[Federal Register: June 8, 2005 (Volume 70, Number 109)]
[Proposed Rules]
[Page 33679-33687]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08jn05-56]
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Part VI
Federal Communications Commission
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47 CFR Part 76
Cable Television Horizontal and Vertical Ownership Limits; Proposed
Rule
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FEDERAL COMMUNICATIONS COMMISSION
47 CFR Part 76
[MM Docket No. 92-264; FCC 05-96]
Cable Television Horizontal and Vertical Ownership Limits
AGENCY: Federal Communications Commission.
ACTION: Proposed rule.
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SUMMARY: The Commission seeks additional input on horizontal and
vertical cable ownership limits to satisfy the legislative mandate in
the Cable Television Consumer Protection and Competition Act of 1992
(1992 Cable Act) and the court's directives in Time Warner
Entertainment Co. v. FCC, 240 F.3d 1126 (D.C. Cir. 2001) (Time Warner
II). Section 613(f) of the Communications Act, enacted as part of the
1992 Cable Act, directs the Commission to conduct proceedings to
establish reasonable limits on the number of subscribers a cable
operator may serve (horizontal limit) and the number of channels a
cable operator may devote to its affiliated programming networks
(vertical, or channel occupancy, limit). The court in Time Warner II
reversed and remanded the Commission's 30% horizontal ownership limit
and its 40% channel occupancy limit. The Commission concludes that it
is necessary to update and strengthen the evidentiary record, which
must be sufficient to support revised ownership limits.
DATES: Comments are due on or before July 8, 2005, and reply comments
are due on or before July 25, 2005.
ADDRESSES: You may submit comments, identified by MM Docket No. 92-264,
by any of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Federal Communications Commission's Web Site: http://www.fcc.gov/cgb/ecfs/.
Follow the instructions for submitting comments.
People with Disabilities: Contact the FCC to request
reasonable accommodations (accessible format documents, sign language
interpreters, CART, etc.) by e-mail: FCC504@fcc.gov or telephone: 202-
418-0530 or TTY: 202-418-0432.
For detailed instructions for submitting comments and additional
information on the rulemaking process, see the SUPPLEMENTARY
INFORMATION section of this document.
FOR FURTHER INFORMATION CONTACT: Barbara Esbin or Patrick Webre, Media
Bureau, (202) 418-7200, or via Internet at
Barbara.Esbin@fcc.gov or Patrick.Webre@fcc.gov.
SUPPLEMENTARY INFORMATION: This is a synopsis of the Commission's
Second Further Notice of Proposed Rulemaking in MM Docket No. 92-264,
adopted May 13, 2005, and released May 17, 2005. The complete text of
this Second Further Notice of Proposed Rulemaking (Second FNPRM) is
available for inspection and copying Monday through Thursday from 8
a.m. to 4:30 p.m. and Friday from 8 a.m. to 11:30 a.m. in the
Commission's Consumer and Governmental Affairs Bureau, Reference
Information Center, Room CY-A257, Portals II, 445 12th Street, SW.,
Washington, DC 20554. The complete text is also available on the
Commission's Internet Site at http://www.fcc.gov. Alternative formats
are available to persons with disabilities by contacting Brian Millin
at (202) 418-7426 or TTY (202) 418-7365. The complete text of the
Second FNPRM may also be purchased from the Commission's duplicating
contractor, Best Copying and Printing, Inc., Portals II, 445 12th
Street, SW., Room CY-B402, Washington, DC 20554, telephone (202) 863-
2893, facsimile (202) 863-2898, or via e-mail at http://www.bcpiweb.com
.
Synopsis of the Second Further Notice of Propose Rule Making (Second
FNPRM)
I. Introduction
1. Pursuant to Section 613(f) of the Communications Act, which was
enacted by the Cable Television Consumer Protection and Competition Act
of 1992 (1992 Cable Act),\1\ the Commission must conduct proceedings to
establish reasonable limits on the number of subscribers a cable
operator may serve (horizontal limit), and the number of channels a
cable operator may devote to its affiliated programming networks
(vertical, or channel occupancy, limit). Congress intended the
ownership limits mandated by Section 613(f) to ensure that cable
operators did not use their dominant position in the multichannel video
distribution (MVPD) market, acting unilaterally or jointly, to unfairly
impede the flow of video programming to consumers. At the same time,
Congress recognized that multiple system ownership could provide
benefits to consumers by allowing efficiencies in the administration,
distribution and procurement of programming, and by providing capital
and a ready subscriber base to promote the introduction of new
programming services.
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\1\ Cable Television Consumer Protection and Competition Act of
1992, Pub. L. 102-385, 106 Stat. 1460; Communications Act of 1934,
47 U.S.C. 151, et seq. (Communications Act).
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2. The Commission first established a 30% horizontal ownership
limit and a 40% vertical ownership limit in 1993.\2\ Initially, the
horizontal limit prohibited any cable operator from serving more than
30% of all homes passed by cable. In 1999, the Commission revised the
horizontal limit to permit a cable operator to reach 30% of all MVPD
subscribers. The vertical limit bars cable operators with 75 or fewer
channels from devoting more than 40% of their channel capacity to
affiliated programming. For systems with more than 75 channels, the
limit applies only to 75 channels. The United States Court of Appeals
for the District of Columbia Circuit in Time Warner Entertainment Co.
v. FCC (Time Warner II) reversed and remanded both limits.\3\ In
response, the Commission issued a Further Notice of Proposed Rulemaking
(2001 FNPRM),\4\ in which it solicited comment on the nature of the
MVPD industry, industry changes since the 1992 Cable Act, how these
changes affected the implementation of horizontal and vertical limits,
and various proposals for a new horizontal limit.
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\2\ Second Report and Order, 58 FR 60135, November 15, 1993.
\3\ 240 F.3d 1126 (D.C. Cir. 2001). The D.C. Circuit upheld the
underlying statute in Time Warner Entertainment Co. v. United
States, 211 F.3d 1313 (D.C. Cir. 2000) (Time Warner I).
\4\ 66 FR 51905, October 11, 2001. After the 2001 FNPRM, the
Commission issued an Order which suspended the elimination of the
broadcast single majority shareholder exemption pending the outcome
of this proceeding. FCC 01-353, 16 FCC Rcd 353 (2001).
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3. None of the comments to the 2001 FNPRM yielded a sound
evidentiary basis for setting horizontal or vertical limits as demanded
by the court in Time Warner II. The Commission subsequently sought to
augment the record by means of a programming network survey \5\ and an
experimental economics analysis (the BKS Study) \6\. The programming
network survey yielded little useful information. The BKS Study and a
theoretical work of Adilov and Alexander \7\ suggest that,
[[Page 33681]]
under certain conditions, increased firm size can produce an improved
bargaining position and adversely affect the flow of programming.
However, these analyses of bargaining power are imprecise in
determining the point at which such increased bargaining power impedes
the flow of programming.
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\5\ Letter from W. Kenneth Ferree, Chief, Cable Services Bureau,
FCC, to Programming Network Owners (Feb. 15, 2002).
\6\ Mark Bykowsky, Anthony Kwasnica, & William Sharkey,
Horizontal Concentration in the Cable Television Industry: An
Experimental Analysis, FCC Office of Plans and Policy, Working Paper
No. 35 (June 2002 & rev. July 2002) (BKS Study). The BKS Study was
released for public comment and was placed in the record of this
proceeding.
\7\ Nodir Adilov & Peter J. Alexander, Asymmetric Bargaining
Power and Pivotal Buyers, FCC Media Bureau Working Paper No. 13
(Sept. 2002) (Asymmetric Bargaining Power); Nodir Adilov & Peter J.
Alexander, Most-Favored Customers in the Cable Industry, FCC Media
Bureau Working Paper No. 14 (Sept. 2002).
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4. In addition to the deficiencies in the record, a number of
significant events have occurred since the release of the 2001 FNPRM
that must be taken into account in fashioning cable ownership limits.
First, the 2002 Comcast-AT&T cable transaction resulted in one entity
having a share of MVPD subscribers very close to our remanded 30%
ownership limit. Second, the 2003 News Corp.-Hughes transaction created
the first vertically integrated DBS operator, involving a number of
video programming assets. Third, courts have remanded media ownership
rules in three decisions, requiring that the Commission more firmly
base its rules on empirical data and record evidence.
5. The Commission concludes that a Second FNPRM is necessary and
seeks comment on the proposals in the record, on recent developments in
the industry, and on certain tentative conclusions. The Commission asks
commenters to supplement the record where possible by providing new
evidence and information to support the formulation of horizontal and
vertical limits, and invites parties to undertake their own studies in
order to further inform the record. The Commission also invites comment
on Media Bureau Staff Research Paper No. 2004-1 (Survival Analysis),
which examines the effect of subscribership on a network's ability to
survive in the marketplace.\8\
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\8\ Keith S. Brown, A Survival Analysis of Cable Networks, Media
Bureau Staff Research Paper No. 2004-1 (rel. Dec. 7, 2004) (Survival
Analysis). The study is being placed in the record of this
proceeding.
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II. Second Further Notice of Proposed Rulemaking
A. Legal Framework
6. The Second FNPRM in paragraphs 18 through 26 examines the
statutory objectives of the 1992 Act, and discusses the Commission's
previous efforts to implement the statute and judicial review of those
efforts. The Second FNPRM in paragraphs 27 through 37 examines the
elements of the horizontal and vertical limits in light of the stated
objectives of the 1992 Act and the Time Warner I \9\ and Time Warner II
decisions. Section 613(f)(1) of the Communications Act directs the
Commission to set horizontal and vertical limits in order to ``enhance
effective competition.'' Section 613(f)(2) sets forth seven specific
criteria and public interest objectives to be taken into account in
setting horizontal and vertical limits. The Second FNPRM considers each
of these criteria.
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\9\ Time Warner Entertainment Co. v. United States, 211 F.3d
1313 (D.C. Cir. 2000) (Time Warner I).
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7. Horizontal Limits. In ruling that the Commission had failed to
meet the required evidentiary standard, the court in Time Warner II
stated that the Commission must base the limits on a ``non-conjectural
risk'' of economic harm. In response to the 2001 FNPRM, cable operators
generally oppose the imposition of any ownership limits.
As discussed in paragraphs 39 through 44 of the Second FNPRM, the
Commission tentatively concludes that the language of Section 613(f)
requires us to set some limit on the number of MVPD subscribers one
entity may reach, and that Congress gave the Commission significant
discretion in determining the ownership limits, both in their absolute
level as well as in their form and structure. The Second FNPRM seeks
comment on the Commission's tentative conclusions.
8. Vertical Limits. In response to the 2001 FNPRM, the Consumer
Federation of America (CFA) argues that although horizontal market
power is the primary focus of this proceeding, vertical market power is
the driving force behind the horizontal ownership cap. CFA argues that
vertical market power results in anticompetitive conduct, and that when
dominant firms become integrated across markets for critical inputs,
there are potential problems, and that vertical integration can create
barriers to entry. However, CFA fails to offer any argument or evidence
on how a channel occupancy limit can prevent the harms it alleges.
Alternatively, commenters representing the cable industry argue that no
vertical limit is necessary.
9. As discussed in paragraphs 45 through 48 of the Second FNPRM,
the Commission observes that Section 613(f) directs us to establish a
reasonable vertical limit, and we are not persuaded that ``reasonable''
can be construed as ``no'' limit. Thus, the Commission tentatively
concludes that Section 613(f) requires the Commission to set both cable
horizontal ownership and vertical channel occupancy limits at some
number. The Second FNPRM seeks comment on how we can set both
horizontal ownership and channel occupancy limits that will survive
constitutional scrutiny in light of present circumstances.
B. Industry Developments
10. As discussed in paragraphs 49 through 58 of the Second FNPRM,
there have been significant changes in the MVPD industry that bear upon
the question of establishing reasonable cable horizontal and vertical
ownership limits. The current MVPD market differs dramatically from
that which existed when Congress enacted the subscriber and channel
occupancy provisions of the 1992 Act. Cable operators, as well as other
MVPDs, have been increasing their plant capacity, and have upgraded and
enhanced system capabilities. As a result, MVPDs are offering
substantially more programming networks and are rolling out new,
advanced services to their customers, including digital tiers, video-
on-demand and subscription video-on-demand. In addition to, and
possibly as a result of the increased plant capacity of cable
operators, the number of national programming networks has increased
dramatically in recent years. Similarly, competition among programming
networks and their diversity of source and content has increased. The
Second FNPRM seeks comment on the effect that these developments,
including the possibility of Internet-based distribution of
programming, may have on the opportunity for independent programmers to
gain distribution of their programming. It also requests information on
plans cable operators may have to increase channel capacity further,
and comment on the implications of such efforts.
11. Unaffiliated Programming Networks. Paragraphs 59 and 60 of the
Second FNPRM examine some of the factors that have been integral to the
success of new programming networks that are not affiliated with any
cable operator. The Second FNPRM seeks comment on whether there is a
relationship between ownership limits and the ability of independent
programmers to gain carriage from cable operators, and remain
independent, viable entities.
C. Economic Basis for Horizontal Limit
12. The Second FNPRM, in paragraphs 61 through 142 considers
potential harms and benefits of horizontal concentration and proposed
economic foundations for establishing a horizontal limit on cable
operator size. None of the comments filed in response to the 2001 FNPRM
yields a sound
[[Page 33682]]
evidentiary basis for setting horizontal or vertical limits.
1. Defining the Market
13. The 2001 FNPRM proposed a definition of markets in which the
Commission distinguished between three separate but interrelated
markets: The production of programming; the packaging of programming in
networks; and the distribution of programming to consumers. While the
Commission has received comments on these proposed market definitions,
we find that some key questions remain unresolved. The Second FNPRM
therefore seeks comment on certain questions and seeks further analysis
and evidence to help resolve the issues raised.
(a) Programming Market
14. In response to the 2001 FNPRM, one commenter argues that the
Commission should not be concerned with networks' ability to enter the
market, but instead should focus on program producers' ability to find
outlets to distribute their programming to the public. Under this
theory, the ability of networks to enter the MVPD marketplace would not
be important if there are sufficient conduits for programming to reach
consumers. If, on the other hand, networks play a significant role in
developing and producing original and high quality programming, then
the entry of new networks will encourage the production and
distribution of new programming to consumers. The Second FNPRM seeks
comment generally on the role that networks play in the production and
distribution of programming, and on the role of niche networks in the
development of genre-specific programs that may target audiences that
are too small and specific to make them attractive to general
entertainment networks or networks serving other genres.
(b) Programming Distribution Market
15. The Commission previously determined that the programming
distribution market should be measured by the number of subscribers
rather than the number of homes passed, and that DBS subscribers should
be included in the count of total subscribers to which the limit is
applied; that is, that the limit should be formulated as a percentage
of all MVPD subscribers, rather than as a percentage of cable homes
passed. The Second FNPRM seeks further comment on the appropriate
definition of the programming distribution market, and tentatively
concludes that other physical conduits such as theatrical showings in
movie theaters and sales and rentals of VHS tapes and DVDs, should not
be considered part of the same market of programming network
distribution.
(c) Relevant Geographic Markets
16. In the 2001 FNPRM, the Commission recognized that ``[t]he
geographic market for certain types of niche programming may * * * be
national or international in scope'' and sought comment on this
conclusion. Some commenters allege that the market for programming is
international. Other commenters say the Commission should also consider
regional markets. The Commission continues to find it reasonable to
concentrate our inquiry on the effects of cable concentration in the
United States, and ask for comment on this tentative conclusion. The
Commission also believes that regional markets may be relevant when
considering programming that is only of interest to, or available in, a
particular region. The Second FNPRM seeks comment on whether and how
the existence of regional markets should affect the Commission's
development of horizontal and vertical limits. Specifically, the Second
FNPRM asks whether a regional limit on concentration would better
effectuate any of the statutory purposes set forth in Section
613(f)(2), and if so, under what circumstances, and what would be the
measure?
2. Potential Harms of Horizontal Concentration
(a) Analytical Frameworks for Economic Analysis of Harms
17. In paragraphs 71 through 136 of the Second FNPRM, the
Commission seeks further comment on the appropriate economic framework
for determining whether, and at what level, a cable operator's size is
likely to impede the flow of programming to consumers or diminish
effective competition, and discusses the strengths and weaknesses of a
number of proposed analytical frameworks and economic theories.
(1) Open Field Approach
18. In 1999, the Commission adopted horizontal limits based on a
theory that cable operators at certain concentration levels could
effectively prevent programming networks from entering or surviving in
the marketplace simply by deciding not to carry them. The Commission
found that a new programming network needs to have access to 15 to 20
million subscribers and that the typical programming network had only a
50% chance of actually reaching all available MVPD subscribers. The
Commission concluded that a programmer needed to have an ``open field''
of 40% of MVPD subscribers nationwide and that a 30% MVPD subscriber
limit would assure that a 40% open field remained even if the two
largest cable operators decided not to carry it.
19. The Time Warner II court rejected certain aspects of this
approach, finding that the Commission lacked any evidence that cable
operators would collude and that it could not simply assume that cable
operators would coordinate their behavior. Further, the court held that
Section 613(f)(1) does not authorize the agency to regulate the
``legitimate, independent editorial choices of multiple MSOs.'' Thus,
the court found that the record supported only a 60% limit under the
Commission's 40% open field premise. However, the court did not reach
the question of whether the 40% open field assumption was reasonable.
The court stated that on remand the Commission should take into account
the effects of retail competition from DBS and other MVPDs.
20. In response to the 2001 FNPRM, several commenters claim that an
open field approach cannot justify a horizontal limit. For example,
commenters point out that many successful programming networks reach
fewer than 15 million subscribers. Commenters also dispute the methods
the Commission used to move from the 20% of the industry necessary for
network survival to the 30% limit, such as the 50% success rate
assumption, and theories of collusion. The statute does not refer to
particular types of programming networks, but rather to programming
generally. The simple fact that some networks may be able to survive
with fewer subscribers than others does not invalidate the use of
averaged data to fashion a limit. The Second FNPRM seeks comment on
whether the Commission should focus its analysis on the minimum number
of subscribers needed by an average network, or instead examine
separately the requirements of networks with high-cost and those with
low-cost programming.
21. The Second FNPRM seeks additional comment on whether the
Commission should continue to use an open field approach. Commenters
should focus on a programmer's ability to survive in the marketplace
without carriage by the largest operator. Commenters advocating the use
of an open field approach should also address how the Commission should
determine the size of the open field, recognizing that different types
of networks may
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require different subscriber reaches to be viable, depending on the
cost of the programming, the target audience, and projected advertising
revenue.
22. While developing a defensible horizontal limit under the open
field approach requires an analysis of the number of subscribers a
programmer needs in order to remain viable, the record in this
proceeding generated almost no comments from independent cable
programming networks. In another proceeding, the Media Bureau released
a report (A La Carte Report) on the efficacy of a la carte pricing
(i.e., offering networks on a per-channel basis rather than only as
part of a package) in the pay-television industry. In that proceeding,
several video programmers alleged adverse impacts of mandated a la
carte or themed-tier offerings, and provided new and insightful data
and information on the current real-world relationships between content
providers and distributors.\10\ The Commission finds this data relevant
to our analysis of reasonable horizontal ownership limits and seeks
comment on how it should be applied.
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\10\ See, e.g., Comments filed in MB Docket No. 04-207 (A La
Carte Proceeding), Oxygen Comments at 2-8; A&E Comments at 15-25;
Crown Media Comments at 7-12; TV One Comments at 1-3, Decl. of Larry
D. Gerbrandt at 4-11.
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23. The Second FNPRM also seeks comment on whether the Commission
should take steps to address the reliability of any subscriber data we
may use in applying the horizontal limit, and whether the Commission
should adopt its own data collection procedures to obtain industry-wide
subscriber data. The Second FNPRM further seeks comment on the recently
released Survival Analysis, which focuses on the actual failure and
success rates of networks and the relationship of those rates to
subscriber reach. The Commission seeks comment on the value of this
method in developing a horizontal limit under the open field approach.
(2) Monopsony Framework
24. In response to the 2001 FNPRM, some commenters argue that the
market for programming does not meet the key conditions necessary for
the applicability of the monopsony \11\ model, in which a large
purchaser of programming could cause harm to the market. On the other
hand, Consumer Federation of America (CFA) maintains that a monopsonist
would have the power to decrease programmers' output and the prices
they receive. In paragraphs 85 through 89 of the Second FNPRM, the
Commission seeks comment on the appropriateness of applying standard
monopsony arguments to the Commission's analysis of the programming
market, and on how monopsony power can be measured.
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\11\ The term ``monopsony'' refers to the situation in which a
firm is the only buyer in a market, and the term ``monopoly'' refers
to the situation in which a firm is the only seller in a market.
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(3) Bargaining Power as a Source of Unilateral Anticompetitive Action
25. Bargaining theory is an alternative framework to the theory of
monopsony for analyzing how a large purchaser of programming services
could exercise market power and cause harm to the market. The 2001
FNPRM suggested that at certain levels of concentration cable operators
could use their bargaining power to force down the prices they pay for
programming, which could harm the flow of programming. In paragraphs 90
through 96 of the Second FNPRM, the Commission explores bargaining
power as a source of unilateral anticompetitive action, and discusses
the inefficiencies that can arise in negotiations for carriage between
programmers and MVPDs.
(a) The Use of Bargaining Theory To Establish New Limits
26. Cable industry commenters draw on the work of Alexander
Raskovich\12\ to argue that large firm size could, in fact, weaken a
cable operator's bargaining position. Raskovich's model is a
generalization of the work of Chipty and Snyder,\13\ who construct a
bargaining framework in which a program seller engages in simultaneous
bilateral bargaining with multiple program buyers. As detailed in
paragraphs 97 through 100 of the Second FNPRM, neither the Chipty and
Snyder model nor the Raskovich model persuades the Commission that
limits on cable operator size are unnecessary. The Commission finds it
unlikely that bargaining power is symmetric across all buyers
regardless of size. Adilov, using basic data from the BKS Study,
estimates bargaining power directly.\14\ Adilov's results reveal
statistically significant differences in individual buyers' bargaining
power, a result that is not consistent with an assumption of constant
bargaining power across firm size. The data generated from the BKS
Study also show that buyers and sellers did not split the economic
surplus evenly under all conditions. The Commission seeks comment on
the usefulness of bilateral bargaining theory in setting an ownership
limit.
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\12\ See Raskovich Comments, later revised and published as
Alexander Raskovich, Pivotal Buyers and Bargaining Position, 51 J.
of Indus. Econ. 4, 405-26 (Dec. 2003).
\13\ Tasneem Chipty & Christopher Snyder, The Role of Firm Size
in Bilateral Bargaining: A Study of the Cable Television Industry,
81 Rev. Econ. & Stat. 2, 326-40 (1999).
\14\ Adilov ex parte statement (Jan. 9, 2003) (submitting Nodir
Adilov, Firm Size and Bargaining Power: A Non-Linear Least Squares
Estimate from the Cable Industry, Working Paper, Department of
Economics, Cornell University (Nov. 2002)).
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(b) Experimental Economics Study
27. In 2002, the Commission released the BKS Study, which concerns
the extent to which different levels of horizontal concentration among
MVPDs might affect the flow of video programming to consumers. The
study, placed in the record of this proceeding, utilized the
methodology of experimental economics, which examines economic
interactions among market participants in controlled laboratory
settings. Commenters to the 2001 FNPRM raise several objections to
reliance on the BKS Study in setting a horizontal ownership limit. The
Commission recognizes that the BKS study has limitations; however, the
Commission believes that experimental economics can be a useful tool
for evaluating the effects of increasing concentration. The Second
FNPRM seeks comment on whether the Commission should consider employing
experimental economics for purposes of setting an ownership limit.
(c) Additional Factors in the Analysis
28. The Second FNPRM in paragraphs 105 through 136 discusses four
factors that should be considered when designing, evaluating, and
applying an analytical framework.
(1) The Impact of Competition at the Distribution Level
29. The Time Warner II court criticized the Commission for failing
to examine whether cable operators had market power in the distribution
market, and in particular, for failing to take into account the growth
of competition from direct broadcast satellite (DBS) providers. In the
2001 FNPRM, the Commission sought comment on the impact of DBS' growth
and presence on cable operators' market power and on their incentive to
choose programming for reasons other than quality. In response, cable
commenters argue that the Commission must conduct a ``dynamic''
examination of market power, which would show that the Commission need
not impose any limits, since programmers have so many different outlets
for their product that cable operators hold no deleterious market
power. These commenters maintain that because any dissatisfied cable
customer can switch to DBS, cable operators have no incentive to lower
the
[[Page 33684]]
quality or quantity of programming. CFA, however, argues that DBS is
not a substitute for cable, because of its higher price and quality,
and that the rise of DBS competition has failed to limit cable rate
increases. CFA points to survey data that show that rural areas often
lack cable service, and that a large proportion of satellite customers
live in rural areas. CFA claims that the survey data demonstrate that
for most satellite customers cable is not a substitute.
30. The Second FNPRM seeks comment on CFA's arguments and evidence,
especially in light of the rapid growth of DBS subscribership and
recent changes in the prices and programming DBS operators offer. It
also seeks comment on whether a dynamic analysis of the type envisioned
by cable commenters is necessary, and comment on how the Commission
could perform such an analysis. The Second FNPRM further seeks comment
on the degree to which the presence of DBS distribution alternatives
acts to curb cable operators' bargaining power in the total programming
market, and on how the Commission can analyze the effects of
competition in the MVPD market to establish a specific limit.
(a) Threshold Approach
31. Under the threshold approach, the Commission would determine
the level of competition from DBS and other MVPDs necessary to prevent
the harms identified by Congress in Section 613(f). As long as
competition exceeded this threshold, no horizontal limit would be
necessary. The 2001 FNPRM proposed several measures that could be used
in a threshold test and asked for comment on these. The Second FNPRM
requests further comment on the threshold approach, as well as on
whether the Implicit Lerner Index, the ``q'' ratio, the Herfindahl-
Hirschman Index (HHI), or alternative measures of market performance
could be used in the threshold approach.
(2) The Potential for Joint Action
32. The Commission in paragraphs 117 through 125 of the Second
FNPRM asks whether Section 613(f)(2)(A) requires the Commission to
examine the possibility of joint action, in which firms act to maximize
their joint benefits by reducing competition, either through overt or
tacit collusion. Because the language of the Act refers to cable
operators' ``joint actions,'' and because the economics and legal
literatures acknowledge the possibility of tacit collusion in certain
circumstances, the Second FNPRM tentatively concludes that the
Commission should determine whether joint action by cable operators is
likely, and if we determine that it is likely, we should factor this
into the analysis.
33. The Commission notes that an explicit agreement among firms in
a given market may not be necessary for that market to be characterized
by joint action. This kind of coordinated action, ``conscious
parallelism,'' is difficult to detect or control. The 2001 FNPRM sought
comment and economic evidence on whether cable operators have the
incentives to engage in collusive behavior, and on what kinds of
coordinated or collusive conduct would be relevant to the establishment
of a limit. The Commission is not persuaded by the comments received in
response to the 2001 FNPRM that argue that joint action could not occur
under certain circumstances, and the Second FNPRM seeks further comment
on whether cable operators have the incentive and ability to engage in
joint action.
(3) The Impact of Independent Actions by Multiple Cable Operators
34. The Commission, in paragraphs 126 through 127 of the Second
FNPRM asks whether there are theories addressing how multiple cable
operators that are acting independently could unfairly impede the flow
of programming. The Second FNPRM seeks comment on whether such theories
would be consistent with the court's holding in Time Warner II that
promoting diversity alone is not a sufficient basis for crafting a
limit designed to address multiple cable operations' independent
editorial choices. The Commission seeks comment on the ability of cable
operators to identify networks that will be successful, and the cost to
programmers and to consumers of cable operator errors in predicting the
value of new networks. The Commission also requests information on
whether the existence of DBS operators affects these relationships.
(4) The Impact of Vertical Integration
35. The 2001 FNPRM asked whether large cable operators with
programming interests would have an incentive to unfairly favor
affiliated programming over unaffiliated programming, and whether they
could withhold their affiliated programming from competitors in order
to disadvantage or prevent entry by competing MVPDs. The 2001 FNPRM
also asked if vertically-integrated cable operators could use their
size to gain large programming license fee discounts and exclusive
contracts with nonaffiliated programming, and whether this would harm
rival MVPDs, lessen competition, and reduce the flow of programming to
consumers. The Commission, in paragraphs 128 through 136 of the Second
FNPRM finds the studies and analysis submitted in the record on the
issue of vertical foreclosure to be insufficient, and seeks further
comment and empirical evidence on the likelihood of vertical
foreclosure and the ability of a horizontal limit to reduce that
likelihood.
(a) Empirical Studies of Foreclosure
36. In response to the 2001 FNPRM, empirical studies were submitted
to the Commission that examined whether vertically-integrated cable
operators have favored their affiliated programming services and are
likely to do so in the future. However, since the industry has
undergone tremendous change since these studies were performed, the
Commission tentatively concludes that these studies are of little
probative value in our analysis. The Second FNPRM asks in paragraph 135
for more evidence that alternative distribution channels are available
to the kinds of new programming found on cable TV, and will provide
sufficient revenues to provide a means of entering the market. The
Commission also asks whether a programming network could make use of
these alternative distribution channels for distributing its regular
programming, as opposed to a program producer attempting to distribute
a single piece of programming, such as a movie.
37. The Commission finds that cable operators potentially have an
incentive to engage in vertical foreclosure, and that the evidence
presented about their past behavior does not rule out the possibility
that a cable operator of larger size could, in the future, have the
incentive and ability to discriminate against or foreclose an
unaffiliated network. The Second FNPRM seeks comment on independent
analyses that have been performed on this issue since the close of the
comment period in the 2001 FNPRM.
3. Potential Benefits of Horizontal Concentration
38. The 2001 FNPRM asked about the benefits of horizontal
concentration, such as economies of scale, development of new
programming, digital deployment, and investment in non-video services.
Some commenters claim that concentration would bring such benefits. The
Second FNPRM in paragraphs 137 through 142 discusses some theoretical
benefits of concentration; however, the Commission has no evidence that
would
[[Page 33685]]
help us identify these benefits or evaluate them at concentrations
higher than those that exist today. Further, many of the purported
benefits such as high-speed Internet, digital cable and telephony
services are emerging at current levels of concentration, and the
Commission tentatively concludes that further concentration is not
necessary to speed development and delivery of these services.
39. Some commenters argue that high levels of concentration may
provide direct benefits to programmers, in particular by better
enabling programmers to recover their costs. Commenters also argue that
increasing concentration can help solve the potential problem of
multiple small cable operators attempting to free ride on the payments
made by other cable operators, in which each cable operator forces down
the price it pays to a level that fails to cover an adequate share of
the fixed costs. The realization of this potential benefit, however,
depends upon several factors that are not likely to occur in practice.
The Second FNPRM tentatively concludes that commenters have not
demonstrated that allowing a cable operator to become large enough to
become a ``pivotal buyer'' will improve the flow of programming, and
should therefore not be counted as a benefit of increased horizontal
concentration.
D. Vertical Limit
40. Section 613(f) of the Communications Act directs the Commission
to ``prescribe rules and regulations establishing reasonable limits on
the number of channels on a cable system that can be occupied by a
video programmer in which a cable operator has an attributable
interest.'' In 1993, the Commission set a 40% limit on the number of
activated channels that can be occupied by a cable operator's
affiliated video programming services. The Time Warner II decision
reversed and remanded the 40% channel occupancy limit, finding that the
Commission had failed to justify its vertical limit with record
evidence, and had failed to adequately consider the benefits and harms
of vertical integration or current MVPD market conditions in its
analysis. The 2001 FNPRM sought comment on how the Commission could
fashion meaningful and relevant channel occupancy limits given the
changes that have occurred in the MVPD industry.
41. As discussed in paragraphs 143 through 147 of the Second FNPRM,
several commenters assert that the Commission should not adopt any
channel occupancy rules and should not limit the carriage of affiliated
programming. Other commenters, however, assert that horizontal
concentration and vertical integration in the MVPD industry require
that the Commission enact and enforce a strict channel occupancy limit.
42. Both Congress and the Commission have long recognized that
vertical integration produces efficiencies in the production,
distribution, and marketing of video programming; however, we have also
been concerned that such integration may provide an incentive for cable
operators to engage in strategic, anticompetitive behavior. The
economics literature provides support for both propositions, yet none
of the comments filed in response to the 2001 FNPRM yielded a sound
evidentiary basis for either retaining the current vertical limit or
for setting a different limit. Nonetheless, the Commission disagrees
with commenters who assert that the Commission should not adopt any
channel occupancy rules and should not limit carriage of affiliated
programming, finding that the Commission is bound to follow Congress'
statutory directive that a vertical limit be set. The Commission
requests comment and empirical and theoretical evidence to assist in
the development of reasonable limits and in the articulation of how
such limits address the statutory goals.
1. Defining the Market
43. In paragraphs 148 through 149, the Second FNPRM seeks comment
on how to define the programming and distribution markets for the
purposes of determining an appropriate vertical limit. The 2001 FNPRM
proposed that programming could be classified into two broad
categories, general entertainment and niche programming. The Second
FNPRM asks whether the market for programming should be segmented
according to the type of programming network involved. It also seeks
comment on whether placement of networks on different tiers affects how
vertical foreclosure might be implemented by a cable operator, and
whether the Commission's rules should be applied on a tier-specific or
package-specific basis.
2. Potential Harms of Vertical Integration
44. The 2001 FNPRM asked commenters to ``address the economic basis
underlying the concern with vertical integration and market
foreclosure'' and whether the necessary conditions existed in the MVPD
industry for cable operators to profitably engage in vertical
foreclosure, and for this foreclosure to be harmful to the flow of
programming. The Commission also sought comment on whether current and
likely future developments in the MVPD market will mitigate past
concerns regarding the ability of cable operators to discriminate
against unaffiliated programming networks. In their responses to the
2001 FNPRM, cable operators point to market factors that make vertical
foreclosure unlikely. The Second FNPRM again seeks empirical,
theoretical and anecdotal evidence to support the Commission's effort
to carry out its statutory mandate in setting a vertical limit.
3. Potential Benefits of Vertical Integration
45. The 2001 FNPRM sought comment on what impact relaxing or
modifying the current limit might have on producing economic
efficiencies, fostering innovation in services, and encouraging greater
investment in and development of diverse and responsive programming. In
response, cable commenters argued that vertical integration provides
efficiencies by increasing the likelihood of financing for new networks
and reducing the likelihood of ``hold-up.'' They also argue that it
eliminates the problem of double marginalization, which occurs when
both upstream and downstream firms attempt to exercise market power by
charging above-cost prices. Commenters failed, however, to demonstrate
that the benefits of vertical integration will always exceed the
potential harms from vertical foreclosure. The Commission thus seeks
further comment on whether and when the benefits of vertical
integration mitigate the potential harms that might result, either
generally or for particular vertical combinations.
46. The literature indicates that historically, content providers
have received benefits from vertical integration with distributors. In
the multichannel video programming industry, three kinds of benefits
can result from vertical integration: transaction efficiencies,
enhanced availability of capital and creative resources, and risk
reduction through signaling commitment. The Second FNPRM examines each
of these benefits in paragraphs 154 through 162.
E. Diversity of Information Sources
47. Section 612(g) of the Communications Act provides that at such
time as cable systems with 36 or more activated channels are available
to 70% of households within the United States and are subscribed to by
70% of
[[Page 33686]]
those households, the Commission may promulgate any additional rules
necessary to promote diversity of information sources. In its Eleventh
Annual Report, the Commission found that the first 70% threshold has
been met, but that the second 70% threshold has not been met.\15\ The
Commission seeks comment in this proceeding on whether Section 612(g)
would provide an independent or complementary statutory basis to limit
cable operators' horizontal or vertical ownership interests, should the
Commission determine that the second threshold has been met.
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\15\ See Annual Assessment of the Status of Competition in the
Market for the Delivery of Video Programming, 20 FCC Rcd 2755, 2767-
68 para. 20 (2005).
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III. Procedural Matters
A. Comment Information
48. Pursuant to sections 1.415 and 1.419 of the Commission's rules,
47 CFR 1.415, 1.419, interested parties may file comments and reply
comments on or before the dates indicated on the first page of this
document. Comments may be filed using: (1) The Commission's Electronic
Comment Filing System (ECFS), (2) the Federal Government's eRulemaking
Portal, or (3) by filing paper copies. See Electronic Filing of
Documents in Rulemaking Proceedings, 63 FR 24121 (1998).
Electronic Filers: Comments may be filed electronically
using the Internet by accessing the ECFS: http://www.fcc.gov/cgb/ecfs/ or the Federal eRulemaking Portal: http://www.regulations.gov. Filers
should follow the instructions provided on the Web site for submitting
comments.
For ECFS filers, if multiple docket or rulemaking numbers
appear in the caption of this proceeding, filers must transmit one
electronic copy of the comments for each docket or rulemaking number
referenced in the caption. In completing the transmittal screen, filers
should include their full name, U.S. Postal Service mailing address,
and the applicable docket or rulemaking number. Parties may also submit
an electronic comment by Internet e-mail. To get filing instructions,
filers should send an e-mail to ecfs@fcc.gov, and include the following
words in the body of the message, ``get form.'' A sample form and
directions will be sent in response.
Paper Filers: Parties who choose to file by paper must
file an original and four copies of each filing. If more than one
docket or rulemaking number appears in the caption of this proceeding,
filers must submit two additional copies for each additional docket or
rulemaking number. Filings can be sent by hand or messenger delivery,
by commercial overnight courier, or by first-class or overnight U.S.
Postal Service mail (although we continue to experience delays in
receiving U.S. Postal Service mail). All filings must be addressed to
the Commission's Secretary, Office of the Secretary, Federal
Communications Commission.
The Commission's contractor will receive hand-delivered or
messenger-delivered paper filings for the Commission's Secretary at 236
Massachusetts Avenue, NE., Suite 110, Washington, DC 20002. The filing
hours at this location are 8 a.m. to 7 p.m. All hand deliveries must be
held together with rubber bands or fasteners. Any envelopes must be
disposed of before entering the building.
Commercial overnight mail (other than U.S. Postal Service
Express Mail and Priority Mail) must be sent to 9300 East Hampton
Drive, Capitol Heights, MD 20743.
U.S. Postal Service first-class, Express, and Priority
mail should be addressed to 445 12th Street, SW., Washington, DC 20554.
People with Disabilities: Contact the FCC to request materials in
accessible formats (Braille, large print, electronic files, audio
format, etc.) by e-mail at FCC504@fcc.gov or call the Consumer &
Governmental Affairs Bureau at 202-418-0531 (voice), 202-418-7365
(TTY).
B. Paperwork Reduction Act
49. This document does not contain proposed information
collection(s) subject to the Paperwork Reduction Act of 1995 (PRA),
Public Law 104-13. In addition, therefore, it does not contain any new
or modified ``information collection burden for small business concerns
with fewer than 25 employees,'' pursuant to the Small Business
Paperwork Relief Act of 2002, Public Law 107-198, see 44 U.S.C.
3506(c)(4).
C. Ex Parte Information
50. This is a permit-but-disclose notice and comment rulemaking
proceeding. Ex parte presentations are permitted, except during the
Sunshine Agenda period, provided that they are disclosed as provided in
the Commission's Rules.\16\
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\16\ See generally 47 CFR 1.1202, 1.1203, 1.1206(a).
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IV. Initial Regulatory Flexibility Act Statement
51. As required by the Regulatory Flexibility Act of 1980, as
amended (RFA), the Commission has prepared this Initial Regulatory
Flexibility Analysis (IRFA) of the possible significant economic impact
on a substantial number of small entities by the policies and rules
considered in the Second Further Notice of Proposed Rulemaking (Second
FNPRM) Public comments are requested on this IRFA. Comments must be
identified as responses to this IRFA and must be filed by the deadlines
for comments provided on the first page of this document. The
Commission will send a copy of the Second FNPRM, including this IRFA,
to the Chief Counsel for Advocacy of the Small Business Administration
(SBA).
Need for, and Objectives of, the Proposed Rules
52. Section 613(f) of the Communications Act is intended, in part,
to foster a diverse, robust, and competitive market in the acquisition
and delivery of multichannel video programming. Specifically, Section
613(f) requires the Commission to establish reasonable limits on the
number of cable subscribers that may be reached through commonly owned
or attributed systems (horizontal limits) and on the number of channels
that can be occupied by the cable system's owned or attributed video
programming services (vertical limits). Congress intended these limits
to ensure that cable operators do not use their horizontal reach in the
multichannel video distribution (MVPD) market, acting unilaterally or
jointly, to unfairly impede the flow of video programming to consumers.
However, Congress recognized that multiple system ownership could
benefit consumers by allowing efficiencies in the administration,
distribution, and procurement of programming, and by providing capital
and a ready subscriber base to promote the introduction of new
programming services. Pursuant to its statutory mandate, and balancing
these competing interests, the Commission has adopted and periodically
revised cable ownership limits.
53. The Commission first established horizontal and vertical
ownership limits in 1993.\17\ The horizontal limit bars cable operators
from serving more than 30% of all U.S. MVPD subscribers. The vertical
limit bars cable operators with 75 or fewer channels from devoting more
than 40% of channel capacity to
[[Page 33687]]
affiliated programming. In Time Warner II, the D.C. Circuit remanded
the Commission's horizontal and vertical limits, finding that the
horizontal and vertical ownership limits unduly burdened cable
operators' First Amendment rights, that the Commission's evidentiary
basis for imposing the ownership limits and its rationales supporting
the vacated attribution rules did not meet the applicable standards of
review, and that the Commission had failed to consider sufficiently
changes that have occurred in the MVPD market since passage of the 1992
Act. The Commission thereafter issued the 2001 FNPRM soliciting comment
aimed at establishing a sound record on which to base cable horizontal
and vertical limits.
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\17\ See Implementation of Sections 11 and 13 of the Cable
Television Consumer Protection and Competition Act of 1992,
Horizontal and Vertical Ownership Limits, Cross-Ownership
Limitations, and Anti-trafficking Provisions, 8 FCC Rcd 8565, 8567
paras. 3-4 (1993) (1993 Second Report and Order).
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54. None of the comments to the 2001 FNPRM yielded a sound
evidentiary basis for setting horizontal or vertical limits. The
Commission concludes that a Second FNPRM is necessary to update the
record and provide additional input on horizontal and vertical
ownership limits so that the Commission may comply with the statutory
mandate and the court's directives.
55. In the Second FNPRM, the Commission seeks comment on how recent
developments in the industry may affect the issues before us.
Additionally, to develop a more focused and useful record, the
Commission addresses the viability of proposals for setting limits
suggested in the record.
Legal Basis
56. The authority for the action proposed in this rulemaking is
contained in Sections 2(a), 4(i), 303, 307, 309, 310, and 613 of the
Communications Act of 1934, as amended, 47 U.S.C. 152(a), 154(i), 303,
307, 309, 310, 533.
Description and Estimate of the Number of Small Entities to Which the
Proposed Rules Will Apply
57. The RFA directs agencies to provide a description and, where
feasible, an estimate of the number of small entities that will be
affected by the rules. The RFA defines the term ``small entity'' as
having the same meaning as the terms ``small business,'' ``small
organization,'' and ``small governmental jurisdiction.'' In addition,
the term ``small business'' has the same meaning as the term ``small
business concern'' under the Small Business Act, unless the Commission
has developed one or more definitions that are appropriate to its
activities.\18\ Under the Small Business Act, a ``small business
concern'' is one which: (1) Is independently owned and operated; (2) is
not dominant in its field of operation; and (3) satisfies any
additional criteria established by the SBA.\19\ In paragraphs 8 through
11 of Appendix B of the Second FNPRM, the Commission discusses the
various types of small entities that may be affected by the rules and
policies in the Second FNPRM.
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\18\ Id. sec. 601(3) (incorporating by reference the definition
of ``small business concern'' in the Small Business Act, 15 U.S.C.
632). Pursuant to 5 U.S.C. 601(3), the statutory definition of a
small business applies ``unless an agency, after consultation with
the Office of Advocacy of the Small Business Administration and
after opportunity for public comment, establishes one or more
definitions of such term which are appropriate to the activities of
the agency and publishes such definition(s) in the Federal
Register.''
\19\ 15 U.S.C. 632.
---------------------------------------------------------------------------
Description of Projected Reporting, Recordkeeping and Other Compliance
Requirements
58. None proposed.
Steps Taken To Minimize Significant Impact on Small Entities and
Significant Alternatives Considered
59. The RFA requires an agency to describe any significant
alternatives specifically affecting small entities that it has
considered in proposing regulatory approaches, which may include, among
others, the following four alternatives: (1) The establishment of
differing compliance or reporting requirements or timetables that take
into account the resources available to small entities; (2) the
clarification, consolidation, or simplification of compliance or
reporting requirements under the rule for small entities; (3) the use
of performance, rather than design, standards; and (4) an exemption
from coverage of the rule, or any part thereof, for small entities.\20\
---------------------------------------------------------------------------
\20\ 5 U.S.C. 603(c).
---------------------------------------------------------------------------
60. The cable ownership limits are intended to prevent large cable
entities from unfairly impeding the flow of video programming to
consumers through their horizontal reach and/or their vertical
integration. Any horizontal or vertical limits adopted by the
Commission would directly impact large cable entities, and we
anticipate that they will have little adverse impact on small entities.
The Second FNPRM discusses several potential scenarios in which small
entities may suffer harm from large entities, either through their
horizontal reach, their vertical integration, or both, and seeks
comment on crafting rules that prevent harms to small entities, which
could, in turn, protect the flow of programming to consumers.
Federal Rules Which Duplicate, Overlap, or Conflict With the
Commission's Proposals
61. None.
V. Ordering Clauses
62. Accordingly, it is ordered, that pursuant to authority
contained in sections 2(a), 4(i), 303, 307, 309, 310, and 613 of the
Communications Act of 1934, as amended, 47 U.S.C. 152(a), 154(i), 303,
307, 309, 310, and 533, this Second Further Notice of Proposed
Rulemaking is adopted.
63. It is further ordered that, pursuant to the authority contained
in sections 2(a), 4(i), 303, 307, 309, 310, and 613 of the
Communications Act of 1934, as amended, 47 U.S.C. 152(a), 154(i), 303,
307, 309, 310, and 533, notice is hereby given of the proposals
described in this Second Further Notice of Proposed Rulemaking.
64. It is further ordered that the Commission's Consumer and
Governmental Affairs Bureau, Reference Information Center, shall send a
copy of this Second Further Notice of Proposed Rulemaking, including
the Initial Regulatory Flexibility Analysis, to the Chief Counsel for
Advocacy of the Small Business Administration.
List of Subjects in 47 CFR Part 76
Cable television.
Federal Communications Commission.
Marlene H. Dortch,
Secretary.
[FR Doc. 05-11473 Filed 6-7-05; 8:45 am]
BILLING CODE 6712-01-P