FOR FCC RECORD ONLY $// MO&O, NewsChannel, Program Acc., Exclus., DA 94-1512//$ $/ 300.548 Development of Competition and Diversity in Video /$ $/ 76.1002 Specific unfair practices prohibited /$ Before the FEDERAL COMMUNICATIONS COMMISSION DA 94-1512 Washington, D.C. 20554 In the Matter of ) ) NEWSCHANNEL, A DIVISION OF ) LENFEST PROGRAMMING SERVICES, INC. ) ) CSR-4295-P Petition for Public Interest Determination ) under 47 C.F.R.  76.1002(c)(4) ) Relating to Exclusive Distribution of ) NewsChannel ) MEMORANDUM OPINION & ORDER Adopted: December 16, 1994 Released: December 16, 1994 By the Chief, Cable Service Bureau: Table of Contents Paragraph I. Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 II. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 III. Summary of Petitioner's Arguments . . . . . . . . . . . . . . .6 IV. Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 A. Effects of Exclusivity on the Development of Competition in the Distribution Market . . . . . . . . . . 19 B. Public Interest Benefits of Exclusivity . . . . . . . . . . . 23 C. Duration of Exclusivity . . . . . . . . . . . . . . . . . . . 30 D. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . 36 V. Ordering Clause . . . . . . . . . . . . . . . . . . . . . . . . . . 37 I. INTRODUCTION 1. The Commission has before it a petition filed by NewsChannel, a Division of Lenfest Programming Services, Inc. ("LPSI"), a regional and local news network, requesting a public interest determination pursuant to Section 628(c) of the Communications Act of 1934 (the "Communications Act") and Section 76.1002(c)(4) of the Commission's rules authorizing NewsChannel to enter into exclusive program distribution agreements with its cable affiliates. NewsChannel contends that granting its request will serve the public interest because it will promote the development of diverse programming while providing viewers with increased access to local news and information. 2. The petition was placed on public notice on August 26, 1994, and is unopposed. Based on the record before us, and pursuant to the criteria set forth in the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"), we have determined that allowing NewsChannel to enter into limited exclusive distribution arrangements with multichannel video programming distributors, as described below, is in the public interest. We thus will grant NewsChannel's petition. II. BACKGROUND 3. Section 628(c)(2)(D) of the 1992 Cable Act provides that, in areas served by a cable operator, exclusive contracts for satellite cable programming between vertically integrated programming vendors and cable operators are prohibited unless the Commission determines that such exclusivity is in the public interest. In determining whether the proposed exclusivity is in the public interest, the statute directs the Commission to consider five specific factors: (a) the effect of such exclusive contract on the development of competition in local and national multichannel video programming distribution markets; (b) the effect of such exclusive contract on competition from multichannel video programming distribution technologies other than cable; (c) the effect of such exclusive contract on the attraction of capital investment in the production and distribution of new satellite cable programming; (d) the effect of such exclusive contract on diversity of programming in the multichannel video programming distribution market; and (e) the duration of the exclusive contract. 4. NewsChannel is a Division of LPSI which is a wholly owned subsidiary of Lenfest Communications ("Lenfest"). Lenfest is a multisystem cable operator ("MSO"), whose systems serve nearly 600,000 subscribers in Southeastern Pennsylvania and Southern New Jersey. Lenfest's ownership of NewsChannel is an "attributable interest" pursuant to Section 76.1000(b) of the Commission's rules, therefore NewsChannel is subject to the Commission's program access rules. Accordingly, NewsChannel may not provide a cable system affiliate the exclusive right to distribute NewsChannel within the operator's franchise area without an affirmative determination by the Commission that such exclusive distribution meets the public interest criteria set forth in Section 628(c)(4) of the 1992 Cable Act. 5. According to petitioner, over the past three years LPSI has been developing the technology and programming sources for the NewsChannel service. On May 18, 1994, NewsChannel launched the service on a test basis on Lenfest's Doylestown, Pennsylvania cable system. The service is "designed to deliver news and information tailored to each community on a system headend basis." To tailor the news to the particular community, NewsChannel has developed a "proprietary computer software and unique hardware" to produce community segments and "sophisticated computer technology" for the headend to select from the digital satellite feed the appropriate local segment for that particular system. NewsChannel seeks authority to enter into exclusive distribution contracts with cable system operator affiliates in four states: Pennsylvania, New Jersey, Maryland and Delaware ("the mid-Atlantic states"), by which the affiliate would receive an exclusive license to distribute NewsChannel in its service areas for a period of seven years. NewsChannel petitions the Commission that its proposed exclusivity meets the statutory public interest standard. III. SUMMARY OF PETITIONER'S ARGUMENTS 6. As support for its petition, NewsChannel heavily relies on our decision in New England Cable News ("NECN"), granting a petition for exclusivity for a new regional news programming service. NewsChannel argues that like NECN, it also faces significant financial hurdles due to the limited distribution area of its regional news service. NewsChannel contends that exclusivity is necessary not only for the financial viability of its service, but simply to launch the service. NewsChannel contends that with the ability to offer exclusive distribution to affiliates, it will secure distribution of its service and ensure financial survival and the ability to provide more subscribers greater programming options through the unique and innovative technology used in delivery of the service. 7. NewsChannel describes the programming service as "consisting of computer generated headlines, text, photos, graphics and video. Off-screen announcers will read short stories over the screen presentation, supplemented by audio soundbites where appropriate." In order to deliver news and information tailored to the particular community, NewsChannel states that it will contract with local newspapers for source material. The various local newspapers will send the community oriented news and information to NewsChannel to be summarized and packaged into short segments by the NewsChannel staff, giving the newspapers on-screen credit for the source material. The local segments are combined with regional, national and international segments, all of which "are digitally produced using proprietary computer software and unique hardware configurations." The segments are transmitted via satellite as an addressed digital stream. NewsChannel states that for each affiliate's headend, the cable operator must install"sophisticated computer technology." 8. NewsChannel contends that the service will benefit the public interest by providing viewers increased access to community news. NewsChannel further contends that the format of the service allows greater access to hearing impaired and visually impaired subscribers by providing the text of the stories on the screen and by providing off-screen announcers to read the text of the stories. 9. NewsChannel contends that the development of the service involved three years of effort and an investment of over $3.25 million dollars to develop the innovative technology needed for a highly specialized delivery system. NewsChannel anticipates that it will have to invest an additional $3 million in order to break even. NewsChannel intends to make the service available on Lenfest systems and to unaffiliated operators in the relevant local markets. NewsChannel argues that the ability to obtain distribution beyond the Lenfest systems is critically important to the service's financial viability. 10. NewsChannel further argues that the inability to offer exclusivity to operators will be an impediment to successful carriage negotiations, and that for certain operators exclusivity is a condition precedent to carriage by that system. NewsChannel notes that one of the largest operators in the area has taken this position and that this operator's "support is necessary for the commercial viability of the channel because that MSO's subscriber base is critical for subscriber revenue and whose advertising base is necessary for the successful sale of regional advertising." NewsChannel argues that without the ability to offer exclusivity "the prospect of obtaining critical mass of cable affiliates necessary to ensure financial viability appears bleak and the future of both Newschannel's innovative programming and unique technology is uncertain at best." 11. NewsChannel states that in NECN the Commission applied the five statutory factors to the facts and found that exclusivity was necessary to attract investment and secure distribution that was essential for financial survival. NewsChannel argues that its situation presents an even stronger case than NECN for the proposed exclusivity. NewsChannel argues that like NECN, NewsChannel is a new start-up news service that must grant program exclusivity to secure distribution agreements. NewsChannel argues that while the Commission held in NECN that exclusivity was necessary for NECN's survival, in this case exclusivity is necessary for NewsChannel's launch and roll-out. In addition, NewsChannel states that NECN was granted exclusive distribution rights in six states, while it is seeking the right to grant exclusive distribution only in four states 12. With respect to the effect on competition from other multichannel video programming distributors ("MVPDs"), NewsChannel argues that the exclusivity sought here will not result in outright denial of access to programming. NewsChannel states that it is not aware of any multichannel multipoint distribution service ("MMDS") or satellite master antenna TV ("SMATV") operator interested in distributing the programming service. Moreover, NewsChannel argues that due to the large start-up costs of equipping each headend and the limited channel capacity of wireless cable systems, it is unlikely that NewsChannel is an option for wireless cable operators. NewsChannel further argues that the exclusivity here, like that in NECN, will not impact the national distribution market because NewsChannel's community specific method of distribution make it unlikely that direct broadcast satellite ("DBS") operators will have an interest in carrying such programming. NewsChannel states that "[p]erhaps the only alternative category of multichannel video provider that may be interested in the carriage of NewsChannel would be video dialtone." NewsChannel contends that because it will not have exclusivity with respect to news sources, if NewsChannel proves to be successful, there is nothing to prevent the development of a similar service. NewsChannel concludes that the denial of service to DBS, MMDS or any other local or national MVPD would be inconsequential. 13. NewsChannel argues that exclusivity for its service, like the NECN exclusivity, is in the public interest because the exclusivity is necessary to attract the necessary investment and secure distribution essential to financial survival. NewsChannel argues that "the Commission has recognized the benefits associated with exclusivity are 'particularly relevant' to the public interest consideration of allowing a start-up regional or local venture grant exclusive distribution rights to its cable affiliates." NewsChannel states that LPSI has invested a significant amount of financial resources in the service and must believe that it will obtain a secure financial base in order to continue the project. NewsChannel contends that the ability to offer exclusivity removes a barrier toward financial viability. NewsChannel further argues that in NECN the Commission relied heavily on the fact that NECN was not offering a national news service, but a regional service with limited distribution potential. NewsChannel argues that NewsChannel's local focus is even more limited than the regional nature of NECN, thus, making exclusivity here even more critical in attracting cable affiliates. 14. Finally, NewsChannel argues that the conclusion reached in NECN, that NECN needed an opportunity to establish itself in order to survive financially, is also true here. Newschannel contends that it must be able to offer long term exclusivity as an incentive to carry the programming and use the technology. NewsChannel states that where NECN had been in operation for two years and reached one million subscribers, Newschannel was launched only three months ago on a test basis and, therefore, its service will take as long, if not longer, to develop than NECN's. Moreover, NewsChannel argues that due to the time needed for negotiations to obtain agreements with local papers and to design and install equipment at each cable system headend, it will be able to roll out only one or two systems per month and thus exclusive distribution rights for seven years or longer is reasonable. IV. ANALYSIS 15. The program access provisions in the 1992 Cable Act were enacted to increase competition and diversity in the multichannel video programming distribution market. When adopting the statute, Congress was concerned with its finding that the majority of cable operators enjoyed a monopoly in program distribution at the local level, and concluded that the use of exclusive contracts between vertically integrated programming vendors and cable operators served to inhibit the development of competition among distributors. In addition, Congress found that increased horizontal concentration of cable operators together with extensive vertical integration has created an imbalance of power between operators and unaffiliated programming vendors, and operators and their multichannel competitors, which also impedes the overall development of competition. 16. Thus, in the 1992 Cable Act, Congress absolutely prohibited exclusive contracts between vertically integrated programming vendors and cable operators in areas unserved by cable, and prohibited such exclusive contracts within areas served by cable absent a specific public interest showing, for a period of ten years. Congress recognized that in areas served by cable, some exclusive contracts between vertically integrated programming vendors and cable operators may provide countervailing benefits to the programming market or to the development of competition among distributors. Congress provided that where such an exclusive contract is demonstrated to be in the public interest, it should be allowed. The public interest criteria set forth in the 1992 Cable Act reflect the benefits to the programming market that exclusivity in areas that are served by cable may provide in a particular case, which ultimately can rebut the presumption inherent in the statute's program access provisions that the use of exclusivity between vertically integrated programming vendors and cable operators frustrates the development of competition. 17. Any agreement between a vertically integrated programming vendor and a cable operator that grants a cable operator the exclusive right to distribute programming within its franchise area must be approved by the Commission before it may be enforced. When engaging in an examination of the proposed exclusive distribution agreement, the Commission will examine the effect of a particular exclusive contract on each of the public interest factors listed in Section 76.1002(c)(3). The Commission has determined that any party seeking a determination that such an agreement meets the statutory public interest standard bears the burden of demonstrating that the proposed exclusivity provides sufficient public interest benefits to outweigh the presumptively anticompetitive effect on competing distributors. The Commission has determined that it will examine petitions for exclusivity on a case-by-case basis and will consider the public interest criteria as a whole in making the statutory determination. 18. Thus, petitioner bears the burden of demonstrating that the benefits of exclusivity on the programming market in this case outweigh the effects on non-cable competitors ability to compete and the effects on the national and local multichannel video programming distribution market. A. Effects of Exclusivity on the Development of Competition in the Distribution Market 19. The public interest factors require us to consider the effect of the exclusivity at issue on two aspects of competition to incumbent cable operators. One statutory factor requires the Commission to consider the effect on the development of competition in local and national programming distribution markets; another statutory factor requires the Commission to consider the effect on competition from MVPD technologies other than cable. As the Commission stated in Time Warner and NECN, "[i]n conjunction with this examination, we believe it is appropriate to evaluate the geographic extent of the proposed exclusivity to identify the relevant markets within which the proposal may affect the development of competing distributors." The Commission has determined that a petitioner may rebut the presumption that exclusive contracts act as a barrier to entry into the MVPD market with a showing that competitive entry is not affected, or that any effects are minimal compared to countervailing public interest benefits to the programming market. 20. With respect to the national distribution market, we note that the proposed exclusivity is limited to the franchise areas of cable systems in the four mid-Atlantic states. National distribution services will be affected by the proposed exclusivity only in this area. However, we believe that NewsChannel has demonstrated that the technical requirements involved in the delivery of the programming service on a community specific basis and the local and regional nature of the service make it unlikely that the proposed exclusivity will effect competition from the national distribution technologies. 21. Petitioner argues that competitors in the local markets in the mid-Atlantic states will be minimally affected by the proposed exclusivity. As noted above, Congress and the Commission found that access to programming by competitors is an essential prerequisite to the ability to compete against incumbent cable operators. Moreover, as discussed in Time Warner, denial of access to popular programming inhibits a competitor's ability to gain subscribers and effectively to compete against the cable operator with the exclusive contract. However, NewsChannel is a new service and its demand is unknown. Because at this point in time the service cannot be considered popular programming, we believe that the proposed exclusivity will not effect the ability of existing alternate technology MVPDs to compete. The fact that no non-cable competitor has expressed an interest in obtaining the service supports our conclusion here. 22. With respect to competitors' ability to enter the local distribution market, NewsChannel identifies video dialtone providers as a category of MVPDs that may be interested in carrying the service. However, NewsChannel dismisses the effect of the proposed exclusivity on this category of MVPD by contending that if NewsChannel becomes successful any entity would be able to develop a similar programming service. The Commission rejected a similar argument in Time Warner, stating that "[w]e cannot imagine that Congress intended the Act to be used to force competitors to develop their own programming, which is precisely what the statute was enacted to prevent." Thus, we are not persuaded by this argument. However, because we do not have any evidence at this time that the exclusivity will effect competition from non-cable MVPDs, the benefits that we believe will inure to the programming market (as discussed below) weigh in favor of granting the exclusivity. B. Public Interest Benefits of Exclusivity on the Programming Market 1. Attraction of Capital Investments in Production and Distribution of Programming 23. Congress and the Commission recognized that exclusivity in some circumstances can serve as an investment incentive for cable operators to finance, promote and carry a new service. All new programming services face similar difficulties in securing carriage commitments for the launch of a service and attracting financial backing which may be ameliorated by the ability of the programming vendor to offer exclusive distribution. However, exclusivity is a tool on which Congress has placed specific limits for vertically integrated programming vendors. Where a vertically integrated programming vendor demonstrates that it faces unique obstacles or limitations in attracting investments and securing carriage agreements for a new programming service, such that its viability requires the ability to offer the additional incentive of exclusivity, exclusive distribution may be in the public interest. 24. We believe that NewsChannel has shown that its service differs from most programming services because each operator intending to carry the service must install equipment to receive the community-specific programming segments. Thus, operators intending to distribute the service must make a commitment of physical space at the headend and install and operate the equipment, which is not required for the launch of the typical new service. Moreover, the process of distributing the local news segments entails commitments from local newspapers that must be negotiated prior to launch on each system. We find that these unique technical and negotiation requirements for distribution of NewsChannel to each cable system create obstacles to financial viability of the programming service that may be ameliorated by the ability to offer cable operators exclusive distribution rights. 25. NewsChannel also asserts that in order to achieve financial security, the service must be distributed beyond Lenfest's own cable systems. NewsChannel presents evidence that a large cable operator in the area has conditioned carriage on the ability of NewsChannel to grant exclusive distribution rights. NewsChannel argues that without distribution by this and other cable operators in the mid-Atlantic states NewsChannel will not be able to distribute the service widely enough to gain financial viability. 26. We conclude that given the technical requirements for carriage of the service on each cable system and the limited distribution potential, NewsChannel's launch beyond Lenfest systems will require the additional incentive of exclusivity to secure carriage commitments and to ensure financial viability. Thus, we find that the proposed exclusivity is necessary to assure the continued investment in this new programming service. 2. Diversity in Programming 27. The statutory factors set forth in the 1992 Cable Act for the public interest analysis include consideration of the effect of exclusivity on diversity in the programming market. We believe that exclusivity may promote diversity in the programming market by providing incentives for cable operators to promote and carry a new and untested programming service. As we stated in NECN, to the extent it is consistent with the statute, our regulatory policy will encourage and promote new and innovative media partnerships. 28. The ability to offer reasonably limited exclusive distribution rights to cable affiliates may be essential for the successful launch of NewsChannel and necessary for its financial survival. According to NewsChannel if such financial viability is not achieved, it is possible that the programming market may lose this regional news service. Thus, it appears that promoting the financial viability of this service by allowing exclusive distribution on a limited basis will foster the public interest in enhancing diversity of programming services. 29. In addition, we believe that the launch and introduction of a new and unique service, such as NewsChannel, increases the diversity of services available in the video programming market. As noted above, NewsChannel takes advantage of new and innovative technologies in ways that optimize the delivery of specialized services to cable subscribers. In addition, NewsChannel involves an innovative approach of using print media which also promotes diversity and increases the sources of information available to local cable subscribers. Thus, we conclude that the proposed exclusivity will enhance diversity in the programming market, which weighs in favor of granting NewsChannel's petition. C. Duration of the Exclusive Agreement 30. The final public interest factor that we must consider is the duration of the contract. Where the duration of the exclusivity is tailored to the minimum period of time reasonably necessary to develop and firmly establish the programming service then such limited duration may weigh in favor of allowing exclusive distribution by cable operators. Similarly, we believe that the geographic extent of the exclusivity proposed should be limited to that which reasonably is necessary to develop and to establish the viability of the programming service, while minimizing the effect on the development of competition in the relevant distribution markets. 31. With respect to the proposed duration of exclusivity, the Commission must also balance the benefits of exclusivity to the development and distribution of new, diverse programming against the overreaching goal of the program access rules to foster the development of competition in the distribution marketplace. Therefore, the duration of exclusivity must be limited to achieve the public interest benefits in allowing the programming vendor to develop a viable service, while at the same time limiting any potential disadvantage or hindrance to the growth of competitive MVPDs. NewsChannel states that it has requested the ability to provide exclusivity to its affiliates for seven years because that is the length of time needed to induce cable operators to carry the NewsChannel programming service. NewsChannel further justifies its request for a seven year term for exclusive distribution agreements based on the Commission's grant of exclusivity for seven years to NECN. NewsChannel argues that it will take NewsChannel longer than it took NECN to develop its programming service because of the slow roll-out. 32. In the absence of any opposition from existing or potential competitors, we will not substitute another time period for that proposed by NewsChannel. We are satisfied that the seven year period is both appropriate and reasonable and that the public interest benefits to the programming marketplace from the exclusivity offset any potential effect to competing distributors. Thus, we believe that it is appropriate to allow NewsChannel to provide exclusivity to its cable affiliates for the proposed seven year period. 33. In NECN, the Commission limited NECN's ability to provide exclusive distribution rights to its cable affiliates to eighteen months in order to minimize the potential effects such exclusivity could have on competing distributors in the future. In NECN, the Commission held that the two to three years following its decision may be the most crucial time period during which NECN must establish itself among consumers in order to ensure its long term financial viability. At the time of the Commission's decision, NECN had been operational for two years and had almost one million cable subscribers. In contrast, NewsChannel was only recently launched on a test basis in one cable system. Moreover, due to the time needed to gain the rights to the newspaper source materials and the installation of special equipment, NewsChannel contends that it would be able to roll-out its programming service on only one or two systems per month. Given these distinctions, we believe that eighteen months may not be long enough for NewsChannel to establish itself among consumers. Instead, we believe that a period of four years is a reasonable period of time to allow NewsChannel the opportunity to establish itself as a viable service without unduly restricting competitors access to the programming necessary to compete effectively against incumbent cable operators. 34. We believe that NewsChannel has demonstrated a need to offer exclusivity to potential affiliates as an additional incentive to encourage investment and carriage negotiations over the next four years. However, we also determine that all exclusive distribution rights provided by NewsChannel to its cable affiliates must terminate seven years from the effective date of this Order. We conclude that limiting the duration of exclusivity in this manner, reasonably balances the public interest in promoting the development of competition in the distribution market against the public interest in promoting the financial viability of NewsChannel. 35. The geographic extent of the proposed exclusivity in this case is limited to the franchise areas of the cable systems located within the four mid-Atlantic states. Given the limited appeal and distribution potential of NewsChannel, we believe that the proposed extent of exclusivity is reasonable and adequately limited. Moreover, because there is no evidence that any MMDS operator or SMATV operator in this area is interested in carrying the service, the limited extent of the proposed exclusivity will not significantly effect access to NewsChannel by alternative distributors. Thus, we believe that exclusivity for an appropriate duration within the franchise areas of the cable systems in the four mid-Atlantic states is in the public interest. D. Conclusion 36. We conclude that NewsChannel has demonstrated that its proposed exclusive distribution agreements to cable affiliates in the four mid-Atlantic states is in the public interest. NewsChannel has demonstrated that the proposed exclusive agreement provides an additional incentive to other cable operators to carry the service, thus, ensuring financial viability. We also find that the ability to offer exclusivity will ensure continued investment in and roll-out of the NewsChannel service, thereby promoting the diversity of programming available to subscribers in the video programming market. Moreover, NewsChannel has shown that the limited exclusivity will not have a significant limiting effect on the development of facilities-based competition in the mid-Atlantic distribution market. Thus, upon consideration of the five statutory public interest factors, we find that NewsChannel has met its burden of demonstrating that the statutory presumption that the public interest is served by requiring open access by emerging competing distributors to the NewsChannel service is offset by countervailing public benefits derived from allowing exclusive agreements in order to create incentives for investment in the development and distribution of the service that will promote diversity in the programming market. Thus, for four years from the effective date of this Order, we will allow NewsChannel to offer exclusive distribution to its cable affiliates within their franchise areas in the four mid-Atlantic states. All exclusive distribution rights provided by NewsChannel to cable affiliates must terminate seven years from the effective date of this Order. V. ORDERING CLAUSE 37. Accordingly, IT IS ORDERED, that the petition for exclusivity filed by NewsChannel, a Division of Lenfest Programming Services, Inc., ("NewsChannel") requesting a finding that its proposed exclusive distribution agreements with cable affiliates is in the public interest IS GRANTED as set forth herein, and NewsChannel is hereby authorized to provide exclusive distribution rights to cable affiliates within their franchise areas in the four mid-Atlantic states for the next four years, so long as all such exclusive distribution rights terminate seven years from the effective date of this Order. This action is taken by the Chief, Cable Services Bureau, pursuant to authority delegated by Section 0.321 of the Commission's rules. FEDERAL COMMUNICATIONS COMMISSION Meredith J. Jones, Chief, Cable Services Bureau