[Federal Register Volume 70, Number 109 (Wednesday, June 8, 2005)]
[Proposed Rules]
[Pages 33680-33687]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-11473]



[[Page 33679]]

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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

  Federal Register / Vol. 70, No. 109 / Wednesday, June 8, 2005 / 
Proposed Rules  

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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: [email protected] 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 [email protected] or 
[email protected].

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

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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

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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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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 [email protected], 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 [email protected] 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\
---------------------------------------------------------------------------

    \16\ See generally 47 CFR 1.1202, 1.1203, 1.1206(a).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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