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How the FCC Can Protect Consumers in the Battle Over Retransmission Consent

Wednesday, September 11, 2013

By Matthew A. Brill and Matthew T. Murchison, Latham & Watkins LLP  

For the past month, television viewers have been bombarded with news of the high-stakes showdown between CBS Corp. and Time Warner Cable Inc. over what are known as retransmission consent fees. On Sept. 2, the two companies finally ended their contract dispute, which had left millions of Time Warner customers in major cities—including New York, Los Angeles, and Dallas—without access to CBS's broadcast stations and cable networks.

This type of pitched battle has become increasingly common as broadcast stations seek large cash payments from video distributors for the right to retransmit over-the-air broadcast signals.

Broadcasters argue (with some justification under the current legal framework) that they are entitled to charge cable operators and other video distributors as much as the market will bear for carriage of their television signals, and to terminate such carriage when their demands are not met. Cable operators and other video distributors respond (also with justification) that there is no “market” in this context, as these carriage negotiations are the product of a comprehensive regulatory regime that skews outcomes in anticompetitive ways. Distributors further argue that the governing statute was never intended to funnel billions of dollars to the national broadcast networks or to spur recurring threats of programming blackouts, much less actual blackouts. For the consumers caught in the middle, most do not care what is causing these service disruptions or who is to blame; they just want uninterrupted access to their favorite shows, sporting events, and other popular broadcast programming—at reasonable rates.

Welcome to the dysfunctional world of “retransmission consent”—a regulatory regime devised by Congress in 1992.

Congress created retransmission consent to preserve viewers' access to broadcast programming, but the system now is having exactly the opposite effect.

A broad coalition of industry participants and public-interest groups petitioned the FCC in 2010 to update the retransmission consent rules to better protect consumers.1 And although the FCC commenced a rulemaking proceeding in 2011 teeing up a number of possible reforms,2 it has yet to adopt any of the rules it proposed. In the meantime, the cycle of escalating fees and blackouts has continued unabated—reaching a fever pitch this summer and spurring a number of lawmakers and independent industry analysts to join the chorus calling for reform.3

As lawyers on the front lines of various high-profile retransmission consent disputes and proceedings before the FCC, we have become all too familiar with the systemic problems that plague this regulatory regime.

What Is Retransmission Consent?

Retransmission consent is a creature of the Cable Television Consumer Protection and Competition Act of 1992, a statute that imposed a variety of obligations on cable operators. Congress believed that regulation was necessary because it viewed the cable industry, in 1992, as a threat to over-the-air broadcasting. The Senate report accompanying the 1992 Cable Act stated that cable operators had attained “monopoly” power in local areas and “bottleneck” control in the distribution of video programming.4 It raised concern that cable operators could use that power to prefer their own programming services and stifle local broadcasting.5 In response to such concerns, Congress established a new regulatory framework under which a broadcast station may elect either “must carry,” which guarantees mandatory carriage on local cable systems, or “retransmission consent,” which requires a cable operator to obtain the station's consent (presumably in conjunction with some exchange of value) in order to carry it.6

Retransmission consent is but one strand of the complex web of carriage regulations that Congress either brought into being or left in place when it adopted the 1992 Cable Act. For example, even as it created a new retransmission consent “right” for broadcasters in 1992, Congress preserved the compulsory licensing regime established in the 1976 Copyright Act,7 under which content owners receive a statutory fee from cable operators in connection with the cable retransmission of broadcast signals. Indeed, Congress made clear that broadcasters' new retransmission consent right was entirely distinct from copyright, and was meant to promote the availability of local broadcast signals.8 The 1992 Cable Act also introduced the requirement that all broadcast signals be carried on the basic, most widely distributed tier of cable service (in areas where the cable system does not face effective competition), and the requirement that cable subscribers purchase the basic tier as a condition of accessing other services.9 And Congress declined to alter the FCC's territorial exclusivity rules, which allow a local station providing network or syndicated programming to prevent the local cable system from carrying that programming as broadcast by an out-of-market station.10

These regulations—along with the 1992 Cable Act's new channel placement, signal non-degradation, and “carriage in the entirety” requirements11—injected administrative oversight into virtually every aspect of the relationship between cable operators and broadcasters.

At First, Disputes Were Rare

In the early years following the enactment of 1992 Cable Act, disputes between broadcasters and cable operators were rare. Many stations elected must-carry status, and those that invoked retransmission consent typically received in-kind compensation (e.g., in the form of advertising buys and commitments to carry affiliated pay-TV networks) for the carriage of their signals.12 The regulatory regime thus appeared, at least in the short term, to have succeeded in advancing Congress's goal of preserving viewers' access to local broadcast signals.

But that delicate balance did not last. As discussed further below, the emergence of more robust competition among multichannel video programming distributors (MVPDs) has converted retransmission consent in many instances from a shield into a sword, enabling some broadcasters to demand significant compensation, backed by credible threats to withhold their signals and to steer consumers to competing distributors if their negotiating demands are not accepted. Indeed, in recent years, the demands for greater cash payments have made retransmission consent negotiations between broadcast stations and MVPDs increasingly contentious.

From the MVPD perspective, where they have agreed to pay significant retransmission consent fees, broadcasters have generated windfall revenues from selling the right to retransmit programming made available for free over the air (and often on the internet). According to SNL Kagan, industry-wide retransmission consent revenues for local broadcast stations have grown more than tenfold since the middle of the last decade, from $215 million in 2006 to roughly $2.4 billion in 2012, and are projected to reach more than $6 billion by 2018.13 When MVPDs have balked at these fee demands—hoping to rein in programming costs that continue to grow much faster than the rate of inflation—a growing number of broadcasters have withdrawn their signals and elected to “go dark” on MVPD systems until a new agreement is reached. Unfortunately, such blackouts are increasing in frequency: A recent study tallied 91 broadcaster blackouts in 2012 alone, up from 51 the year before and just 12 in 2010.14Thus, no matter how these disputes turn out—i.e., whether the MVPD ultimately yields to the broadcaster's fee demands or refuses to yield and is met with a blackout—consumers lose; they either pay more for MVPD services, as higher retransmission consent fees necessarily translate into higher retail rates for subscribers (without any commensurate increase in the quality or quantity of broadcast programming),15or they lose access to popular broadcast programming.

Such results are precisely the opposite of what Congress had in mind when it created the retransmission consent regime.

How Did Retransmission Consent Go Awry?

The disconnect between the goals of retransmission consent and the outcomes it now produces begs the question of how the regulatory regime veered so far off-course. The answer will be familiar to anyone who has followed similar efforts by the government to regulate dynamic industries: While the rules governing retransmission consent have remained the same over the past two decades, the video landscape has changed dramatically—and in ways that have undercut the rationale for those rules.

The most obvious change in the industry has been the increased competition among video distributors seeking to carry local broadcast programming. Today, broadcasters can distribute their programming to viewers over a wide array of platforms, including the two nationwide satellite providers (DirecTV and Dish Network Corp.), telecommunications companies (such as Verizon Communications Inc.’s FiOS TV and AT&T Inc.’s U-verse) and other cable “over-builders” (such as RCN Corp. and Google Inc.’s Google Fiber), and over the internet (through their own web sites and services such as Hulu and iTunes).

The FCC recently found that over 98 percent of homes in the U.S. have access to at least three video distribution options, and many homes have access to four or more.16 As a result, cable operators' share of the MVPD marketplace has fallen steadily, from 95 percent in 1994 to roughly 55 percent today,17 even without accounting for online video providers like Netflix Inc., Apple Inc., Amazon.com, Hulu, and Google. As noted above, the transition from the monopoly conditions identified by Congress in 1992 to today's far more competitive marketplace has enabled broadcast stations to play distributors off against one another and to make credible threats to withdraw retransmission consent when their fee demands are not met. Whereas the loss of cable carriage in 1992 was perceived as potentially fatal for broadcast stations, stations in recent years have shown that their ability to reach consumers through other MVPD platforms and over the internet now makes blackout threats a successful (and enormously profitable) tactic.

Broadcasters Still Receive Special Protections

Although the video marketplace has undergone this profound transformation, and courts have found that the “bottleneck” that concerned Congress in 1992 has disappeared,18 the special protections for broadcasters that Congress and the FCC baked into the retransmission consent regime remain in place. For instance, broadcasters still can rely on rules guaranteeing them automatic placement on the basic cable tier in many areas, even though other video programming vendors must negotiate for such favorable tier placement. Broadcasters also continue to take advantage of the FCC's territorial exclusivity rules, which shield stations from competition by ensuring that the local network affiliate is the only source of that network's programming for a local cable system. The exclusivity rules strengthen broadcasters' bargaining leverage by preventing MVPDs from seeking lower fees from stations in other markets, or from importing a nearby station to cure a blackout during a negotiating impasse with the local station.

Some local broadcasters also have enhanced their bargaining leverage by using so-called “sharing” agreements to coordinate their retransmission consent negotiations. These arrangements, often called local marketing agreements (LMAs), shared services agreements (SSAs), or joint sales agreements (JSAs), often include terms that expressly authorize one broadcast station to negotiate retransmission consent on behalf of another station in the same local market—i.e., for a direct competitor. Several studies submitted to the FCC demonstrate that this coordinated conduct has contributed to the precipitous rise in retransmission consent fees and the significant increase in broadcaster blackouts in recent years.19

Indeed, the Department of Justice even brought an antitrust suit in 1996 against a group of broadcasters that were coordinating their retransmission consent negotiations to obtain more favorable terms from the local cable operator.20 Since then, however, the DOJ appears to have left the job of policing these arrangements to the FCC, and the FCC has done nothing to address this coordinated conduct, despite repeated entreaties from MVPDs, consumer groups, and others.

Involvement of ‘Big Four’ Having Impact

Another factor contributing to rising rates has been the increased involvement of national networks in local affiliates' retransmission consent negotiations. The so-called “Big Four” networks—ABC, CBS, NBC, and FOX—have sought to share in the retransmission consent boom, and they have done so in two ways. First, each network owns a number of television stations in major markets (known as “owned-and-operated” or “O&O” stations), and the networks have demanded large retransmission consent payments for those O&O stations. For example, CBS reportedly recently sought $2 per subscriber from Time Warner Cable.21

Second, the Big Four networks now require independent affiliates to pay them a “cut” of their own retransmission consent revenues.22 Independent broadcast stations thus have all the more incentive to seek higher fees from MVPDs, in order to cover the “reverse retrans” payments they must now send upstream to the networks.

The resultant subsidies to the Big Four networks are precisely what the congressional sponsors of the retransmission consent regime assured skeptics would not occur. Members of Congress made repeated statements that retransmission consent was not intended “to serve as a subsidy for major networks,”23 but rather was designed to safeguard the ability of local television stations to produce news programming and other local content.24 Yet many broadcast stations have been curtailing their commitment to local news and other local content, notwithstanding the increases in retransmission consent revenue.25 Again, this seems an obvious departure from the congressional intent underlying the creation of the retransmission consent right.

While broadcasters and MVPDs have often been eager to blame each other in the retransmission consent disputes that have grown so common in recent years, it seems clear that the real culprit is the outdated regulatory regime itself—one that rests on the fiction that a monopoly-era regulatory framework should apply without alteration in today's dramatically different landscape.

The governing rules continue to presume that broadcasters need artificial regulatory preferences to protect against cable monopolists, and ignore current dynamics that undermine the stated goals of the 1992 Cable Act. As a result, what was originally intended to be a minor subsidy to support local broadcasting has become a shadow copyright regime, apparently used to bankroll the production of national network programming. And when battles over fees have boiled over into blackouts for television viewers, the FCC has stood on the sidelines, even as its anachronistic and asymmetrical rules continue to fuel these disputes.

Where Do We Go From Here?

Broadcast interests have argued vehemently that the retransmission consent system is working as intended, and that the escalating fees being demanded and paid merely reflect the substantial investments made by the Big Four networks in major sports programming and other high-value content.

But MVPDs and allied parties respond that Congress never intended retransmission consent fees to be a second copyright license or to subsidize network programming; quite the contrary, congressional sponsors insisted that the regime had nothing to do with such programming. MVPDs also stress that the billions of dollars in new fees—for the same content broadcast stations provide over the air for free—are being passed through to budget-constrained consumers and increasingly are spurring frustrating service disruptions.

In our view, the status quo has become untenable from a public interest standpoint, and policymakers should make significant changes to address the harms flowing from the current system.

Stakeholders at the FCC have advanced numerous reform proposals, which generally fall into one of two categories.

First, the FCC, working with Congress, could pursue a deregulatory path aimed at eliminating the anachronistic protections for broadcasters and facilitating genuine market-based negotiations. Such reforms could entail repealing the retransmission consent regime altogether, but at a minimum would require eliminating the territorial exclusivity rules, tier-placement requirements, and other provisions that distort carriage negotiations.

A deregulatory approach certainly has some appeal, particularly now that the asserted “monopoly” rationale for many of these rules no longer applies. Eliminating broadcaster-skewed regulations also makes sense in light of the FCC's upcoming broadcast incentive auction, under which broadcast stations that choose to surrender their licenses will receive a portion of the proceeds once the freed-up spectrum is auctioned to wireless carriers for the provision of 4G (fourth-generation) broadband services. Broadcasters will be less likely to give up spectrum as long as holding onto their licenses enables them to garner huge retransmission consent revenues. But the prospects of stoking transformative deregulatory action on Capitol Hill in the near future appear quite dim, given the gridlock in Congress and the absence of consensus on the appropriate direction of any reforms.

Options for FCC

While a deregulatory approach strikes us as the optimal long-term solution, a more realistic path in the near term would be for the FCC to amend its current rules to ensure that they better protect consumers. FCC leaders have suggested that the agency has very limited authority to intervene in retransmission consent disputes or to reform the governing regime.26 As many stakeholders have observed, it is ironic for FCC officials to disclaim authority here, given the agency's typically expansive view of its own statutory power.27 In any case, our reading of the statute leads us to conclude that the commission has ample authority to reform its retransmission consent rules.

Section 325(b) of the Communications Act arms the FCC with a broad mandate “to govern the exercise by television broadcast stations of the right to grant retransmission consent,”28 and specifically directs the FCC to consider “the impact that the grant of retransmission consent by television stations may have on the rates for the basic service tier” and “to ensure that the rates for the basic service tier are reasonable.”29 This directive to “govern” broadcasters' exercise of retransmission consent plainly confers sufficient authority to implement the various reforms under consideration. In addition, the statute requires the FCC to ensure that parties negotiate retransmission consent in “good faith,”30 thus empowering the FCC to police or proscribe particular negotiating practices. Further bolstering the FCC's authority is the broad public interest mandate applicable to broadcast stations.31 Broadcast stations receive immensely valuable licenses to use the public airwaves in exchange for their commitment to operate in the public interest. To the extent that some stations are abusing that privilege through practices that diminish competition and/or harm consumers, the FCC has well-established authority (beyond that contained in Section 325) to take remedial action.

For starters, the FCC should amend its “good faith” rules. The agency's existing rules have proven toothless; the FCC has only once found that a party violated the good faith standard,32 even though numerous complaints alleging bad faith have been filed over the years and evidence of anticompetitive conduct has been manifest. The FCC thus should bolster its good faith rules by clarifying that certain harmful conduct—such as joint negotiations involving competing local stations, tying retransmission consent to the carriage of affiliated cable network programming, or blocking online content during a dispute—constitutes “bad faith” negotiation.

The FCC also should use its existing authority to play a greater role in dispute resolution, such as by requiring “interim carriage” of affected broadcast signals on MVPD systems during negotiating impasses. Despite the FCC's reticence, the legislative history of 1992 Cable Act indicates that Section 325 authorizes the FCC to intervene in retransmission consent disputes in order to protect consumers, including by ordering interim carriage.33 In addition to this direct authority, the FCC can rely on its “ancillary” authority,34 which, according to the Supreme Court, authorizes the FCC to issue an order maintaining the status quo in cable carriage disputes where “the public interest demands interim relief.”35 The FCC should generally be wary of relying on ancillary authority, but here, where the agency has a direct statutory responsibility under Section 325 to “govern” the exercise of retransmission consent and to ensure reasonable cable rates, and it is the regulatory regime itself producing consumer harm, the FCC should not hesitate to use all available authority to eliminate the programming disruptions that millions of consumers now face.

Whatever the path to reform, it has become clear that leaving in place a regulatory regime that consistently produces anti-consumer outcomes is the least palatable option for television viewers. If Congress and the FCC do nothing, the number of programming disruptions is certain to keep rising, as will the retail rates for basic MVPD service (driven in large part by higher retransmission consent fees). And news headlines like those that appeared this summer, proclaiming “war” between broadcasters and MVPDs, will become the new normal.

Matthew A. Brill is a partner, and Matthew T. Murchison is an associate, at Latham & Watkins LLP.  

©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.  

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