decision whether to deliver programming by satellite or terrestrial means.
39. Fifth, we expect that any enforcement of exclusive contracts in the near term will be limited by the terms of existing affiliation agreements. In the