D.C. Preview: Looking Into D.C.'s Crystal Ball

Rumblings coming from federal regulators suggest that this year will be much like the past two years for the cable industry. That means the deregulatory trends put forward by a Republican president, a Republican Congress and Republican-appointed bureaucrats should continue, at least until the November elections. The most influential of those Republican-appointed bureaucrats, FCC chairman Michael Powell, gave voice to those deregulatory leanings last month, when he reiterated his desire to keep regulations from stunting the growth of new technologies. In years past, Powell made these statements regarding high-speed Internet access, and has largely kept the cable-modem space free from regulations. He’s now repeating that mantra with Internet-based telephony (VoIP), which is primed to be the most important issue cable will face in D.C. this year. “As we begin to consider what regulation, if any, is warranted for these new services, we should borrow the credo of the medical profession and, first, do no harm,” Powell said during a December address on VoIP. “Let’s make sure the patient is sick before we offer a cure.” Keeping regulations away from VoIP services is considered the top priority for many in the industry, including NCTA president and CEO Robert Sachs, who called it the top legislative concern facing cable this year. VoIP dominated an end-of-the year briefing Sachs conducted with D.C.-based reporters in December. The FCC does not seem to be as focused on Internet telephony, as Media Bureau chief Ken Ferree did not list it as an important regulatory issue for the cable industry this year. Instead, Ferree listed two-way plug-and-play, something Sachs left off his list. The cable industry won a lot of goodwill at the FCC for the one-way plug-and-play deal it crafted with the Consumer Electronics Association in December 2002. A pact on two-way signals is certain to be more contentious. Few expect an agreement to be worked out on two-way this year. Following are the five most important issues cable will face in D.C. this year, according to Robert Sachs: 1. Internet Telephony
Desperate to raise funds for its public coffers, the state government of Minnesota last summer decided to regulate cable’s VoIP services as a telecom service. Though a federal Appeals Court overturned the Minnesota state House’s move in October, other states have looked into imposing regulations on the service. This has caused the cable industry to ask for a federal ruling from the FCC “so companies are not spending their resources and energies piecemeal at the state level,” Sachs says. Given the consistent deregulatory leanings of the FCC, this seems to be a good year for cable to push for that kind of framework. “I put this first because of its immediacy,” he says. “The FCC would like to come to a decision quickly… Most rumblings suggest a minimum of six months.” Sachs expects a ruling to come out of the FCC by the fall. The commission is expected to issue a Notice of Proposed Rulemaking on VoIP classification early in the year. 2. Rate Hikes & Reregulation
It’s a rite of passage for MSOs each year: They raise their rates for programming packages anywhere from 5% to 15%. Each round of rate hikes is met with a lot of bluster from Capitol Hill. Last year, that bluster led Sen. John McCain’s (R-Ariz.) Commerce Committee to schedule a round of hearings last November. Ultimately, the hearings were postponed and should be held early this year. MSOs typically cite rising programming costs and an $84 billion rebuild as reasons for the increases, which the FCC said averaged 8.2% from the summer of 2002 to the summer of 2003. Regardless of reasons, the issue of rising cable rates is one that seems to energize D.C. and allows politicians to discuss potential rate regulations. “While I don’t anticipate that federal legislators will reregulate cable, operators have to be sensitive to price issues and their impact on consumers,” Sachs says. “At the system level, management and explanations of reasons for cable rate adjustments needs to always be handled with care.” 3. Dual Must-Carry
Perhaps the most contentious issue in front of the FCC deals with dual must-carry and multicasting, with broadcasters saying they need MSOs to carry digital duplicates of every analog signal carried before they return their analog spectrum. Broadcasters also want MSOs to carry all their digital signals after they return their spectrum. Sachs expects the FCC to render a decision in the first part of the year. “If the commission reaffirms the decision it reached on both those issues in early 1999, it will not have a big impact,” he says. But Sachs also warns that this issue’s final chapter won’t be written for several years. He cites must-carry, which has its origins in the mid-1980s and took a decade to go through the courts. “Whatever action the FCC takes, an appeal is likely,” he says. Other D.C.-based execs are skeptical that digital must-carry will pass. They are less optimistic on dual must-carry, noting that the FCC is starting to lean against it. The NCTA argues that any dual must-carry mandate would threaten the existence of cable-industry-supported public affairs nets. 4. Internet Tax Freedom Act
A piece of legislation that focuses on the Internet arena could, if passed, give state legislatures the power to tax some MSO subs, Sachs warns. “If Congress does not extend the moratorium on Internet taxes, it raises the prospects that we could see state legislatures start to pass measures to impose taxes on Internet services,” Sachs says. “That potentially could add cost for cable modem, DSL and dial-up users.” Thus far, Sen. Lamar Alexander (R-Tenn.) has been the main obstacle to extending the moratorium, as he had been pushing to find new ways for state and local governments to raise new revenues. At some point, expect Senate Majority Leader Bill Frist (R-Tenn.) to exert some influence over his Tennessee colleague and broker a compromise. Sachs expects a resolution in the first six months. 5. The Brand X Case
Two years ago, the FCC classified cable modem services as an “interstate information service” rather than as a “telecom service.” The classification kept nascent cable modem services from being subject to telco-type regulation. Last fall, a three-judge panel in the 9th Circuit overturned that decision, saying prior precedents mandate that cable-modem services be classified as “telecom services.” The FCC and NCTA asked the full 9th Circuit to review the decision. A decision on whether the full court will hear the case is expected by March. Sachs says his association is prepared to appeal to the Supreme Court if necessary. “This is an important case for the industry,” he says. “It would be good for the industry to have these issues finally resolved.”