FTC Staff Comment Before the Federal Communications Commission In the Matter of Reexamination of the Effective Competition Standard for the Regulation of Cable Television Basic Service Rates

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BEFORE THE 	t,: 	. -..,.......__·5·-.·~........
FEDERAL COMMUNICATIONS 	COMM~S
WASHINGTON, 	D.C. 	20554
In the Matter 	of
Reexamination 	of 	the 	Effective
Competition 	Standard 	for 	the
Regulation 	of 	Cable Television
Basic Service 	Rates
carriage 	of 	Television
Broadcast 	Signals 	by
Cable Television Systems
)
)
)
)
)
)
)
)
)
)
MM Docket 	No. 	90-4
Reply 	Comment 	of 	the 	Staff 	of
the 	Bureau 	of 	Economics 	and
the 	San 	Francisco Regional 	Offiqe
of 	the 	Federal 	Trade 	Commission
November 	26, 	1991
• This 	reply 	comment 	represents 	the views 	of 	the 	staff 	of 	the
Bureau 	of 	Economics 	and 	the 	San 	Francisco 	Regional 	Office 	of 	the
Federal 	Trade 	Commission. 	They 	are 	not 	necessarily 	the 	views 	of
the 	Commission or those 	of 	any 	individual 	Commissioner. 	Inquiries
regarding this comment should be directed to Michael Vita 	(202-326-
3493) 	of 	the 	FTC's 	Bureau 	of 	Economics 	or 	John 	Wiegand 	(415-744-
7920) 	of 	the 	FTC'S 	San 	Francisco 	Regional 	Office.

Table 	of 	Contents
I. 	Introduction 	....
II. 	Expertise 	of 	the 	Staff 	cf 	the 	FTC 	.
III. 	Empirical 	Evidence 	on 	Cable 	systems' 	Carriage
Decisions 	. 	. 	. 	. 	. 	. 	. 	. 	. 	. 	. 	. 	. 	. 	. 	. 	.
1
5
7
IV. 	Potential 	Benefits 	of 	Must-Carry 	. . . . . . 	. 	. 	16
A. 	Preventing 	the 	Exercise 	of 	Market 	Power 	in
Advertising Markets 	. 	. 	. 	. 	. 	. 	. 	. 	. 	. 	. 	16
B. 	Eliminating 	other 	Distortions 	in 	Cable 	Systems'
carriage 	Choices 	. 	. 	. 	. 	• 	• 	. 	25
V. 	The 	Costs 	of 	a 	Must-Carry 	Rule
VI. 	Conclusion
. 	. 	. . . . . . 	26
29

Executive 	Summary
Signal 	carriage 	("must-carry") 	rules 	compel 	cable 	systems 	to
carry 	local 	broadcast 	signals. 	In 	this 	Second 	Further 	NPRM, 	the
FCC 	seeks 	to 	determine 	whether 	signal 	carriage 	requirements
should 	now be 	adopted.
In 	this 	reply 	comment, 	the 	staff 	of 	the 	FTC 	recommends 	that
the 	FCC 	take 	account 	of 	the 	welfare 	of 	consumers 	in 	assessing 	the
desirability 	of 	new 	signal 	carriage 	requirements. 	Under
conventional 	economic 	criteria 	for 	measuring 	consumer 	welfare,
new 	must-carry 	rules 	could 	be 	justified 	only 	if 	three 	conditions
are 	met. 	First, 	non-carriage 	of 	local 	signals 	should 	be 	shown 	to
occur 	and 	potentially 	to 	raise 	sufficient 	concern 	to 	require 	a
broad-based 	regulatory 	remedy. 	There 	would 	be 	little 	reason 	to
compel 	cable 	systems 	to 	carry 	local 	signals 	if 	profit-seeking
behavior 	induces 	them 	to 	carry 	the 	vast 	majority 	of 	these 	signals
voluntarily. 	Second, 	if 	significant 	non-carriage 	of 	local
signals 	occurs, 	it 	should 	be 	demonstrated 	to 	be 	the 	consequence
of 	some 	market 	failure, 	such 	as 	the 	exercise 	of market 	power 	by
the 	cable 	system. 	If 	instead 	non-carriage 	reflects 	cable
systems' 	efforts 	to 	offer 	consumers 	a 	preferred 	array 	of
programs, 	must-carry 	rules 	could 	impair 	the 	systems' 	ability 	to
serve 	their 	customers. 	Finally, 	and 	related 	to 	the 	first 	point,
if 	non-carriage 	results 	from 	market 	failure 	or 	market 	power, 	it
should 	be 	shown 	that 	the 	net 	effect 	of 	the 	proposed 	remedy 	would
likely 	benefit 	consumers.
This 	comment 	uses 	information 	from 	three 	sources 	to 	address
these 	issues. 	These 	are: 	(1) 	the 	FCC's 	1988 	Cable 	System
Broadcast 	Carriage 	Survey 	Report; 	(2) 	the 	1990 	GAO/FCC 	Follow-Up
National 	Survey 	of 	Cable 	Television 	Rates 	and 	Services; 	and 	(3)
the 	staff 	of 	the 	FTC's 	1986 	analysis 	of 	the 	carriage 	decisions 	of
private 	cable 	systems 	(i. e., 	"SMATVs"). 	A review 	of 	this
empirical 	evidence 	shows 	that 	most'·cable 	systems 	voluntarily
carryall 	of 	their 	former 	must-carry 	stations. 	Most 	episodes 	of
non-carriage 	appear 	to 	have 	involved 	distantly-located 	(and
duplicated) 	network 	signals 	and 	relatively 	low-rated 	commercial
independent 	stations. 	Such 	actions 	would 	be 	consistent 	with
competitively-determined 	carriage 	decisions, 	and 	would 	suggest
generally 	that 	non-carriage 	d~cisions have 	not 	been 	motivated 	by
anticompetitive 	considerations, 	such 	as 	the 	acquisition 	of 	market
power 	in 	advertising 	markets. 	If 	this 	inference 	is 	correct,
requiring 	systems 	to 	carryall 	local 	broadcast 	signals 	could
displace 	programming 	cable 	subscribers 	value 	more 	highly 	and
could 	reduce 	incentives 	to 	develop 	cable 	programming. 	Under
these 	circumstances, 	consumer 	interests 	would 	unlikely 	be 	served
by 	reimposing 	must-carry 	obligations 	on 	cable 	television 	systems.
11

BEFORE THE
FEDERAL COMMUNICATIONS 	COMMISSION
WASHINGTON, 	D.C. 	20554
In 	the Matter 	of
Reexamination 	of 	the 	Effective
Competition Standard 	for 	the
Regulation 	of 	Cable Television
Basic 	Service 	Rates
Carriage 	of 	Television
Broadcast 	Signals 	by
Cable 	Television Systems
)
)
)
)
)
)
)
)
)
)
MM Docket No. 	90-4
Reply 	Comment 	of 	the 	Staff 	of
the 	Bureau 	of 	Economics 	and
the 	San 	Francisco Regional 	Offi~e
of 	the 	Federal 	Trade 	Commission
November 	26, 	1991
I. 	Introduction
The 	staff 	of 	the 	Federal 	Trade 	Commission 	appreciates 	this
opportunity 	to 	submit 	a 	reply 	comment 	in 	response 	to 	the 	Federal
Communications 	Commission's 	Report 	and 	Order 	and 	Second 	Further
1 This 	reply 	comment 	represents 	the views 	of 	the 	staff 	of 	the
Bureau 	of 	Economics 	and 	the 	San 	Francisco 	Regional 	Office 	of 	the
Federal 	Trade 	Commission. 	They 	are 	not 	necessarily 	the 	views 	of
the 	Commission or those 	of any 	individual 	Commissioner. 	Inquiries
regarding this comment should be directed to Michael Vita 	(202-326-
3493) 	of 	the 	FTC's 	Bureau 	of 	Economics 	or 	John 	Wiegand 	(415-744-
7920) 	of 	the 	FTCr s 	San 	Francisco 	Regional 	Office.

Notice 	of 	Proposed 	Rulemaking 2 ("Second 	Further 	NPRM")
concerning 	reinstituting 	signal 	carriage 	requirements 	("must-
carry" 	rules) 	for 	cable 	television 	systems.
The 	previous 	must-carry 	rules 	compelled 	cable 	systems 	to
carry 	local 	broadcast 	signals. 	They 	were 	first 	adopted 	more 	than
twenty 	years 	ago, 	when 	cable 	television's 	principal 	function 	was
to 	provide 	improved 	reception 	of 	local 	television 	signals 	(i.e.,
"antenna 	service"). 	These 	rules 	were 	held 	unconstitutional. 3
The 	purpose 	of 	the 	Second 	Further 	NPRM 	is 	to 	determine 	whether
signal 	carriage 	requirements 	are 	needed 	in 	the 	marketplace 	now,
and 	if 	so, 	whether 	they 	could 	be 	crafted 	to 	overcome
constitutional 	objections.'
In 	this 	reply 	comment 	the 	staff 	of 	the 	FTC 	reviews 	evidence
bearing 	on 	cable 	systems' 	carriage 	choices 	in 	the 	absence 	of
must-carry 	regulation. 	This 	evidence 	suggests 	that 	although
must-carry 	rules 	have 	not 	been 	in 	effect 	for 	several 	years, 	most
of 	the 	broadcast 	stations 	that 	would 	have 	been 	entitled 	to 	must-
carry 	status 	are 	still 	carried 	by the 	cable 	systems 	that 	formerly
were 	required 	to 	carry 	them. 	Further, 	the 	local 	broadcast
2 See 	Report 	and 	Order 	and 	Second 	Further 	Notice 	of
Proposed 	Rulemakinq 	In 	the 	Matter 	of 	Reexamination 	of 	the
Effective 	Competition 	Standard 	for 	the 	Regulation 	of 	Cable
Television 	Basic 	Service 	Rates 	and 	the 	carriage 	of 	Television
Broadcast 	Signals 	by 	Cable 	Television 	Systems, 	Docket 	Nos. 	90-4
and 	84-1296, 	July 	12, 	1991.
3 See 	CenturY 	Communications 	CorD. 	v. 	FCC, 	835 	F.2d 	292
(D.C. 	Cir. 	1987), 	cert. 	denied, 	486 	U.S. 	1032 	(1988); 	and 	Quincy
Cable 	TV. 	Inc. 	v. 	FCC, 	("Quincy") 	768 	F.2d 	1434 	(D.C. 	Cir.
1985), 	cert. 	denied, 	476 	U.S. 	1169 	(1986).
, 	Second 	Further 	NPRM, 	'111.
2

signals 	that 	were 	dropped 	from 	carriage 	tend 	to 	be 	either 	those
of 	relatively 	remote 	(and 	duplicated) 	network 	stations, 	or 	local
stations 	that 	few 	viewers 	watch. 	These 	findings 	are 	consistent
with 	the 	proposition 	that 	cable 	systems 	are 	trying 	to 	carry 	the
programming 	their 	customers 	most 	want 	to 	watch. 	If 	so, 	requiring
cable 	systems 	to 	carry 	unwanted 	broadcast 	signals 	could 	displace
programming 	cable 	subscribers 	value 	more 	highly 	and 	could 	reduce
incentives 	to 	develop 	cable 	programming.
The 	FCC 	adopted 	the 	previous 	must-carry 	rules 	in 	response 	to
two 	concerns. 	First, 	the 	FCC 	viewed 	a 	cable 	system's 	failure 	to
carry 	local 	broadcast 	stations 	as 	an 	"unfair 	competitive
practice."s 	Second, 	the 	FCC 	believed 	that 	such 	a 	failure 	would
adversely 	affect 	the 	growth 	of 	local 	broadcast 	stations 	as
outlets 	for 	local 	expression. 6
This 	comment 	addresses 	certain 	issues 	raised 	by 	the 	first
concern 	-- 	whether 	non-carriage 	is 	now 	a 	competition 	problem 	that
calls 	for 	a 	regulatory 	solution. 	We 	do 	not 	address 	other
policies, 	such 	as 	the 	relationshippetween 	non-carriage 	and 	the
vitality 	of 	outlets 	for 	local 	expression, 	that 	may 	be 	important
to 	the 	FCC. 7 We 	note, 	however, 	that 	in 	recent 	policy
statements, 	the 	FCC 	appears 	to 	have 	taken 	account 	of 	similar
S In 	re 	CATV, 	2 	FCC 	2d 	725, 	736 	(1966) 	(Rulemaking, 	Second
Report 	and 	Order).
6 lQ.
7 	Specifically, 	this 	comment 	addresses 	issues 	relating 	to
economic 	efficiency 	and 	competition, 	using 	price 	theory 	and
welfare 	economics 	as 	understood 	in 	the 	interpretation 	and
enforcement 	of 	the 	antitrust 	laws.
3

..
factors 	through 	a 	competitive, 	consumer-welfare 	centered
approach. 	For 	example, 	in 	Policies 	Regarding 	Detrimental 	Effects
of 	Proposed 	New 	Broadcast 	stations 	on 	Existing 	stations,8 	the
FCC 	announced 	that 	economic 	harm 	to 	existing 	stations 	would 	no
longer 	be 	considered 	relevant 	to 	the 	decision 	to 	grant 	a 	license
to 	a 	new 	station. 9 In 	National 	Association 	of 	Broadcasters 	v.
FCC,10 	this 	principle 	was 	applied 	to 	issues 	involving
competition 	among 	different 	methods 	of 	signal 	transmission
(direct 	broadcast 	satellite 	service 	and 	local 	broadcast
• 	) 	11
serv~ce 	. 	In 	addition, 	recent 	interpretations 	of 	the 	FCC's
9
responsibility 	to 	allocate 	radio 	facilities 	under 	§ 	307(b) 	of 	the
12
Communications 	Act 	suggest 	that 	this 	obligation 	should 	be
fulfilled 	by 	considering 	the 	needs 	of 	consumers 	in 	all
1 	1 · t' 	13	oca 	~ 	~es.
8 3 	F.C.C. 	Rec. 	638 	(1988).
The 	FCC 	had 	earlier 	adopted 	this 	policy 	in 	a 	limited
set 	of 	matters. 	See, 	e.g., 	Application 	of 	Satellite 	Television
Corp., 	91 	F.C.C. 	2d 	953,976 	(198~); 	Revision 	of 	FM 	Assignment
Policies 	& 	Procedures, 	90 	F.C.C.' 2d 	88, 	98 	(1982); 	see 	also
National 	Association 	of 	Independent 	Television 	Producers 	&
Distributors 	v. 	FCC, 	502 	F.2d 	249, 	256 	(2d 	Cir. 	1974) 	(FCC 	must
incorporate 	the 	nation's 	policy 	favoring 	competition 	in 	its
regulation 	of 	broadcasting).
10 740 	F.2d 	1190 	(D.C. 	Cir. 	1984).
11 740 	F.2d 	1190, 	1198 	(D.C. 	Cir. 	1984) 	("existing 	systems
[of 	broadcasting] 	. 	. 	. 	have 	no 	entitlement 	that 	permits 	them 	to
deflect 	competitive 	pressure 	from 	innovative 	and 	effective
technology").
12 47 	U.S.C. 	§ 	307(b) 	("localism 	policy").
13 See, 	~, 	National 	Association 	of 	Broadcasters 	v. 	FCC,
740 	F.2d 	1190, 	1198 	(D.C. 	Cir. 	1984) 	("The 	ultimate 	touchstone
(continued ... )
4

II. 	Expertise 	of 	the 	Staff 	of 	the 	FTC
The 	FTC 	is 	an 	independent 	regulatory 	agency 	responsible 	for
maintaining 	competition 	and 	safeguarding 	the 	interests 	of
14 	1	consumers. 	In 	response 	to 	requests 	by 	federa 	, 	state, 	and
local 	government 	bodies, 	the 	staff 	of 	the 	FTC 	often 	analyzes
regulatory 	or 	legislative 	proposals 	that 	may 	affect 	competition
or 	the 	efficiency 	of 	the 	economy. 	In 	the 	course 	of 	this 	work, 	as
well 	as 	in 	antitrust 	and 	consumer 	protection 	research, 	nonpublic
investigations, 	and 	litigation, 	the 	staff 	applies 	established
principles 	and 	recent 	developments 	in 	economic 	theory 	to
competition 	and 	consumer 	protection 	issues. 	The 	staff 	of 	the 	FTC
previously 	has 	commented 	on 	various 	issues 	before 	the 	FCC 	on
. 	bl 	1" 	15	matters 	relat~ng to 	ca 	e 	te 	ev~s~on.
13 ( ••• cont inued)
for 	the 	FCC 	is 	thus 	the 	distribution 	of 	service, 	rather 	than 	of
licenses 	or 	stations; 	the 	constituency 	to 	be 	served 	is 	people,
not 	municipalities."); 	Main 	studio 	& 	Program 	Origination 	Rules,
1 	F.C.C. 	Rec. 	536 	(1986) 	("Primary 	emphasis 	should 	be 	on
whether 	the 	station 	is 	serving 	the 	needs 	of 	the 	community 	and
not 	where 	the 	program 	originates. "').;.
14 15 	U.S.C. 	§§ 	41 	- 	59.
15 See, 	e.a .. 	Comment 	of 	the 	Staff 	of 	the 	Bureau 	of
Economics 	and 	the 	San 	Francisco 	Regional 	Office 	In 	the 	Matter 	of
Reexamination 	of 	the 	Effective 	Competition 	Standard 	for 	the
Regulation 	of 	Cable 	Television 	Basic 	Service 	Rates, 	MM 	Docket 	No.
90-4, 	April 	24, 	1991; 	Comment 	of 	the 	Staff 	of 	the 	Bureau 	of
Economics 	and 	the 	San 	Francisco 	Regional 	Office 	In 	the 	Matter 	of
Competition, 	Rate 	Deregulation, 	and 	the 	Commission's 	Policies
Relating 	to 	the 	Provision 	of 	Cable 	Television 	Service, 	MM 	Docket
No. 	89-600, 	April 	20, 	1990 	("FTC 	Staff 	Cable 	Comment"); 	and
Reply 	Comments 	of 	the 	Bureaus 	of 	Competition. 	Economics. 	and
Consumer 	Protection 	in 	the 	Matter 	of 	Part 	76 	of 	the 	Commission's
Rules 	Concerning 	the 	Carriage 	of 	Television 	Broadcast 	Signals 	by
Cable 	Television 	Systems, 	MM 	Docket 	No. 	85-349, 	February 	25,
1986.
5

In 	assessing 	competitive 	consequences 	of 	actions 	and
policies, 	antitrust 	analysis 	is 	most 	concerned 	about 	the 	welfare
of 	consumers. 	An 	analysis 	based 	on 	conventional 	economic
criteria 	for 	measuring 	consumer welfare'6 would 	set 	three
conditions 	to 	be met 	before 	concluding 	that 	must-carry 	rules 	are
justified. 	First, 	non-carriage 	of 	local 	signals 	should 	be 	shown
to 	occur 	and 	potentially 	to 	raise 	sufficient 	concern 	to 	require 	a
broad-based 	regulatory 	remedy. 	There 	would 	be 	little 	reason 	to
compel 	cable 	systems 	to 	carry 	local 	signals 	if 	profit-seeking
behavior 	induces 	them 	to 	carry 	the 	vast 	majority 	of 	these 	signals
voluntarily. 	Second, 	if 	significant 	non-carriage 	of 	local
signals 	occurs, 	it 	should 	be 	demonstrated 	to 	be 	the 	consequence
of 	some 	market 	failure, 	such 	as 	the 	exercise 	of 	market 	power 	by
the 	cable 	system. 	If 	instead 	non-carriage 	reflects 	cable
systems' 	efforts 	to 	offer 	consumers 	a 	preferred 	array 	of
programs, 	must-carry 	rules 	could 	impair 	the 	systems' 	ability 	to
serve 	their 	customers. 	Finally, 	and 	related 	to 	the 	first 	point,
if 	non-carriage 	results 	from 	marKet 	failure 	or market 	power, 	it
should 	be 	shown 	that 	the 	net 	effect 	of 	the 	proposed 	remedy 	would
likely 	benefit 	consumers.
16 	Economists 	typically 	employ 	a 	measure 	of 	consumer 	welfare
based 	on 	the 	concept 	of 	"consumers' 	surplus." 	See 	Henderson 	and
Quandt, 	Microeconomic 	Theory 	(third 	ed.), 	1980, 	pp. 	49-52.
6
I.

III. 	Empirical 	Evidence 	on 	Cable 	Systems' 	Carriage 	Decisions
Information 	on 	cable 	systems' 	carriage 	decisions 	is
available 	from 	three 	sources: 	(1) 	the 	FCC's 	1988 	Cable 	System
Broadcast 	Carriage 	Survey 	Report 	("Carriage 	Report"); 	(2) 	the
1990 	GAO/FCC 	Follow-Up 	National 	Survey 	of 	Cable 	Television 	Rates
and 	Services 	("Follow-Up 	Survey1') ; 	and 	(3) 	the 	staff 	of 	the 	FTC's
1986 	analysis 	of 	the 	carriage 	decisions 	of 	private 	cable 	systems
(i.e., 	"SMATVs").
., ~
7

Distribution 	of 	Broadcasters, 	by
Number 	of 	Systems 	Denying 	Carriage
(69.3%1
Source: 	FCC Carriage Report
Figure 1
1 system
(10.7%1
5 -t systems (10.7%)
4 s ys tems (1.9%)
3 sys tems 	[2.95l>1
2 systems
['1.5%1
The 	Carriacre 	Report 	is 	the 	mo~t comprehensive 	source 	of
information 	on 	cable 	systems' 	carriage 	choices 	in 	the 	post-must-
carry 	period. 	The 	FCC 	surveyed 	a 	large 	number 	of 	cable 	systems
(4,303) 	and 	broadcasters 	(912) 	to 	determine, 	among 	other 	things,
the 	incidence 	of 	signal 	non-carriage 	among 	stations 	that 	would
have 	been 	entitled 	to 	must-carry 	status 	under 	the 	old 	(pre-1985)
standard. 	Most 	of 	the 	responding 	broadcasters 	(about 	70 	percent)
reported 	that 	they 	had 	not 	been 	denied 	carriage 	by 	any 	cable
system. 	Of 	the 	280 	broadcasters 	reporting 	at 	least 	one 	instance
8

of 	non-carriage, 	most 	were 	denied 	carriage 	on 	three 	or 	fewer
cable 	systems 	(~ 	figure 	1). 	In 	total, 	there 	were 	1,533
,-instances 	of 	non-carriage 	reported 	by 	respondent 	broadcasters. 	I
Almost 	half 	of 	these 	were 	reported 	by 	independent 	co~~ercial
stations, 	approximately 	one-fifth 	by 	noncommercial 	educational
stations, 	and 	the 	remaining 	30 	percent were 	split 	among 	network
affiliates 	and 	"other" 	(e.g., 	religious) 	stations.
The 	Carriage 	Report's 	survey 	of 	cable 	systems 	yields
qualitatively 	similar 	results. 	Most 	cable 	systems 	(about 	80
percent) 	reported 	that 	they 	did 	not 	deny 	carriage 	to 	any 	former
must-carry 	station. 	Of 	those 	systems 	that 	did, 	about 	half 	denied
carriage 	to 	only 	one 	station, 	and 	the 	overwhelming 	majority
(close 	to 	90 	percent) 	denied 	carriage 	to 	three 	or 	fewer 	stations.
About 	two-thirds 	of 	the 	dropped 	stations 	were 	non-network
stations.
The 	1990 	GAO/FCC 	Follow-Up 	Survey 	is 	less 	comprehensive 	than
the 	1988 	Carriage 	Report, 	but 	provides 	qualitatively 	similar
information. 	The 	Follow-Up 	Survey.asked 	respondent 	cable 	systems
for 	information 	on 	the 	number 	of 	"local 	signals" 	available 	in 	the
franchise 	area 	and 	the 	number 	of 	these 	signals 	that 	were 	carried
'8
by 	the 	system. 	According 	to 	the 	Follow-Up 	Survey, 	the 	numbers
of 	over-the-air 	signals 	available 	to 	the 	average 	cable 	subscriber
'7 	If 	a 	broadcaster 	reported 	that 	it 	had 	been 	dropped 	by
two 	cable 	systems, 	this 	would 	count 	as 	two 	instances 	of 	non-
carriage.
18 "Local 	signals" 	were 	defined 	as 	signals 	that 	were 	(1)
"significantly viewed" 	in 	the 	franchise 	area, 	or 	(2) 	"acceptable"
in 	the 	area, 	as 	defined 	by 	the 	FCC.
9

Distribution 	of 	Cable 	Systems
by 	Number 	of 	Dropped 	Stations
(79.8%)
~~~i~~ S i 	s·tations IU%)	2! sta IOns 	[1.2%)
3 stations 	13.0~1
2 sta110ns (4.4%1
station
IIO.a)
Source: 	FCC Carriage Report
Figure 2
in 	1986 	and 	1989 	were 	8.4 	and 	8.9;~respectively.19 	The 	average
number 	of 	local 	signals 	carried 	on 	the 	lowest-priced 	basic
service 	tier 	in 	those 	years 	was 	7.7 	and 	7.9, 	respectively. 	Thus,
this 	survey 	evidence 	suggests 	that, 	even 	without 	being 	required
to 	do 	so 	by 	regulation, 	cable 	systems 	would 	carry most 	of 	the
local 	signals 	available 	to 	subscribers 	over-the-air.
The 	third 	piece 	of 	information 	relevant 	to 	cable 	systems'
carriage 	decisions 	is 	contained 	in 	the 	1986 	Reply 	Comments 	of 	the
19 See 	Follow-Up 	Survey, 	Table 	V.3.
,
, . 	10

· 	k' 	20	staff 	of 	the 	FTC 	in 	the 	prev~ous must-carry 	rulema 	~ng. 	In
this 	submission, 	the 	staff 	of 	the 	FTC 	analyzed 	the 	carriage
choices 	of 	satellite 	master 	antenna 	television 	(SMATV) 	systems
using 	data 	from 	the 	period 	1981-85. 	SMATVs 	are 	private 	cable
systems 	that 	do 	not 	cross 	pUblic 	rights-of-way. 	Because 	SMATVs
never were 	sUbject 	to 	must-carry 	rules, 	the 	staff 	regarded 	their
carriage 	choices 	as 	indicative 	of 	how 	cable 	systems 	might 	behave
in 	the 	absence 	of 	must-carry 	rules. 	All 	of 	the 	SMATVs 	in 	the
sample 	analyzed 	carried 	the 	local 	signals 	of 	the 	three 	network
affiliates. 	Holding 	constant 	the 	system's 	channel 	capacity, 	the
proportion 	of 	local 	signals 	carried 	fell 	somewhat 	as 	the 	number
of 	available 	local 	signals 	increased: 	however, 	a 	large 	proportion
of 	these 	signals 	continued 	to 	be 	carried. 	For 	example, 	when
three 	local 	signals 	were 	available, 	all 	were 	carried; 	when 	nine
local 	stations 	were 	available, 	about 	two-thirds 	were 	carried.
The 	proportion 	of 	local 	signals 	carried 	also 	fell 	with 	increases
in 	the 	number 	of 	alternative 	programming 	sources, 	such 	as
satellite 	channels; 	again, 	howeve~, most 	local 	signals 	continued
"
to 	be 	carried. 21 Thus, 	in 	1981, 	when 	35 	satellite 	channels 	were
available, 	eight 	of 	the 	nine 	local 	stations 	were 	carried; 	later,
when 	45 	satellite 	channels 	became 	available, 	seven 	of 	the 	nine
local 	stations 	were 	carried. 	Overall, 	this 	evidence 	suggests
20 Supra, 	note 	15.
21 	The 	term 	"satellite 	channels"
are 	made 	available 	to 	cable 	systems
ESPN 	and 	CNN).
] ]
refers 	to 	channels 	that
only 	by 	satellite 	(e. g. ,

that 	even 	without 	regulation, 	market 	forces 	will 	lead 	cable
systems 	to 	carry 	most 	local 	stations.
All 	three 	data 	sources 	show 	that 	some 	(although 	limited)
non-carriage 	of 	local 	signals 	occurs. 	However, 	this 	does 	not
imply 	necessarily 	that 	non-carriage 	results 	from 	market 	power 	or
market 	failure 	requiring 	regulatory 	action. 	Instead, 	the
particular 	non-carriage 	decisions 	observed 	could 	be 	the 	result 	of
normal 	competitive 	market 	forces. 	This 	possibility 	becomes 	more
apparent 	upon 	detailed 	examination 	of 	the 	data 	from 	the 	FCC
22
Carriage 	Report. 	These 	data 	suggest 	that 	most 	of 	the 	network
affiliates 	that 	were 	denied 	carriage 	may 	have 	been 	relatively
remote 	stations 	that 	substantially 	duplicated 	the 	programming 	of
another 	network 	affiliate. 	Table 	7 	of 	the 	Carriage 	Report 	shows
that 	in 	379 	out 	of 	595 	instances 	where 	a 	network 	affiliate 	was
denied 	carriage, 	the 	distance 	between 	the 	station 	and 	the 	system
h 	d 	d 	5 	· 1 	23 	Th 	d' 	t 	. 1 	24	ea 	en 	was 	over 	1 	m1 	es. 	e 	mean 	1S 	ance 	was 	59 	m1 	es.
In 	417 	of 	these 	cases, 	the 	dropped 	station 	was 	in 	a 	different
22 	The 	raw 	survey 	data 	were 	provided 	by 	the 	FCC 	to 	the
staff 	of 	the 	FTC.
23 	In 	contrast, 	most 	(78 	percent) 	of 	the 	dropped 	commercial
independent 	stations 	were 	less 	than 	50 	miles 	away; 	the 	mean
distance 	was 	38 	miles. 	For 	pUblic 	and 	"other" 	stations, 	the
mean 	distances 	were 	43 	and 	33 	miles, 	respectively. 	The 	Carriage
Report 	does 	not 	provide 	the 	transmitter-headend 	distance 	for
those 	stations 	that 	were 	still 	carried, 	however, 	and 	thus 	does
not 	itself 	show 	unequivocally 	that 	the 	retained 	stations 	were
closer 	to 	the 	system 	than 	the 	dropped 	stations.
24 Computed 	from 	survey 	response 	data 	provided 	to 	the 	FTC
staff 	by 	the 	FCC.
12

25
"area 	of 	dominant 	influence" 	(ADI) 	from 	the 	cable 	system.
Moreover, 	despite 	dropping 	some 	network 	affiliates, 	these 	cable
systems 	continued 	to 	offer 	their 	subscribers 	roughly 	the 	same
number 	of 	network 	affiliates, 	about 	4, 	as 	did 	those 	systems 	that
did 	not 	drop 	any 	stations. 	The 	decision 	to 	drop 	a 	distantly-
located 	network 	affiliate 	that 	may 	largely 	duplicate 	the
programming 	of 	a 	more 	p~oximate affiliate 	that 	is 	retained 	could
easily 	reflect 	a 	desire 	to 	replace 	one 	program 	service with 	an
alternative 	to 	network 	programming 	that 	is 	more 	preferred 	by 	the
system's 	customers.
In 	the 	case 	of 	pUblic 	television 	stations, 	the 	signals 	that
were 	denied 	carriage 	were 	closer 	to 	the 	cable 	system 	than 	in 	the
case 	of 	commercial 	network 	affiliates 	(43 	miles 	versus 	59 	miles).
However, 	as 	in 	the 	case 	of 	commercial 	network 	affiliates, 	those
systems 	that 	denied 	carriage 	to 	a 	pUblic 	television 	station
continued 	to 	offer 	their 	subscribers 	roughly 	the 	same 	number 	of
pUblic 	stations 	(about 	2) 	as 	were 	offered 	by 	systems 	that 	did 	not
drop 	any 	stations.
For 	independent 	commercial 	stations, 	program 	duplication 	is
f 	. 	26 	t 	' 	d 	. 	.	less 	0 	an 	~ssue, 	so 	a 	sys 	em 	s 	ec~s~on 	to 	drop 	the 	station
25 A 	station's 	Arbi tron 	ADI 	is 	geographic 	market 	measure
that 	is 	based 	upon 	measured 	household 	viewing 	patterns.
26 The 	issue 	does 	not 	disappear 	entirely, 	however. 	Some
cable 	systems 	located 	between 	FCC 	designated 	television 	markets
may 	have 	been 	obligated 	to 	carry 	independent 	stations 	from 	both
markets. 	Such 	stations 	frequently 	feature 	some 	duplicate
programming, 	inasmuch 	as 	program 	syndicators 	would 	have 	promoted
the 	same 	programming, 	including 	sports 	and 	movie 	packages, 	in
both 	markets.
13

may 	have 	a 	somewhat 	different 	motivation. 	Nevertheless, 	the
motive 	also 	could 	be 	a 	desire 	to 	replace 	a 	relatively 	low-rated
station with 	programming 	that 	viewers 	value 	more 	highly.
Examining 	the 	rankings 	of 	the 	dropped 	signals 	in 	the 	last 	full
year 	of 	must-carry 	(1984),27 	and 	using 	data 	from 	the 	cable
survey, 	discloses 	that 	191 	of 	the 	485 	reported 	instances 	of 	non-
carriage 	of 	independent 	commercial 	stations 	involved 	stations
that 	did 	not 	attract 	a 	large 	enough 	audience 	to 	qualify 	for 	an
. 	. 	h 	t' 	28	
Arb~tron 	aud~ence 	s 	are 	ra 	~ng. 	Another 	63 	instances 	involved
the 	lowest 	ranked 	station 	in 	the 	station's 	Arbitron 	ADI, 	and
another 	25 	involved 	stations 	rated 	next-to-last. 	Only 	20
27 The 	last 	year 	of 	must-carry 	was 	chosen 	to 	avoid 	the
problems 	of 	inference 	associated 	with 	a 	post-must-carry 	year
(i.e., 	did 	low 	ratings 	induce 	non-carriage, 	or 	were 	they 	caused
by 	non-carriage?). 	Television 	station 	ratings 	were 	taken 	from
Investing 	in 	Television: 	5 	Year 	Ratings 	Review 	(BIA
Publications, 	Inc.).
28 	There 	appear 	to 	be 	a 	numl::!er 	of 	reporting 	errors 	in 	the
carriage 	Report 	survey. 	Some 	dropped 	stations 	were 	incorrectly
classified 	as 	commercial 	independents 	when 	they 	were 	not; 	some
dropped 	commercial 	independent 	stations 	were 	mistakenly 	included
in 	other 	categories. 	The 	485 	reported 	instances 	of 	carriage
denial 	break 	down 	as 	follows: 	191 	had 	no 	measurable 	audience
share; 	63 	were 	ranked 	last; 	25 	were 	ranked 	next-to-last; 	7 	were
below 	the 	median 	(but 	better 	than 	next-to-last); 	13 	were 	in 	the
top 	half; 	57 	were 	incorrectly 	classified 	(i.e., 	were 	either
network 	affiliates, 	educational, 	or 	"other"); 	28 	were 	home
shopping 	networks; 	83 	came 	on-the-air 	after 	1984; 	and 	18 	could
not 	be 	identified 	(i.e., 	their 	call 	letters 	were 	not 	listed 	in
the 	1989 	Television 	& Cable 	Factbook). 	When 	account 	is 	taken 	of
commercial 	independents 	that 	were 	misclassified, 	the 	figures
change 	to: 	224 	stations 	had 	no 	measurable 	audience 	share; 	69
were 	ranked 	last; 	26 	were 	ranked 	next-to-last; 	and 	85 	came 	on-
the-air 	after 	1984. 	Other 	numbers 	are 	unchanged. 	The 	85
stations 	that 	came 	on-the-air 	after 	1984 	break 	down 	as 	follows:
44 	were 	unranked, 	and 	41 	were 	ranked 	last.
14

instances 	of 	non-carriage 	involved 	stations 	that 	were 	ranked
better 	than 	next-to-Iast.
The 	carriage 	Report's 	survey 	of 	independent 	commercial
stations 	yields 	similar 	findings. 	Of 	the 	73 	independent 	stations
that 	were 	denied 	carriage 	in 	1988,29 	50 	were 	on-the-air 	in 	1984;
23 	commenced 	broadcasting 	afterwards. 	Of 	the 	former, 	25 	were
unranked. 	Another 	13 	were 	the 	lowest 	or 	next-to-Iowest 	station
in 	their 	respective 	ADI's. 	Only 	3 	stations 	were 	in 	the 	upper
half 	of 	the 	ratings 	distribution 	for 	their 	respective 	ADI's. 	For
the 	23 	stations 	that 	came 	on-the-air 	after 	1984, 	the 	1988
rankings 	were: 	8 	unranked; 	14 	ranked 	last; 	and 	1 	ranked 	in 	the
lower 	half 	(but 	better 	than 	last).
The 	figures 	from 	both 	surveys 	are 	consistent 	with 	the 	view
that 	in 	many 	instances 	non-carriage 	of 	independent 	commercial
stations 	may 	have 	been 	motivated 	by 	a 	desire 	to 	replace 	less
popular 	stations. 	This 	does 	not 	mean 	that 	consumers' 	interests
necessarily 	were 	served 	by 	these 	carriage 	denials. 	Determining
whether 	these 	non-carriage 	decisions 	necessarily 	served	,
consumers' 	interests 	is 	complicated 	by 	the 	fact 	that 	broadcast
ratings 	are 	an 	imperfect 	measure 	of 	consumers' 	willingness-to-
30
pay. 	A station 	could 	have 	few 	viewers 	who 	nevertheless 	might
be 	willing 	to 	pay 	a 	great 	deal 	to 	have 	its 	programming 	televised.
29 	The 	Carriage 	Report 	(Table 	1) 	states 	that 	83 	independent
commercial 	stations 	were 	denied 	carriage. 	Ten 	of 	these, 	however,
were 	actually 	home 	shopping 	networks.
30 See 	Spence 	and 	Bruce
Monopolistic 	Competition, 	and
Economics 	91 	(1977), 	103-26.
Owen, 	"Television 	Programming,
Welfare," 	Quarterly 	Journal 	of
15

In 	these 	circumstances, 	however, 	cable 	systems 	may 	respond 	better
to 	consumer 	demands 	than 	would 	advertiser-supported 	broadcasters.
Cable 	systems, 	unlike 	broadcasters, 	may 	have 	greater means 	to
elicit 	information 	on 	the 	values 	consumers 	attach 	to 	different
programs. 31 consequently, 	a 	system's 	decision 	to 	drop 	a 	poorly-
ranked 	station 	suggests 	that 	the 	station 	is 	both 	low-rated 	and
low-valued; 	i.e., 	its 	cable 	viewers 	are 	unwilling 	to 	pay 	enough
to 	cover 	the 	cable 	system's 	opportunity 	cost 	of 	carrying 	that
station 	in 	place 	of 	some 	other. 	Under 	such 	circumstances,
consuners' 	interests 	would 	not 	be 	well-served 	by 	requiring 	that
these 	signals 	be 	carried.
IV. 	Potential 	Benefits 	of Must-Carry
A. 	Preventing the 	Exercise 	of Market 	Power 	in 	Advertising
Markets
Cable 	systems, 	like 	broadcast 	television 	stations, 	receive
revenues 	from 	the 	sale 	of 	advertising 	time. 	If 	a 	cable 	system 	is
not 	sUbject 	to 	sufficient 	competition 	from 	other 	cable 	systems,.; ,
television 	broadcasters, 	or 	other 	advertising 	media, 	a 	system
might 	be 	able 	to 	raise 	unilaterally 	the 	price 	of 	its 	advertising
time 	to 	supracompetitive 	levels, 	as 	advertisers 	would 	have
31 	Cable 	systems 	that 	are 	not 	sUbject 	to 	basic 	service 	rate
regUlation 	could 	place 	highly-valued 	stations 	on 	higher-priced
service 	tiers. 	Viewership 	of 	these 	stations 	then 	would 	be
limited 	to 	those 	who 	place 	a 	relatively 	high 	value 	on 	them. 	In
the 	limiting 	case, 	an 	individual 	station's 	signal 	could 	be
scrambled 	and 	sold 	on 	an 	"a 	la 	carte" 	basis. 	For 	a 	general
discussion 	of 	these 	issues, 	see 	Minasian, 	"Television 	Pricing 	and
the 	Theory 	of 	Public 	Goods," 	Journal 	of 	Law 	and 	Economics 	81
(1964), 	71-80.
16

insufficient 	alternative 	means 	to 	reach 	potential 	customers 	in
the 	area 	served 	by 	the 	system. 	It 	has 	been 	suggested 	that 	non-
carriage 	of 	local 	signals 	may 	be 	motivated 	by 	a 	desire 	to 	impair
the 	ability 	of 	local 	broadcasters 	to 	compete 	in 	the 	market 	for
advertising. 	If 	so, 	must-carry 	rules 	could 	be 	beneficial 	if 	they
increase 	the 	audience 	size, 	and 	therefore 	the 	viability, 	of 	local
broadcast 	stations 	competing 	with 	local 	cable 	systems 	in 	the
market 	for 	advertising.
This 	theory 	of 	competitive 	harm 	posits 	that 	individual 	cable
systems 	can 	profitably 	exercise 	or 	acquire 	market 	power 	in
advertising 	markets 	through 	unilateral 	decisions 	to 	deny
carriage. 	As 	explained 	below, 	however, 	there 	are 	a 	number 	of
conditions 	that 	must 	hold 	if 	this 	theory 	is 	to 	explain 	carriage
choices 	and 	provide 	a 	possible 	justification 	for 	reimposing 	must-
carry 	rules. 	While 	it 	may 	be 	the 	case 	that 	cable 	systems 	possess
market 	power 	in 	the 	delivery 	of 	certain 	video 	signals 	to 	the
households 	in 	their 	franchise 	area,32 	it 	does 	not 	follow 	from
this 	that 	each 	cable 	system 	necessqrily 	possesses 	market 	power 	in
the 	local 	advertising 	market 	in 	which 	it 	competes.
Note 	first 	that 	a 	cable 	system 	faces 	a 	trade-off 	when 	it
denies 	carriage 	to 	a 	local 	station. 	If 	cable 	viewers 	prefer 	a
dropped 	local 	station 	to 	the 	alternative 	programming 	carried 	in
its 	place, 	then 	the 	cable 	system's 	audience 	and 	its 	advertising
32 	Whether 	cable 	systems 	are 	constrained 	in 	the 	price 	they
can 	charge 	for 	the 	delivery 	of 	local 	over-the-air 	signals 	is
discussed 	at 	length 	in 	the 	FTC 	Staff 	Comment 	on 	the 	Effective
Competition 	Standard, 	supra 	note 	15.
17

price 	would 	be 	reduced 	by 	the 	carriage 	denial. 	On 	the 	one 	hand,
carrying 	that 	local 	station 	would 	increase 	the 	cable 	system's
audience 	and 	the 	price 	that 	it 	can 	charge 	subscribers 	and
advertisers. 	But 	on 	the 	other 	hand, 	carrying 	that 	local 	station
may 	also 	increase 	advertising 	competition 	if 	it 	increases 	the
station's 	audience 	size, 	and 	this 	may 	tend 	to 	reduce 	advertising
prices 	in 	the 	market 	as 	a 	whole, 	including 	the 	prices 	the 	cable.
system 	can 	charge. 	The 	decision 	to 	carry 	or 	drop 	would 	depend
upon 	which 	effect 	predominated. 	An 	anticompetitive 	motive 	for
carriage 	denial 	would 	be 	most 	plausible 	when 	a 	system's
penetration 	rate 	is 	both 	high 	and 	relatively 	unresponsive 	to 	the
• 	. 	d" 	33	
system 	s 	carr~age 	ec~s~ons. 	Under 	such 	conditions, 	denial
of 	carriage 	could 	cause 	the 	affected 	station 	to 	lose 	access 	to
most 	of 	the 	households 	in 	the 	system's 	franchise 	area. 34
Second, 	in 	order 	for 	carriage 	denial 	to 	reduce 	competition,
advertising 	sold 	by 	cable 	systems 	must 	compete 	directly 	with
advertising 	sold 	by 	local 	broadcasters 	and 	account 	for 	a 	large
share 	of 	this 	market. 	If 	purchase~s of 	cable 	advertising 	do 	not
regard 	broadcast 	advertising 	as 	a 	close 	sUbstitute, 	a 	cable
system would 	not 	need 	to 	reduce 	broadcasters' 	access 	to 	cable
subscribers 	in 	order 	to 	raise 	the 	price 	of 	cable 	advertising 	--
it 	could 	do 	so 	unilaterally.
33 	A 	system's 	penetration 	rate 	is 	the 	ratio 	of 	sUbscribing
households 	to 	total 	households 	passed. 	The 	average 	cable 	system
has 	a 	penetration 	rate 	of 	58 	percent 	(See 	1990 	GAO/FCC 	Follow-Up
Survey; 	p. 	25).
34 As 	discussed 	below, 	however, 	cable 	subscribers 	might
still 	have 	the 	means 	to 	receive 	non-carried 	stations.
18

A recent 	FCC working 	paper 	does 	suggest 	that 	cable
advertising, 	both 	local 	spot 	and 	cable 	network, 	is 	becoming 	an
increasingly 	close 	substitute 	for 	broadcast 	television
advertising. 35 Cable 	advertising 	accounts 	only 	for 	a 	very 	small
share 	of 	this 	market, 	however. 	In 	1990, 	five 	years 	after 	the
elimination 	of must-carry, 	cable 	advertising 	revenues 	accounted
I 	'd 	d 	t" 	36	for 	only 	6 	percent 	of 	tota 	v~ 	eo 	a 	ver 	~s~ng revenues. 	This
small 	fraction 	suggests 	that 	even 	if 	denial 	of 	cable 	carriage 	to
some 	stations 	could 	result 	in 	a 	monopolistic 	reduction 	in 	the
quantity 	of 	advertising 	time, 	the 	principal 	beneficiaries 	of 	this
reduction 	would 	be 	other 	broadcasters, 	which 	continue 	to 	produce
most 	of 	the 	output 	in 	this 	market. 	Also, 	unless 	the 	local
stations 	(especially 	those 	that 	continue 	to 	be 	carried) 	could 	be
prevented 	from 	increasing 	their 	output 	of 	advertising 	time 	in
response 	to 	the 	incentives 	created 	by 	cable's 	supracompetitive
advertising 	price, 	expansion 	of 	output 	back 	to 	the 	competitive
level 	would 	tend 	to 	occur.~
35 See 	Setzer 	and 	Levy, 	"Broadcast 	Television 	in 	a
Multichannel 	Marketplace," 	FCC 	opp 	Working 	Paper 	Series 	No. 	26,
June 	1991, 	pp. 	129-31.
36 	In 	1990 	total 	broadcast 	television 	advertising 	Fevenues
were 	$26,616 	million. 	By 	contrast, 	total 	cable 	advertising
revenues 	were 	$1,789 	million. 	Source: 	Setzer 	and 	Levy, 	supra
note 	35, 	Table 	24.
37 	Given 	the 	large 	fraction 	of 	market 	output 	contributed 	by
these 	producers, 	only 	a 	small 	percentage 	increase 	in 	their
collective 	output 	would 	be 	necessary 	to 	restore 	the 	competitive
price 	and 	output. 	See 	Landes 	and 	Posner, 	"Market 	Power 	in
Antitrust 	Cases," 	Harvard 	Law 	Review 	94 	(1981), 	937-83, 	esp. 	pp.
946-47.
19

the 	average 	number 	of
least 	one 	must-carry
The 	anticompetitive 	motive 	for 	carriage 	denial 	is 	most
plausible 	when 	the 	cable 	system's 	franchise 	area 	is 	large
relative 	to 	the 	total 	area 	served 	by 	the 	affected 	broadcast
station. 	A system 	that 	serves 	only 	a 	small 	fragment 	of 	the
station's 	total 	potential 	audience 	has 	a 	very 	limited 	ability 	to
harm 	that 	station 	through 	unilateral 	actions. 	A decision 	not 	to
carry 	a 	station 	would 	be 	unlikely 	to 	contribute 	significantly 	to
the 	station's 	failure: 	other 	anticompetitive 	effects 	also 	would
be 	minimal.
To 	illustrate, 	consider 	a 	cable 	system 	with 	10,000 38
subscribers 	located 	within 	a 	metropolitan 	area 	(i.e., 	ADI) 	of
39
1,000,000 	households. 	Although 	this 	system may 	have
unilateral 	market 	power 	that 	it 	can 	exercise 	against 	the
households 	in 	its 	franchise 	area 	(e.g., 	by 	raising 	the 	price 	of
cable 	service), 	it 	is 	not 	clear 	that 	it 	could 	profitably
undertake 	a 	unilateral 	anticompetitive 	strategy 	against 	a
broadcast 	television 	station. 	This 	system's 	carriage 	choice 	will
:i
have 	only 	a 	minor 	effect 	on 	that 	st~tion's viewership 	(Which 	is
drawn 	from 	the 	entire 	metro 	and 	surrounding 	areas), 	and 	thus 	on
38 	d' 	.	Accor 	~ng 	to 	the 	Carr~age 	Report,
subscribers 	on 	systems 	that 	dropped 	at
signal 	was 	slightly 	more 	than 	10,000.
39 To 	use 	a 	real-world 	example, 	consider 	the 	Washington,
D.C. 	"area-of-dominant 	influence" 	(ADI). 	According 	to 	the 	1989
Television 	& Cable 	Factbook, 	there 	are 	22 	cable 	systems 	serving
this 	ADI, 	which 	contains 	about 	1.6 	million 	television 	households.
When 	account 	is 	taken 	of 	mUltisystem 	ownership, 	the 	number 	of
independent 	systems 	is 	14. 	The 	Herfindahl-Hirschmann 	index 	(HHI)
for 	these 	systems 	(based 	on 	the 	each 	system's 	share 	of 	total
cable 	subscribers) 	is 	1,438. 	An 	HHI 	computed 	for 	total
television 	households 	would 	obviously 	be 	much 	smaller.
20

the 	station's 	advertising 	revenues 	and 	profits. 	Moreover, 	the
attendant 	anticompetitive 	"gains" 	to 	the 	cable 	system, 	whatever
their magnitude, 	would 	be 	shared 	in 	part 	with 	all 	of 	the 	other
local 	cable 	systems 	and 	broadcasters 	serving 	other 	parts 	of 	the
broadcast 	area, 	while 	the 	costs 	(in 	terms 	of 	reduced 	consumer 	and
advertiser 	demand 	for 	the 	system) 	would 	be 	borne 	solely 	by 	the
system 	denying 	carriage.
Accordingly, 	when 	(as 	will 	often 	be 	the 	case) 	a 	metropolitan
area 	is 	subdivided 	into 	multiple 	independent 	cable 	franchise
areas, 	a 	significant 	anticompetitive 	effect 	from 	carriage 	denial
may 	require 	express 	coordination 	among 	these 	cable 	systems. 40
otherwise, 	each 	system 	would 	find 	it 	most 	profitable 	to 	carry
popUlar 	local 	stations, 	thus 	avoiding 	any 	loss 	of 	sUbscription
and 	direct 	advertising 	revenue, 	and 	to 	"free 	ride," 	at 	least 	to
some 	extent, 	on 	the 	higher 	advertising 	prices 	that 	result 	from
the 	other 	systems' 	actions. 	Of 	course, 	if 	each 	system were 	to
follow 	this 	individual 	strategy, 	the 	joint 	strategy 	of 	reducing
advertising 	time 	via 	carriage 	denia)s 	would 	fail. 	This
coordination 	problem 	would 	fail 	to 	arise 	only 	if 	the 	cable
system's 	franchise 	area 	covered 	a 	large 	portion 	of 	the 	affected
station's 	reception 	area.
Finally, 	carriage 	denials 	could 	be 	anticompetitive 	only 	if
subscribers 	had 	no 	other 	low-cost 	way 	to 	continue 	to 	receive 	non-
40 Such 	conduct 	would 	be 	a 	per 	se 	violation 	of 	Section 	1
of 	the 	Sherman 	Act, 	15 	U.S.C. 	§ 	1. 	Northern 	Pacific 	Ry. 	Co. 	v.
United 	States, 	356 	U.S. 	1, 	5 	(1958); 	Fashion 	Originators' 	Guild
of 	America 	v. 	FTC, 	312 	U.S. 	457, 	468 	(1941).
21

· 	., 	.
carried 	signals. 	If 	subscribers 	can 	receive 	the 	non-carried
signals 	satisfactorily 	over 	the 	air, 	they 	could, 	in 	theory,
thwart 	any 	anti~ompetitive denial 	of 	carriage 	on 	cable 	systems.
Consumers 	with 	cable 	service 	may 	be 	able 	to 	receive 	non-carried
broadcast 	signals 	in 	several 	ways. 	Some 	televisions 	and 	VCRs
have 	built 	in 	capacity 	to 	receive 	two 	inputs 	simultaneously,
allowing 	easy 	access 	to 	both 	cable 	system 	signals 	and 	signals
received 	through 	a 	traditional 	antenna. 	Many 	households 	with 	a
television 	served 	by 	cable 	have 	other 	televisions 	that 	are 	not
connected 	to 	cable, 	and 	thus 	continue 	to 	receive 	broadcast
signals 	on 	them. 	A basic 	way 	to 	receive 	non-carried 	signals 	on 	a
set 	connected 	to 	a 	cable 	system 	is 	an 	"AlB" 	switch 	connected 	to
41
an 	antenna. 	The 	switch 	itself 	is 	inexpensive 	and 	easy 	to
install. 	Using 	an 	AlB 	switch 	could 	be 	more 	difficult 	and 	costly
for 	cable 	subscribers 	who 	have 	dismantled, 	or 	who 	have 	never 	had,
an 	exterior 	or 	separate 	antenna.
Few 	surveyed 	cable 	households 	reported 	ever 	having 	used 	an
AlB 	sWitch,42 	suggesting 	that 	consumers 	tend 	to 	find 	that 	its
costs 	exceed 	its 	benefits. 	But 	that 	result 	may 	be 	due 	not 	to
high 	costs, 	but 	to 	low 	benefits 	from 	receiving 	broadcast 	signals
41 An 	AlB 	switch 	operates
a 	car 	radio. 	When 	the 	switch 	is
set 	receives 	broadcast 	signals;
receives 	cable 	signals.
much 	1 ike 	the 	AM/FM 	switch 	on
in 	one 	position, 	the 	television
in 	the 	other 	position, 	the 	set
42 See 	Comments 	of 	the 	National 	Association 	of
Broadcasters 	In 	the 	Matter 	of 	Reexamination 	of 	the 	Effective
Competition 	Standard 	for 	the 	Regulation 	of 	Cable 	Television 	Basic
Service 	Rates 	and 	for 	the 	Carriage 	of 	Television 	Broadcast
Signals 	by 	Cable 	Television 	Systems, 	MM 	Docket 	Nos. 	90-4 	and 	84-
1296, 	September 	25, 	1991 	("NAB 	Comments"), 	pp. 	32-34.
l 	22

in 	addition 	to 	cable 	signals. 	Factors 	contributing 	to 	low
benefits 	would 	include 	the 	continued 	high 	rate 	at 	which 	local
stations 	are 	carried 	on 	cable, 	the 	infrequency 	with 	which 	some
non-carried 	stations 	are 	viewed, 	and 	the 	duplicative 	nature 	of
other 	non-carried 	stations. 	If 	cable 	systems 	attempted 	to 	behave
anticompetitively, 	by 	decreasing 	the 	rates 	at 	which 	they 	carried
local 	stations, 	in 	order 	to 	exercise 	market 	power, 	installing 	or
using 	an 	AlB 	switch 	might 	enable 	their 	subscribers 	to 	have
continued, 	low 	cost 	access 	to 	local 	broadcast 	stations, 	even 	if
AlB 	switch 	utilization 	is 	currently very 	low.
The 	empirical 	evidence 	presented 	in 	§ 	IlIon 	cable 	carriage
choices 	provides 	little 	support 	for 	this 	anticompetitive 	theory.
First, 	most 	systems 	did 	not 	deny 	carriage 	to 	any 	of 	their 	former
must-carry 	stations, 	indicating 	either 	that 	cable 	market 	power 	in
advertising 	markets 	is 	absent, 	or 	that 	the 	likely 	decrease 	in
audience 	size 	and 	profits 	from 	carriage 	denial 	is 	large 	relative
to 	any 	anticompetitive 	gains 	in 	advertising 	revenue. 43
Second, 	when 	carriage 	denial ~id occur, 	it 	often 	involved
stations 	that 	either 	did 	not 	sell 	advertising 	or 	that 	accounted
for 	only 	a 	trivial 	share 	of 	the 	total 	television 	advertising
market. 	The 	Carriage 	Report's 	surveys 	of 	cable 	systems 	and
broadcasters 	show 	that 	a 	large 	percentage 	(between 	36 	and 	39
percent) 	of 	the 	instances 	of 	carriage 	denial 	involved 	either
43 	The 	FCC 	may 	wish 	to 	conduct 	a 	more 	detailed 	study 	of
cable 	carriage 	choices 	to 	fUlly 	determine 	if 	there 	were 	any
systematic 	differences 	between 	systems 	that 	dropped 	stations 	and
those 	that 	did 	not.
23

pUblic 	television 	stations 	or 	other 	noncommercial 	(e.g.,
religious) 	stations.
Third, 	the 	cable 	system 	survey 	showed 	that 	about 	30 	percent
of 	all 	carriage 	denials 	involved 	network 	affiliates 	that 	appeared
to 	be 	located 	a 	substantial 	distance 	from 	the 	cable 	system.
About 	70 	percent 	of 	these 	network 	affiliate 	carriage 	denials
involved 	stations 	that 	served 	an 	ADI 	different 	from 	that 	served
by 	the 	cable 	system. 	Dropping 	distantly-located 	stations 	seems
inconsistent 	with 	the 	advertising monopoly 	hypothesis; 	a 	desire
to 	restrict 	the 	quantity 	of 	advertising 	time 	in 	a 	cable 	system's
own 	market 	would 	lead 	it 	to 	deny 	carriage 	to 	a 	local 	station, 	not
a 	remote 	one 	(e.g., 	Washington-area 	systems 	would 	presumably 	wish
to 	drop 	Washington-area 	affiliates, 	rather 	than 	those 	from 	the
Baltimore-area)."
Fourth, 	the 	remaining 	carriage 	denials 	(30 	percent) 	involved
commercial 	independent 	stations 	that 	tended 	to 	have 	very 	low
audience 	shares 	even 	when 	they 	were 	entitled 	to 	must-carry
.; ~
status. 	Again, 	this 	behavior 	is 	inconsistent 	with 	the
advertising 	monopoly 	hypothesis. 	Denying 	carriage 	to 	stations
44 We 	also 	note 	that 	recent 	regulatory 	changes 	would 	now
discourage 	the 	carriage 	of 	these 	signals. 	Under 	the 	network
nonduplication 	rules 	that 	became 	effective 	in 	1990 	(47 	C.F.R. 	§§
76.92 	- 	76.97), 	less 	distant 	network 	affiliates 	can, 	in 	most
cases, 	demand 	that 	a 	cable 	system 	"black 	out" 	all 	network
programming 	on 	a 	more 	distant 	affiliate 	of 	the 	same 	network
(e.g., 	the 	Washington-area 	NBC 	affiliate 	could 	demand 	that
Washington-area 	cable 	systems 	black 	out 	the 	network 	programming
component 	of 	the 	Baltimore-area 	NBC 	affiliate's 	telecast). 	In
such 	circumstances,· a 	cable 	system 	would 	likely 	carry 	only 	the
less 	distant 	network 	affiliate.
J
, 24

,.
that 	viewers 	seldom watch 	is 	not 	a 	promising 	anticompetitive
strategy 	for 	reducing 	advertising 	output.
B. 	Eliminating 	other 	Distortions 	in 	Cable 	systems' 	Carriage
Choices
An 	alternative 	rationale 	for 	regUlating 	cable 	systems'
carriage 	choices 	might 	be 	based 	on 	the 	premise 	that 	each 	system
has 	market 	power 	in 	the 	distribution 	of 	programming. 	Generally
speaking, 	a 	system with 	market 	power 	might 	be 	expected 	to 	alter
the 	quantity 	and 	quality 	of 	the 	programming 	it 	offers 	relative 	to
what 	would 	be 	offered 	if 	it 	behaved 	competitively. 	Economic
theory 	demonstrates 	that 	a 	monopolist's 	level 	of 	quality 	can
differ 	from 	that 	arising 	under 	competition. 4S But 	theory 	does
not 	say 	whether 	quality 	will 	exceed 	or 	fall 	short 	of 	the
competitive 	quality. 	This 	means 	that 	even 	when 	the 	exercise 	of
market 	power 	by 	cable 	systems 	changes 	programming 	choices, 	the
direction 	of 	the 	change 	is 	indeterminate. 	Some 	cable 	systems
with 	market 	power 	might 	carry 	fewe~ local 	stations 	than 	their
subscribers 	would 	receive 	under 	competition, 	but 	others 	might
carry 	more. 	Where 	customers 	would 	prefer 	that 	the 	system 	carry
more 	local 	stations, 	it 	does 	not 	follow 	that 	they 	would 	prefer
the 	system 	to 	carryall 	of 	the 	local 	stations, 	or 	that 	carrying
all 	of 	them 	would 	increase 	consumers' 	surplus. 	Thus,
4S See 	Leffler, 	"Ambiguous 	Changes 	in 	Quality," 	American
Economic 	Review 	72 	(1982), 	956-67, 	and 	Besanko, 	Donnenfeld, 	and
White, 	"The 	Multiproduct 	Firm, 	Quality 	Choice, 	and 	Regulation,"
Journal 	of 	Industrial 	Econc~ics 36 	(1988), 	411-29.
25

. 	..
reimposition 	of 	a 	rule 	requiring 	carriage 	of 	all 	local 	stations
could 	ultimately 	harm 	rather 	than 	help 	consumers.
v. 	The 	Costs 	of 	a 	Must-Carry Rule
The 	empirical 	findings 	cited 	earlier 	imply 	that 	a 	must-carry
rule 	would 	not 	affect 	the 	majority 	of 	cable 	systems, 	because 	they
carryall 	local 	stations 	voluntarily. 	But 	that 	does 	not 	mean 	a
must-carry 	rule 	would 	be 	costless. 	Adoption 	of 	the 	rule 	could
generate 	two 	types 	of 	costs, 	whose 	magnitudes 	are 	admittedly
difficult 	to 	estimate. 	Although 	these 	costs 	may 	be 	small, 	they
nonetheless 	could 	exceed 	any 	benefits 	associated 	with 	must-carry.
First, 	for 	those 	systems 	where 	the 	requirement 	would
increase 	the 	number 	of 	local 	stations 	carried, 	the 	rule 	could
cause 	them 	to 	eliminate 	some 	currently-carried 	nonlocal 	stations
or 	programming 	sources. 	If 	these 	systems 	cannot 	alter 	their
channel 	capacity 	when 	the 	rule 	is 	adopted 	(e.g., 	because 	it 	is
costly 	to 	alter 	capacity 	quickly), 	the 	number 	of 	nonlocal
,
stations 	carried 	would 	be 	reduced 	tb 	accommodate 	the 	greater
number 	of 	must-carry 	stations. 	The 	empirical 	evidence 	presented
earlier 	suggests 	that 	this 	could 	often 	represent 	a 	shift 	from 	a
preferred 	to 	a 	less-preferred 	array 	of 	channels, 	which 	would
reduce 	the 	welfare 	of 	consumers.
Over 	the 	longer 	run, 	affected 	systems 	could 	find 	it
profitable 	to 	increase 	their 	channel 	capacities 	to 	avoid
discontinuing 	certain 	program 	choices 	otherwise 	replaced 	by 	must-
carry 	stations. 	The 	cost 	of 	this 	capacity 	expansion 	would 	likely
26

• t' 	,.
be 	reflected 	in 	higher 	cable 	rates 	to 	subscribers. 	Moreover,
depending 	upon 	the 	costs 	of 	adding 	channel 	capacity, 	some 	program
services 	that 	would 	have 	been 	offered 	absent 	the 	rule 	might 	be
unprofitable 	to 	carry, 	even 	after 	affected 	systems 	adjust 	their
.. 	46
channel 	capac~t~es.
A must-carry 	rule 	also 	could 	reduce 	somewhat 	programmers'
incentives 	to 	make 	expenditures 	on 	programming. 	To 	retain
carriage 	in 	an 	unregulated 	market, 	satellite 	programmers 	and
broadcasters 	compete 	to 	demonstrate 	their 	program's
attractiveness 	to 	viewers 	and 	their 	profitability 	to 	cable
systems. 	These 	competitive 	forces 	spur 	existing 	programmers 	and
entrants 	to 	expend 	resources 	developing 	programming 	that 	they
hope 	will 	attract 	audiences. 	This 	competition 	has 	brought 	about
substantial 	growth 	in 	the 	quantity 	and 	variety 	of 	cable
programming 	over 	the 	last 	decade. 	As 	the 	FCC's 	1990 	Cable 	Report
observed:
There 	is 	no 	question 	that 	the 	number 	of 	programming
services 	offered 	by 	cable 	sys~ems has 	increased
sUbstantially 	since 	the 	passage 	of 	the 	Cable 	Act 	in
46 	For 	example, 	suppose 	the 	following: 	the 	incremental 	cost
of 	adding 	a 	thirteenth 	channel 	to 	a 	twelve-channel 	cable 	system
is 	$100, 	while 	the 	cost 	of 	adding 	a 	fourteenth 	channel 	is 	$200;
absent 	a 	must-carry 	rule, 	with 	thirteen 	channels 	available 	the
system 	would 	offer 	four 	out 	of 	five 	local 	broadcast 	stations 	and
nine 	satellite 	services. 	Suppose 	also 	that 	the 	lowest
incremental 	revenue 	generated 	by 	any 	satellite 	service 	carried
is 	$150. 	Now, 	if 	a 	must-carry 	rule 	requires 	the 	cable 	system
to 	carryall 	five 	local 	broadcast 	stations, 	carrying 	all 	nine
satellite 	services 	as 	well 	would 	require 	spending 	$200 	to 	add
the 	fourteenth 	channel. 	That 	would 	be 	a 	money-losing
proposition, 	because 	the 	last 	satellite 	service 	generates 	only
$150 	in 	revenue. 	A 	profit-maximizing 	cable 	operator 	would 	not
invest 	in 	the 	additional 	capacity 	necessary 	to 	carry 	that
service.
27

· .
1984. 	As 	we 	observed 	in 	the 	Notice 	of 	Inquiry, 	the
number 	of 	existing 	or 	proposed 	cable 	services 	in 	1984
was 	reportedly 	67, 	while 	in 	1989, 	the 	number 	of
domestic 	existing 	and 	proposed 	paY,1v 	and 	satellite
cable 	services 	was 	reportedly 	181.
If 	certain 	carriage 	choices 	were 	to 	be 	mandated 	by
regulation, 	rather 	than 	chosen 	voluntarily 	by 	market
participants, 	these 	competitive 	incentives 	would 	be 	somewhat
diminished. 	A must-carry 	rule 	guarantees 	local 	stations 	free
cable 	carriage, 	whether 	or 	not 	their 	programming 	is 	sUfficiently
appealing 	to 	lead 	cable 	operators 	to 	select 	it 	voluntarily.
Guaranteed 	cable 	access 	would 	attenuate 	the 	competitive 	pressure
these 	stations 	face.'8 	Moreover, 	the 	initial 	decline 	in 	the
quantity 	of 	cable 	systems' 	discretionary 	channel 	capacity 	would
reduce 	the 	number 	of 	potential 	outlets 	for 	new 	programming
services. 	In 	effect, 	fewer 	cable 	outlets 	would 	be 	available 	for
new 	programming, 	and 	the 	risk 	of 	introducing 	new 	programming
presumably 	would 	increase. 	Absent 	higher 	returns 	(and 	ultimately
higher 	costs 	to 	consumers) 	to 	compensate 	for 	this 	higher 	risk,
there 	will 	be 	fewer 	such 	investmerits.
One 	could 	argue, 	given 	the 	abundance 	of 	programming 	services
now 	available, 	that 	the 	effect 	of 	must-carryon 	competition 	among
programmers 	would 	be 	minimal. 	It 	bears 	noting, 	however, 	that
'7 	Report 	in 	the 	Matter 	of 	Competition, 	Rate 	DeregUlation
and 	the 	Commission's 	Policies 	Relating 	to 	the 	Provision 	of 	Cable
Television 	Service, 	MM 	Docket 	No. 	89-600, 	July 	31, 	1990, 	, 	43.
48 	These 	stations 	would 	still 	face 	competitive 	pressure 	to
attract 	audiences 	(and 	thus 	advertisers). 	The 	argument 	here 	is
that 	these 	pressures 	would 	be 	diminished, 	not 	completely
eliminated.
28

· 	. , ,. 	,
this 	expansion 	of 	programming 	services 	occurred 	concurrently 	with
a 	substantial 	increase 	in 	cable 	channel 	availability.49 	It 	is
doubtful 	that 	this 	growth 	of 	programming 	services 	would 	have
occurred 	without 	the 	contemporaneous 	expansion 	of 	cable 	capacity.
In 	the 	short-run, 	when 	the 	supply 	of 	program 	services 	is 	fixed,
it might 	be 	difficult 	to 	discern 	any 	clear 	impact 	of 	must-carry
on 	incentives 	to 	develop 	programming 	services. 	In 	the 	lons-run,
however, 	a 	deleterious 	effect 	is 	more 	likely. 	It 	would 	be
undesirable 	to 	institute 	a 	regulatory 	policy 	that 	would 	diminish
the 	incentive 	to 	develop 	programming 	that 	is 	attractive 	to
viewers, 	unless 	the 	policy 	provided 	offsetting 	benefits. 	Such
benefits 	from 	must-carry 	are 	not 	readily 	apparent.
VI. 	Conclusion
Under 	conventional 	economic 	criteria 	for 	measuring 	consumer
welfare,50 	must-carry 	regulations 	could 	be 	justified 	only 	if:
(1) 	non-carriage 	of 	local 	signals 	is 	shown 	to 	occur 	and
potentially 	to 	raise 	sufficient 	concern 	to 	require 	a 	broad-based
regulatory 	remedy; 	(2) 	non-carriage 	of 	local 	signals 	is 	the
consequence 	of 	some 	market 	failure, 	such 	as 	the 	exercise 	of
market 	power 	by 	the 	cable 	system; 	and 	(3) 	the 	net 	effect 	of 	the
proposed 	remedy 	would 	likely 	benefit 	consumers.
49 According 	to 	the 	Follow-Up 	Survey, 	Table 	V.5, 	the
average 	number 	of 	active 	cable 	channels 	increased 	by 	33 	percent
between 	1984 	and 	1989.
50 See 	note 	16, 	supra.
29

A review 	of 	available 	empirical 	evidence 	shows 	that 	most
cable 	systems 	voluntarily 	carryall 	of 	their 	former 	must-carry
stations. 	Additionally, 	most 	episodes 	of 	non-carriage 	have
involved 	distantly-located 	(and 	duplicated) 	network 	signals 	and
relatively 	low-rated 	commercial 	independent 	stations. 	Such
actions 	are 	consistent 	with 	competitively-determined 	carriage
decisions, 	and 	generally 	suggest 	that 	non-carriage 	decisions 	are
not 	motivated 	by 	anticompetitive 	considerations, 	such 	as 	the
acquisition 	of 	market 	power 	in 	advertising 	markets. 	If 	this
inference 	is 	correct, 	requiring 	systems 	to 	carryall 	local
broadcast 	signals 	could 	displace 	programming 	cable 	subscribers
value 	more 	highly 	and 	could 	reduce 	incentives 	to 	develop 	cable
programming. 	Under 	these 	circumstances, 	consumer 	interests 	would
unlikely 	be 	served 	by 	reimposing 	must-carry 	obligations 	on 	cable
television 	systems.
30
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