ROD CARVETH Rochester Institute of Technology INTRODUCTION

ROD CARVETH Rochester Institute of Technology INTRODUCTION

On February 1, 1996, after months of negotiations and political wrangling, Congress overwhelmingly passed the Telecommunications Act of 1996 (the Act). The Act was the first comprehensive rewrite of the Communications Act of 1934, and dramatically changed the ground rules for competition and regulation in virtually all sectors of the communications industry, from local and long-distance telephone services, to cable television, broadcast- ing, and equipment manufacturing.

For decades, communications policy—including ownership and service restrictions that maintained protected monopolies at both the state and fed- eral levels—has been set largely by the Federal Communications Commis- sion (FCC), state public utility commissions (PUCs), and the federal courts’ enforcement of the 1984 antitrust consent decree that dismantled the Bell System. The ambiguity inherent in enforcing a 62-year statute, however, led to legal uncertainty and conflicting interpretations. With the 1996 Act, Con- gress adopted competition as the basic charter for all telecommunications markets.

The Act eliminated most cross-market entry barriers, relaxed concentra- tion and merger rules, and placed new implementation obligations on the FCC and state regulators. 1 The Act overruled all state restrictions on com- petition on local and long-distance telephone service. The Bell Operating Companies (“Baby Bells”) were freed to provide long-distance service out- side their regions, and inside their regions once completing a series of steps to remove entry barriers for local telephone competition. New universal ser-

50 CORN-REVERE AND CARVETH

vice rules continued subsidization of telephone service for rural and low-in- come subscribers and assisted schools, libraries, and other public institutions in becoming connected to sophisticated telecommunications services, such as the Internet. The 1984 antitrust consent decrees were re- pealed, but their requirements for “equal access” (“1” + dialing) to all long- distance companies were maintained.

The Act relaxed the FCC’s media concentration rules by allowing any single company or network to own TV stations that reach as many as 35% of the nation’s television households (the previous limit was 25%). The FCC would be required to consider changing other limits on ownership in a sin- gle community. Networks would for the first time be allowed to own cable television systems, but no network could acquire another network. All na- tionwide limits on radio-station ownership were repealed, but local limits on concentration were maintained, albeit in a much relaxed form.

Television broadcasters were allowed spectrum flexibility to use addi- tional frequencies for high-definition or other purposes, but would have to return any additional spectrum allocated by the FCC and possibly pay auc- tion fees. In April 1997, the FCC announced rules governing the transition of broadcasters from analog to digital broadcasting, phasing in the transi- tion in a manner such that major market stations would have to switch to digital channels earlier that small market stations.

The Act substantially relaxed rules governing cable television systems under the 1992 Cable Act, including rate deregulation. Ironically, the 1995 report on the competitiveness of the cable-TV industry concluded that al- though some progress had begun toward a competitive marketplace for the distribution of video programming, cable-television systems continue to enjoy market power in local markets. At the time of the Act, subscribership for cable operators was over 91% of total multichannel video programming distribution (MVPD) subscribership, dwarfing subscribership to direct broadcast satellite (DBS) multichannel multipoint distribution (MMDS) and satellite master antenna television (SMATV) systems (Second Annual Report, 1995).

FCC Reaction to the Act

Reaction by the FCC to the Act was swift. The day President Bill Clinton signed the Act (February 8, 1996), the FCC granted several waivers to the Walt Disney Company to help facilitate its merger with Cap Cities/ABC. Within a month, the Commission implemented new rules on TV and radio station ownership, and by April had proposed to extend the license terms for television and radio to 8 years (the maximum allowable under the Act).

The Act is yet another example of how the legal and economic character- istics of media industries are inextricably related. With the advent of elec-

2. ECONOMICS AND MEDIA REGULATION

tronic communications technologies, governmental control moved to a system of regulation. The regulatory structure was designed to be flexible and adaptive to the changing shape of the industry. As economic power shifts among various media players, or as developing technologies alter the playing field, the governing agencies—most prominently, the FCC—react to maintain their views of the public interest. As a result, virtually all signif- icant economic developments among the regulated media industries pro- voke some kind of regulatory response. As a corollary to this premise, regulations have profound implications for the economic well-being of me- dia corporations.