DA 94-1172 FOR RECORD ONLY Before The FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of ) ) CLEARVIEW CABLE TV, INC. ) File No. CSR-4247 ) Application for Waiver of Section 76.501(d) ) of the Commission's Rules, ) 47 C.F.R.  76.501(d) ) MEMORANDUM OPINION AND ORDER Adopted: October 19, 1994 Released: October 19, 1994 By the Chief, Cable Services Bureau: 1. On March 24, 1994, Clearview Cable TV, Inc. ("Clearview"), filed a petition for special relief, requesting a waiver of the Commission's rules concerning cable operators' ownership and operation of satellite master antenna television ("SMATV") systems. Clearview seeks this waiver in order to permit the sale of five SMATV systems it owns and operates to Sammons Communications of New Jersey, Inc. ("Sammons"). On July 27, 1994, Clearview filed a supplement to its petition for special relief. Clearview's waiver request is unopposed. 2. Sections 76.501(d) and (e) of the Commission's rules implement Section 613(a)(2) of the Communications Act of 1934 (the "Act"). That section of the Act prohibits a cable operator from offering SMATV service "separate and apart from any franchised cable service, in any portion of the franchise area served by that cable operator's cable system." The Act also permits the Commission to waive the prohibition to the extent necessary to ensure that all significant portions of a franchise area are able to obtain video programming. 3. Clearview seeks a waiver of the SMATV-cable cross-ownership rules because Sammons is the cable franchisee in the area of the five SMATV systems it would purchase from Clearview. Clearview contends that three of the SMATV systems are located in areas of Sammons' franchise area that Sammons does not serve, and that a waiver to permit the sale of those systems is consistent with the Commission's rules. The other two SMATV systems that Clearview seeks to sell to Sammons compete directly with Sammons for subscribers. Clearview states that it is in dire financial straits and contends that, under the circumstances presented, permitting the sale of these two SMATV systems to Sammons would be consistent with the statutory prohibition because it would ensure that all significant portions of the franchise areas in which Clearview provides services continue to receive a source of multichannel video programming. 4. Legal and Regulatory Framework. When it adopted its cross-ownership rules, the Commission observed that the cross-ownership provisions of Section 613 of the Act address Congress' concern that common ownership of different means of video distribution may reduce competition and limit the diversity of voices available to the public. The Commission also noted that the Senate Committee had indicated in the Senate Report that cross-ownership rules were necessary to enhance competition and further diversity because they prevent cable operators from warehousing facilities that could be used by potential competitors, and because they prevent anti-competitive acts that would limit the types of services available. Accordingly, the Commission concluded that the purpose of the statutory provision is to "encourage alternative providers of multichannel video services and to promote the development of local competition [to] established cable operators." 5. When it adopted rules implementing the SMATV-cable cross-ownership restriction, the Commission determined that Congress intended that the SMATV-cable cross- ownership restriction be narrowly tailored. As the Commission observed, the statutory provision does not prohibit all SMATV-cable cross ownership within a cable operator's actual service area. Consequently, although the Commission adopted rules that prohibit a cable operator from acquiring an attributable ownership interest in a separate SMATV service within the cable operator's actual service area, a cable operator is permitted to construct a stand-alone or integrated SMATV system in its actual service area, provided such SMATV service is offered in accordance with the terms and conditions of the cable franchise agreement. Common ownership of a SMATV system that itself qualifies as a "cable system" under Section 602(7)(B) of the Act and a separate stand-alone SMATV system is also permitted. Finally, in the unserved portions of the franchise area, a cable operator is permitted to build or acquire a stand-alone SMATV system, provided such cable-owned SMATV system is operated in accordance with the terms and conditions of the cable franchise agreement. 6. While the SMATV-cable cross-ownership restriction is narrowly tailored, the Commission did determine that a cable operator should not be allowed to acquire existing SMATV facilities within the cable operator's actual service area for the purpose of providing cable service. In reaching this conclusion, the Commission observed that in "light of the important statutory objectives of promoting competition and encouraging diverse sources of programming, such acquisitions would undermine the goals of the cross-ownership restriction and eliminate an important potential source of competition for established cable operators." Therefore, the Commission determined that allowing cable operators to acquire existing SMATV facilities would (1) undermine the goal of encouraging cable operators and SMATV providers to compete directly with one another, (2) reinforce existing cable monopolies and (3) reduce competitive opportunities for SMATV providers within the cable service area. 7. Section 613(a)(2)(B) of the Act authorizes the Commission to waive the statutory cross-ownership requirements "to the extent the Commission determines is necessary to ensure all significant portions of a franchise area are able to obtain video programming." The rules adopted by the Commission mirror this language, providing that the Commission will entertain requests to waive the cross-ownership restrictions where necessary to ensure that all significant portions of the franchise area are able to obtain multichannel video service. The reach of this waiver authority is not addressed further in the context of the SMATV-cable cross-ownership restriction in the First Report and Order. 8. Factual Background. Clearview operates nine SMATV systems in New Jersey, serving approximately 3400 subscribers. Clearview seeks to sell five of the SMATV systems, serving approximately 1125 subscribers, to Sammons. The five systems are all located in Absecon Town in Galloway Township in Atlantic County, New Jersey. Of the four SMATV systems Clearview proposes to retain, two are located in Lawrenceville in Mercer County, New Jersey, and the other two are located in Cranberry in Middlesex County, New Jersey. Clearview states that its subscriber penetration rate is 66.9% and that little room exists for either growth or increased revenue among its SMATV systems. 9. Clearview states that it is in default on a construction loan received from Phillips Credit Corporation ("Phillips"). Clearview notes that it owes over two million dollars to Phillips, that Phillips has deferred part of the monthly principal and thereby reduced the monthly payments but that it is still unable to make the reduced monthly payments, that it is losing approximately $20,000 per month and that Phillips is prepared to foreclose on the loan. 10. Clearview has owned and operated the two SMATV systems in Cranberry, New Jersey -- Rossmore and Clearbrook -- since prior to 1989. In 1989, Clearview acquired the Mattix Forge and Mattix Crossing systems in Absecon, New Jersey, and a partially constructed system at Society Hill I, also in Absecon, New Jersey from RCK. Clearview states that, since that acquisition, it completed construction of the Society Hill I system and constructed the remaining two Society Hill systems in Absecon and the two Lawrence Square Village systems in Lawrenceville, New Jersey. Clearview states that its business plans included projections based upon an exclusive contract to construct SMATV systems in developments by K. Hovnanian Enterprises, Inc., in New Jersey, and rights of first refusal for developments in Florida and Pennsylvania. However, Clearview states that when Hovnanian slowed construction as a result of the sagging economy in the early 1990's, it found itself unable to meet its revenue projections and its loan payments to Phillips. 11. Clearview represents that it will not realize any profit on the sale of the SMATV systems, but rather, that the sale of assets will allow it to pay down enough of the principal debt to Phillips so that its monthly payments will become more manageable and it will be able to continue operating its four remaining SMATV systems, which serve approximately 2283 subscribers. 12. Clearview's Arguments. Clearview represents that the three Society Hill SMATV systems are located in contiguous condominium-style developments where Clearview operates without competition from any other multichannel video distributor. Clearview states that while these three SMATV systems are in Sammons' franchise area, they are located in parts of the franchise area that Sammons does not serve. Clearview further represents that Sammons could not serve the three Society Hill developments by tapping existing curb drops. Rather, approximately 4.5 miles of underground cable would have to be laid to connect the 166 buildings, and the 884 units would have to be post-wired. Therefore, Clearview asserts that grant of a waiver to permit the transfer of those three systems is consistent with Section 76.501(e)(2) of the Commission's rules, which permits cable operators to acquire and operate SMATV systems in unserved areas of the cable operator's franchise area. Clearview contends that while the term "unserved portions of the franchise area" is not defined for purposes of the SMATV-cable cross-ownership rules, the term "area served by a cable system" is defined in Section 76.501(e)(2)(ii) as "any area actually passed by a cable system and which can be connected for a standard connection fee." Consequently, Clearview argues that the three systems that Sammons has not wired represent "unserved portions" of Sammons' franchise area for purposes of the cross-ownership rules (i.e., the non- wired systems are not "passed" by Sammons and cannot be connected to Sammons' system for a standard connection fee). 13. The two other SMATV systems involved in the proposed transaction, the Mattix Forge and Mattix Crossing systems in Absecon, are located in multiple dwelling units ("MDU's") served by both Clearview and Sammons. A total of 626 households are passed in those two systems, 199 of which are served by Sammons and 345 of which are served by Clearview. Clearview recognizes that permitting Sammons to acquire those two systems would result in a loss of competition within the MDUs. However, Clearview contends that less than fourteen percent of its total SMATV subscribers would lose the ability to select from competing providers of multichannel video programming. 14. Clearview notes that among the four SMATV systems it intends to retain, there are competing multi-channel video programming distributors for two of the four systems. In particular, Clearview states that it is the sole provider of multichannel video programming for its 1865 subscribers in the Clearbrook system, in Cranberry, and to the 140 subscribers in the Rossmore system. On the other hand, its two Lawrence Square Village SMATV systems are within the franchise area of Comcast of Mercer County, and Clearview represents that it directly competes with Comcast for subscribers in those systems. Clearview states that it has attained a penetration level of approximately 47% with 278 subscribers in those two systems, while Comcast has a penetration level of approximately 25%. Clearview provides this information in an effort to demonstrate that if it is not permitted to sell the five systems in Absecon to Sammons, the net result will be that a majority of its subscribers will be left without any multi-channel video programming because of the impending foreclosure and bankruptcy, and that none of its subscribers will be able to select between competing multichannel video programming distributors ("MVPD's"). 15. Clearview represents that it has endeavored in good faith to locate a buyer for its Society Hill and Mattix SMATV systems. Clearview states that it actively marketed the systems to: (1) cable operators that are not franchised to serve the area where the five SMATV systems are located, including TKR, Comcast and Storer; (2) ACS Enterprises, a Philadelphia SMATV and wireless cable operator; (3) Telecomm, Inc., and other SMATV operators; and (4) a private cable investor. However, Clearview states that Sammons was the only party that expressed any interest in acquiring the systems. 16. Clearview contends that in enacting the SMATV-cable cross-ownership prohibition, Congress sought to ensure that a diversity of voices are available to the public and to limit potential anti-competitive activity. However, Clearview contends that where SMATV subscribers face the loss of their only source of multi-channel video programming service, Congress saw the need to permit waivers of the rule "to the extent the Commission determines is necessary to ensure that all significant portions of a franchise area are able to obtain video programming," and deliberately included this provision as a safeguard to ensure that at least one source of multi-channel video programming is available to all potential subscribers. Clearview contends that the Commission's rule allowing cable operators to acquire or construct SMATV systems in unserved areas within their franchise area was adopted in recognition of this safeguard. 17. Clearview also asserts that grant of its requested waiver would be consistent with Commission precedent pertaining to the granting of waiver in the context of the cable- television cross-ownership rules. Clearview contends that the rationale underlying the cable- television cross-ownership restriction -- to secure a diversity of voices by preventing the concentration of video programming sources in a market in the hands of any one television station licensee -- is similar to the rationale underlying the SMATV-cable cross-ownership rules. Therefore, Clearview asserts, the reasoning applied by the Commission in Falcon Communications (Petition for Special Relief) should apply to its present situation. Clearview states that in Falcon Communications, the Commission granted a waiver of the cable-television cross-ownership rule upon finding that the number of subscribers actually affected by the overlap involved in the proposed acquisition by the television station of the cable system was small (239 of the 770 cable subscribers were in the overlap area) and the cable system was in a "dire economic predicament" facing foreclosure, thus endangering cable television service in all of the communities served by the cable system. 18. Clearview states that its own dire financial condition cannot be resolved without a sale of assets, and that Sammons is the only buyer interested in acquiring some of its SMATV properties. Rather than endangering the SMATV service provided by Clearview to its approximately 3400 subscribers, Clearview contends that the public interest would be served by granting the waiver and allowing Sammons to acquire the two Mattix systems where Clearview serves 345 subscribers in competition with Sammons. 19. Discussion. The Commission's rules permit a cable operator to construct or acquire SMATV facilities within its franchise area in areas not served by the cable system. Indeed, the Commission expressly stated that "if a cable operator has not wired its entire franchise area, the cross-ownership ban does not prevent the operator from building or acquiring a stand-alone SMATV system." Clearview correctly notes that the Commission did not define "unserved portions of a franchise area" in the context of its analysis of the SMATV-cable cross-ownership rules in the First Cross-Ownership Report & Order. However, the Commission's SMATV-cable cross-ownership rules expressly state that the "term 'area served by a cable system' shall mean any area actually passed by a cable system and which can be connected for a standard connection fee." Moreover, in the discussion of the MMDS-cable cross-ownership rules in the First Cross-Ownership Report & Order, the Commission observed that this same definition is provided in the context of the program access provisions and in the Conference Report accompanying the 1992 Cable Act. 20. We need not decide the precise contours of the portion of the franchise area that is served by Sammons, however, for the purpose of resolving Clearview's petition. In its unopposed petition, Clearview states that Sammons would have to lay approximately 4.5 miles of cable plant in order to provide cable service to the three Society Hill facilities. We conclude that, under any possible definition of an area served by cable, Clearview has established that the three SMATV facilities at Society Hill are not in a portion of the franchise area that is served by Sammons, and accordingly, that the cross-ownership restriction does not preclude their acquisition by Sammons. 21. The two SMATV facilities at Mattix, where Clearview and Sammons directly compete, present a more difficult question. As noted above, our waiver authority derives from the provision of both the statute and the Commission's rules that permits the grant of waivers where necessary to ensure that all significant portions of a franchise area are able to obtain multichannel video service. Clearly, permitting Sammons to acquire the SMATV systems where it currently competes with Clearview would not, standing alone, result in the provision of cable service to significant areas that would otherwise not be served. 22. However, based upon the evidence presented by Clearview regarding its financial situation, particularly the apparently imminent foreclosure by Phillips, it appears that denial of the waiver would result in the loss of any available multichannel video programming service to the three Society Hill developments and the Rossmore and Clearbrook developments, which currently are served solely by Clearview. By granting the waiver, we are allowing Clearview to remain in business, which ensures that those parts of franchise areas in which it is the sole provider remain able to obtain multichannel video service. A denial of the waiver would also result in the loss of competitive multichannel video service in the Lawrence Square developments where Clearview competes with Comcast. Accordingly, the policy preference for preserving competition from SMATV systems that underlies the cross-ownership restrictions would be disserved by a denial of Clearview's petition for waiver because such competition would be eliminated by Clearview's demise. 23. The Commission has long recognized that economic realities are often a component of waiver requests. We note that in the context of the television one-to-a-market rules, the Commission looks favorably on waiver requests involving "failed" stations, i.e., stations that have not been operational for a substantial period of time (four months) or that are involved in bankruptcy proceedings. Also, when examining one-to-a-market waiver requests on a case-by-case basis the financial difficulties of the station is one factor the Commission has explicitly noted it will consider. The "failed" station rationale was also employed by the Commission to allow certain radio-UHF television combinations under earlier versions of the Commission's broadcast multiple ownership rules. 24. Another factor the Commission has looked at in waiver cases in other contexts is the unavailability of alternative buyers. For example, in the context of the Commission's policy regarding television satellite stations, one of the three criteria for entitlement to a presumption that operation of a full power terrestrial broadcast station as a "satellite" (through the retransmission of all or part of the programming of a commonly-owned television broadcast station) will serve the public interest is if "no alternative operator is ready and able to construct or to purchase and operate the satellite as a full-service station." Under that criteria, a prospective seller must establish its diligence in trying to find a buyer. Similarly, under the case-by-case analysis for waivers of the one-to-a-market rules, information related to whether a station has been offered for sale, but to no avail, will be considered in assessing the financial difficulties of a station. 25. One of the Commission's public interest obligations is to exercise its discretion and expert judgement to assess the costs and benefits of combinations in the same market and carefully weigh and consider requests for waivers of its rules. We recognize that permitting Clearview to sell the two Mattix development SMATV systems to Sammons will reduce competition and limit the diversity of voices available to the public in those two developments. However, the case presented here does not implicate Congress' concerns regarding warehousing of competition or anti-competitive conduct by the franchised cable operator. Moreover, the continued economic viability of Clearview would preserve competition and further diversity in other developments where it operates SMATV systems. Further, upon balancing the equities involved in this case, we believe that if granting the waiver will permit Clearview to remain in business, albeit as a smaller competitor, then the grant would also serve the important policy goal of encouraging and promoting alternative distribution sources of multichannel video programming. 26. Based upon the totality of the evidence presented, we conclude that: (1) the requested waiver will permit the continued uninterrupted offering of multichannel video programming within the SMATV systems in Absecon, Lawrenceville and Cranberry, New Jersey; (2) the requested waiver will ensure that significant portions of the franchise area in Absecon township will obtain multichannel video programming; (3) the Society Hill developments in Absecon township are in an area of Sammons' franchise area that Sammons does not serve; (4) the transaction does not implicate warehousing concerns; (5) Clearview has endeavored to find alternative buyers for the systems; (6) Clearview faces foreclosure and bankruptcy; and (7) a relatively small number of Clearview subscribers will be affected by the loss of competitive offerings of multichannel video programming. Accordingly, we conclude that, under the particular circumstances present in this case, granting Clearview's petition to waive Section 76.501(d) will best serve the public interest and is consistent with our obligations pursuant to Section 613 of the Act. 27. The waiver granted herein applies only to the transaction with Sammons Communications of New Jersey, Inc., and is conditioned upon the operation of the SMATV systems at issue by Sammons Communications of New Jersey, Inc. in accordance with the terms and conditions of its franchise agreement. 28. In view of the foregoing, IT IS ORDERED that, pursuant to 47 C.F.R.  0.321, the request for waiver of 47 C.F.R.  76.501(d) IS GRANTED with respect to the proposed transfer of the Clearview SMATV systems at Society Hill, Mattix Forge and Mattix Crossing in Absecon, New Jersey to Sammons Communications of New Jersey, Inc. FEDERAL COMMUNICATIONS COMMISSION Meredith J. Jones Chief, Cable Services Bureau