Cable Television Industry Regulation History

Origins and Early Development of Cable Television

The cable television industry has its roots in the United Kingdom shortly before the start of World War II. Several apartment buildings had been wired to a single community antenna so that residents could receive programs broadcast on the British Broadcasting Company (BBC) (Singular, 2003, p. 45). This design gave rise to the acronym "CATV" for community antenna television, which would define the industry for decades to come.

Within the United States, interest in television grew dramatically along with the population explosion following World War II. Prior to the war, a significant portion of the population had limited or no exposure to television, and few could afford to purchase a set. American servicemen returning from the war found themselves in a much improved economic environment and sought to acquire consumer goods that had been unavailable before 1940–41. Television ranked among the top priority items for new homeowners. However, a critical problem emerged: because television was still in its infancy, signals broadcast by television stations could not be reliably received by sets located far from large broadcast markets. Between 1948 and 1953, small groups of pioneers, inventors, and entrepreneurs worked to solve this problem by finding ways to import signals into smaller and more remote towns.

The location of the first working cable system within the United States is disputed, with Arkansas, Oregon, and Pennsylvania all claiming priority. However, the roots of the commercial cable business truly began in Pennsylvania. In the city of Pottsville, appliance store owner Martin Malarkey began stringing coaxial cable throughout the town after visiting New York City. Malarkey negotiated with the local power company for permission to attach his cable to their poles and charged subscribers $3.75 per month plus a one-time $150 hookup fee. He operated his cable system free from direct FCC oversight, but he did encounter the Internal Revenue Service, which sought to impose an eight percent excise tax on his subscriber revenues. Malarkey fought the IRS and won his case, but this victory proved to be only the first in a long and contentious battle that the cable industry would wage with various authorities as it expanded (Singular, 2003, pp. 49–50).

Early Regulation Efforts and FCC Authority

While the IRS pursued its tax claims, the Federal Communications Commission (FCC) had other urgent priorities that delayed its oversight of the emerging cable industry for several years. The explosion of demand for television after the war overwhelmed the FCC with new broadcasting station license requests by 1948. To manage the burden of technical and policy issues, the commission imposed a four-year freeze on new television station applications. This freeze resulted in only 108 stations being operated between 1948 and 1952, while the number of homes with television sets increased to over 15 million (Robichaux, 2002, p. 8). Many of these homes were located outside any broadcast signal range, which spurred construction of numerous homemade antenna and cable systems.

Throughout the 1950s, the FCC declined to regulate cable television systems, despite frequent pressure from communities and broadcasters. The culmination of this hands-off approach came in 1958 with the FCC's decision in Frontier Broadcasting v. Collier, which ruled that cable was not a common carrier and thus fell outside the FCC's jurisdiction. Broadcasters had brought the case seeking to persuade the FCC to assert authority over cable systems (PublicAccessTV.net, 2002). Later in 1959, the FCC conducted its first investigation into the operation of CATV systems and their impact on broadcasters and concluded that no regulatory action was necessary.

The FCC began to assert itself in the cable industry with the Carter Mountain case of 1962–63. The case centered on the FCC's denial of a microwave license to Carter Mountain to import television signals into a market where the local television station feared economic harm. In 1963, the DC Circuit Court of Appeals affirmed the FCC's position and its jurisdiction over cable systems using microwave facilities to import signals. In 1965, the FCC drafted rules that initiated the first comprehensive regulation of portions of the industry based on this case. Rules issued in 1966 extended regulation to the rest of the industry. A major component of the 1965 and 1966 orders was the "must carry" and distant signal importation rules. The "must carry" rule required cable operators to carry local broadcast channels on their cable networks. The distant importation rule prevented cable operators from importing signals into a market where doing so would duplicate a local broadcaster's programming. Additionally, cable operators could not import a signal into one of the top 100 markets unless they could demonstrate that it served the public interest. The distant importation rule was eliminated in 1980, but the "must carry" provisions remained subject to legal battles throughout most of the rest of the twentieth century (Cooper, n.d.). The FCC rules regulating the industry were validated in the 1968 Supreme Court case United States v. Southwestern Cable Corporation (FCC, 2000).

The 1970s brought a new era of FCC involvement with a flurry of new regulations in 1970, 1971, 1972, and 1976. In 1970, the FCC issued three rules, two of which regulated cable television system ownership. Rule 21 FCC 2d 307 prohibited telephone companies from owning cable systems within their service areas, and rule 23 FCC 2d 816 prevented cable system ownership by national networks or by local broadcast stations transmitting in the same area as the overlapping cable system (Cable Center, 2002). The third 1970 rule involved what became known as the anti-siphoning rule. Anti-siphoning rules were enacted under pressure from broadcasters, but the commission felt that a public interest concern was valid. These rules prevented cable systems from devoting 90% of their schedules to sports and movies and would not allow films less than three years old to be shown solely on cable. The goal was to prevent cable from capturing new programming for a restricted and limited audience instead of making it available to the masses through free broadcasting. The anti-siphoning rules were later found unconstitutional by the Supreme Court in 1977 in the HBO v. FCC case (Cooper, n.d.).

In 1972, the FCC introduced its strongest rules yet for regulating the medium. In the Cable Television Report and Order (36 FCC 2d 143), the FCC issued a comprehensive set of rules citing public interest concerns and intent to protect broadcast television. Among the most contentious rules were two requirements: two-way channel capability and public access programming. Although cable operators denounced the two-way rule as expensive and unnecessary, the two-way channel capability would later serve as the foundation for on-demand television tests in the 1980s and cable Internet in the late 1990s. The requirements for public access programming also drew criticism from cable broadcasters. Cable systems were required in the public interest to provide channels for schools and general use by townspeople and local government (Robichaux, 2002). While providing individuals and organizations an outlet to exercise free speech rights and enhance community involvement, the addition of public access channels occurred when technology limited the number of channels a cable system could carry. Under 1972 regulations, cable systems had to carry the three major network channels; some had to drop other channels or upgrade their infrastructure to support public access. At the time, Congress was very broadcaster-friendly—at least 30 senators and congressmen owned interests in television or radio stations—so the legislation came as little surprise to many cable operators (Robichaux, 2002). Many provisions of the 1972 act would be litigated throughout the rest of the 1970s.

In the late 1970s, the regulatory environment shifted as the anti-regulatory Ford administration asserted its views and litigation began to turn regulatory efforts in a more cable-friendly direction. The distant importation rules were dropped in 1976 and the anti-siphoning rules in 1977. Another Supreme Court case in 1979 found in favor of the cable industry and brought the decade of regulation to a close. In FCC v. Midwest Video Corp, the court ruled that the FCC had overstepped its authority in demanding that cable systems carry a certain number of channels or public access channels, finding this a violation of the First Amendment. The court also found that the FCC had been attempting to regulate cable broadcast systems as a common carrier, in direct violation of the Communications Act of 1934 (SCOTUS, 1979).

The Cable Franchise Policy and Communications Act of 1984

Like other Republican presidential administrations, the Reagan administration adopted a reduced regulatory view of the industry and crafted deregulatory policies. President Reagan appointed Mark Fowler as FCC Chairman; Fowler proclaimed in 1981 that public interest would be "defined by market forces" instead of FCC regulations (PublicAccessTV.net, 2002). During this period, two key Supreme Court decisions limited state and local regulatory authority over cable systems. In Community Communications Co., Inc. v. City of Boulder, Colorado, the Supreme Court found that cities and local governments are not exempt from antitrust actions under the Sherman Act (SCOTUS, 1982). A ruling the same year further limited states' rights to regulate cable content.

The deregulatory efforts of the late 1970s and early 1980s culminated in the passage of the Cable Franchise Policy and Communications Act of 1984. The act was decidedly cable-friendly and was initially proposed to foster orderly growth of the expanding industry. Its goal was to create a national policy while limiting local and state regulatory abuses. The act served as an update to the Communications Act of 1934, with provisions centered around four main themes: rate regulation, system ownership, franchising, and public access.

The Act of 1984 reaffirmed that cable systems could not be regulated as common carriers but recognized that cable constituted a natural monopoly. Common carriers such as telephone companies, in return, could not own cable systems within their territory unless the area was rural and underserved. The act set strict limits on the requirements cities could impose in granting a cable franchise while capping franchise fees at 5% of gross revenues. It also provided stronger protections against cable franchise revocation or denial of renewal. This reflected cable company concerns that city franchise policies had become corrupt and driven by local government desire for higher revenues from captive cable providers. The franchise fee cap, coupled with new rate regulation rules, was expected to limit the frequency of price increases passed to cable subscribers. The 1984 Act allowed rate regulation only when local competition was absent. Since local competition was defined as the presence of three off-air television signals, the practical effect was enormous (Cooper, n.d.). Rate regulations introduced by the 1984 Act effectively deregulated cable rates industrywide.

The Cable Franchise Policy and Communications Act of 1984 also addressed system ownership and public access channel mandates. Emphasizing public interest in requiring diverse media alternatives, the act prevented television broadcasters from owning cable systems in their broadcast area and telephone companies from owning systems within their geographic area. After the defeat of the 1972 public access regulations, Congress restructured rules regarding cable provider obligations for public access. Instead of mandating free studio and channel access as under earlier rules, the 1984 Act required cable providers to lease 10–15% of their channels for these purposes (Cooper, n.d.). This was intended to balance allowing public access without imposing uncompensated burdens on cable companies.