FCC eliminates terrestrial loophole

Sports programming at center of debate

NEW YORK -- The FCC on Wednesday voted to close what is known as the "terrestrial loophole" in program access rules, which has allowed cable operators like Comcast Corp., Cablevision Systems and Cox Communications to keep local sports networks or their HD versions from their satellite TV and telecom competitors.

The decision sets Philadelphia, San Diego and New York and surrounding areas as potential new subscriber battlegrounds between big cable firms and their rivals, even though cable companies must not automatically hand over their sports programming. They are expected to appeal the FCC ruling, and even after a final decision, competitors would still need to request and negotiate carriage deals with them. This could delay broader distribution of the sports channels until mid-year or beyond.

Once they do make local sports channels available to rival, cable firms may see some subscriber losses, but likely only a relatively small near-term financial hit.

"It is certainly a negative, but not that disruptive in the context of the overall business," said Wunderlich Securities analyst Matthew Harrigan about the FCC's 4 to 1 decision in favor of the rule change.

Cable firms may see higher affiliate fee and advertising revenue from broader carriage of their local sports channels, but that could be offset by subscriber losses to competitors.

Analysts didn't have any immediate estimates on the likely total financial impact for key players.

"It takes away some potential stickiness of subscribers to their systems, which, if subscribers are lost, would negatively affect revenue, (operating cash flow) and free cash flow," said Miller Tabak analyst David Joyce. "Tough to say if subscribers would go through the rigamarole of switching email addresses and new set-top-box hookups and home wiring just to get away from an incumbent cable provider the first chance they get."

Sanford C. Bernstein analyst Craig Moffett called the decision "bad news for Comcast in more ways than one" and argued that DirecTV will be the primary beneficiary, followed by Dish Network and telecom firms.

Moffett had expected that the FCC would require the closing of the "terrestrial loophole" as part of its review of Comcast's play for a majority stake in NBC Universal. "There could be no clearer signal that the FCC is looking for bigger concessions than this in order to approve the NBCU deal," he said.

Comcast has in Philly mostly kept games of the Philadelphia 76ers, the Flyers and the Phillies to itself via Comcast SportsNet Philadelphia, even though the cable giant recently also made the network available to Verizon FiOS and RCN.

"Philadelphia is a market with one of the lowest (satellite TV) penetration compared to cable" with a teen percentage compared to about 60%, said Collins Stewart analyst Thomas Eagan.

But in a filing with the FCC last week, Comcast used SNL Kagan data to argue that satellite TV penetration in markets with exclusive sports networks is often as high as or higher than in markets were such channels are shared. In Philly, satellite penetration reached 14.4% as of September, compared to 14.6% in Boston and Baltimore with 16.5%.

Moffett estimated that about 3 million Comcast subscribers in Philly and surrounding areas get the local sports channel. Assuming a 15 point market share swing over several years, Comcast could lose about 450,000 subscribers to competitors, which the analyst called "relatively small." Eagan sees about 200,000 up for grabs.

Meanwhile, Cablevision through its soon-to-be-spun-off Madison Square Garden unit, has used its MSG Network, which broadcasts New York Knicks and New York Rangers games in high definition, against competitors. Time Warner Cable has also offered it.

But in anticipation of a potential repeal of the "terrestrial loophole," Cablevision boosted its carriage fees of its MSG and Fuse networks by $30 million this year "to set the affiliate fee rate higher for the other potential carriers" it may get down the line, said Joyce.

Still, Harrigan argued that Cablevision will see "the biggest relative impact" from the FCC order "given its very high penetration and the concentrated competition with about 1.7 million homes passed by FiOS." He added that the firm "has gone out of its way to brand itself locally, and having to provide access to the MSG Network has to be annoying to the (owning) Dolan family."

The "terrestrial loophole" is part of the program access rules in the 1992 cable act that were designed to prevent cable operators from doing exclusive deals with their affiliated networks. However, the rules applied only to content delivered to cable via satellite signals, not content delivered via terrestrial wires, thereby creating the loophole.

Last year, Verizon had filed a complaint against Cablevision for not sharing its New York HD sports programming, and AT&T had filed one against Cox for keeping local sports broadcasts in San Diego from it. Cablevision and Verizon have also feuded over sports programming in parts of New Jersey and Connecticut. And Comcast, the nation's largest cable operator, has at times been under fire from rivals for its exclusive Philadelphia sports offers.

"The FCC's order today eliminating the terrestrial loophole is a big win for consumers and fair competition in the marketplace," satellite TV giant DirecTV said. "We vigorously applaud the FCC for recognizing that withholding cable-owned regional sports networks from non-cable competitors significantly hinders competition and is anti-consumer. We are looking forward to offering DIRECTV customers the local sports programming they have been denied for so many years."

Dish Network thanked the FCC and its chairman Julius Genachowski for handing consumers what it said was a double victory. "First, sports fans in Philadelphia and San Diego will soon have a choice of pay TV providers; second, consumers can no longer be held hostage during a contract dispute between cable programmers and video distributors."

Kathleen Grillo, Verizon senior vp of federal regulatory affairs, said: "This is a big-time win for television sports fans...This ruling means that consumers will no longer have to stick with their incumbent cable provider in order to watch local teams in high definition."

Cablevision argued that the legal basis for the FCC decision was "unfounded" and vowed: "Verizon and AT&T will not receive an FCC bailout that will allow them to capture News 12, MSG Varsity and other programming that we have developed for our customers." It also lauded the FCC for establishing a complaint process that it said it expects to win: "If the phone companies complain that they are unable to compete, we are confident that we can prove that it is for a variety of reasons, none of which have to do with HD sports programming."
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