Why Does Cable Package Its Programming?

Regulation has been as big a factor in the growth of cable tiers as technology and market forces. Here’s a look at some of the most important regulatory moves of the past 40 years. By John P. Ourand Mid 1960s—The FCC initiated "Cable Freeze" regulation, cable’s first real experience with must-carry. The rules mandated carriage of local signals and restricted carriage of out-of-market signals. The rules were nicknamed the "Cable Freeze" rules because they stymied the extension of cable into previously unbuilt larger markets. 1968—Content owners filed suit against cable operators, charging them with copyright infringement for retransmitting local and distant signals. Ultimately, Hollywood lost, with the courts saying that cable operators provide an antenna reception service, which did not break existing copyright laws. Early 1970s—The FCC adopted the policy of "deliberately structured dualism" under which it shared regulatory jurisdiction of cable television with local franchising authorities. This put rate regulation under the control of local governments. The FCC kept oversight of technical standards and signal carriage regulation. 1972—Cable operators, broadcasters and copyright holders reached a compromise, in which the cable industry agreed to support a change in the copyright law that made it responsible for copyright payments (i.e., license fees). In exchange, cable struck a deal to allow the FCC to replace the Cable Freeze with a set of regulations addressing signal carriage and access channels. 1975—The FCC adopted "anti-siphoning" rules in response to broadcaster fears that premium movie and sports programming would lure viewers and advertising revenue away from broadcast stations. The rules created content windows, prohibiting premium cable channels from showing movies that had been in theatrical release within two years; sports events that had been televised live on broadcast channels in the cable community within two years; and "series" programming. They also prohibited premium cable channels from carrying advertising. 1977—The United States Court of Appeals for the District of Columbia Circuit struck down the anti-siphoning rules on First Amendment grounds, leading premium channels like HBO and Showtime to show more recent movies, uncut and commercial-free, and allowing other channels, like ESPN and BET, to accept advertising. Early 1980s—The FCC issued a series of rulings that preempted local regulation of services not only on a per channel basis, but also on optional expanded basic tiers. 1984—Congress passed the Cable Communications Policy Act, recognizing local authority to regulate basic rates charged by cable operators not subject to "effective competition." The practical result was to deregulate virtually all systems’ rates. Mid-1980s—The Copyright Act’s royalty calculation rules were clarified. Cable operators pay royalties for carrying distant broadcast signals based on a percentage of the revenue operators receive from the basic tier. To hold down copyright costs, operators reduced the content and price of the basic tier, thereby maximizing revenue while still keeping copyright royalty costs low. 1992—In response to increasing cable rates, Congress passed the Cable Television Consumer Protection and Competition Act of 1992. This Act redefined effective competition, thereby reregulating most cable operators and giving the FCC a bigger role in establishing standards to judge cable rates. It introduced "retransmission consent" rules, whereby broadcasters could elect, in lieu of must-carry, to prevent cable operators from retransmitting their signals without consent. At first, broadcasters tried to charge a fee for carriage. But cable operators resisted, and wound up negotiating carriage for new networks from large broadcast groups, which led to the launch of SoapNet (ABC), MSNBC (NBC) and FX (Fox). Broadcasters demanded these networks be carried on a system’s most widely penetrated tier. 1993—Several MSOs, including Time Warner, Adelphia and Century, launched a la carte services. Adelphia made every channel outside of its basic tier a la carte. Franchising authorities complained that these offerings were attempts to evade rate regulation. The FCC eventually ruled operators that offered more than six channels of a la carte were evading the rules, a decision that was affirmed by the D.C. Circuit a few years later. 1994—The FCC adopted "Going Forward" rules, allowing cable operators to add new channels to the expanded basic tier at a price of not more than 20 cents per channel plus license fees, with a total increase over two years not to exceed $1.50. The commission also created a new program package, called the New Product Tier, which cable operators were permitted to offer on an unregulated basis. 1994—A divided Supreme Court remanded the must-carry law to a lower court. The next year, the lower court again affirmed must-carry rules. 1996—Acknowledging that the 1992 Act stifled cable-industry investment, Congress passed the Telecommunications Act of 1996, phasing out regulation of expanded basic service rates, effective in 1999. Franchising authorities kept the power to regulate basic tiers where no effective competition exists. 1997—A divided Supreme Court affirmed the must-carry law. 2002—The Supreme Court refused to hear a case challenging a 1999 must-carry law that applied to DBS distributors.