FCC Releases Text of New Digital Transition “Must-Carry” Order, NPRM

Dual carriage requirement imposed on most cable systems from February 2009 - February 2012; "all-bits" transmission standard rejected

On Nov. 30, 2007, the FCC released the text of its Third Report and Order (“Order”) and of its Third Further Notice of Proposed Rulemaking (NPRM) in the long-running “Digital Must Carry” proceeding. The Order and NPRM were actually adopted by the Commission at its September 2007 meeting (see our previous advisory).

The Order addresses cable operators’ carriage of broadcast signals after the broadcast industry completes its statutorily mandated transition from analog to digital transmission on Feb. 17, 2009. These new signal carriage rules will be effective only through February 2012, at which point the rules will automatically sunset, absent further consideration by the FCC. Neither the Order nor the NPRM directly address the ongoing “multicast” debate, which may not be resolved before the 2009 transition.

“Viewability” and the new post-transition digital must-carry rules

The bulk of the Order concerns the “viewability” of digital must-carry signals. It focuses on two statutory provisions of the 1992 Cable Act (Sections 614(b)(7) and 615(h)) governing cable’s distribution of must-carry signals. The Order interprets these two statutory provisions expansively to maximize broadcast access to cable customers.

Under the new Order, cable operators have a “choice” after Feb. 17, 2009—if they convert to 100 percent digital operations, they need simply offer digital must-carry signals in digital format; however, if they maintain hybrid analog/digital systems, their must-carry burden will increase dramatically. In hybrid systems (which are likely to represent the vast majority of the nation’s cable systems), cable operators will be obligated to offer digital must-carry signals in digital format and to downconvert these same broadcast signals and offer them in analog format. In short, despite the FCC’s protestations to the contrary, most cable systems will be subject to a dual must-carry obligation.

The Commission clearly believes that a dual must-carry regime is necessary in hybrid systems to ensure that every cable customer has unlimited access to every must-carry signal after Feb. 17, 2009. Under the Commission’s reasoning, it is not enough for hybrid systems to offer every digital must-carry signal in digital format and make equipment available so that interested customers can access it. The Commission evidently fears that satisfied analog subscribers will be unwilling to acquire the equipment necessary to view digital broadcast signals. Rather than expose must-carry signals to the risk of reduced viewership, the Order mandates hybrid cable systems offer digital broadcast signals in both analog and digital format.

The Order unequivocally rejects all of the various constitutional, statutory, and policy arguments advanced by the cable industry to mitigate the burdens associated with dual must-carry. On the constitutional front, the Commission insists that the new must-carry rules pose a “modest” burden on cable operators and serve an “important” government interest. To a large extent, the Order dismisses the cable industry’s First Amendment and Fifth Amendment challenges by emphasizing that the Commission is offering operators a “choice”—they can avoid dual must-carry by converting to all digital operations. The Order rejects the cable industry’s suggestion that the “all-digital” option may be an unrealistic business proposition.

The Order also rejects the cable networks’ argument that the devotion of additional bandwidth to carriage of duplicative broadcast streams unconstitutionally discriminates against cable networks by treating must-carry broadcast stations as a favored class of “speakers,” concluding that Congress did not intend that cable networks “deserve protections on par with must-carry broadcasters.”

The Order is based in part on the Commission’s belief that cable operators still possess market power, “commanding approximately 69 percent of all MVPD (multichannel video programming distribution) households,” and therefore, continue to “represent the threat to free, over-the-air broadcasting that drove the Turner decisions” upholding the original must-carry requirement. In light of the controversy at the FCC last week over Chairman Kevin Martin’s effort to adopt so-called “70/70” cable regulations based upon questionable market data—which one FCC Commissioner characterized as an attempt to “cook-the-books”—the Order’s reliance on this market data may present another basis for a legal challenge.

The Order concludes that, after Feb. 17, 2009, cable operators (not broadcasters) should bear the entire cost of downconverting digital must-carry signals on hybrid systems for analog retransmission. The Order also clarifies that the new rules apply only to “must-carry” stations and that cable operators can reach alternative arrangements with stations electing “retransmission consent.” However, on a practical level, it is unlikely that many retransmission stations will agree to lesser carriage rights than those afforded must-carry stations. The Commission expressly declined to consider expanding the carriage rights associated with low-power television stations in this proceeding.

Significantly, as a result of a last-minute compromise with the cable industry, the FCC’s expanded digital must-carry rules will automatically sunset on Feb.17, 2012, “unless the Commission extends the requirements in a proceeding to be conducted during the year proceeding such date.” Given the reasoning in this Order, the Commission may end up extending the dual must-carry obligation, as it has done with the program-access rules, but it is also possible that a future Commission, confronted with intervening technological developments, will allow the dual must-carry requirement to sunset in 2012.

In recognition of the burden the new dual must-carry regime imposes on cable systems with limited capacity, the Order establishes a limited waiver mechanism. Cable systems with activated channel capacity of 552 MHz or less may apply for a waiver of the new carriage rules where compliance would be particularly difficult. The Order does not explain why an automatic exemption was not created, nor does it detail precisely what an operator must demonstrate to secure a favorable waiver ruling.

“Material degradation” standards

The must-carry statute requires cable operators to retransmit must-carry signals without “material degradation.” In this proceeding, the FCC considered and rejected a proposal to adopt an “objective” standard that would have required cable operators to carry “all bits” of the digital content broadcast by must-carry stations. The Commission recognized that the proposal was unnecessarily burdensome and would negate the benefits otherwise associated with digital compression technology. The Commission explained that “the all content bits approach is likely to stifle innovation and the very efficiency that digital technology offers and may be more exacting a standard than necessary to ensure that a given signal will be carried without material degradation.”

As a result of this ruling, cable operators can continue employing reasonable compression technologies to maximize the capacity available for additional programming services and other advanced services, such as voice and Internet. The Commission reaffirmed its 2001 statement that “the issue of material degradation is about the picture quality the consumer receives and is capable of perceiving.” The Order specifically notes that, as there have been no more than two “material degradation” complaints filed since the “subjective” test was adopted in 1992, and both of those cases were dismissed, there is no need to adopt a new, rigorous “objective” test to evaluate material degradation.

Although the Commission rejected the “all bits” proposal, it did clarify that cable operators will be required to carry “high definition” broadcasts in “high definition.” It also clarified that cable operators will not be considered to be in breach of the “material degradation” standard when they downconvert digital signals to analog to comply with the new dual must-carry obligation.

Notice of proposed rulemaking

The NPRM seeks comment on a handful of issues that require further examination in light of the new dual must-carry rules. For example, it asks how the 1992 Cable Act’s channel positioning rules should apply when carrying digital signals. It specifically asks whether it will be technically possible for cable operators to map digital channels so that, from the customer’s perspective, alternative digital versions of a particular broadcast signal, i.e., both HD and standard definition (SD), appear on the same cable channel.

The NPRM also asks whether the FCC should adopt formatting standards for downconverting digital broadcasts to an analog format. Alternatively, it asks whether broadcasters or cable operators should be allowed to determine the format of downconverted signals.

Finally, the NPRM suggests some willingness to consider additional rule changes that would “minimize the economic impact for small cable operators while still complying with the statutory requirements.” The NPRM reflects particular concern with, and skepticism of, a claim by the American Cable Association regarding the high cost of carrying an HD broadcast station. The Order emphasizes the waiver mechanism already adopted for systems with an activated channel capacity of 552 MHz or less, but it does ask whether it would be appropriate to adopt any additional relief for small cable operators.

Comments will be due 30 days after the NPRM is published in the Federal Register. If you have questions about the impact of the FCC’s new post-DTV transitional must-carry rules or wish to file comments on the NPRM, please let us know.