FCC downplays cable industrys potential to provide Internet

Nov. 1, 1998

By STEPHEN N. BROWN

The growing importance of the Internet, coupled with the cable-TV industry`s capacity shortage, makes the FCC`s "must carry" docket a dilemma for the cable industry, perhaps forcing it to choose between delivering digital TV and Internet access.

When presidential adviser Ira Magaziner attended the Internet Society`s meeting in Geneva last July, he told a group of reporters that the "Internet is driving one-third of the real growth in the American economy." Magaziner`s remark suggests that Internet access will be a critical part of daily economic life.

The two most likely providers of Internet access are the cable and telephone industries. Their competitive positions with regard to each other are being determined respectively by two ongoing proceedings at the Federal Communications Commission (FCC): CS Docket 98-120 and CC Docket 98-147. The first docket was issued in July and deals with the television industry`s transition from the broadcasting of analog signals to digital ones and the requirements that the cable industry "must carry" both sets of signals. The second docket was issued in August and sets rules on how incumbent local telephone companies deliver data services to the public and how the companies allow their competitors access Digital Subscriber Line technology (DSL) as the means to deliver data services themselves.

An issue that should be common to both dockets is Internet access. Unfortunately, it is totally ignored in the cable docket while being vital to the telephone docket. The commission appears to be fashioning policies where incumbent telephone companies will be the chief providers of Internet access and where the cable industry is not considered a serious contender.

During the next 10 years the nearly 1600 TV stations in the United States will "simulcast" two signal streams for broadcasted programs. One stream will be analog and the other digital. The analog portion will be phased out, but not before every cable-TV system develops enough capacity to carry each signal stream simultaneously to TV viewers. When the analog signal streams are phased out, the broadcasters have to return the analog frequencies to the government to redistribute the spectrum to other users. The broadcasters are under pressure from Congress to comply readily because, unlike many other users of the spectrum, they got their portion for free.

The FCC has already conducted hearings that led to the development of a new Table of Allotments for digital-TV stations. The broadcasters are now ready to offer digital TV to the public, but the cable industry may not have the capacity to handle simulcasting. This lack of capacity would be bad news for both the broadcasters and the government because 65% of television viewers receive broadcasts through the cable system. If these viewers do not get digital signals, the government does not get the spectrum it wants and the TV industry confronts several unpleasant problems.

Certain channels could be dropped in either their analog or digital mode. Dropping the digital portion constrains the market for digital-TV sets and upsets the manufacturers who have planned to meet the demand for the new sets. Mitsubishi announced earlier this year that it would no longer make "direct view" TV sets, which are the type used today. Sets for digital TV must be larger than those used today because, with digital reception, the images on a small screen cannot be seen very well unless the viewer sits within 2 to 3 ft of the screen. The alternative is to drop the analog stream immediately, but current sets in use cannot handle the digital picture well. Therefore, a major portion of CS 98-120 is devoted to defining and ascertaining the real capacity of cable-TV systems and what "digital" carriage accomplishes.

The FCC is seeking "quantified estimates and forecasts of useable channel capacity," but it also says, "The conversion of television stations to a digital transmission mode is generally associated with greatly improved sound and picture quality...[but] the practical definition of `digital` in the cable context may vary from system to system. The fact that a portion of a cable system capacity is digital may mean only that more channels are offered with no fundamental enhancements in sound and picture quality." Once the definitions and capacities are agreed upon, several alternative "must carry" proposals will be considered.

The most forceful one is "Immediate Carriage," which would require "all cable systems, regardless of channel capacity constraints, to carry, in addition to the existing analog television stations, all digital commercial television stations up to the one-third capacity limit and any additional digital noncommercial stations" within the carriage area. The remaining proposals are weaker and trickle down to a "no must carry" option, which is not feasible.

Threaded through the entire argument is the unspoken idea of cable access to the Internet and what that could do for the cable-TV industry in spite of its limited capacity. In effect, the FCC`s "must carry" decision tells the cable industry how to divide its limited capacity between Internet data and simulcast video streams for the next decade. One service enhances revenue while the other does not. To the degree that Internet access becomes a focus of competition between the cable and telephone industries, the less important is digital TV and the speedy return of spectrum to the government. It is the Internet, not digital TV, that has captured the public`s imagination and looms large as a driver of economic growth in the next 10 years.

The contention between the competing uses for cable emerged in a more recent FCC document, "Internet over Cable," issued by the FCC`s Office of Plans and Policy (OPP). Referring to the "must carry" docket, the OPP`s paper says "the reexamination of the channel capacity issue may address how the addition of cable Internet-based services affects the definition of a cable channel." This observation comes nearly two months after the docket began but is inconsistent because the agency does not ask in the "must carry" docket how Internet services affect the definition or use of cable capacity. Instead, the FCC says, "there is some dispute as to how capacity should be defined in a digital environment....We solicit comments on the definition of `usable activated channels` in the context of" digital TV.

The agency has presented the "must carry" docket to industry and the public as if the Internet does not exist. Decisions by federal agencies are supposed to be based strictly on the evidence in the legal record. The FCC`s final order could be overturned if it addresses Internet considerations because thus far they are not a substantial part of the legal record. If the FCC wants the Internet factored into "must carry," it should request a new round of comments from industry and the public.

In the telephone docket, the FCC is highly motivated by the Internet. For example, the FCC wants to know how to determine if "LATA [Local Area Transport Access] has high-speed access to the Internet" and has concluded that "modification of LATA boundaries may be necessary for subscribers in rural areas to have high-speed connections to the Internet." This is a major policy initiative because LATA boundaries define the separation of local and long-distance telephone service and have barely changed since 1983. Also, the FCC explicitly associates Internet access with phone service, saying, "To the extent that advanced services are exchange access services, advanced services will be offered...to Internet service providers." The commission also notes that "Ameritech, Bell Atlantic, and US West seek regulatory relief...to become Internet backbone providers."

In her comments on opening the telephone docket, FCC Commissioner Ness said an "increasingly Internet-savvy Congress crafted a framework to promote competition and deregulation throughout all telecommunications markets as we enter a new chronological and technological millennium." If Congress is Internet-savvy, then it knows that the cable industry could be a major provider of Internet access, keeping access prices competitive for the next decade. The cable industry`s tradeoff between the Internet and digital TV would be less severe if more fiber optics penetrate to the cable feed. Docket CS 98-120 should not only revisit the Internet-access issue but also consider how incentives can be given to the industry to increase its system capacity.

Stephen N. Brown specializes in market research and public policy toward new technology in the telecommunications industry. He can be contacted at tel: (615) 399-1239.

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