Before the Federal Communications Commission Washington, D.C REPLY COMMENTS OF SUREWEST COMMUNICATIONS

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1 Before the Federal Communications Commission Washington, D.C In the Matter of ) ) MM Docket Annual Assessment of the Status of ) Competition in the Market for the ) Delivery of Video Programming ) REPLY COMMENTS OF SUREWEST COMMUNICATIONS SureWest Communications ( SureWest ), by its attorneys, hereby files these Reply Comments in response to the Commission s Further Notice of Inquiry, FCC 11-65, released April 21, 2011, in the above-captioned proceeding ( FNOI ). In these Reply Comments, SureWest shows that there is substantial evidence in the record that lack of access to programming on reasonable terms and prices, and forced program tying, are significantly harming competition in the multichannel video programming distributor ( MVPD ) market. SureWest also urges the Commission to continue to distinguish between different classes of wireline MVPDs, specifically recognizing smaller operators, including overbuilders, for the purposes of analyzing competition in its Annual Video Competition Reports, as well as in its substantive regulatory actions. I. Introduction With almost a century of providing service in northern California, and three years of providing service in the Kansas City market, SureWest and its family of companies represent an integrated network of advanced communications products and services. While its origins are as an incumbent local exchange carrier and it continues to provide local and long distance voice services, SureWest now also provides fiber-based { }1

2 broadband data services with digital multichannel video ( MV ) services over IP and RF platforms using different technologies. SureWest s MV services are well-accepted by consumers. Currently, about 63,000 customers take MV services from SureWest, either alone or in combination with other services. 1 In all of these cases, SureWest is acting as the overbuilder or the new competitor against the incumbent cable TV operator and satellite carriers. As an overbuilder, SureWest is well aware of the challenges of competition, and it meets those challenges through the offering of advanced high quality products, along with attentive customer service and reasonable prices. Customers win in this scenario, and thus the public interest is served. Where competition is not fair, however, and regulations create an uneven playing field, then customers lose and the public interest is harmed. Accordingly, it is critical that the Commission not only issue its required Report on Video Competition, but also take remedial action where it finds that competition is harmed due to flawed regulation. II. In Analyzing and Promoting Competition in Video Markets, the Commission Should Continue to Distinguish Between Different Types of Wireline MVPDs. In footnote 21 of the FNOI, the Commission stated that in previous Reports, it distinguished between broadband service providers ( BSPs ) and other wireline MVPDs, but it does not plan to maintain that distinction going forward. This, according to the Commission, was due to the fact that in 2010, the members of the Broadband Service Providers Association ( BSPA ) joined the American Cable Association ( ACA ), 1 As of December 31, 2010, SureWest s facilities passed over 271,000 households, and offered subscribers approximately 330 linear channels of programming. { }2

3 which allegedly asked that its members be considered cable operators for the purposes of statistical reports. As stated in Comments filed by ACA in this proceeding on June 8, 2011 ( ACA Comments ), ACA never requested that its BSP members be considered generic cable operators for the purposes of analyzing the state of competition in the MVPD market. SureWest was an active member of the BSPA, and has been a member of the ACA for a number of years. It fully concurs with ACA s distinction between large national incumbent cable operators on the one hand, and smaller wireline operators such as overbuilders and rural telecommunications providers, on the other. ACA Comments, filed June 8, 2011, at pages 4-5. Regardless of whether they are called BSPs, new entrants, or overbuilders, while these new MVPD competitors agree on certain regulatory issues with large incumbent cable operators such as Comcast and Time Warner, they face competitive circumstances that are significantly different than those of the large incumbents. For example, they face unique or greater challenges than large incumbents in terms of obtaining access to programming, and even when they can obtain programming, they often must pay discriminatorily higher prices for such programming than that paid by large incumbents. 2 Accordingly, SureWest urges the Commission to continue to distinguish between different classes of wireline MVPDs, specifically recognizing smaller operators, including BSPs/overbuilders, for the purposes of analyzing competition in its Reports, as well as in its substantive regulatory actions. 2 ACA s small and mid-sized incumbent cable operator members typically face the same challenges. { }3

4 III. The Record Shows That Lack of Access to Programming on Reasonable Terms and Prices Harms Competition in the MVPD Market. In paragraph 21 of the FNOI, the Commission asks whether regulations, such as those for retransmission consent, impact rivalry in the MVPD market. Similarly, in paragraph 63 of the FNOI, the Commission asks whether changes in the business models of content aggregators affected competition among distributors of video programming. The answer to both of those questions is certainly yes. Smaller MVPDs find it increasingly difficult to compete due to regulatory constraints, such as retransmission consent and related rules, that allow broadcasters to charge supracompetitive, discriminatory rates for programming, while at the same time leveraging their regulatory advantage into demanding all-or-nothing tying of must-have to less popular programming. The record shows that lack of access to must-have programming at reasonable terms and prices disproportionately affects smaller MVPDs, thus harming competition in the MVPD market. A. Price Discrimination Against Smaller MVPDs for Consent to Retransmit Broadcast Channels Harms MVPD Competition. In response to a question in paragraph 42 of the FNOI regarding the fees paid by MVPDs to broadcasters in connection with retransmission consent, ACA makes a strong case that small and mid-sized MVPDs pay disproportionately higher prices for broadcast programming than large incumbents. ACA Comments at pages 5-9, and citations therein. See also, Comments of Hiawatha Broadband Corporation, Inc. et al. ( Hiawatha ), filed June 8, 2011, at page 14; and Comments of National Telecommunications Cooperative Association, et. al. ( Telco Associations ), filed June 8, 2011, at page 10. { }4

5 ACA demonstrates that smaller MVPDs are on average charged retransmission consent fees that are more than double those charged to larger MVPDs, for the same stations. This practice is not justified based on cost to the broadcaster; rather, it is the direct result of the bargaining power differential between large and small MVPDs. 3 Thus, in the same geographic market, smaller MVPDs may be burdened with higher retransmission consent costs than their larger incumbent competitors, and the smaller MVPDs must then either pass this additional cost on to their subscribers in the form of higher subscription fees, or eat the additional costs, resulting in reduced profitability (and reduced investment in the broadband network). 4 In either case, this significantly limits the ability of the smaller MVPD to compete effectively with the incumbent, and negatively impacts customer choice of their MVPD provider. B. Forced Tying of Unwanted Programming with Must-Have Programming Harms Competition in the MVPD Market. The record also demonstrates that forced tying by programming aggregators of unwanted programming with must-have programming harms competition in the MVPD market. This tying can occur in the context of retransmission consent negotiations, as well as in negotiations with non-broadcast programming aggregators. The Telco Associations state that forced program tying is the most prevalent and pernicious problem faced by rural MVPDs in the market today, since it drives up the 3 Some broadcasters have suggested that the differences in retransmission consent compensation demanded from large and small MVPDs are based on economies of scale. This is clearly invalid as there are no scale cost savings for broadcasters in this situation: the cost to a broadcaster of transmitting its signal to an MVPD s headend (either over-the-air or by fiber) is identical regardless of whether that MVPD subsequently retransmits the signal to one subscriber, or to one million subscribers. 4 See Reply Comments of SureWest Communications, filed June 27, 2011 in MB Docket 10-71, at note 5. { }5

6 purchase price of service offerings, and thus prevents [rural MVPDs] from offering their subscribers affordable service packages. Telco Associations Comments at page 6. Hiawatha states that such tying is [p]erhaps the greatest challenge telco MVPDs face. Hiawatha Comments at page 3. In addition to the impact on MVPD costs, programming contract provisions related to tying, bundling and placement of channels on the tiers restrict the ways that an MVPD can offer that content to consumers and also serve to constrain the ability of an MVPD to carry other content not subject to such provisions, primarily content produced by independent programmers. These restrictions directly limit the ability of MVPDs to seek competitive advantages through the offering of diverse, distinctive and economical programming packages to subscribers. As noted by Hiawatha, the Commission has already recognized the competitive harm and adverse impact on consumers resulting from such tying demands, and particularly noted the burden such demands place on smaller MVPDs. 5 These harms to competition and consumers continue unabated. Accordingly, the Commission must not only describe 5 Hiawatha Comments at page 5, citing, Implementation of the Cable Television Consumer Protection and Competition Act of 1992: Sunset of Exclusive Contract Prohibition; Review of the Commission's Program Access Rules and Examination of Programming Tying Arrangements, Report and Order and Notice of Proposed Rulemaking, 22 FCC Rcd 17791, 120 (2007) ( When programming is available for purchase only through programmer-controlled packages that include both desired and undesired programming, MVPDs face two choices. First, the MVPD can refuse the tying arrangement, thereby potentially depriving itself of desired, and often economically vital, programming that subscribers demand and which may be essential to attracting and retaining subscribers. Second, the MVPD can agree to the tying arrangement, thereby incurring costs for programming that its subscribers do not demand and may not want, with such costs being passed on to subscribers in the form of higher rates, and also forcing the MVPD to allocate channel capacity for the unwanted programming in place of programming that its subscribers prefer. In either case, the MVPD and its subscribers are harmed by the refusal of the programmer to offer each of its programming services on a stand-alone basis. We note that the competitive harm and adverse impact on consumers would be the same regardless of whether the programmer is affiliated with a cable operator or a broadcaster or is affiliated with neither a cable operator nor a broadcaster, such as networks affiliated with a non-cable MVPD or a non-affiliated independent network. Moreover, we note that small cable operators and MVPDs are particularly vulnerable to such tying arrangements because they do not have leverage in negotiations for programming due to their smaller subscriber bases. ). See also, Hiawatha Comments at page 7, citing to ACA discussion of the burdens of improper tying on smaller MVPDs (http://www.americancable.org/issues/page/wholesale_unbundling) (last visited July 5, 2011). { }6

7 the impact on competition in its upcoming Report, it should also take action to remedy the problem in rulemaking proceedings, including the pending proceeding on retransmission consent. 6 C. The Commission Must Reform the Broadcast Carriage Rules to Prevent Further Harm to the MVPD Market. As discussed above, abuses of the retransmission consent negotiation process, such as price discrimination and forced tying of programming, harm the state of competition in the MVPD market, and ultimately, harm consumers. However, these abuses of retransmission consent can result in additional harm to competition through the withholding of retransmission consent. If an MVPD refuses to pay discriminatory pricing, or refuses to accept abusive tying arrangements, and a broadcaster thus withholds retransmission consent of must-have programming from one MVPD in a market while granting it to another, the competitive impact to the MVPD denied consent can be substantial. Viewers subscribe to MVPD offerings to obtain specific programming, and if the MVPD cannot offer that programming, viewers can and 6 SureWest recognizes that the Ninth Circuit recently upheld a lower court s rejection of antitrust claims that were based on multi-channel bundling by programmers. Brantley v. NBC Universal, Inc., No (9 th Cir., June 3, 2011). Yet the Communications Act authorizes the Commission to consider competition that does not rise to the level of antitrust violations, as evidenced by its broadcast ownership rules, telephone unbundling rules, and other provisions meant to address competition concerns. In the context of cable competition, the Commission recently acted on competitiveness concerns by prohibiting exclusivity agreements between cable operators and owners of multiple dwelling units. See Exclusive Service Contracts for Provision of Video Services in Multiple Dwelling Units & Other Real Estate Developments, 22 FCC Rcd (2007). Media competitiveness is at heart a public interest concern, and thus it is central to the Commission s mission and jurisdiction, regardless of the strictures of antitrust law. { }7

8 sometimes will cancel their subscription and move to a competitor that has been allowed to offer the programming. 7 The competitive harm caused by a broadcaster s withholding of retransmission consent would be minimized if MVPDs could freely obtain substitute network and syndicated broadcast programming from a station in the neighboring market. Stations often demand exclusivity rights at the same time they seek retransmission consent negotiations, as a way of seeking additional leverage in those negotiations. 8 At this point, the network non-duplication and syndicated exclusivity rules ( Exclusivity Rules ) are often used as a barrier to MVPDs obtaining programming for subscribers in situations where a local station is abusing its market power and refusing to grant consent to an MVPD. In such cases, the Exclusivity Rules can deny subscribers of that MVPD access to network and syndicated programming that they have come to rely on, and that is improperly being withheld from them by the local broadcast station. Moreover, because the broadcaster can chose to enforce exclusivity rights against one MVPD in a geographic market, but not another, the use of the Exclusivity Rules can harm MVPD competition, and thus can harm consumers. IV. Conclusion There is substantial evidence in the record that lack of access to programming on reasonable terms and prices, and forced program tying, are significantly harming competition in the MVPD market. The Commission should address these issues in its 7 See, e.g., Cablevision Loses 35,000 Basic Subscribers, as Last Year s Dispute With Fox Hits Home, TV Week, February 16, 2011, available at (last viewed July 5, 2011). 8 See, Comments of SureWest Communications in MB Docket 10-71, filed May 27, 2011, at pages and Appendix A. { }8

9 Annual Video Competition Report, and it should also take action to remedy these issues in rulemaking proceedings, including the pending proceeding on retransmission consent. The Commission should also continue to distinguish between different classes of wireline MVPDs, specifically recognizing smaller operators including BSPs/overbuilders for the purposes of analyzing competition in its Reports, as well as in its substantive regulatory actions. Respectfully submitted, SUREWEST COMMUNICATIONS SureWest Communications 8150 A Industrial Ave. Roseville, CA /s/greg Gierczak Greg Gierczak Executive Director - External Relations July 8, 2011 { }9

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