Economic Analysis and Cable Regulation

Although the Commission previously eschewed direct regulation of cable systems, in 1962 it began to deny permission for carriage of broadcast signals that might adversely affect local television stations (Carter Mountain Transmission Corp., 1962). The FCC subsequently adopted formal rules that banned the importation of distant signals into a top-100 market unless the cable operator could demonstrate that the transmission would not hurt UHF broadcasters in the affected market (First Report and Order, 1965). These rules were predicated on two assumptions. First, the Commission believed that importation of distant signals could fragment the audience for local stations, thus eroding their revenue bases, perhaps to the point of affecting their programming or driving them from the air. Second, the

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2. ECONOMICS AND MEDIA REGULATION

Commission considered the retransmission of broadcast programming— for which the cable systems paid nothing—to be an unfair advantage over local broadcast stations. These conclusions were based on economic studies submitted to the FCC by the regulated industries.

As time passed and technology developed, however, the validity of the economic analyses became questionable. Moreover, the Commission’s assumptions regarding industry evolution began to shift. For example, when it first adopted distant signal and other protectionist rules, such as “must-carry” obligations, the FCC viewed cable television as merely an ad- junct of broadcasting. The rules were designed to ensure that cable did not undermine the economic strength of television. But by 1975, the Commis- sion began to seek ways “to assure the orderly development of this new technology into the national communications structure” (Report and Order, 1975, p. 863).

This subtle, but significant, shift in emphasis hailed a change in how the Commission assessed economic data presented to it. Moreover, the Com- mission became increasingly dissatisfied with its previous “intuitive model” for predicting competitive effects of the development of cable television on broadcasting. Accordingly, in 1977 the Commission initiated a Notice of Inquiry to reexamine the assumptions that an unregulated cable industry would ravage existing broadcasters. This “broad inquiry into the economics of the relationship between television broadcasters and cable television” was premised on the concept that “[a] more complete under- standing of the economics of the cable-broadcast interface [could] yield many benefits.” The Commission predicted that “[i]t may be show that cer- tain of our rules are unnecessary; it is also possible that others should be adopted, or that familiar rules should be applied to different situations” (Notice, 1977, p. 14).

Notwithstanding its newly discovered interest in “the collection of economic data and analysis,” the Commission did not await that outcome of its economic inquiry before modifying its distant signal rules. Rather, it placed the burden on broadcasters to prove that importation of a distant signal would have an adverse economic effect and adopted a general policy that presumed there would be little or no harmful impact (Arlington Telecommu- nications Corp., 1977).

Two year later, the Commission released its Economic Inquiry Report, which concluded that distant signal carriage rules should be eliminated. The 350+ page report analyzed the supply and demand for cable television and attempted to assess the impact of distant signals on local broadcast au- diences. The FCC’s analysis unabashedly embraced economic analysis as the determinant of the public interest. Its principal criteria for defining the public interest in its cable regulatory policies included the economic con- cepts of consumer welfare, distributional equity, and external or spillover

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effects. Basing its findings on economic studies, the Commission stated its conclusions with a clarity and confidence “which is uncommon in matters of public policy” (Inquiry, 1979, p. 659).

On the strength of its conclusion that “few, if any, TV stations are likely to experience a reduction in real income” due to the growth of cable television, the Commission began to dismantle its web of regulations that previously protected broadcasters. In 1980, the Commission eliminated its syndicated exclusivity and network nonduplication rules, which had protected local broadcasters from duplication of both network and syndicated programming via distant signals (CATV, 1980). These rules differed from the general limits on signal importation in that they prohibited only duplication of programming for which the local broadcasters had obtained exclusive rights. The Commission concluded that deletion of the rules would not lead to a reduction in the availability of programming or otherwise diminish service to the pubic.

The same consideration ultimately led to the elimination of the FCC’s “must-carry” rules. Like other measures designed to protect local broadcasters, the must-carry rules assumed that cable television could limit the ability of over-the-air television station to serve their intended audience. These rules addressed that concern by requiring cable systems to carry a specified number of local television signals. Cable operators challenged the rules on constitutional grounds, arguing that the government lacked a suf- ficient interest to support restrictions on the operators’ editorial autonomy. Citing the Economic Inquiry Report, the United States Court of Appeals for the District of Columbia Circuit found that if the Commission “has repudi- ated the economic assumptions that underlie the must-carry rules, the sug- gestion that they serve an important governmental interest (or any interest at all) would be wholly unconvincing” (Quincy Cable TV Inc. v. FCC, 1985). The court concluded that the findings of the report, combined with the FCC’s inability after 20 years to demonstrate a tangible economic threat to broadcasters, made “the continued deference to the Commission’s con- cededly unsupported determinations plainly inappropriate” (p. 714). Con- sequently the court struck down the must-carry rules.

Economic Analysis and Cable Regulation