CABLE OPERATORS AGREE WITH FCC CONDITIONS ON NEWS CORP./DIRECTV DEAL
Cable operators generally were pleased with the conditions the FCC placed on News Corp.’s acquisition of Hughes Electronics and DirecTV, having feared the newly combined company would use its leverage to shut cable operators out of some programming. In a joint statement, Advance/Newhouse, Cable One, Cox and Insight said the arbitration mechanisms imposed by the FCC had “greatly reduced the danger that the transaction itself will do harm to consumer prices.” The 4 companies had joined forces in filing comments on the deal, and together they still worried that News Corp. would remain a “formidable presence.” EchoStar congratulated News Corp. on its purchase but said consumers can “count on” its own Dish Network to offer an alternative to “goliaths such as Time Warner, Comcast, and now News Corp.”
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The concern among cable operators was that they would have undue pressure brought on them in negotiations to carry Fox broadcast and cable networks or that News Corp. might pull the programming altogether and rely on its vertical integration, allowing only DirecTV carriage. The cable companies said that now, if carriage negotiations between a News Corp. broadcast or satellite-delivered program service and a cable system or DBS provider broke down and a service interruption occurred, both News Corp. and the cable system or DBS provider stood to lose. After completion of the takeover, the cable operators said, News Corp.’s losses would be offset by gains at DirecTV, “giving News Corp. substantial additional power to raise prices for Fox programming to DirecTV, EchoStar and cable alike. The harm would be particularly severe with respect to the Fox broadcast services and regional sports networks, which clearly are ‘must-have’ programming.”
The companies announced Mon. that the deal, which allowed News Corp. to acquire a 34% interest in Hughes, including DirecTV and PanAmSat -- was completed. An official close to the situation said while 34% wasn’t technically a controlling interest, News Corp. would have control of Hughes as a part of the original agreement. The FCC’s approval of the deal was conditioned on: (1) Mandated arbitration of retransmission consent and regional sport network carriage disagreements. (2) Provision of local-into-local service to 130 DMA’s by the end of 2004. (3) Provision of News Corp.’s existing and future cable programming services on a nonexclusive, nondiscriminatory basis. The same commitment must be made for News Corp.’s broadcast TV stations. The Dept. of Justice (DoJ) said Fri. it wouldn’t challenge the deal and said FCC conditions would “reduce News Corp.’s ability to withhold, or threaten to withhold, its programming content from cable television and DBS providers that currently compete with DirecTV.”
The cable MSOs said they were pleased the Commission had adopted safeguards to address those concerns. By providing for “last offer” arbitration as an alternative to interruptions of service, the FCC reduced the danger, they said. “We believe that arbitration proceedings will be rare and parties will be able to reach appropriate carriage arrangements through private negotiations without the threat of service interruptions,” they said.
NCTA Pres. Robert Sachs said the FCC’s approval of News Corp’s acquisition of DirecTV should “put to rest any remaining questions about the robustness of competition in the multichannel video marketplace. Rupert Murdoch is a tough competitor.” He said cable operators also were “very well positioned” to compete by offering consumers a variety of services not provided by satellite, including high-speed Internet and cable telephony.
The American Cable Assn., which lobbied for concessions on Fox’s ability to use retransmission consent and programming against independent and small cable operators, described the FCC conditions as a big win for its team. “The FCC’s order is a milestone in recognizing the unique concerns of independent cable and the harms that can be caused by the merger of Fox and DirecTV,” ACA Pres. Matt Polka said. “We applaud the FCC’s efforts to limit Fox’s ability to use DirecTV, retransmission consent and Fox programming for anticompetitive purposes.”
Specifically, the FCC’s order said that when dealing with cable companies with fewer than 5,000 subscribers, Fox must either elect must-carry or negotiate retransmission consent for its owned broadcast stations, but without any requirements for cash compensation or carriage of affiliated Fox programming other than the broadcast signal. The FCC approved the ability of independent cable to designate an entity, such as the National Cable TV Cooperative, to collectively bargain with Fox for retransmission consent and for Fox’s regional sports networks. The order requires Fox to negotiate with that entity, which will have all of the rights given to any other cable operator or multivideo programming distributor.
For cable companies with more than 5,000 subscribers, the order permits them to challenge through arbitration any allegedly onerous retransmission consent terms proposed by Fox. If there is a dispute with Fox over retransmission consent, Fox can’t pull the signal of a Fox O&O station or a Fox regional sports network currently carried on the cable system.
The FCC didn’t impose a condition proposed by ACA that would have required DirecTV to negotiate with and provide independent cable access to “local-into-local” broadcast signals. Polka said independent operators would continue to push for the ability to bargain for and obtain access to such signals where over-the-air broadcast reception was weak.
Overall, Polka said, the FCC’s order is a “key step in recognizing the harms caused by further media consolidation and taking action to correct them.” Nevertheless, ACA said it would continue to try to show Congress and the FCC how the actions of some large conglomerates “harm the viewing public through higher costs and lack of choice.” ACA recently joined with Cox in a fight with Disney-owned ESPN over carriage rates.
In a report issued Mon., Legg Mason said it wasn’t surprised with either FCC or DoJ approval of the deal or with the conditions. It said only the arbitration condition was slightly controversial, considering RSNs and broadcast signals had to be made available during arbitration and because it was mandated for only 6 years: “We understand that one of the dissenting commissioners had tried to get the sunset removed but that News Corp. had only agreed to the condition with the sunset in place.” Arbitration is only a “mild negative” for the companies, Legg Mason said, but it will serve as a precedent for future deals.
TelAstra Pres. Roger Rusch said arbitration was a particularly good solution considering the number of disputes that came up in renegotiations: “The risk is that sometimes and arbitrator can be arbitrary and capricious.” Charles Hewitt, former pres. of the Satellite Bcstg. & Communications Assn. (SBCA), said that while arbitration “won’t have a major impact on the ability of DirecTV” to function, it was doubtful News Corp. would try to withhold its RSNs from operators: “Most companies want as much expanded distribution as they can get. However, that doesn’t mean exclusive services won’t be made available in the future.” Hewitt said there was less a danger that News Corp. would withhold its RSNs than cable operators.
Stephen Blum of Tellus Venture Assoc. said the conditions definitely didn’t put DirecTV at a disadvantage and wouldn’t be harmful to the company: “The primary conditions have to do with competitive issues and if you take News Corp.’s statements at face value, these should be a problem.” Blum also commented on the local-into-local condition, saying the 130 DMA requirement was reasonable. “There’s been all kinds of different technical proposals for providing local-into-local to all 210 DMAs. Putting up market 200 on a satellite has never made economic sense because DirecTV doesn’t have the capacity. Technically speaking, there’s no elegant solution to having one satellite and getting all local markets,” Blum said.
Consumer groups reacted much more strongly to the approval. Jeffrey Chester of the Center for Digital Democracy (CDD) said the Commission hadn’t grappled “with more important issues” raised by the deal. He said that while a recent General Accounting Office (GAO) report pointed out that DBS wasn’t an effective cable competitor, the FCC hadn’t created conditions that would require DirecTV to compete. “The principal remedy… was to ensure capacity for nonaffiliated programmers at the national and local level that do not have any market power” which would increase diversity and reduce Rupert Murdoch’s power, Chester said. Mark Cooper of the Consumer Federation of America said approval wasn’t framed with the proper conditions: “I don’t think this will do much good for consumers. My original take was that the consumer issue was much bigger” than the economics of the deal.
The National Rural Telecom Co-op (NRTC) said it was pleased the Commission had approved the deal with conditions, particularly because it hoped News Corp. would bring local programming to more rural consumers. While the organization agreed with FCC Comr. Adelstein that DirecTV should provide local channels to consumers in all 210 DMA’s, NRTC Pres. Robert Phillips said: “We are committed to exploring options with the new owners of DirecTV to ensure that local programming be provided to DirecTV subscribers regardless of where they live. We feel that this is not only sound public policy but also makes good business sense.” NRTC recently reached a settlement with DirecTV that required the latter to continue program distribution agreements through June 2008 (CD Aug 12 p3).