Federal judges opened the door for more TV industry consolidation Friday by throwing out the FCC's 30% cap on one cable company's share of the pay TV market.
Although the judges' decision directly impacts only cable companies, their ruling also casts doubt on validity of the FCC's broadcast ownership cap, which bars TV station owners from reaching more than 35% of the U.S. audience.
The ruling, handed down by the federal appeals court in Washington, came one week after the Supreme Court uphold the 1992 law that served as the basis for the FCC's cable ownership limits. But in ordering the FCC to establish new limits the lower court said that the FCC failed explain why the specific restrictions were justified, given the infringement on cable companies' free speech rights.
The suit against the FCC was waged by Time Warner and AT&T.
"The FCC must still justify the limits that it has chosen as not burdening substantially more speech than necessary," wrote Judge Stephen Williams. "The FCC must show a record that validates the regulations, not just the abstract statutory authority." Williams also suggested that a 60% limit might be more appropriate.
The decision also ordered the FCC to set new channel occupancy limits, which currently bar a cable company from devoting more than 40% of its channel lineup to programming it owns. The channel lineup restrictions seems to have been "plucked from thin air," Williams added.
The judges also ordered the FCC to rewrite some of the ways it tallies partial investments in cable systems toward the ownership cap. For starters, the judges found that the FCC hasn't justified why limited partnerships, generally exempt from the cap, must be counted if the limited investor supplies programming to the partnership. The court also said the FCC showed no reason for its decision last year to eliminate the "single majority shareholder" exemption, which shields holdings of minority investors from attribution when one partner controls 51% or more of the partnership.
AOL Time Warner officials said the decision made for a "good day for cable operators First Amendment rights."
Consumer groups predicted the decision would squelch opportunities for independent cable programmers. "It is now up to the FCC to create a new limit that will protect consumers from media consolidation," said Cheryl Leanza, deputy director, Media Access Project
Some broadcasters were cheering the court's ruling because it appeared to leave their industry's ownership cap vulnerable to a court-ordered re-write as well. "I think it has pretty significant importance for us," said one industry source who would like to see the 35% station cap lifted. News Corp., owner of Fox Television Stations, has a challenge to the broadcast cap pending before the same federal panel.
Besides Fox, the other Big Four networks also want to see the cap raised or eliminated and the court's ruling gives them powerful judicial backing against political muscle carried by the network affiliates and smaller station groups, backed by the powerful National Association of Broadcasters, that would like to preserve the broadcast cap.
Although the decision has no immediate effect on broadcasters, it's unclear whether immediate relief will be delivered to the one cable company currently impaired by the ownership cap. AT&T, with a 42% share of multichannel subscribers is the only company exceeding or even near the cap. As part of the government's approval for the company's acquisition of MediaOne Group, AT&T agreed by May 19 sell enough cable businesses to get below the cap.
FCC officials said when the merger was approved that they would hold AT&T to the deal regardless of how the court case turned out. But the company is free to ask that merger terms be altered at any time and the FCC's view of ownership caps may change radically since Michael Powell took the chairman's seat from William Kennard.
Powell wouldn't comment on the case after it was released Friday, but the night before said he took a dim view of ownership caps in general because they "almost always outlive their usefulness.
AT&T officials would only say they were "pleased" by the decision but wouldn't predict whether it would impact their divestiture plans. - Bill McConnell