Can the Internet really compete with cable TV?

As an expected Federal Communications Commission vote for more cable regulations nears, Washington wonders whether competition from Hulu, iTunes, Verizon's Fios, and so on should justify less regulation.

Whether broadband can provide serious competition to cable TV has suddenly transformed from a theoretical question to the heart of a political debate in Washington.

The debate is expected to come to a head on Tuesday morning, when the Federal Communications Commission is scheduled to meet to decide whether to impose extensive new regulations on the cable industry.

FCC Chairman Kevin Martin, a Republican who's acting more like a Democrat, wants the regulations. The cable industry, already reeling from a hefty decline in share prices, definitely doesn't.

Also taking the free-market view are Republican senators, who said in a letter to Martin on Monday that the emphasis on "broadband deployment" has created a "competitive environment" that is providing cable with fierce competition.

"It is clear to us that it was Congress' intent that the marketplace, and not regulatory fiats, should govern wherever possible," said the letter from Sens. Jim DeMint of South Carolina, Kay Bailey Hutchison of Texas, Gordon Smith of Oregon, and John Sununu of New Hampshire. "If there is to be a fundamental shift or adoption of new regulatory policies, it is up to Congress, not the commission, to implement it."

House Democrats sent a similar letter, also on Monday, predicting increased regulation "would threaten program diversity and undermine a smooth and seamless" transition to digital TV.

It's a little unclear exactly what Martin is contemplating, not least because reports so far have been based on selective leaks and no polished proposal is available for public review.

The most likely explanation is that Martin is continuing what amounts to a populist campaign against the cable industry that involved him, in April, calling for laws forcing cable operators to let consumers select individual channels instead of purchasing them in packages with dozens of others.

In FCC-ese, the concept is called "a la carte" programming, and Martin claims it will help parents protect children from inappropriate TV shows. The argument has failed, and the 2000 Bush-Cheney campaign aide turned FCC chairman has been smarting ever since.

This has led some Washingtonians to view the rift as a matter of personal pique. One top Republican questioned the "manner in which" Martin treats "all industries before the commission," an unsubtle suggestion that Martin is not exactly objective when it comes to putting the screws to cable providers. The Wall Street Journal speculated that it might be "personal animus against cable."

What Martin is trying to do this week, according to published reports, is force a vote on a so-called 70/70 rule, which gives the FCC more authority once 70 percent of Americans subscribe to cable services. He'd like to, by regulatory edict, force these companies to lower prices they charge independent programmers. He'd also like to force cable operators to settle disputes such as one involving the NFL Network, through an FCC arbitration process.

It's not that easy an argument to make. A fundamental principle of U.S. regulation is, at least in theory, that government intervention is necessary only when market failure occurs. Market failure is more difficult to establish when there's vigorous competition. So actual and expected competition from iTunes, NBC Universal and News Corp.'s Hulu.com, and telephone companies is highly relevant to this question of whether FCC intervention is justified.

In a letter to Martin on Monday, House Republican Leader John Boehner stressed the rivalry of online offerings. Boehner wrote: "Wireline and wireless phone companies are now also offering video programming. The explosion in Internet video and Web sites such as YouTube not only provide Americans with an unlimited source of content, but also allow each American to distribute his or her own content to the world."

This is no longer the land of the ABC, NBC, and CBS oligopoly. Apple's iTunes alone offers dozens of current TV shows, including Desperate Housewives, NCIS, and Prison Break (although the current episodes of some NBC shows are conspicuously absent). Hulu, which launched a test version last month, features high-quality video from the rich archives of News Corp. and NBC (which explains the iTunes absence). Verizon's Fios fiber service offers hundreds of channels--probably more than many cable companies. Satellite TV companies are Comcast's most deadly rivals. And while video-sharing sites like YouTube and its many smaller brethren may not be replacing traditional TV, they deserve to be counted in any official survey of the landscape.

Another potential objection to FCC action is a big quibble about some small numbers. Martin's staff has reportedly concluded that the number of Americans with access to cable has climbed to 71.4 percent--a hair over the 70 percent threshold required for regulation. But other FCC surveys have put the number at closer to 60 percent, and the cable companies are emphatic that the key threshold has not been crossed.

But even in a non-election year, Washington remains an intensely political town, and intense political pressure may prove decisive. With top Democrats and Republicans hotly proclaiming what a bad idea cable regulations are, and wavering support from the FCC's two Democratic commissioners jeopardizing a 3-2 majority vote, it would hardly be surprising if the FCC chairman decided to find an excuse to postpone Tuesday's meeting until the heat dies down.

 

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