Court Rejects Limits on Cable Ownership

A federal appeals court handed cable operators--and possibly the entire media industry--a victory Friday by tossing out federal rules that prevent any single cable firm from controlling more than 30% of the pay-television market.

The ruling by the U.S. Court of Appeals for the District of Columbia does not lift the government’s broad powers to regulate media ownership limits, but would block the Federal Communications Commission from setting arbitrary rules affecting consolidation.

Citing the free-speech rights of cable companies, the court found that the FCC had set rules on ownership limits in the cable industry without demonstrating that the rules were justified.

The decision could bolster support for overturning other media-concentration rules, such as FCC rules preventing television broadcasters from owning stations that serve more than 35% of the population. CBS owner Viacom and Fox parent News Corp. now exceed the limit because of recent or pending acquisitions. Major networks have sued the FCC contending that the cap is not justified. Newspaper companies, including Times owner Tribune Co., also could benefit from the ruling. Several have already objected to rules blocking ownership of broadcast stations and newspapers in the same market.

“The broadcasters and the newspaper groups are going to come in with an argument that these other ownership rules are arbitrary,” said Blair Levin, a telecommunications analyst at Legg Mason who worked on the FCC staff. “The question that needs to be addressed is, should there be any cap other than a normal antitrust review?”

The new, Republican FCC chairman, Michael Powell, is expected to be more open than the previous administration to further deregulation of media ownership. “It’s a good day for cable operators’ 1st Amendment rights,” said Kathy McKiernan, spokeswoman for AOL Time Warner, which serves about 13% of the nation’s 84 million cable and satellite subscribers.

However, analysts noted that AT&T; is the only cable company currently exceeding the government cap and that few others are even close. A high-ranking AOL Time Warner official said the company, the No. 2 cable operator, has no intention of acquiring more systems. Even cable leader AT&T; has been shedding subscribers to pay off its onerous debt.

“I see this as an important theoretical victory for the industry,” said Tom Eagan, an analyst at UBS Warburg. “But it doesn’t impact anyone because AT&T; will have to sell systems for financial reasons and Time Warner is nowhere near the cap.”

Time Warner Cable has been fighting since 1994 to overturn the FCC rules, saying the agency exceeded its authority and imposed arbitrary ownership caps that violated free-speech rights. The FCC rules also restricted cable operators and their affiliates from controlling more than 40% of the television programming and channels they offered to viewers.

As a result of AT&T;’s purchase of MediaOne Group last year, the company has been ordered by the FCC to sell a 25% stake it owns in Time Warner Entertainment by May.

AT&T; declined to comment Friday, other than to express satisfaction with the court’s ruling. But at a minimum, AT&T; may seek to push back the May deadline to gain more time to negotiate with AOL Time Warner, analysts say.

Though AT&T; and Time Warner joined forces to overturn the cable ownership rules, they have been battling one another for months over the value of AT&T;’s Time Warner Entertainment stake. More time would enable AT&T; to hold out for a higher price.

What’s more, under FCC Chairman Powell, AT&T; now might find it easier to wriggle out of the MediaOne agreement entirely, something the company has been trying to do for several months.

“This sets up an opportunity for AT&T; to ask the FCC to modify or delay the divestiture requirement,” said Paul Glenchur, analyst at Schwab Capital Markets Washington Research Group.

Though the FCC could technically force AT&T; to live up to the MediaOne divestiture agreement, Glenchur said such a demand is unlikely in light of the court order, particularly under Powell, who has vowed to take a more deregulatory approach to the industry than his predecessors. Powell also has openly questioned the need for the agency’s broadcasting ownership cap.

An FCC spokeswoman said the agency is reviewing the decision, but declined to comment further.

Friday’s victory for the cable industry was a dramatic turnaround from just two weeks ago, when the Supreme Court refused to hear a separate lawsuit, filed by AOL Time Warner, challenging the constitutionality of the Cable Television Consumer Protection and Competition Act of 1992. The high court’s action left intact a lower court ruling that the law did not violate the cable industry’s 1st Amendment rights.

Consumer groups called Friday’s ruling a devastating blow.

“At a time when cable rates keep going up and there’s no meaningful competition, this decision just sends a clear signal to the industry that companies can further consolidate their cable properties and programming to expand their market dominance,” said Gene Kimmelman, executive director of Consumers Union. He said his group will oppose any efforts to relax ownership caps.

Cable industry officials praised the court ruling. “We favor the use of antitrust laws, rather than an artificial ownership cap, to govern ownership limits,” said Mark Smith, spokesman for the National Cable Television Assn.