With the FCC preparing to decide that the cable industry is sufficiently powerful to warrant regulations per its so-called 70/70 threshhold, the question on the cable industry's collective minds is: "Where did that second 70 come from?
According to the threshhold, the commission can adopt regulations to encourage "diversity of information sources," when cable's household penetration exceeds 70% and the percentage of those households take the service also exceeds 70% (for cable systems with at least 36 channels. The invocation of the rule would give the FCC the power to impose programming conditions such as a la carte, lowering rates for leased access, and enforcing cable ownership caps at 30% of households.
Cable long ago passed the 70% penetration point, so there is no argument about cable's meeting the first half of the test.
But in the FCC's last "annual" report on cable competition, which was in early 2006 and so based on data collected in 2005, the commission said it remained an open question whether the second prong of the 70/70 threshhold had been met.
Using its own price survey data, the commission said that the percentage of subscribers had actually fallen to 54% from 54.7% the year before. But it also had at least one commenter, cable competitor SBC (AT&T), which put the figure well beyond the 70% at 77.2%, which the cable industry labeled "Rube Goldberg calculations." Other 2005 estimates ranged from 63% to a little south of 69%.
"The question of whether the second prong has been met is less clear." said the FCC in the report, "since at least one party finds that the benchmark has been exceeded and some other estimates, while under 70 percent, are very close to that threshold. Given these circumstances and the fact that all available data sources are imprecise to some extent, it is possible that the second prong of the 70/70 benchmark has been met."
The FCC then asked for input on how the number should be calculated. For example, should the universe be all homes, as it is now interpreted, or only those with TVs. It also asked for suggestions of how to regulate cable if it does conclude the threshhold has been met.
The National Cable & Telecommunications Association had no suggestions for regulation, but it had a lot to say about the need, more precisely the lack of it, for those regs. Quoting from the FCC's own report, NCTA pointed out that the commission had concluded that "“competition in the delivery of video programming services has provided consumers with increased choice, better picture quality, and greater technological innovation." NCTA pointed out that the FCC's own data had shown cable's share declining, and said the trend was likely to continue. Congress' fear of cable domination, which spurred the 70/70 test has been "overtaken" by marketplace forces, NCTA said, with the test likely never to be met.
Even when the test is met, NCTA argues, it only applies to changes regarding leased access, since the test falls under that category in the Communications Act. AFter news of the 70/70 test invocation was reported by The New York Times,NCTA President Kyle McSlarrow suggested the FCC was twisting figures to justify more cable regulation.
News of Martin's suggestion the threshhold had been met was sparking cries of "show us the data" from Wall Street.
One issue analysts are questioning is whether the cable industry actually meets the criteria this rule is based on. “The basis for invocation of the 70/70 rule appears untenable,” writes Sanford Bernstein analyst Craig Moffett, who estimates cable penetration of cable-available households is between 50 and 54%. While Martin contends the industry does exceed both 70% availability and 70% penetration, the data supporting that is not expected to be available until the report is released.
Deutsche Bank analyst Doug Mitchelson questions whether enforcement of the rule will stand up in a more competitive environment for cable with the emergence of satellite and telcos, since the rule was originally drafted to ensure competition. “This is an old law that was created when cable was a monopoly,” Mitchelson states.
Andrew Schwartzman of Media Access Project, which believes the threshhold has been met, took issue with the Wall Street characterization that the 70/70 test was about promoting competition. Instead, he said, it was to protect program diversity in the event cable achieved too great market power.
He also suggests that the reasons the FCC data has yet to conclude the 70% subscriber penetration figure has not been met is that the figures aren't good.
The FCC has yet to put out its 2007 multichannel video competition report, but that is where Martin will announce that the FCC has concluded the threshhold has been met. Schwartzman says he believes Martin has taken Government Accountability Office criticisms of the FCC's to heart. "Martin has followed the recomendations of the GAO to come up with the new numbers and, guess what? they come up with higher numbers than [former Media Bureau chief] Ken Ferree had."
The news of possible new cable regs should be a negative for cable stocks, which have been under significant pressure throughout earnings season as they reported subscriber losses in the third quarter. Though they are only off marginally Monday through midday trading, this latest regulatory pressure is just one more strike against the struggling sector. Oppenheimer analyst Thomas Eagan says that while it is unclear whether Martin is using the threat of new regulation as a negotiating tactic to gain concessions on programming with the industry, “the regulatory risk for the cable operators will likely get worse before we know the answer.”