The Chairman's Holy Grail

In his blog, The Bauminator, Cable Digital News Site Editor Jeff Baumgartner has been covering the recent brawl at the Federal Communications Commission (FCC) over Chairman Kevin Martin's latest cable regulatory jihad. Fortunately for MSOs, other commissioners at the agency remembered that friends don't let friends drive under the influence.

The FCC indefinitely postponed a meeting to address Martin's effort to invoke the infamous "70/70" rule, sentencing it to a form of regulatory purgatory. And then, in a move to help Martin save face, the Commission decided to do its own homework and request data from the MSOs themselves. (See Martin Misses and FCC Demands Cable Sub Data.)

So what's behind the Martin madness? The Chairman is an aggressive advocate for making the à la carte programming choice available to cable consumers. While most MSOs and programmers despise the concept, the idea does have some appeal. (See Ordering à la Carte).

But, unable to make headway on à la carte based on the merits of the policy, Martin tried to use fuzzy math to access additional regulatory powers specified in the 1984 Communications Act. Specifically, the "70/70" provision outlined in Section 612(g), which states:

At such time as cable systems with 36 or more activated channels are available to 70 percent of households within the United States and are subscribed to by 70 percent of the households to which such systems are available, the Commission may promulgate any additional rules necessary to provide diversity of information sources.

In a classic scene from the flick, a crowd of medieval villagers, itching for some action, drags a woman through the streets proclaiming: "A witch! A witch! A witch! We've got a witch! Burn her!"

She is brought to the wise Sir Bedevere. "How do you know she is a witch?" he asks.

"She looks like one," a villager replies.

"I'm not a witch... They dressed me up like this," retorts the accused woman.

"Did you dress her up like this?" Bedevere inquires. "No, no... Yes, yes, a bit, a bit," admits the crowd.

In an effort to discern whether the accusation has merit, a laughable dose of logic plays out as Bedevere and the villagers reason that since witches are burned, they must be made of wood. And since wood floats, its nature must also be like a duck.

Therefore, if she weighs the same as a duck, she's made of wood and must be a witch.

This isn't too far off from Martin's efforts to burn the cable industry by cooking the numbers, so to speak. In launching his 70/70 attack, Martin used cable MSO data from a single source -- the Warren Communications Television & Cable Factbook.

While a handy reference tome, it's not exactly renowned for quantitative infallibility. Indeed, the 70 percent-plus figures derived from the book contradict some of the FCC's own internal cable industry data.

It's easy to see why.

There are more than 100 million homes passed by U.S. cable operators. Thus, more than 70 million cable subscribers are required to top 70 percent penetration.

At mid-2007, the top 25 MSOs -- including competitive players like RCN Corp. , WideOpenWest Holdings LLC (WOW) , Suddenlink Communications, and Knology Inc. (Nasdaq: KNOL) -- counted fewer than 62 million subs. Are another 10 million cable subscribers hiding in the woods somewhere? Sorry folks, even Verizon Communications Inc. (NYSE: VZ) and AT&T Inc. (NYSE: T) don't make up the difference.

Some have suggested that cable operators intentionally undercount their subscribers, as if there is vast industry conspiracy in place to ensure MSOs remain under the magic 70 percent threshold. It seems a strange accusation, as MSOs are watching their stock prices nose-dive thanks to mounting basic customer losses. Were MSOs to play games, wouldn't the natural incentive be for them to inflate their numbers?

Describing a half-full stadium that was billed as a sell-out game, sportscaster Warner Wolf once quipped, "If that game was a sell-out, 25,000 people must have come dressed as empty seats." And so it is with Chairman Martin's latest games with the cable industry.

— Michael Harris, Chief Analyst, Cable Digital News