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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of ) ) Implementation of Section 11(c) ) of the Cable Television Consumer Protection ) and Competition Act of 1992 ) MM Docket No. 92-264 ) ) Horizontal Ownership Limits ) MEMORANDUM OPINION AND ORDER ON RECONSIDERATION AND FURTHER NOTICE OF PROPOSED RULEMAKING Adopted: June 23, 1998 Released: June 26, 1998 Comment date: August 14, 1998 Reply comment date: September 3, 1998 By the Commission: Commissioner Furchtgott-Roth issuing a separate statement; Commissioner Tristani dissenting in part and issuing a separate statement. Table of Contents Paragraph I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 II. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 III. Issues on Reconsideration . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 A. Requests to Lower the Current 30% Ownership Limit . . . . . . . . . . . . . . . . . . . . . . 9 1. Consideration of Diversity Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2. Alteration of the Status Quo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3. Divestiture by TCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 4. Current Levels of Horizontal Concentration . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 5. Impact of Other Statutory Provisions and Rules . . . . . . . . . . . . . . . . . . . . . . . . 46 B. Requests to Revise the Calculation Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 1. Inclusion of Affiliated Telephone Companies. . . . . . . . . . . . . . . . . . . . . . . . . . . 52 2. Exemption for Systems Facing Effective Competition. . . . . . . . . . . . . . . . . . . . . 60 3. Attribution Rules. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 IV. Motion to Lift Stay. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 V. Further Notice of Proposed Rulemaking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 VI. Initial Regulatory Flexibility Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 VII. Paper Work Reduction Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 VIII. Procedural Provisions . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 IX. Ordering Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 Appendix A: List of Commenters I. INTRODUCTION 1. This Second Memorandum Opinion and Order on Reconsideration and Further Notice of Proposed Rulemaking ("Second Order on Reconsideration" or "Further Notice") addresses petitions for reconsideration of the Second Report and Order in MM Docket No. 92-264 ("Second Report and Order") filed by the Center for Media Education/Consumer Federation of America ("CME/CFA") and Bell Atlantic Corporation ("Bell Atlantic"). Among other things, the Second Report and Order promulgated rules pursuant to Section 613 of the Communications Act, which requires the Commission to "prescribe rules and regulations establishing reasonable limits on the number of cable subscribers a person is authorized to reach through cable systems owned by such a person, or in which such a person has an attributable interest" ("horizontal ownership rules"). The Commission's horizontal ownership rules established in the Second Report and Order provide that "no person or entity shall be permitted to reach more than 30% of all homes passed nationwide through cable systems owned by such person or entity or in which such person or entity holds an attributable interest." In addition, ownership of cable systems that reach up to 35% of all homes passed nationwide is permitted "provided the additional cable systems, beyond 30% of homes passed nationwide, are minority-controlled." 2. In the Second Report and Order, the Commission voluntarily stayed the effective date of the horizontal ownership rules pending final judicial resolution of the District Court decision in Daniels Cablevision, Inc. v. United States, which held that the underlying statute violates the First Amendment. The Daniels court expressly recognized that "there is substantial ground for difference of opinion" as to the constitutionality of the underlying statute, meriting an immediate appeal of its judgment. Accordingly, rather than enjoining the Commission from adopting and enforcing horizontal ownership rules, the court stayed further court proceedings, including determination and imposition of relief for the plaintiffs, pending appeal. On December 15, 1993, CME/CFA moved that the Commission lift its administrative stay. The following month, Time Warner challenged the stayed rules in the D.C. Circuit Court in Time Warner Entertainment Co., L. P. v. FCC. In August 1996, the D.C. Circuit Court consolidated the Daniels appeal regarding the facial validity of the statute and the Time Warner challenge to the Commission's rules, and determined to hold court proceedings in abeyance while the Commission reconsidered the horizontal ownership rules. 3. In this Second Order on Reconsideration, the Commission maintains the current 30% horizontal ownership limit and denies the motion to lift the voluntary stay on enforcement of that limit. We note that, while the most established programmers can obtain favorable terms from even the large cable multiple system operators ("MSOs"), the cable horizontal ownership rules remain necessary to prevent MSOs from exercising market power against new, independent, and less prominent programmers. In order to facilitate monitoring of cable ownership interests, the Commission hereby lifts the voluntary stay insofar as it applies to the information reporting requirements of 47 C.F.R.  76.503(c). Prior to acquiring attributable interests in any additional cable systems, a person holding an attributable interest in cable systems reaching 20% or more of homes passed nationwide will be required to notify the Commission of the incremental change the acquisition makes in terms of the 30% of homes passed standard, i.e. specifying the ownership in terms of homes passed before and after the acquisition is complete. 4. In the Further Notice, we seek comment on possible revisions of the horizontal ownership rules and the method by which horizontal ownership is calculated. Specifically, we ask whether changes are needed to provide a more accurate measure of horizontal concentration to reflect changes in the market as alternative MVPDs continue to grow in the future. The Further Notice seeks comment on two possible changes in the manner that the rules are applied: (1) whether the rules should consider the presence in the market of all MVPDs rather than cable operators alone; and (2) whether the rules should be based on actual subscribers rather than on homes passed. Specifically, comment is sought on whether the rules should provide that the number of cable subscribers an entity is authorized to reach through cable systems, when combined with the number of subscribers reached by that entity through other MVPD systems, may not exceed 30% of all MVPD subscribers nationwide. II. BACKGROUND 5. The 1992 Cable Act and its legislative history indicate heightened Congressional concern regarding horizontal concentration among cable multiple system operators. Witnesses at the Congressional hearings, including representatives of the MSOs themselves, testified to the need for cable horizontal ownership limits to preserve competition and protect the public interest. Section 613(f) of the Communications Act (Section 11(c) of the 1992 Cable Act) requires that the Commission, "[i]n order to enhance effective competition . . . prescribe rules and regulations establishing reasonable limits on the number of cable subscribers a person is authorized to reach through cable systems owned by such a person, or in which such a person has an attributable interest." 6. In adopting Section 613, Congress also recognized that multiple system ownership can benefit consumers. The House Report stated that cable industry consolidation has benefited consumers by allowing efficiencies in the administration, distribution and procurement of programming, and also noted that concentration of cable MSOs may help promote the introduction of new programming services by providing capital and a ready subscriber base for new services. The House Report also observed that large cable MSOs can take competitive and programming risks that smaller operators cannot. Similarly, the Senate Report acknowledged that horizontal concentration can create efficiencies from lower transaction costs in carriage negotiations between programmers and cable operators. 7. Recognizing these conflicting factors, Congress directed in Section 613(f)(2) that, in addition to other public interest concerns, the Commission must consider and balance seven particular public interest objectives: (1) to ensure that no cable operator or group of cable operators can unfairly impede the flow of video programming from the programmer to the consumer; (2) to ensure that cable operators do not favor affiliated video programmers in determining carriage and do not unreasonably restrict the flow of video programming of affiliated video programmers to other video distributors; (3) to take account of the market structure, ownership patterns, and other relationships of the cable industry, including the market power of the local franchise, joint ownership of cable systems and video programmers, and the various types of non-equity controlling interests; (4) to take into account any efficiencies and other benefits that might be gained through increased ownership or control; (5) to make rules and regulations that reflect the dynamic nature of the communications marketplace; (6) to impose no limitations that prevent cable operators from serving previously unserved rural areas; (7) to impose no limitations that will impair the development of diverse and high quality programming. 8. Based on an assessment of these factors, in the Second Report and Order, the Commission adopted a horizontal ownership limit prohibiting any person from having an attributable interest in cable systems that in the aggregate reach more than 30% of cable homes passed nationwide. We found that this 30% ownership limit struck the proper balance between (1) ensuring that the structure of the cable industry nationwide limited the possibility that large cable MSOs might exercise excessive market power in the purchase of video programming, and (2) ensuring that the majority of MSOs could continue to expand and benefit from the economies of scale necessary to encourage investment in new video programming services, diverse program offerings, and the deployment of advanced cable technologies. In order to promote minority ownership and diversity, we also adopted the minority-control allowance, which allows an MSO to reach an additional 5% of homes passed by cable nationwide if these homes are reached by cable systems that are more than 50% owned by one or more members of a minority group. III. ISSUES ON RECONSIDERATION A. Requests to Lower the Current 30% Ownership Limit 9. In its reconsideration petition, CME/CFA requested that the Commission lower the current limit on the number of homes passed by cable systems owned by any one entity from 30% to 10%-20%. Viacom, in its comments, argued for a 15% limit. The arguments raised by CME/CFA and Viacom against the Commission's 30% limit fall into five broad categories -- consideration of diversity issues; alteration of the status quo; divestiture by Tele-Communications, Inc. ("TCI"); current levels of horizontal concentration; and impact of other statutes and rules. We address the arguments for each category below. 1. Consideration of Diversity Issues a. Background 10. CME/CFA argued that the Commission did not give sufficient consideration to media diversity concerns in setting the 30% limit and that "[p]romoting First Amendment diversity may well require limits below that needed to address anticompetitive concerns alone." 11. Opposing reconsideration of the 30% limit, TCI noted that the CME/CFA diversity argument does not even attempt to balance the pros and cons of horizontal concentration, as the Commission is required to do by Section 613. TCI noted that Congress, the Commission, the courts, and antitrust scholars and economists uniformly have recognized that horizontal ownership can enhance consumer welfare and that this enhancement must be considered in addition to diversity aims. CME/CFA's diversity argument focuses only on the potential negative consequences of horizontal concentration. b. Discussion 12. Congress specifically directed that the Commission "impose no limitations that will impair the development of diverse and high quality programming." Promoting diversity of ownership has been a long- standing policy of the Commission. Diversity of information sources and viewpoints can be threatened by substantial concentration among cable system operators. Moreover, as the Commission has found, entry by new MVPDs is neither cheap nor easy and cable system operators remain the dominant distributors of video programming. As a result, decreases in diversity of information sources or viewpoints that accompany increased concentration among purchasers of programming may not be easily remedied. 13. Diversity is not the sole factor the Commission must consider in promulgating the cable horizontal ownership limits. As indicated above (paragraph 7), Section 613 lists seven public interest factors that the Commission must balance in making a decision. Before reaching a determination that 30% was a proper limit, the Commission twice requested public comment regarding the benefits and problems of horizontal concentration among cable MSOs. In addition to considering diversity aims, the Commission considered the possibility that large MSOs might have the ability to preclude the launch of new video programming services (as required by public interest factors (1) and (2) above), the benefits and efficiencies that result from horizontal concentration (as required by public interest factor (4)), and the relative impact of other statutes and rules in addressing competitive concerns regarding large MSOs. In the Second Report and Order, the Commission specifically noted that Section 19 of the 1992 Cable Act (the program access requirements), Sections 4 and 5 of the 1992 Cable Act (the must-carry requirements), and Section 612 of the Communications Act (the leased access requirements), combined with the 30% ownership limit, "will be appropriate to address the diversity aims which underlie the statutory horizontal ownership provisions." The Commission also considered diversity in allowing ownership of additional cable systems up to 35% of cable homes passed, provided the additional cable systems are minority-controlled. 14. We believe the 30% horizontal ownership limit adopted by the Commission provides considerable protection for diversity concerns. The record in this docket clearly demonstrates that the Commission took into consideration diversity concerns in adopting the 30% cable horizontal ownership limits. The Commission balanced those considerations, as required by Section 613, with many other factors, some of which support the growth of cable MSOs. In fact, the Commission's consideration of diversity concerns is reflected by the fact that we adopted a horizontal ownership limit lower than one that might have been indicated by a traditional antitrust analysis alone. The Commission was concerned that a lower horizontal ownership limit could "impair the development of diverse and high quality programming." The Commission properly concluded that a 30% limit is generally appropriate to prevent the largest MSOs from gaining excessive leverage, and also ensures that the majority of MSOs continue to expand and obtain the economies of scale necessary to encourage investment in new video programming services and the deployment of advanced cable technologies. 2. Alteration of the Status Quo a. Background 15. CME/CFA asserted that the 30% horizontal ownership limit is too high because it does not alter the status quo. CME/CFA contended that the Commission "failed to acknowledge that existing levels of horizontal concentration are too high," citing a passage from the Senate Report stating that large MSOs have market power vis-a-vis programmers. Arguing that Congress had made a specific finding that MSOs have the power to exact equity from programmers in exchange for carriage, CME/CFA asserted that Congress sought to change the status quo in the 1992 Cable Act. In their reply comments, CME/CFA argued, without citing any specific legislative history, that the 1992 Cable Act was intended to reverse the Commission's decision in the 1990 Cable Report not to adopt ownership limits. CME/CFA stated that the 30% limit in the Second Report and Order resembles the balance struck by the Commission in its 1990 Cable Report more than those envisioned in the 1992 Act, and that the Second Report and Order substituted the 1990 Cable Report judgment for the requirements of the 1992 Cable Act. 16. Time Warner Entertainment Co., L.P. ("Time Warner") and the National Cable Television Association ("NCTA") argued the Commission was given the discretion to balance competing concerns by Congress and disagreed that the 1992 Cable Act requires the Commission to alter the status quo. b. Discussion 17. The issue here is one of statutory interpretation -- whether Congress, in enacting Section 613, made a final determination that then current levels of horizontal concentration were too high, requiring the Commission to adopt rules to force divestiture and to reduce horizontal concentration. We believe that the text of Section 613 is clear that the Commission was given the discretion to adopt limits that may or may not require divestiture. 18. Section 613 gives the Commission the discretion "to prescribe rules and regulations establishing reasonable limits on the number of cable subscribers a person is authorized to reach ...." CME/CFA's argument ignores that the statute does not direct the Commission to alter the status quo by ordering divestiture by any cable MSO. Instead, Congress required that the Commission set "reasonable limits" and left the parameters of what "reasonable limits" would be to Commission discretion. 19. Further, we note that this construction of the statute is supported by the legislative history. The Senate Report explicitly states that "[t]he legislation does not imply that any existing company must be divested and gives the FCC flexibility to determine what limits are reasonable." The House Report states that: "Currently, the largest MSO controls access to almost 25 percent of all US cable subscribers. Although this percentage may appear low relative to other industries, the Committee believes that it may be quite significant depending on the subscriber level needed to launch and sustain a cable programming service." The language of the House Report is significant on this point. While it demonstrates Congress' concern about current levels of horizontal concentration, it expressly does not make a final conclusion, but simply states that current levels "may be quite significant depending on" the number of subscribers needed to launch and sustain a programming service. 20. The statute and the legislative history make clear that the Commission was not required to alter current industry structure, but to consider the potential public interest concerns associated with the industry structure. The Commission fully considered such interests. 3. Divestiture by TCI a. Background 21. CME/CFA asserted that the Second Report and Order was too concerned about avoiding divestiture by TCI and was not focused on consumer welfare. Arguing that the legislative history of Section 613 indicates that divestiture might be warranted, CME/CFA contended that a passage in the Senate Report stating that the legislation "does not imply that any existing company must be divested" expressly left open the possibility of divestiture. CME/CFA urged that the Commission not be deterred from imposing horizontal limits which would require TCI to divest, as Congress required the Commission to weigh seven public interest considerations, none of which was to ensure that MSOs could continue to expand. 22. Viacom agreed with CME/CFA that the Second Report and Order placed too much reliance on language in the Senate Report which states that the limit "does not imply that any existing company must be divested." Viacom argued that the legislative history does not prohibit the Commission from adopting a limit that would require divestiture, but, at most, only indicates that the Commission should not promulgate rules which would impose divestiture if the divestiture were not in the public interest. Viacom stated that divestiture is relevant and should be considered by the Commission in adopting horizontal ownership rules, but that avoiding divestiture should not override the public interest concern regarding excess MSO market power against unaffiliated programmers. 23. Time Warner, TCI, Liberty Media Corporation ("Liberty Media"), and NCTA responded that the Commission's decision not to order divestiture by TCI was based upon the finding that there was an "absence of definitive evidence that existing levels of ownership are sufficient to impede the entry of new video programmers or have an adverse effect on diversity." Liberty Media argued that, since no programmer claimed in the original proceeding that any cable operator had exercised horizontal market power and no commenter introduced empirical evidence of such power, it was proper for the Commission to make this finding. NCTA argued that avoiding divestiture was not the driving factor in the Commission's decision, as the Commission considered a number of factors in proposing and adopting the limits, including avoiding potential disruption in existing ownership and the absence of definitive evidence that existing levels of ownership are harmful. b. Discussion 24. We agree with Viacom and CME/CFA that the Commission has the authority under Section 613 to order divestiture. We disagree with CME/CFA to the extent they argue that the Commission should not consider the full impact divestiture would entail before promulgating such rules. Inquiry into the impact divestiture would have upon subscribers, programmers and industry investment are legitimate public interest objectives that the Commission is entitled to consider. A rule requiring divestiture must be based on consideration of all relevant factors. We believe that the Second Report and Order properly considered whether the substantial structural change that divestiture would entail was warranted. 25. We reject CME/CFA's argument that the impact of ordering divestiture should not have entered into the Commission's decision-making because it is not one of the seven specifically-enumerated public interest factors of Section 613. The statute explicitly contemplates that the factors enumerated are "among other public interest objectives" that the Commission is to consider. Assessing the impact of divestiture is consistent with Section 613's directive that the Commission "take particular account of the market structure" and "not impose limitations which would impair the development of diverse and high quality video programming." 26. In both the First Report and Further Notice and the Second Report and Order, the Commission considered arguments for low limits that would require divestiture. The Commission based its final decision not solely on a determination to avoid divestiture, as CME/CFA suggested, but, more importantly, upon the public interest requirements of Section 613. In its initial comments, the Association of Independent Television Stations, Inc. argued for a 10% subscriber cap. In the First Report and Further Notice, the Commission stated that this proposal not only would require divestiture but "would sacrifice the efficiencies achieved by horizontal concentration." The Commission determined that the proposal would "be contrary to the legislative history" of Section 613. The Commission asked in the First Report and Further Notice that parties "favoring limits below 25%" that would require divestiture "discuss the effect that such divestiture would have on service to subscribers, programming carriage agreements, and on future MSO investment in new programming and technology." The Commission emphasized the over-arching importance of striking "the proper balance among the competing public interest objectives Congress directed us to consider" in setting the horizontal ownership limit, without excluding the possibility of divestiture. 27. In the Second Report and Order, the Commission again considered proposals that would have required divestiture by the largest MSO, TCI, and also discussed the other effects divestiture would create. The Commission, after considering the "statutory factors and . . . the preponderance of the data provided in the record," concluded that a 30% limit was appropriate because it would "prevent the nation's largest MSOs from gaining enhanced leverage from increased horizontal concentration" while "ensur[ing] that the majority of MSOs continue to expand and benefit" from the positive aspects of increased concentration. The Commission expressly confronted the divestiture issue and explicitly determined that "in the absence of definitive evidence that existing levels of ownership are sufficient to impede the entry of new video programmers or have an adverse effect on diversity, existing arrangements should not be disrupted." 4. Current Levels of Horizontal Concentration a. Background 28. CME/CFA asserted that the Second Report and Order did not sufficiently address the evidence that the largest MSO, TCI, already has market power and uses its market power to disadvantage competing program services. CME/CFA argued that, from a competitive standpoint, the Commission "fail[ed] to acknowledge that existing levels of horizontal concentration are too high." 29. Viacom argued that a lower limit is needed because, based upon its own experience, 40 million subscribers are necessary for an advertising-supported, basic cable programming network to be successful. Viacom extrapolated from this figure its argument that no MSO should be allowed to come close to controlling access to enough subscribers that would prevent a programmer from reaching 40 million homes -- i.e., based on 1993 cable subscribership figures, no MSO should be allowed to come close to controlling access to 30.9% of cable subscribers. Viacom also asserted that the then current levels of market concentration allowed large MSOs to drive down the license fees they pay to programmers. This, Viacom argued, affects the entire market for license fees and drives them down across the board. The result is that programmers cannot spend as much on development, thus potentially reducing the diversity and quality of programming available to subscribers. 30. Both CME/CFA and Viacom provided anecdotal evidence to support their belief that TCI, the nation's largest MSO, is too large. CME/CFA cited the Federal Trade Commission's ("FTC") agreement with TCI and Liberty Media forcing divestiture of QVC, Inc. ("QVC") as evidence that TCI possesses currently anticompetitive influence resulting from its large horizontal size. In addition, CME/CFA cited Viacom's antitrust complaint against TCI and claimed that, according to the Viacom complaint, TCI had dropped Viacom's The Movie Channel in favor of TCI affiliate Encore Media, and had withheld affiliation with Viacom's Showtime to force Showtime either to merge with Encore Media or be destroyed. CME/CFA asserted that, if TCI can wield power over Viacom and its popular networks, it certainly has power to preclude the launching of new programming from smaller programmers. CME/CFA also cited a passage in the Senate Report stating that "[w]itnesses at the hearings testified that. . . [MSOs have the power] to determine what programming services can 'make it' on cable." CME/CFA argued that independent programmers' failure to argue for lower levels of concentration previously in this docket indicates "their reasonable fear of offending the MSOs who, after all, have it in their power to put them out of business." 31. Viacom stated that TCI's anticompetitive conduct led Viacom, after the initial comment periods in this proceeding closed, to file its antitrust complaint against TCI, Liberty Media and others and also convinced Viacom that stricter horizontal rules are necessary to prevent anticompetitive conduct in the market for programming services. 32. All other cable operators filing comments strenuously opposed the argument that current levels of horizontal concentration are "too high." TCI stated that the arguments of CME/CFA and Viacom fail to recognize the current benefits of horizontal concentration, which the Commission is required to consider under its statutory mandate. TCI also asserted that horizontal concentration allows MSOs to achieve economies of scale in research and development of transmission and distribution technology and achieve considerable savings in administrative costs such as billing operations, advertising, marketing, and management. In addition, Time Warner stated that the costs of negotiating with programmers are reduced on both sides of the table. 33. TCI argued that under traditional antitrust analysis, the then current ownership level of MSOs did not equate to high concentration, citing legislative history which reported that the Herfindahl-Hirshman Index ("HHI") of the top 20 MSOs was 491 and the Four-Firm Ratio was 36%, well below the Department of Justice thresholds of 1,000 and 50%. TCI stated that these levels did not indicate that MSOs are able to extract unreasonable concessions from their suppliers. Time Warner pointed out that an MSO's incentive to undertake a foreclosure strategy is counterbalanced by desires to increase subscribership and decrease churning of programming. TCI also submitted a report from a group of economists that recommended against setting low ownership limits because, due to MSOs' recognition that their own success depends on the availability of a high quantity and quality of programming, increased concentration "will not affect the array of programming selected and distributed by the cable operator and therefore will not distort the allocation of resources in the production of program services." 34. Cable MSOs and programmers also strongly disputed Viacom's suggestion that 40 million subscribers are required for success. Several pointed out that a number of successful cable networks had never achieved penetration levels above 60% to 70%. Time Warner argued that there is no "magic" level of penetration that necessarily assures, or prevents, a programming service's commercial success. Turner Broadcasting System, Inc. ("TBS") pointed out in its opposition that ESPN2, an unaffiliated programmer, already had over 10 million subscribers, one million more than the vertically affiliated Cartoon Network, and the then-unaffiliated Sci-Fi Channel was regarded as successful with 15 million subscribers. Liberty Media stated that 46 of the 68 listed national basic cable networks then had fewer than 40 million subscribers. 35. TCI and Liberty Media responded to CME/CFA and Viacom's specific charges of anticompetitive conduct by arguing that the charges were unsupported. TCI argued that the consent decree cannot be used as evidence against TCI. TCI also stated that no competitive problems were ever proved in the QVC matter and that TCI divested its interest solely because it did not want to interfere with QVC's tender offer for Paramount. Liberty Media argued that the agreement with the FTC was intended to address vertical concerns and not horizontal size. TCI and Liberty Media stated that Viacom's antitrust suit was filed in the context of its attempt to prevent QVC from acquiring Paramount. Given this history, TCI and Liberty Media argued that it would be improper for the Commission to decide its cable horizontal ownership limits based upon unproven allegations made by a competitor with the desire to enhance Viacom's efforts to increase its own ownership concentration in several markets. TBS discounted Viacom's allegations against TCI as "an extension of its current jihad with TCI." Time Warner stated that Viacom's argument consists of unproven allegations. 36. Time Warner also pointed out that during the prior comment period, no programmer, either failed or successful, proposed or well-established, claimed that any cable operator exercised horizontal market power, and no commenter introduced any empirical evidence of the exercise of such market power. Liberty Media argued that without this evidence, the Commission appropriately determined that cable horizontal ownership limits that freeze or reduce existing ownership levels were unjustified. b. Discussion 37. As stated above, the Commission found in the Second Report and Order that 30% was an appropriate limit "in the absence of definitive evidence that existing levels of ownership are sufficient to impede the entry of new video programmers or have an adverse affect on diversity ..." The legislative history of Section 613 indicates Congress' concern that excessive horizontal concentration had the potential to facilitate the anticompetitive exercise of monopsony power and adversely impact the diversity of programming. Because cable MSOs generally purchase cable programming on a national level and at the same time distribute that programming to consumers on a local level through the locally franchised cable system, assessing the impact of cable concentration by examining both the national programming market and the local distribution market is appropriate. In the Second Report and Order, the Commission found that a 30% limit was "appropriate to prevent the nation's largest MSOs from gaining enhanced leverage from increased horizontal concentration." The Commission then concluded that the 30% limit is "reasonable to prevent the types of anti-competitive conduct which concerned Congress, particularly when coupled with the behavioral restrictions contained in [the program access and program carriage provisions] . . . . " In this reconsideration proceeding, no one has proffered any new evidence that requires the Commission to alter this finding. Moreover, we believe the 30% limit complies with the intent of Congress and satisfies the criteria specified in Section 613. 38. In enacting Section 613, Congress expressed concern about concentration of the media in the hands of a few "media gatekeepers'' who could control dissemination of information. The accumulation of market share on a national level by a single or small number of large cable MSOs could diminish the diversity of programming available to most households in the United States. As of June 1997, there were more than 64 million cable subscribers representing more than 66% of all television households in the United States. As such, cable television remains a primary source of information and programming for many households in the United States. The 30% rule limits the extent to which one or a few large cable MSOs could reduce the diversity of programming in the United States. 39. The 30% limit diminishes the likelihood that either a large cable MSO acting unilaterally or a group of cable MSOs acting in concert could exercise market power in the purchase of programming. While the exercise of market power could result in lower negotiated programming costs for these MSOs in the short run, it could also adversely affect the development of diverse and innovative programming in the long run. In addition to preserving the development of programming, the 30% limit decreases the likelihood that a large cable MSO acting unilaterally could coerce nonaffiliated programmers into denying programming to alternative MVPDs, such as a DBS provider. 40. The 30% limit may serve to facilitate the development of competition in those markets where cable MSO market power already exists. The rule limits the extent to which large cable MSOs can merge and result in one or two MSO's controlling local cable markets nationwide. Limiting this merger potential may preserve opportunities for entry by overbuilders or other MVPD providers and reduce the likelihood that large MSOs can coordinate their behavior by mutually forbearing from overbuilding each other's service territories. Coordinated activity between cable MSOs, whether tacit or overt, is more likely with few firms than many (due to greater ease in reaching a consensus, monitoring compliance, and punishing cheaters), and such behavior will have a greater impact the larger combined share of the market these collusive firms control. The 30% limit also reduces the likelihood of coordinated activity between large cable MSOs in areas such as program purchasing and equipment purchasing (e.g., set top boxes and converters). 41. The 30% limit permits cable MSOs to cluster systems in order to gain efficiencies related to economies of scale and scope in administration, deployment of new technologies and services, extension into previously unserved territories, etc.. Accordingly, the 30% limit simultaneously guards against the potential anticompetitive effects of horizontal concentration and allows cable MSOs to realize the benefits of clustering. 42. The 30% limit is a structural complement to the program access provisions. The horizontal ownership rules limit the potential for anticompetitive abuses of purchasing power in areas outside of the core areas covered by the program access rules, such as programming contracts between cable operators and non- vertically integrated programmers or contracts involving programming that is not delivered to cable operators via satellites. In addition, structural regulation generally is more easily enforced and detected than conduct regulation. We recognize that a large market share does not in and of itself indicate that a firm or a collection of firms has the ability to exercise market power or engage in anticompetitive behavior. Nevertheless, structural regulation imposes far fewer economic costs on the market than regulatory models that use primarily price or case-specific conduct regulation as a way to mitigate strategic, anticompetitive behavior. 43. It appears that the current level of concentration among cable MSOs has not prevented an expansion in programming sources and networks. The nation's largest cable MSO reached 24% of homes passed by cable in 1990; grew to 27% by 1993; and reached 29.32% at the time of the 1997 Competition Report. At the same time, our annual competition reports indicate a gradual but continuous growth and expansion in both cable-affiliated and independent programming sources and programming networks. This evidence tends to suggest that the Commission properly struck a reasonable balance between concentration and diversity concerns. Thus, contrary to CFA's allegations, the actual evidence to date suggests that allowing a cable MSO to own systems reaching 30% of homes passed has not significantly hampered new video programmers' entry in the programming market. 44. Viacom's argument that 40 million subscribers are needed for a national cable programming network to be successful is not supported by the record. Other parties in the proceeding have presented evidence disputing Viacom's 40 million figure, including several examples of cable programming services (such as BET, Nickelodeon, ESPN2) that were successful before reaching 40 million subscribers. Prior comments in this docket also provide data that 40 million subscribers are not necessary for a national, basic cable programming network to be successful. Commenters, including new networks, in other proceedings before the Commission likewise have stated that a new national, advertiser-supported network requires a threshold subscriber base of ten to twenty million subscribers. 45. The 1997 Competition Report estimates the total number of MVPD subscribers nationwide to be 73,646,970. Consequently, a programmer that fails to sell its product to an MSO having 30% of cable homes passed nationwide still would have the opportunity to reach (through the remaining MVPDs) over 50 million subscribers, well over the threshold for national success. Many among the top 50 programmers nationwide, including MSNBC, the Disney Channel, and Turner Classic Movies, reach substantially less than 40 million subscribers. Neither Viacom nor CME/CFA has provided sufficient grounds to warrant a lowering of the 30% horizontal ownership limit and freezing or reducing existing levels of cable ownership. 5. Impact of Other Statutory Provisions and Rules a. Background 46. CME/CFA argued that the Commission's reliance in the Second Report and Order upon existing statutes and regulations, such as the program access and carriage rules, as a justification for higher ownership limits was improper because structural regulations provide "a superior means of promoting diversity compared to behavioral regulations." 47. Viacom also asserted that the Commission should not have relied on other sections of the 1992 Cable Act, such as program carriage and access provisions, must-carry requirements, channel occupancy limits, and leased access requirements. Viacom argued that Congress did not indicate that the Commission should calibrate the cable horizontal ownership rules to take these provisions into account, as these provisions were enacted with purposes separate from the cable horizontal ownership provision. Viacom stated that these other provisions probably will not have any practical impact on restraining anticompetitive conduct of cable operators: leased access is probably not a viable option for programmers, must-carry provisions are for television broadcasters (not unaffiliated programmers like Viacom), and the program access provisions only require MSOs to offer their own programming to other distributors. Viacom also argued that although the program carriage provisions prohibit cable operators from extracting a financial interest or exclusivity rights in exchange for programming carriage, the statute does not address the issue arising when an MSO "solely by virtue of the size of its subscriber base" has market power to determine whether a programming service can reach the critical mass of subscribers needed to succeed. Viacom also stated that programmers are not likely to bring program carriage complaints against the largest MSOs, who are their biggest customers and therefore essential to success. 48. Liberty Media and Time Warner responded by arguing that the existing restrictions in the 1992 Cable Act support maintaining the 30% ownership limit. Liberty Media argued that the Commission properly considered the cumulative effect of these regulations to protect against the exertion of undue power over the success of new video services. Time Warner agreed, stating that the cable horizontal ownership limits should not be viewed as an isolated measure and that the cumulative effect of all provisions and rules should be taken into account. Liberty Media also pointed out that Viacom had taken completely the opposite position on this point in the initial comment round in this docket. NCTA stated that Congress directed the Commission to take into account the market structure, ownership patterns and other relationships in the industry in establishing these limits, and that the Commission found that the cumulative effect of all these rules should protect against any one cable operator's exertion of excessive market power. b. Discussion 49. We believe that the Second Report and Order properly considered the impact of other rules and statutes since the public interest requirements of Section 613 require the Commission to examine the marketplace as it currently operates, which includes the effects of current Commission rules and statutes. Specifically, the public interest factors of Section 613 state that the Commission is to "take particular account of the market structure, ownership patterns, and other relationships of the cable television industry," "account for any efficiencies and other benefits that might be gained through increased ownership or control," "make such rules and regulations reflect the dynamic nature of the communications marketplace," and "not impose limitations which would impair the development of diverse and high quality video programming." 50. Statutes and rules such as the program access, program carriage, channel occupancy limits, and must-carry requirements all affect the way the cable television industry currently operates and have a profound effect on current industry structure and performance. For example, in the 1994 Competition Report, the Commission stated that, "[t]o the extent that large MSOs used their power over vertically-integrated programmers to obtain exclusive distribution rights to satellite-delivered programming, and those exclusive rights disadvantaged competitors of those large MSOs, the 1992 Cable Act's program access provisions and the Commission's program access rules appear to have largely addressed the problem." In the 1997 Competition Report, the Commission noted that "the program access rules have been credited as having been a necessary factor in the development of both the DBS [direct broadcast satellite] and MMDS [multichannel multipoint distribution service] industries." Because these provisions have real and substantive impact upon the market, the Commission, in setting the horizontal ownership limit, may properly consider the impact of these provisions in alleviating some of the public interest and anticompetitive concerns about horizontal concentration. 51. In addition to CME/CFA's argument that the Commission should not have placed any reliance on the impact of these other statutes and rules, both CME/CFA and Viacom argued that the Commission placed too much weight on the impact of these other statutes and rules on alleviating competitive concerns. In the Second Report and Order, the Commission recognized that anticompetitive concerns might indeed be present under the current market structure. The Commission did not conclude that statutory provisions and rules such as the program carriage and access provisions, the must-carry requirements, and the channel occupancy limits were sufficient by themselves to address anticompetitive concerns about horizontal concentration. The Commission did find that, when combined with these other statutory provisions and rules addressing similar concerns, the 30% horizontal ownership limit was "reasonable" and stated that: "The cumulative effect of these regulations coupled with a horizontal ownership limit of 30% should protect against any one cable system exerting undue power that could prevent the success of new video programming services or `unfairly impede the flow of video programming to the consumer.'" The Commission's weighing of these other statutory provisions and rules in crafting the rules adopted in the Second Report and Order was appropriate. B. Requests to Revise the Calculation Factors 1. Inclusion of Affiliated Telephone Companies a. Background 52. CME/CFA requested that the Commission take into account in the calculation of "homes passed" the number of telephone households of a telephone company affiliated with an MSO. CME/CFA argued that the current regulations do not take into account proposed mergers and joint ventures between telephone companies and cable companies -- e.g., the (then) proposed merger of Bell Atlantic and TCI that would have resulted in access to 40% of all U.S. households, either through Bell Atlantic telephone lines or TCI's cable systems. CME/CFA argued that just as "homes passed" measures potential cable subscribers, telephone customers should be viewed as potential "cable subscribers" via video dialtone or broadband networks. CME/CFA argued that if cable and telephone companies merge, the potential for direct competition in their overlapping areas is removed and smaller video programmers are threatened. CME/CFA further stated that its proposed expansion of the horizontal ownership rules is a logical outgrowth of the "homes passes" standard, as potential VDT subscribers are functionally indistinguishable from potential cable subscribers. 53. MSOs and telephone companies uniformly responded that the Commission does not have the authority under Section 613 to treat telephone customers as "cable subscribers." NCTA and Bell Atlantic argued that Section 613 specifically refers to "cable subscribers" reachable through "cable systems" and that VDT and other systems are not regarded as "cable services or systems" in their respective proceedings. U S West Communications, Inc. ("U S West") argued that the Communications Act's definition of "cable system" specifically excludes common carrier facilities subject to Title II of the Communications Act. In addition, Bell Atlantic argued that VDT service is not a single "facility" that includes the necessary signal generation, reception and control equipment required of a "cable system," since a VDT network's generation and transmission equipment will generally be provided by the programmers. GTE Service Corporation ("GTE"), BellSouth Telecommunications, Inc. ("BellSouth") and Bell Atlantic also stressed that unlike cable, VDT is an open-access, subscriber controlled system where the subscriber will not be the programming captive of the telephone company, because the telephone company is a common carrier. Liberty Media pointed out that the proposal ignores the Commission's rules prohibiting a telephone company from acquiring a cable system within its telephone service area. 54. Time Warner argued that the CME/CFA proposal would discourage telephone investment in cable and would be fundamentally at odds with the Commission's "two wires" policy. NCTA also stated that CME/CFA's proposition is absurd because it would require the Commission to consider all telephone subscribers as "potential cable customers" in determining the percentages. 55. Bell Atlantic posited that the proposal would impose an arbitrary limit on the very companies capable of succeeding as new entrants against the cable companies and would provide a disincentive in creating and upgrading VDT services. According to Bell Atlantic, under its then proposed merger with TCI, Bell Atlantic would have upgraded TCI's systems to allow telephone service in competition with incumbent telephone companies. TCI would have divested itself of cable systems in Bell Atlantic's region and Bell Atlantic would have upgraded its networks to compete with these systems. Bell Atlantic noted that similar arrangements were included in other cable-telco transactions proposed at the time the comments were filed. 56. Liberty Media also stated that since the Commission Notices in this docket did not mention potential application of the limits to telephone customers, to extend the limits would violate the Administrative Procedure Act ("APA"). 57. CME/CFA responded that the Commission always has the authority to regulate in ways "reasonably ancillary to the effective performance of the Commission's various responsibilities for the regulation of television broadcasting." The Commission has authority under the "reasonably ancillary" test to achieve "long established" goals or "ultimate purposes." CME/CFA asserted that, since the Commission had power before Section 613 to impose horizontal limits on the cable industry, the Commission certainly has authority to adopt limits which include affiliated telephone subscribers under the "reasonably ancillary" standard. However, CME/CFA stated, that if the Commission finds that considerations of fairness and the APA require further rulemaking, the Commission should initiate such a procedure. b. Discussion 58. Section 613 specifically authorizes the Commission to place limits on "cable subscribers" a person may reach through "cable systems." Where the use of a telephone company's lines is limited to the provision of local exchange services, we see no reason why that company's telephone subscribers should be counted as cable subscribers for the purposes of the cable horizontal ownership limit. Likewise, the cable horizontal ownership limit does not apply to subscribers of a telephone company that offers multichannel video programming distribution service solely through means other than a "cable system." 59. We note, however, that if a telephone company offers multichannel video programming distribution service to subscribers through a "cable system," the households passed by that cable system would be regarded as "cable households" for purposes of the cable horizontal ownership rules. As discussed below, the Commission will be seeking further comment on possible revisions to the rules to take into account all MVPD subscribers, such that a person would be allowed to reach fewer subscribers through cable systems if that person also reaches a large percentage of MVPD subscribers nationwide through other MVPD systems, including video distribution by a telephone company. 2. Exemption for Systems Facing Effective Competition a. Background 60. Bell Atlantic proposed that homes in franchise areas facing "effective competition" not be included in calculating whether an operator has reached the 30% limit. To illustrate Bell Atlantic's proposal, assume that cable company A passed 25% of cable homes nationwide, but 5% of these cable households were in areas subject to "effective competition." Under Bell Atlantic's proposal, if 10% of the cable homes passed nationally were in franchise areas subject to "effective competition," cable company A's horizontal share under the rules would not be 25% but would be 22%. Bell Atlantic argued that horizontal ownership limits are only required to combat the local monopoly and "gatekeeper" power of cable systems, so that the justification for these limits disappear where local distribution markets are competitive. 61. Bell Atlantic argued that subjecting systems under "effective competition" to the horizontal ownership limits will harm competition in the industry. Bell Atlantic contends that, in exempting competitive markets from rate regulation, Congress recognized that competition eliminates the ability of cable operators in those markets to exercise market power and that continued regulatory constraints hinder flexibility in those markets. According to Bell Atlantic, Congress found that cable operators' ability to exercise market power arises from lack of competition in local service areas. As a result, Bell Atlantic asserts, national market power over programmers is diminished by the presence of competition at the local level. 62. CME/CFA argued that Bell Atlantic's argument ignores Congress' well-founded concern that MSOs exercise market power at the national level by dint of sheer size. Congress did not provide an "effective competition" exception here, as it did for rates in Section 3 of the 1992 Cable Act, indicating that Congress did not intend such an exception. CME/CFA noted that Bell Atlantic provides no evidence that the presence of local competition diminishes the incentive or ability of cable operators to favor affiliated programmers and disfavor independents. CME/CFA argued that it is not clear how sporadic local competition seriously undermines the power which flows from "being able to provide ready-made subscriber levels." CME/CFA also pointed out that, because years and "billions of dollars" were required before VDT was to become operational, VDT systems at that time could not compete with cable or offer independent programmers a viable alternative to delivery by cable. Since broadcasters are subject to analogous limits despite vigorous competition from local stations, CME/CFA stated that there is no reason for making local competition a basis for dropping the horizontal ownership limits on MSOs. 63. Bell Atlantic responded to the CME/CFA opposition by stressing that it was not asking the Commission to eliminate the ownership limits where only a "theoretical" possibility of competition exists. Instead, Bell Atlantic argued, it simply proposed that these limits not apply where actual head-to-head competition exists. Where competition exists, according to Bell Atlantic, distributors have strong incentives to ensure that consumers obtain the programming they value, regardless of source. The only effect of applying these limits in competitive markets, Bell Atlantic contended, would be to prevent established companies from invading each others' territories and to inhibit entry by those companies that are best equipped to compete with existing MSOs. b. Discussion 64. We agree with Bell Atlantic that the concern that cable operators may "unfairly imped[e]. . . the flow of video programming from the video programmer to the consumer" will be reduced when there is sufficient competition at the local distribution level. If there is sufficient local distribution competition, the local cable operator will no longer be a "gatekeeper" over that particular audience and video programmers would have alternative means to reach that audience. We disagree with Bell Atlantic's conclusion that horizontal ownership limits are only required to combat the local monopoly of cable systems, so that the justification for these limits disappears where there is sufficient local competition to satisfy the "effective competition" standard applicable to rate deregulation. 65. A level of competition sufficient to support rate deregulation is not necessarily sufficient to address the public policy objectives of the horizontal ownership rules. As we observed in the First Order on Reconsideration in rejecting Bell Atlantic's similar argument in the context of channel occupancy limits, "the effective competition standard was not adopted for this specific purpose and [] it is not clear that the presence of effective competition for any cable system will address all of the relevant concerns that Congress expressed in enacting Section 11 of the 1992 Cable Act." As an example, we noted that, if both the cable system and the competing MVPD are vertically integrated, unaffiliated programming services may continue to be denied access from either outlet, thus frustrating the diversity and competition objectives of the 1992 Act. We agree with CME/CFA that, had Congress intended to eliminate all cable regulations where systems face effective competition, the effective competition exemption would have been drawn much more broadly. Instead, the exemption is expressly limited to rate regulation; nowhere in either its language or legislative history does it state that the presence of head-to-head local distribution competition will render the horizontal ownership rules unnecessary. 66. The "effective competition" standard determines when there is sufficient local competition to prevent an incumbent cable operator from exercising market power in setting local rates for cable services sold to local subscribers. In contrast, the horizontal ownership limit was designed to ensure that no cable MSO acquires a sufficiently large share of subscribers nationwide to exercise undue market power at the national level in its purchase of programming from networks, which generally sell their programming nationwide. In the Second Report and Order, the Commission rejected an argument similar to that of Bell Atlantic, stating: "The presence of effective competition in any given system or group of systems does not, however, directly respond to Congress' concern about the exercise of undue control by a single entity at the national level." We reaffirm that decision today. We will not assume that, in their bargaining, programming networks and cable MSOs do not consider an MSO's total subscribership, but only its subscribers in areas not subject to "effective competition." There may be grounds for revising the 30% horizontal ownership limit, however, as more systems become subject to effective competition. 3. Attribution Rules a. Background 67. CME/CFA asked that the Commission tighten its attribution rules by eliminating the single majority shareholder exception, which provides that minority interests will not be attributed where a single shareholder owns more than 50% of the outstanding voting stock. CME/CFA argued that this exception to the attribution rules is "unduly mechanistic" and ignores the minority shareholder's "ability to influence the actual operation of the property" even when a majority shareholder is present. CME/CFA posited that there are situations where a single majority shareholder may be forced to accommodate minority shareholders. 68. Responding to the CME/CFA proposal, NCTA noted that the attribution rules address the ability of an MSO to influence in a meaningful way the programming decisions of an individual cable system. NCTA argued that the single majority shareholder exception appropriately recognizes that the influence of non- majority shareholders is significantly attenuated when a majority shareholder exists, such that attribution is not required. b. Discussion 69. In the Second Report and Order, the Commission adopted the broadcast attribution rules, which contain the single majority shareholder exception, in the cable horizontal ownership context because "the objectives of the broadcast attribution model are consistent with our goals in establishing ownership standards for subscriber limits." The Commission explicitly stated that the broadcast rules "focus on ownership thresholds that enable a broadcast licensee to influence or control management or programming decisions" and that "these same issues are also relevant to addressing the concerns at issue in this proceeding relating to the ability of cable operators to unduly influence the programming marketplace. 70. The Commission does not believe there is enough evidence in this docket to justify reversing our prior opinion that, in single majority shareholder situations, ownership of minority voting stock alone is unlikely to grant sufficient "influence" over programming decisions to warrant attribution. The single majority shareholder provision of the rules is currently under review in the broadcast context in MM Docket Nos. 94- 150, 92-51 and 87-154. In that proceeding, the Commission sought comment on the nature of "influence" and "control" and the connection between equity ownership and such influence and control. The Commission is also issuing a Notice of Proposed Rulemaking seeking comment on whether and how the cable attribution rules should be revised. Given the paucity of information in this proceeding from which to make an informed decision as to the need for changes in the attribution standards, that appears to be the preferable course. 71. This determination regarding the cable attribution rules applies to both our horizontal ownership rules and channel occupancy limits. As we noted in the First Order on Reconsideration, that order addressed the issues on reconsideration regarding our cable channel occupancy limits, but left issues concerning the cable attribution standard for the current proceeding. IV. MOTION TO LIFT STAY a. Background 72. In the Second Report and Order, the Commission voluntarily stayed the effective date of the cable horizontal ownership rules pending final judicial resolution of the District Court decision in Daniels that the underlying statute violates the First Amendment. While the Daniels Court had stayed further District Court proceedings pending interlocutory appeal of its judgment, it had not enjoined the Commission from adopting and enforcing horizontal ownership rules under the statute. CME/CFA filed a motion to lift the Commission's voluntary stay, which was opposed by NCTA. 73. CME/CFA argued that, because the Daniels Court elected to stay further District Court proceedings pending appeal, the Commission's stay "cancels out the Court's stay, resulting in a situation where there are no regulations controlling the growth of cable systems while the constitutionality of the limits is being appealed." As a result, CME/CFA argued, while stays are generally granted to preserve the status quo, the Commission's stay does not preserve the status quo. CME/CFA further argued: (1) that the Commission and the United States are likely to prevail on the merits on appeal; (2) that lifting the stay during the litigation will not result in irreparable harm to cable operators because the current rule still allows expansion for all cable systems and only causes "a temporary inability to expand beyond the 30% limit;" (3) that continuance of the stay could result in harm to video programmers and the public; and (4) that the public interest in "achieving competition and diversity in the cable television marketplace" requires that the rules be enforced while the constitutionality of the limits are under review. 74. In its opposition, NCTA argued that the case for a stay is one of "surpassing strength." NCTA stated: (1) that it is "far from clear" that the cable horizontal ownership limits will be upheld; (2) that "irreparable injury will result if cable systems are prevented from lawfully expanding their operations;" (3) that continuance of the stay during the litigation will not harm other interested parties, such as video programmers and the public; and (4) that the public interest favors the stay because the stay avoids "potential confusion and uncertainty during the period of judicial review." b. Discussion 75. In August 1996, the D.C. Circuit Court consolidated the Daniels appeal regarding the facial validity of the statute and the Time Warner challenge to the Commission's rules, and determined to hold court proceedings in abeyance while the Commission reconsidered the horizontal rules. In light of the continuing pendency of the judicial proceedings relating to the underlying provision, we will retain the voluntary stay of the 30% horizontal ownership limit at this time. That decision has been appealed and the Commission has argued that the provision in question is indeed constitutional. 76. In order to facilitate monitoring of MSOs' ownership interests, we will lift the stay insofar as it applies to the information submission provisions of 47 C.F.R.  76.503(c) that are applicable when any person or entity holding an attributable interest in cable systems reaching 20% or more of homes passed nationwide acquires additional cable systems. The existing rules require a certification that no violation of the 30% limit will occur as a result of such acquisition. In light of the continuation of the stay, however, the certification should only specify the incremental change the acquisition makes in terms of the 30% of household passed standard, i.e. specifying the ownership in terms of homes passed before and after the acquisition is complete. 77. Affected parties will be required to come into compliance with the horizontal ownership rules within 60 days of the appellate court's issue of a mandate upholding Section 613(f)(1)(a) and the rules, unless the Commission determines as part of this ongoing proceeding to lift the stay at an earlier date. Interested parties, including in particular parties that are now entering into business arrangements that would violate the rules but for the existence of the stay, should be well aware of the existence of the rules and thus have a full opportunity to be prepared to comply with them. V. FURTHER NOTICE OF PROPOSED RULEMAKING 78. We stated in the Second Report and Order, adopting the rules in question in this proceeding, that we plan to review subscriber limits every five years to determine whether such limits are reasonable under the prevailing market conditions and whether such limits continue to serve the objectives for which they were adopted. We regard such periodic review as an important means of addressing Congress' intent that such rules reflect the "dynamic nature of the communications marketplace." The rules in question were adopted in 1993, and it is appropriate that we undertake this review to address intervening changes in the communications marketplace. We seek comment on whether 30% remains the appropriate horizontal ownership limit in light of evolving market conditions. In addition, the current rules allow ownership of additional cable systems reaching up to 35% of cable homes passed, provided such additional cable systems are minority-controlled. The purpose of the minority-control allowance was to encourage diversity of viewpoints by fostering increased minority participation and ownership in the cable industry, through increased MSO investment in minority-owned cable systems. Recognizing that the minority-control allowance has never been utilitized by any MSO, we seek comment on the effectiveness of this rule and on the development of alternative rules to serve our purpose of promoting minority participation. We also recognize that, since this rule was adopted, the Supreme Court issued Adarand Constructors, Inc. v. Pena, 515 U.S. 200 (1995). We seek comment on the constitutionality of the minority-control allowance in light of that decision. We also seek comment on how we can develop our policies consistent with the standards set forth in Adarand. 79. We also seek comment on two specific issues concerning the method of ownership calculation: (1) whether the rules should consider the presence in the market of all MVPDs rather than cable operators alone, and (2) whether the rules should be based on actual subscriber numbers rather than on homes passed. The rules proposed here would provide that, in calculating a cable MSO's market share, the numerator would consist of the MSO's cable subscribers plus its non-cable MVPD subscribers, and the denominator would consist of the total number of cable subscribers plus non-cable MVPD subscribers nationwide. In addition to these proposed rule changes, we seek comment as to whether the method of ownership calculation should be modified in some way to support cable overbuild competition. 80. The MVPD market has continued to evolve since our adoption of the horizontal ownership rules. The 1997 Competition Report noted the growth of MVPDs other than cable operators and suggested that a true measure of horizontal concentration ought to take into account all MVPDs and MVPD subscribers, rather than cable operators and cable subscribers alone: [I]n assessing the impact that national concentration may have in the MVPD programming market, we believe that it is appropriate to consider the presence of all MVPDs and MVPD subscribers in national concentration figures, and not just cable MSOs and cable subscribers. As non-cable MVPD subscribership increases, the significance of DBS, MMDS and SMATV operators in the MVPD program purchasing market also increases. With the growth of alternative MVPDs, network programmers gain alternative avenues for distribution of their products, thus reducing cable operators' market power or influence in the purchase and distribution of network programming. Conversely, just as growth in alternative MVPDs' subscribership can reduce a cable MSO's market power, a cable MSO also can increase its market power by acquiring interests in alternative MVPDs. 81. We seek comment on a proposal to revise the rules to include alternative MVPDs in the measure of horizontal concentration in order to reflect the emergence of competitors to cable in the video marketplace, as well as potential MSO increases in market power through acquisition of interests in other MVPDs. By recognizing the impact of all purchasers of video programming, not just cable operators, this rule revision would provide a more accurate measure of MSOs' market power. 82. We seek comment on whether the proposed revision of the horizontal ownership rules is consistent with the Commission's authority under Section 613 of the Communications Act to "prescribe rules and regulations establishing reasonable limits on the number of cable subscribers a person is authorized to reach through cable systems . . .." This proposal would result in a sliding or adjustable cable horizontal ownership limit, under which the number of subscribers a cable operator is authorized to reach through cable systems would decrease in proportion with any increase in the number of subscribers that entity reaches through other MVPD systems. Conversely, the cable horizontal ownership limit would rise for a cable operator that reaches fewer subscribers through other MVPD systems. The proposed rules would impose no limit on the number of subscribers a cable operator may reach through alternative MVPD systems. These rules also would not apply to persons who have no attributable ownership interests in cable systems. We seek comment on this proposal and on whether it is consistent with the terms of the underlying statute, given Section 613's focus on the cable industry and the establishment of a cable subscribership limit rather than an MVPD subscribership limit. 83. We also seek comment on the possibility of changing the method of calculating the basis of the horizontal ownership limits from potential reach, i.e., number of homes passed, to actual reach, i.e., number of MVPD subscribers served. In the Second Report and Order, we stated that the homes passed standard reflects a cable operator's potential reach and constitutes a more stable basis on which to impose horizontal limits than a subscriber based standard. We also noted some commenters' argument that a subscriber based standard may have the effect of discouraging subscriber growth. In revisiting the horizontal ownership rules, we seek comment on whether the homes passed standard continues to be an accurate measure of horizontal concentration and market power in today's marketplace, and whether the easier to measure subscriber standard can be adapted for use in a fashion that will not require an abrupt halt to the addition of new subscribers to established cable systems. 84. While homes passed reflect the number of subscribers an MVPD has the potential of reaching, the MVPD often secures only a fraction of those potential subscribers. The MVPD typically does not purchase programming for all potential subscribers, only for those subscribers that it actually has. As alternative MVPDs continue to grow in the future, the number of homes passed by a cable operator may become an increasingly inaccurate measure of its actual subscribership and thus of its actual market power. We seek comment on whether the ownership calculation should be based on the number of actual subscribers, rather than homes passed, in order to reflect an MVPD's actual purchasing power. 85. The homes passed standard is also difficult to apply if we revise the horizontal ownership rules to consider all MVPDs in the calculation, since several different MVPDs may pass the same homes. Furthermore, the homes passed standard is a particularly inaccurate measure of market power for a new MVPD whose actual subscribership is only a small fraction of its potential reach in terms of homes passed. For example, under a homes passed standard, each direct to home satellite service provider, no matter how weak or new an entrant, could be deemed to pass virtually all homes in the country and thus be deemed to have far greater market power than an established cable operator passing 30% of homes nationwide. We ask commenters to comment on the best method for counting subscribers, including those residing in multi-dwelling units and commercial subscribers such as hotels, bars, etc. 86. We seek comment on whether the greater accuracy provided by a subscriber based standard outweighs the greater stability provided by a homes passed standard. With regard to the argument that a subscriber based standard may have the effect of discouraging subscriber growth, we seek comment on whether system operators would have a sufficient opportunity to anticipate the approaching limit and to dispose of systems sufficient to stay under the limit rather than to simply cease the addition of new subscribers. 87. We ask commenters to address whether these proposed revisions will serve the public interest objectives that Congress directed the Commission to consider and balance in implementing the horizontal ownership limits, particularly the objectives "to ensure that no cable operator or group of cable operators can unfairly impede the flow of video programming from the programmer to the consumer;" "to ensure that cable operators do not favor affiliated video programmers in determining carriage . . .;" "to take account of the market structure, ownership patterns, and other relationships of the cable industry, including the market power of the local franchise . . .;" and "to make rules and regulations that reflect the dynamic nature of the communications marketplace." 88. We ask commenters to address whether the proposed revisions are consistent with the Commission's legal authority under Section 613 and other provisions of the Act and are reasonable and appropriate given our objectives. We seek comment on whether the proposed horizontal ownership rules would provide a more accurate measure of horizontal concentration and market power than the current rules. We also seek comment on the practical impact of the proposed rule changes on MSO ownership and operation. In particular, we ask that commenters address whether the proposed changes would place any cable MSO in violation of the 30% horizontal ownership limit and to provide specific factual information in support of any such conclusions. We seek comment on whether we should develop special rules to address situations where a cable MSO may exceed the 30% limit as a result of subscriber growth within an existing area of homes passed. We further invite comment on any other matters relevant to our proposals and tentative conclusions. VI. INITIAL REGULATORY FLEXIBILITY ANALYSIS 89. As required by Section 603 of the Regulatory Flexibility Act, 5 U.S.C.  603 ("RFA"), the Commission is incorporating an Initial Regulatory Flexibility Analysis ("IRFA") of the expected impact on small entities of any policies or proposals contained in this Further Notice of Proposed Rulemaking ("Further Notice"). Written public comments concerning the effect of the proposals in the Further Notice, including the IRFA, on small businesses are requested. Comments must be identified as responses to the IRFA and must be filed by the deadlines for the submission of comments in this proceeding. The Secretary shall send a copy of this Further Notice, including the IRFA, to the Chief Counsel for Advocacy of the Small Business Administration in accordance with paragraph 603(a) of the Regulatory Flexibility Act. In addition, this Notice and IRFA will be published in the Federal Register. A. Need for, and Objectives of, the Proposed Rules 90. The 1992 Cable Act and subsequent actions to implement it, and Section 11(c) of the 1992 Cable Act in particular, are intended to encourage competition in the cable industry and prevent the exercise of undue market power by large cable multiple systems owners. The Commission issues this Further Notice to obtain comment on whether certain aspects of the Commission's horizontal ownership rules should be revised to make them more effective in serving the public interest objectives Congress charged the Commission with protecting in Section 11(c). B. Legal Basis 91. Authority for the actions proposed in this Further Notice may be found in Sections 1, 4, 303, and 613 of the Communications Act of 1934, as amended, 47 U.S.C.  151, 154, 303, 533. C. Description and Estimate of the Number of Small Entities to Which the Proposed Rules Will Apply 92. The RFA generally defines "small entity" as having the same meaning as the terms "small business," "small organization," and "small governmental jurisdiction" and "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 for its activities. 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 Small Business Administration ("SBA"). 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 SBA 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." 93. The SBA has developed a definition of small entities for cable and other pay television services under Standard Industrial Classification 4841 (SIC 4841), which covers subscription television services, which includes all such companies with annual gross revenues of $11 million or less. This definition includes cable systems operators, closed circuit television services, direct broadcast satellite services, multipoint distribution systems, satellite master antenna systems and subscription television services. According to the Census Bureau, there were 1,323 such cable and other pay television services generating less than $11 million in revenue that were in operation for at least one year at the end of 1992. 94. The Commission has developed its own definition of a "small cable company" and "small system" for the purposes of rate regulation. Under the Commission's rules, a "small cable company," is one serving fewer than 400,000 subscribers nationwide. Based on our most recent information, we estimate that there were 1,439 cable companies that qualified as small cable companies at the end of 1995. Since then, some of those companies may have grown to serve over 400,000 subscribers, and others may have been involved in transactions that caused them to be combined with other cable companies. Consequently, we estimate that there are fewer than 1,439 small entity cable companies that may be affected by the proposal adopted in this Notice. The Commission's rules also define a "small system," for the purposes of cable rate regulation, as a cable system with 15,000 or fewer subscribers. We do not request nor do we collect information concerning cable systems serving 15,000 or fewer subscribers and thus are unable to estimate at this time the number of small cable systems nationwide. 95. The Communications Act also contains a definition of a "small cable operator," which is "a cable operator that, directly or through an affiliate, serves in the aggregate fewer than 1 percent of all subscribers in the United States and is not affiliated with any entity or entities whose gross annual revenues in the aggregate exceed $250,000,000." The Commission has determined that there are 61,700,000 subscribers in the United States. Therefore, we found that an operator serving fewer than 617,000 subscribers is deemed a small operator, if its annual revenues, when combined with the total annual revenues of all of its affiliates, do not exceed $250 million in the aggregate. Based on available data, we find that the number of cable operators serving 617,000 subscribers or less totals 1,450. Although it seems certain that some of these cable system operators are affiliated with entities whose gross annual revenues exceed $250,000,000, we are unable at this time to estimate with greater precision the number of cable system operators that would qualify as small cable operators under the definition in the Communications Act. We are likewise unable to estimate the number of these small cable operators that serve 50,000 or fewer subscribers in a franchise area. D. Description of Projected Recording, Record keeping, and Other Compliance Requirements 96. If our horizontal ownership rules are changed, the Commission may have to change certain cable reporting requirements. Cable entities also may have to adjust the organization of their business interests in order to comply with any new rules that we may adopt. E. Steps Taken to Minimize Significant Economic Impact on Small Entities, and Significant Alternatives Considered 97. The actions proposed in the Further Notice are intended to ensure that the Commission's horizontal ownership rules are effective in preventing the exercise of undue market power by large cable multiple systems owners and promote a competitive, diverse and fair marketplace. Accordingly, as discussed in the above descriptions of the proposed rule changes, the approaches proposed in this Further Notice should promote fairness and diversity for all cable systems, including the small entities listed above. We invite comments on these approaches, including comment on whether alternative approaches will mitigate any unwarranted expenses incurred by smaller entities by virtue of their size alone. F. Federal Rules that Overlap, Duplicate or Conflict with the Proposed Rules 98. None. VII. PAPERWORK REDUCTION ACT 99. The proposals contained herein in the Further Notice have been analyzed with respect to the Paperwork Reduction Act of 1995 (the "1995 Act") and found to impose modified information collection requirements. Implementation of any new or modified requirements will be subject to approval by the Office of Management and Budget ("OMB"). The Commission, as part of its continuing effort to reduce paperwork burdens, invites the general public to take this opportunity to comment on the information collection requirements contained in this Further Notice, as required by the 1995 Act. Comments should address: (1) whether the proposed collection of information is necessary for the proper performance of the functions of the Commission, including whether the information shall have practical utility; (2) the accuracy of the Commission's burden estimates; (3) ways to enhance the quality, utility, and clarity of the information collected; and (4) ways to minimize the burden of the collection of information on the respondents, including the use of automated collection techniques or other forms of information technology. 100. Written comments by the public on the modified information collection requirements are due 45 days from date of publication of this Second Order on Reconsideration and Further Notice in the Federal Register. OMB comments are due 60 days from the date of publication in the Federal Register. Comments on the information collection requirements contained herein should be submitted to Judy Boley, Federal Communications Commission, Room 234, 1919 M Street, N.W., Washington, DC 20554, or via the Internet to jboley@fcc.gov and to Timothy Fain, OMB Desk Officer, 10236 NEOB, 725 - 17th Street, N.W., Washington, DC 20503 or via the Internet to fain_t@al.eop.gov. For additional information on the information collection requirements, contact Judy Boley at 202-418-0214 or via the Internet at the above address. VIII. PROCEDURAL PROVISIONS 101. Ex parte Rules - "Permit-but-Disclose" Proceeding. This proceeding will be treated as a "permit-but-disclose" proceeding subject to the "permit-but-disclose" requirements under Section 1.1206(b) of the rules. Ex parte presentations are permissible if disclosed in accordance with Commission rules, except during the Sunshine Agenda period when presentations, ex parte or otherwise, are generally prohibited. Persons making oral ex parte presentations are reminded that a memorandum summarizing a presentation must contain a summary of the substance of the presentation and not merely a listing of the subjects discussed. More than a one or two sentence description of the views and arguments presented is generally required. Additional rules pertaining to oral and written presentations are set forth in Section 1.1206(b). 102. Filing of Comments and Reply Comments. Pursuant to applicable procedures set forth in Sections 1.415 and 1.419 of the Commission's Rules, comments are due August 14, 1998, and reply comments are due September 3, 1998. To file formally in this proceeding, you must file an original plus four copies of all comments, reply comments, and supporting comments. If you want each Commissioner to receive a personal copy of your comments and reply comments, you must file an original plus nine copies. You should send comments and reply comments to Office of the Secretary, Federal Communications Commission, 1919 M Street, NW, Washington, DC 20554. Comments and reply comments will be available for public inspection during regular business hours in the FCC Reference Center, Room 239, Federal Communications Commission, 1919 M Street NW, Washington DC 20554. IX. ORDERING CLAUSES 103. Accordingly, IT IS ORDERED that the petitions for reconsideration filed in this proceeding ARE DENIED. 104. IT IS FURTHER ORDERED that the Motion to Lift Stay filed December 15, 1993 by the Center for Media Education and Consumer Federation of America IS GRANTED as to the Commission's voluntary stay on enforcement of 47 C.F.R.  76.503(c), and IS DENIED as to the Commission's voluntary stay on enforcement of 47 C.F.R.  76.503(a), (b), (d), (e) and (f). 105. IT IS FURTHER ORDERED that, pursuant to Sections 1, 4, 303 and 613 of the Communications Act of 1934, as amended, 47 U.S.C.  151, 154, 303 and 533, NOTICE IS HEREBY GIVEN of proposed amendments to the Commission's rules, in accordance with the proposals, discussions and statements of issues in the Further Notice of Proposed Rulemaking, and COMMENT IS SOUGHT regarding such proposals, discussions and statements of issues. 106. IT IS FURTHER ORDERED that the Commission SHALL SEND a copy of this Report and Order and Second Further Notice of Proposed Rulemaking, including the Initial Regulatory Flexibility Analyses, to the Chief Counsel for Advocacy of the Small Business Administration. FEDERAL COMMUNICATIONS COMMISSION Magalie Roman Salas Secretary APPENDIX A List of Commenters Petitions for Reconsideration of Cable Horizontal Ownership Rules Bell Atlantic Center for Media Education and Consumer Federation of America (joint petition) Comments in Support of Petition(s) for Reconsideration Viacom International, Inc. Oppositions to Petition(s) for Reconsideration Bell Atlantic BellSouth Telecommunications, Inc. Center for Media Education and Consumer Federation of America (joint opposition) GTE Service Corporation Liberty Media Corporation National Cable Television Association, Inc. Tele-Communications, Inc. Time Warner Entertainment Company, L.P. Turner Broadcasting System, Inc. US West Communications, Inc. Replies to Comments and Oppositions Bell Atlantic Center for Media Education and Consumer Federation of America (joint reply) Liberty Media Corporation National Cable Television Association, Inc. Time Warner Entertainment Company, L.P. Turner Broadcasting System, Inc. Viacom International, Inc. Motion to Lift Stay Center for Media Education and Consumer Federation of America (joint motion) Opposition to Motion to Lift Stay National Cable Television Association, Inc. Separate Statement of Commissioner Harold Furchtgott-Roth In re: Implementation of Section 11(c) of the Cable Television Consumer Protection and Competition Act of 1992, Horizontal Ownership Limits, Second Memorandum Opinion and Order and Further Notice of Proposed Rulemaking. I am pleased that the Commission seeks comment on the constitutionality of the 35% "minority-control allowance," 47 CFR section 76.503(b), for cable subscriber limits. See supra at 32. In my view, the constitutionality of this provision in light of intervening judicial decisions -- most notably, Adarand v. Pena, 515 U.S. 200 (1995) -- is, at best, dubious. Accordingly, while it certainly does no harm to seek comment on the efficacy of this regulation, I believe that such comment is entirely unnecessary and I would not have sought it. If a regulation appears to violate the Constitution, that is all we need to know in order to decide whether to affirm it on reconsideration. At the outset, I note that the Commission's statutory authority to promulgate the minority-control allowance (or any other race-based cable subscriber limits, for that matter) is scant. Section 613(f)(1)(a), which orders the Commission to set horizontal ownership rules, is entirely race-neutral. Its plain language supports no rational inference that Congress intended different subscriber limits to apply to different people based on nothing other than their race: "[T]he Commission shall . . . prescribe rules and regulations establishing reasonable limits on the number of cable subscribers a person is authorized to reach through cable systems owned by such person, or in which such person has an attributable interest." 47 U.S.C. section 613(f)(1)(a)(emphasis added). Nor do the "public interest" factors that Congress outlined make any distinctions between people based on minority or non-minority status. See id. section 613(f)(2)(A)-(G). To be sure, one of the factors states that the Commission shall "not impose limitations which would impair the development of diverse and high quality programming." Section 613(f)(2)(G). Congress clearly meant for the Commission to protect cable operators' ability to show a wide variety of choice programming by not setting subscriber limits so low as to dry up concentration-based efficiencies that facilitate costly programming investments. See House Report at 43; Senate Report at 33; see also 8 FCC Rcd at 8571 (observing that "higher concentration levels enable[] cable companies to take advantage of economies of scale and foster investment in more and better original programming and a wealth of viewing options for consumers"). But there is no indication in the statute, or even its legislative history, that Congress meant for the Commission to view the issue of subscriber limits and varied, quality programming through the historically troubled lens of race. In short, we simply do not have a clear Congressional directive that the Commission, in setting horizontal limits, make race-based distinctions among cable system owners. Given the weighty constitutional issues that arise whenever government employs such classifications, we should be reluctant to read them into statutes. See generally United States v. Thirty-Seven Photographs, 402 U.S. 363, 369 (1971) (statutes should be construed to avoid, not to create, constitutional problems). II. Section 76.503(b), which on its face employs racial classifications, raises grave constitutional questions. In particular, Adarand v. Pena, 515 U.S.200 (1995), which was decided after the Commission promulgated section 76.503(b), casts substantial doubt upon its constitutionality under the Equal Protection component of the Fifth Amendment. In Adarand, the Supreme Court held that all governmental action based on race is subject to strict scrutiny. Id. at 226. This standard of review obtains, the Court made clear, whether or not the government's motives can be characterized as "benign." Id. at 227. Thus, the use of racial classifications by any governmental actor is now constitutionally permissible only where the measure is narrowly tailored to serve a compelling government interest. Id. at 235. With respect to the government interest in section 76.503(b), the Supreme Court has never held that diversity of programming -- the Commission's purported goal in adopting the minority-control allowance, see 8 FCC Rcd 8565, 8578-79 (1993) -- qualifies as a compelling government interest. See Lutheran Church- Missouri Synod v. FCC, No. 97-1116, slip op. at 20-21 (D.C. Cir. April 14, 1998) (observing that in Metro Broadcasting, Inc. v. FCC, 497 U.S. 547 (1990), the Court held programming diversity to be an important but not a compelling government interest). There is simply no affirmative authority for the proposition that the interest that has been asserted by the Commission in support of its regulation is legally sufficient under strict scrutiny. Furthermore, as in other contexts, the Commission's stated goal is something of a moving target. The Second Report & Order adopting the allowance does not explain what the Commission actually intends to accomplish when it speaks of promoting "diversity" in cable programming. Cf. id. at 19 ("The Commission never defines exactly what it means by 'diverse programming.'"). Of course, were "diversity" defined in a content-specific way, such an interpretation would trigger the First Amendment, as the D.C. Circuit has noted. See id. at 19-20 ("Any real content-based definition of the term may well give rise to enormous tensions with the First Amendment."). With respect to the second step under strict scrutiny, the fit between the means and ends here is loose, if not sloppy. The Commission has stated that the 5% allowance will foster investment in minority-owned cable systems, in turn create more minority ownership, and ultimately result in more minority "viewpoints" in programming. See 8 FCC Rcd at 8578-79. But the record in this proceeding is devoid of any evidence to support the Commission's predictive rationale, particularly the assumption that cable system ownership by a person of a certain race will lead to an identifable type of programming content. Cf. Lutheran Church, slip op. at 22-23 (faulting Commission, in overturning EEO rules as unconstitutional, for lack of evidence "linking low- level employees [at broadcast stations] to programming content"); Lamprecht v. FCC, 958 F.2d 382 (D.C. Cir. 1992) (criticizing Commission, in finding gender preferences in licensing hearings unconstitutional, for lack of evidence of connection between female ownership of broadcast stations and "female programming"). Nor has the Commission made any attempt to explain why a 5% allowance is a more appropriate remedy for the posited diversity problem than a more limited allowance of, say, 3%. To the contrary, the flat 5% of extra passage for minority-controlled systems seems an exceedingly blunt instrument for achieving the Commission's goal (even if that goal were a legally compelling one, which, under current precedent, it is not). For instance, I can find no connection in the record between the particular percentage of extra subscribers that minority-controlled companies may serve under this regulation and the degree to which that allowance furthers ownership and programming. The 5% allowance thus appears to be a rigid numerical preference, with no record evidence to support either its necessity or efficacy in relation to the purported goal. Relatedly, there appears to have been no consideration in this docket of race-neutral alternatives for increasing minority ownership or programming participation, as required under the narrow-tailoring prong of strict scrutiny. See Adarand, 500 U.S. at 237-38 (citing Richmond v. J.A. Croson, 488 U.S. 469, 507 (1989)). The Commission seems to have approached the use of this explicit racial classification as a foregone conclusion, rather than as an alternative approach after first evaluating the utility of rules that do not draw lines among citizens based on their race. Indeed, in the notices of proposed rulemaking and the order of adoption, the Commission never even broached the possibility of race-neutral rules. See 8 FCC Rcd 210, 217 n. 58 (1992); 8 FCC Rcd 6828, 6850-51 (1993); 8 FCC Rcd at 8678-79. This is perhaps understandable given that Adarand had not been decided at the time these documents were issued, but that fact does not solve the basic deficiency in this proceeding that now exists under that case. III. For the foregoing reasons, governing judicial precedent strongly suggests that section 76.503(b), which literally creates two sets of rules for regulated entities based solely on the racial identity of those who own or control related systems, constitutes a denial of equal protection of the laws. The Commission has failed to articulate either a compelling government interest or to achieve a carefully crafted fit between the means it has chosen and the ends it says it intends to promote. The regulation therefore appears to be, at this juncture, facially unconstitutional. * * * As indicated above, I certainly cannot object to my fellow Commissioners asking questions about the practical workings of the rule. The significance of such information, however, pales in comparison to the strong indication under existing caselaw that the regulation is unconstitutional. As the courts have admonished us, "[f]ederal officials are not only bound by the Constitution, they must also take a specific oath to support and defend it." Meredith Corp. v. FCC, 809 F.2d 863, 874 (D.C. Cir. 1987). If a regulation appears to be unconstitutional, I believe that is reason enough -- indeed, it is the most important reason that I can imagine -- to eliminate the rule. PARTIAL DISSENT OF COMMISSIONER GLORIA TRISTANI In the Matter of Implementation of Section 11(c) of the Cable Television Consumer Protection and Competition Act of 1992 -- Horizontal Ownership Limits, MM Docket No. 92-264 I would have lifted the Commission's voluntary stay on the enforceability of the horizontal ownership rules. In 1993, when the stay was imposed, a stay may have made sense: the largest cable operator, TCI, still controlled significantly less than 30% of cable subscribers nationwide and appellate review of the Daniels decision could have been expected well before the horizontal limit was threatened. In the past five years, that situation has changed dramatically. By the middle of 1997, TCI controlled 29.3% of cable subscribers, and with the flurry of deals announced over the last several months, it is clear that TCI has breached, or will soon breach, the 30% limit. Moreover, the anticipated appellate review never happened and may not happen anytime soon -- the D.C. Circuit has been waiting for the Commission to release this reconsideration of our rules before examining the underlying statute's constitutionality. Under these circumstances, the 30% limit we are reaffirming today may be rendered moot unless the stay is lifted. To the extent that TCI already exceeds the 30% limit, I would identify those cases and address them separately. That task may be difficult, but not nearly as difficult as the situation we will face if TCI's dealmaking continues and a year from now the D.C. Circuit upholds the statute. Then we will face a situation in which the "facts on the ground" may severely hamper our ability to implement the right policy. I recognize that the majority has put cable operators on notice that they must be prepared to come into compliance within 60 days if our rules are upheld. I am supportive of such an admonishment, but I am not convinced that it will be enforced. I therefore dissent on this part of the item.