i Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of ) Implementation of Section 302 ) CC Docket No. 96-46 of the Telecommunications Act of 1996 ) ) ) Open Video Systems ) To: The Commission NYNEX REPLY COMMEN TS Of Counsel: Theodore D. Frank Marilyn D. Sonn Arent Fox Kintner Plotkin & Kahn 1050 Connecticut Avenue, N.W. Washington, D.C. 20036 (202)857-6016 Donald C. Rowe NYNEX Corporation 1111 Westchester Avenue White Plains, New York 10604 Telephone (914) 644-6993 Dated: April 11, 1996 h\fedreg\96-46.rep SUMMARY OF COMMENTS This proceeding presents the Commission with its best opportunity to encourage the development of wireline competition to the CableCo-dominated video services marketplace. By clear legislative action and direction Congress has made possible the provision of Open Video Systems which will accommodate both affiliated and unaffiliated programmers and offer consumers a choice they lack today. The public interest benefits in OVS, which go far beyond those of cable systems because OVS is open, are obvious and substantial. In providing for Open Video Systems, Congress also established the manner in which OVS should be regulated, rejecting the Title II constraints that ultimately dimmed the once-bright prospects for Video Dial Tone (VDT), and carefully sorting through the Title VI cable service requirements that do and do not apply to OVS. In the NPRM which initiated this proceeding, the Commission thoughtfully worked within the Congressional scheme. It also demonstrated a clear understanding of the importance of preserving flexibility in technical development and commercial terms that must be afforded OVS for such systems to be built. The importance of this approach can be simply stated: if OVS is not made an attractive means of providing video services, wireline competition will come, if at all, only from cable system overbuilders --and there is no history of such overbuilding. For all of these reasons the Commission must use a light regulatory hand in this proceeding to foster, rather than impair, the prospects for the successful development of OVS. Unfortunately, numerous parties have presented the Commission instead with very heavy-handed regulatory proposals which, if adopted, will likely kill OVS as they did VDT. To begin, the CableCos seek literally dozens of front-end prohibitions and prescriptions that will burden and sink the business prospects of prospective OVS operators. Only the most egregious of these are set forth and addressed in Section I, but others could have been recounted at length to the same effect. The short answer to such proposals is that the Commission should reject them as designed by threatened monopoly providers to destroy the prospects for wireline video competition. Similarly, MCI (which is heavily invested in DBS) proposes to resurrect all of the VDT regulatory accounting and ratesetting provisions of Title II -- provisions the Congress repealed in an extraordinary specific legislative action. Simply stated, there is no merit to these proposals. Programmers and broadcasters, on the other hand, welcome the opportunities that OVS would provide for them to reach new and existing customers through an alternative wireline competitor. Nevertheless, they ask the Commission to establish various detailed, front-end requirements for OVS which will stifle technical innovation and preclude necessary commercial flexibility. The Commission should not follow this path. These entities also seek Commission authority to discriminate against the OVS operator and participants with respect to program access agreements and must-carry elections/ retransmission consents. If countenanced by the Commission, these practices will gravely impair OVS market entry and any incentive for either OVS investment or participation (Section II). Finally, various municipal parties ask the Commission to impose conditions and requirements on the OVS providers which go far beyond those` requirements carefully selected by Congress. The law provides for payments in lieu of franchise fees, and the Commission should resist efforts to impose franchising indirectly. The local exchange carriers that are considering the provision of OVS have decades of experience working with municipal governments in areas of right-of-way administration (e.g., street openings, facility placements). This will continue. In all other areas of economic regulation and OVS system design and regulation, however, Congress has preempted franchising authorities to ensure that OVS has a reasonable prospect for success (Section III). NYNEX is hopeful that this rulemaking will follow the flexible regulatory course outlined in the NPRM, and result in the implementation of OVS by NYNEX and others. TABLE OF CONTENTS SUMMARY i I. TITLE II-TYPE REGULATORY BURDENS ARE INCONSISTENT WITH SECTION 653 AND CONGRESS DESIGN FOR OPEN VIDEO SYSTEMS 3 A. The Commission Should Reject The Proposed Burdens Which Vitiate The Attractiveness Of OVS 3 B. The Commission Must Refrain From Establishing Burdensome Accounting And Rate Regulations 7 C. The Commission Should Reject AT&T s Prohibition On The Bundled Sale of Telephone Services 9 II.GENERAL PRINCIPLES OF NON-DISCRIMINATION SHOULD GOVERN ARRANGEMENTS BETWEEN THE PARTIES 10 A. Adoption of Detailed Commercial Requirements Would Unduly Constrain OVS Technical Innovation and Commercial Flexibility 11 B. General Principles of Non-Discrimination Should Also Apply to Programmers and Broadcasters on OVS 14 III. STATE AND LOCAL GOVERNMENTS MUST NOT INDIRECTLY IMPOSE FRANCHISE REQUIREMENTS THROUGH THE POWER TO REGULATE THE USE OF THE STREETS 16 IV.CONCLUSION 19 Before the FEDERAL COMMUNIC ATIONS COMMISSION Washington, D.C. 20554 In the Matter of) Implementation of Section 302 ) CC Docket No. 96-46 of the Telecommunications Act of 1996 ) ) ) Open Video Systems ) To: The Commission NYNEX REPLY COMMEN TS NYNEX Corporation ( NYNEX ) hereby submits its Reply Comments in response to the Comments of other parties filed April 1, 1996, in this proceeding. In our Comments, NYNEX urged the Commission to give open video system ( OVS ) operators maximum flexibility to design their systems and offer video services in a manner responsive to the marketplace. NYNEX pointed out that open video systems have no market share and must compete with entrenched CableCo competitors that have established program supplier relationships and vast customer bases. The Commission itself has reported that CableCos serve 91.4 percent (61.7 million of 67.5 million) of the households subscribing to MVPDs ( Multichannel Video Program Distributors ), and that there is no competitive market ... for the delivery of video programming. To promote competitive entry in these circumstances, Congress instructed the Commission to encourage the development of OVS services. Also, because no one yet has a firm or comprehensive picture of the technologies that may be used to deliver these services, or their feasibility or marketability, the Commission should refrain from adopting rules which constrain technical innovation and system variation. And, Congress has facilitated the Commission s ability to follow exactly this path by: (1) repealing all of the Commission s video dialtone rules and policies; (2) establishing OVS service outside of the Title II regulatory scheme whose weight of regulation and accounting rules ultimately killed Video Dial Tone ( VDT ): and (3) enacting a new Part V of Title VI for this service, thus concurrently setting new requirements for the accommodation of non-affiliated programmers and determining specifically which other provisions of Title VI (Parts I-IV) should and should not be applied to OVS. NYNEX commends the Commission for thoughtfully following these Congressional judgments in the NPRM. Therein, the Commission appears to recognize that the development of OVS represents its best opportunity for broadscale wireline competition. The same thoughtful approach must be applied in weighing commenter proposals. Specifically, numerous commenters urge the Commission to adopt a plethora of new rules and regulations which, if adopted at the front-end of OVS implementation, will so encumber OVS with prohibitions and requirements that such systems will likely never be built. As addressed below, there are neither sound legal nor policy bases for the Commission to adopt these proposals. Perhaps more importantly, the resulting death of the OVS concept would represent a real injury to the public interest. I. TITLE-II TYPE REGULATORY BURDENS ARE INCONSISTENT WITH SECTION 653 AND CONGRESS DESIGN FOR OVS A. The Commission Should Reject Proposed Burdens Which Vitiate The Attractiveness of OVS Congress recognized when it enacted Section 653 of the Act that the rigid and burdensome VDT rules required by Title II caused the demise of that promising means of introducing wireline competition to the established CableCos. Thus, it wisely directed the Commission to discard the Title II approach and employ a new, streamlined regulatory approach codified in Section 653. The CableCos, joined on some issues by state and local governments ("local governments"), would have the Commission ignore that clear Congressional directive. Through the guise of assuring that OVS operators charge "just and reasonable" rates and do not "discriminate" against programming providers, they propose that the Commission impose a host of Title II- type regulations on OVS operators. They urge inter alia that the Commission adopt regulatory measures that: -- Require local exchange carriers ( LECs ) to create a separate subsidiary to operate any open video system; -- Apply revised Part 64 rules and Cost Allocation Manual ("CAM") requirements to OVS operations (and to former VDT operations, retroactively) and adopt any changes to those before the Commission accepts OVS certifications; -- Require LECS to obtain approval of revised CAMs before they submit their OVS certification, and to certify that projected revenues will cover the long run incremental costs of providing service; -- Adopt "specific, enforceable requirements" implementing the nondiscrimination provisions of Section 653(b), including the following:  that the OVS operator set forth procedures to decide how channel positions will be allocated and channel positions assigned, or require OVS operators to employ a channel administrator, selected by all of the open video system's programmers; and  that part-time users be accommodated; -- Require that shared channels be administered by a third party, or that all programmers using the open video system participate in selecting the programming on shared channels; -- Prohibit LEC-affiliated OVS operators from offering bundled OVS and telecommunications services, or engaging in joint marketing of OVS and telephone services until others are offering competitive services in the market or, in the alternative, require LECs to disclose the offering of "all OVS lessees" on an equal basis; -- Ensure that all video programmers on the open video system have access to the same customer information on a real-time basis; and -- Apply a letter-perfect standard to certifications, such that the Commission could deny certification for a technical inconsistency in the certification filing. These proposals would in substance reimpose the overly regulatory regime that Congress instructed the Commission to avoid and destroy the attractiveness of OVS. These proposals derive from the Commission's VDT and Computer II regimes. Both those regimes have been rejected -- the first by Congress alone, and the second by both Congress and the Commission. Both proved overly regulatory and unduly burdensome, serving to deprive the public of the benefits of economies-of-scale and stifling innovation. It would be foolish to resurrect these requirements here and impose them on a service Congress intended to make attractive so as to encourage entry by LECs and others. As the Commission acknowledges in its NPRM, Congress recognized that OVS operators would have to have freedom "to tailor services to meet the unique competitive consumer needs of individual markets" to make OVS attractive to investors. That requires that the OVS operator have flexibility to manage and operate the open video system in a manner it believes will attract consumers. Congress manifestly did not intend that OVS operators should be passive providers of video distribution capacity. Yet, requiring OVS operators to employ a separate subsidiary, limiting their ability to allocate channels and make decisions concerning the sharing of capacity, obligating them to publish rates and to charge the same rates to all participants, prohibiting them from joint marketing of telecommunications and OVS services, and the other constraints suggested by the CableCos would render the OVS operator just such a passive carrier. Moreover, the proposals advanced by the CableCos and others are not essential to assure compliance with the nondiscrimination and rate regulations requirements of Section 653, as the CableCos contend. The nondiscrimination and reasonable rate requirements were intended, as the Commission stated, to assure that non-affiliated programmers have "fair access" to open video systems (NYNEX 9-11). General rules incorporating the non-discrimination and reasonable rate requirements of Section 653, coupled with a dispute resolution mechanism, will assure that the goal of fair access is realized, and will do so in a manner that satisfies Congress' directive to subject OVS operators only to streamlined regulation. Heavy-handed, before-the-fact prescriptive and prophylactic rules such as these suggested by the CableCos are neither necessary nor desirable. B. The Commission Must Refrain From Establishing Burdensome Accounting And Rate Regulations In addition to these requirements, others suggest that the Commission resurrect -- in whole or in part -- VDT and other Title II-like reports and regulations governing rates. The Commission should summarily reject such proposals. Perhaps the most egregious of these proponents is MCI. To begin, MCI asks the Commission to reinstate the accounting classifications, subsidiary records, amendments to cost allocation manuals and other reporting requirements adopted in RAO Letter 25, and the Reporting Requirements Order. (MCI 7-8). Adoption of this proposal would fly in the face of Congress directive to employ streamlined regulation and take the Commission backward into Title II regulation, rather than forward into marketplace competition. MCI next requests that the Commission order the filing of tariffs by OVS providers for their OVS services accompanied by the supporting documents required under the Commission s existing tariff procedures (MCI 9). There are no tariff procedures applicable outside of Title II and, as above, Congress specifically eliminated the application of Title II to OVS services. Further, there is no logic for the proposal because even the rates of the entrenched cable operators will be deregulated upon the advent of OVS. At a time when the Commission is actively contemplating eliminating many federal tariffs completely because of their anti- competitive effect, and Congress has instructed the Commission to rely on competition over regulation, these proposals to tariff OVS services deserve short shrift. Finally, MCI argues that detailed rate regulation is necessary because the market for wholesale video services is not competitive (MCI 4-5). MCI is correct about the market, because the current combined wholesale/retail market is controlled by monopolistic cable systems operators. However, the provision of OVS will open such markets to the forces of competition. These market forces, not the detailed regulation favored by MCI, are the best means to ensure competitive rates. Thus, at its heart, MCI s proposed rate regulation rests entirely on the a priori assumption of OVS operator misconduct in unlawfully discriminating in favor of affiliated programmers. The Commission should not begin with this speculative premise and risk foreclosing OVS as a competitive option. Rather, the Commission should let the marketplace develop and act only as experience proves necessary. Certainly, an ounce of experience here is worth far more than pounds of speculation. C. The Commission Should Reject AT&T s Prohibition On The Bundled Sale Of Telephone Services AT&T argues that the OVS operator should not have the ability to sell local telephone and OVS services as a bundled package (AT&T 2-4). It cites as authority the Commission s rules with respect to the unbundling of customer premises equipment ( CPE ) (Id. 3). AT&T s proposed constraint, that the Commission should prohibit the bundling by open video system operators of non-competitive services with their competitive offerings, should be rejected as contrary to the judgment of Congress and, in fact, the Commission s own policies. That is, Congress has not barred the sale by OVS operators of telephony services, and it has decided that the safeguard of a separate subsidiary is not necessary (Section 272 (a)(2)). Further, Congress has set forth both the requirements and procedures for the unbundling and resale of telephone services (Sections 251 and 252) to address precisely the competitive issues that AT&T seeks to raise here. Moreover, the Commission itself has regarded Computer II CPE rules as economically inefficient, and they should not be extended without strong reason. Finally, such rules would be contrary to Congress admonition to eschew Title II type regulation (NPRM  15). For all of these reasons, AT&T s proposed prohibition should not be adopted. II.GENERAL PRINCIPLES OF NON-DISCRIMINATION SHOULD GOVERN ARRANGEMENTS BETWEEN THE PARTIES Many broadcast, programmer and consumer commenters support the advent of OVS and urge that the Commission encourage development as the first real prospect for competition to incumbent CableCo systems. However, while many lament the loss of similar early period enthusiasm for VDT systems, they now urge rigid new regulations which are both unnecessary for, and detrimental to, the development of a competitive OVS alternative. Ironically, as these programming entities express concern for even-handed treatment on the OVS, they seek for themselves the authority to discriminate against the OVS operator and others also on the OVS. It would be far better for the Commission to let OVS develop under general principles of non-discriminatory conduct on the part of the OVS participants, as well as the OVS operator. A. Adoption of Detailed Commercial Requirements Would Unduly Constrain OVS Technical Innovation And Flexibility 1. OVS Rate Structure To begin, Commenters unanimously welcome the prospects for competitive signal carriage that OVS services may make available. For example, RCN advises that [a]s an emerging company which plans to provide a diverse package of video and telephone services to end users, it looks forward to having OVS networks available as a means to distribute video programming to its subscribers. From this auspicious start, commenters diverge in all directions as they ask the Commission to adopt rules which will favor their particular interests. Thus, the Community Broadcasters Association argues that rates should be equal for all programmers (emphasis in original), while the joint consumer parties argue as vigorously for preferential rates for not-for- profit programmers. Others state more simply that carriage rates should be cost- based, then argue for ratesetting by the Commission in accordance with their individual interests. In fact, the Commission is best advised to let the interests of the parties shape the forces of the marketplace and let negotiations determine appropriate rate structures and levels in the first instance, subject to review by the Commission upon complaint (NYNEX 22-24). Here, we concur completely with the views expressed by Access 2000 (a membership organization of independent film, television, video and new media providers): The Commission asks whether or not it is permissible for OVS operations to charge different rates to different categories of video programming -- e.g., not-for-profit programmers, home shopping programmers, or pay per channel or pay-per-program programmers. Allowing OVS operators to charge different rates for different categories of programming is permissible and in the public interest. We believe that within each of these categories the Commission should require that rates for carriage be just and reasonable and ... not unjustly or unreasonably discriminatory, but that between categories, the OVS operator should have a fair degree of latitude (citation omitted). 2. Analog Capacity Some commenters ask the Commission to compel the provision of analog services to broadcasters, while others ask the Commission to compel the carriage of both digital (HDTV) and analog signals. The former effectively ask the Commission to require all OVS providers to provide analog channels. Neither the Act nor the Commission have proposed to constrain system design in this manner, likely in recognition that evolving technology may lead economically to wholly digital OVS (NPRM  18). NYNEX urges the Commission to hold to that position. If the OVS concept is to be realized, OVS operators must have the full flexibility to deploy new and evolving technology. Thus, the Commission should not require that programming be available in analog format on the OVS system, or for that matter, in a digital format. The OVS operator must remain free to develop its system in a manner that best suits the operator s business plans for the particular market. Neither should the Commission determine in this proceeding the must-carry rights of broadcasters with respect to their digital service offerings. As the proponent NBC itself concedes, those issues are already pending decision in the ATV proceeding. 3. Network Non-Duplication, Syndicated and Sports Exclusivity Responsibilities Commenters favorably note the legislative determination to make network non- duplication, syndicated exclusivity and sports exclusivity applicable to OVS. Many go farther, however, by urging that the OVS operators be responsible for compliance with these rules, even as to unaffiliated programmers on the OVS. The convenience of these parties does not provide a reasonable basis for placing this responsibility on the OVS operator. Certainly, the OVS operator should be responsible for compliance on the must-carry channels and on operator or affiliate program channels. But, as MPAA recognizes, with respect to programming distributed by unaffiliated programmers, these unaffiliated programmers should be required to assure compliance. In these circumstances the OVS operator may perform the ministerial task of blacking-out the programming at issue, but the unaffiliated programmer has the legal responsibility for preventing its showing. Indeed, these unaffiliated programmers may decide in such circumstances to offer alternative programming, which the OVS operator cannot provide. B. General Principles of Non-Discrimination Should Also Apply to Programmers And Broadcasters on OVS Notwithstanding their views on OVS discrimination, broadcasters and programmers seek to establish for themselves the right to discriminate against others on the OVS. Thus, broadcasters claim the right to elect (or deny) retransmission consent against OVS providers on different terms than they require of CableCos in the same operating area, or even where they elect must-carry status on the incumbent CableCo system. Given the CableCo s ability to use its vast market power and nearly 100 percent market share to exact more favorable terms, this power to discriminate can be expected to tilt substantially, and perhaps irreparably, the competitive balance against the OVS provider. There is no reason for the Commission to countenance such unfair conduct, particularly where Congress has said that the new entrant is entitled to its support (NPRM  6). Indeed, because the thrust of both the CableCo and OVS operator s must-carry obligations are to enable broadcasters to require household coverage in a specific Area of Dominant Influence ( ADI ), the Commission may reasonably require that a consistent determination be made -- and equal terms be offered -- to all side-by-side competitors within an ADI. Similarly, programmers seek to establish the right to discriminate in the offer -- or refusal to offer -- their program content to others on the OVS as they see fit. Like the broadcasters position, this asserted right threatens to diminish any interest in OVS investment. Clearly, if one participant on the OVS (e.g., an out-of-region CableCo) can use its market power elsewhere to secure independent programming for its use on the OVS on a preferential or exclusive basis, the incentive for LECs or new entrants like MFS to construct OVS will be severely diminished. Consequently, the Commission must allow an OVS operator to insist that those using its system have the ability to obtain programming on comparable, nondiscriminatory terms. Any other result will eviscerate the incentive to invest in the development of OVS (NYNEX 12- 13). Importantly, the preclusion of such discriminatory practices does not compel the broadcaster or programmer to surrender its property rights to either withhold or sell its program content to the OVS or CableCo systems (NPRM  41). Rather, it would simply ensure that discriminatory conduct on their part will not have a chilling and anticompetitive effect on new market entry, resulting in the frustration of Congress s goals to promote competition, to encourage investment in new technologies and to maximize consumer choice of services that best meet their information and entertainment needs. III. STATE AND LOCAL GOVERNMENTS MUST NOT INDIRECTLY IMPOSE FRANCHISE REQUIREMENTS THROUGH THE POWER TO REGULATE THE USE OF THE STREETS NYNEX has shown that, in enacting Section 653, Congress evidenced an intention to occupy the field and to preempt any state or local government regulation of OVS (NYNEX 30-32). The National League of Cities ("NLC") argues, however, that any preemption of the right of local governments to regulate the use of the streets by OVS operators would constitute a "taking" in violation of the Fifth Amendment. Since this right to regulate the use of the streets allegedly gives local governments a stake in the provision of OVS service, the NLC urges the Commission to require OVS operators to show in their OVS certifications that they have obtained all necessary approvals from the local government. NLC's concerns over Congress' preemption of local regulatory authority is groundless and its certification proposal is unnecessary. No one has proposed to preclude local governments from exercising their right to control the use of streets and rights-of-way ( ROW ) or from obtaining reasonable compensation for their use. Nothing in the Act or its legislative history indicates that Congress intended to preempt that right, and the Conference Report states that "an operator of an open video system . . . shall be subject, to the extent permissible under State and local law, to the authority of a local government to manage its rights of way in a nondiscriminatory and competitively neutral manner." Further, nothing in the NPRM purports to limit local governments from exercising these powers. And, since Section 653(c)(2)(B) permits local franchise authorities to impose fees, there is no "taking" of property of the local governments. On the contrary, this payment of franchise-like fees should be viewed to fully convey franchise-like rights of access equal to CableCos. The Act does preclude, however, local governments from using their ROW power to regulate the streets as a pretext for imposing franchise-type requirements on open video systems. Local governments cannot use that power to require, for example, that OVS operators provide facilities, equipment or other benefits as a condition to using local streets, nor can they specify the program services the OVS operators must offer. Congress has made it unmistakably clear that it intended to "occupy the field" of open video regulation, leaving no room for state and local governments to supplement the regulatory scheme (NYNEX 30-32). Thus, local governments should not be permitted to make an end run around the statute by wielding their authority over the streets as a subterfuge for extracting concessions from OVS operators. Local governments may thus only regulate activities of OVS operators relating to protection of the environment, health and safety, and they may receive just compensation for use of the streets and ROW. Given this limited role for local governments, there is no need for the certification showing the NLC urges. Indeed, LECs have a long history of cooperating with local governments in this respect. Moreover, requiring OVS operators to obtain local government approvals before filing their OVS certifications would provide the OVS operator's competitors with an opportunity to delay entry. By setting a ten-day period for approval of a certification, Congress evidenced its distaste for the prolonged approval period involved with VDT and instructed the Commission to expedite action on certification requests. The NLC's proposal is inconsistent with that legislative directive. IV. CONCLUSION Congress provided for Open Video Systems in the 1996 Act to encourage competition in the video services market now dominated by incumbent CableCos in each area. Fully aware of the fate that had befallen the Video Dial Tone concept, Congress freed OVS from the rigid structure of Title II regulation that doomed VDT. Title II does not, therefore, apply to OVS. In addition, Congress selected specific provisions of Title VI to apply to OVS in order to create a real opportunity for new wireline entrants to provide consumers with a competitive alternative to the entrenched cable monopolies. The remainder of Title VI requirements do not apply to OVS. OVS is the Commission s best opportunity to encourage wireline video competition. The Commission should affirm and support that opportunity by declining the numerous proposals of commenters to establish extensive new regulatory rules, as set forth above. Only by doing so can the Commission fulfill Congress overriding goal of establishing: a pro-competitive, de-regulatory national policy framework designed to accelerate rapidly private sector deployment of advanced telecommunications and information technologies and services to all Americans by opening all telecommunications markets to competition . . . . (Conference Report at 113). Respectfully submitted, NYNEX Corporation By:/s/Donald C. Rowe Of Counsel: Theodore D. Frank Marilyn D. Sonn Arent Fox Kintner Plotkin & Kahn 1050 Connecticut Avenue, N.W. Washington, D.C. 20036 (202)857-6016 Donald C. Rowe 1111 Westchester Avenue White Plains, New York 10604 Telephone (914) 644-6993 Its Attorney Dated: April 11, 1996 h\fedreg\96-46.rep