FCC Decides Bulk Billing and Exclusive Marketing Arrangements in the Provision of Video Services to MDUs Should Not Be Restricted

Kelley Drye Client Advisory

On March 2, 2010, the Federal Communications Commission (“Commission”) released a Second Report and Order (“Order”) in MD Docket 07-51, declining to prohibit Multichannel Video Program Distributors (“MVPDs) from utilizing bulk billing or exclusive marketing arrangements in Multiple Dwelling Units (“MDUs”). In permitting such arrangements, the Commission focused on whether benefits to consumers outweighed any harms and on whether the arrangements prevented or hindered other MVPDs from servicing the MDUs. The Commission also denied the Petition of Shenandoah Telecommunications Company (“Shentel”) for Clarification or Reconsideration concerning the Commission’s ban on exclusivity clauses for video service.

The Order grew out of a Further Notice of Proposed Rulemaking accompanying the Commission’s 2007 First Report and Order in the docket, in which the Commission prohibited cable operators and other MVPDs subject to Section 628 of the Communications Act of 1934, as amended, (the 1934 Act”) from entering into or enforcing exclusivity clauses in agreements with MDU owners. The Commission inquired in the further notice whether it should prohibit or otherwise restrict the use of bulk billing arrangements and exclusive marketing agreements entered into between MVPDs and MDU owners.

1. Bulk Billing Arrangements

In examining bulk billing arrangements, the Commission found that their benefits outweighed any potential harms and the arrangements did not hinder competitor MVPDs from serving MDUs. Bulk billing arrangements are those where an MDU owner enters into a contract for the MVPD’s service and the MVPD connects its service to each residential unit in the MDU. The MVPD bills the MDU each month and the MDU typically factors this cost into each unit’s rent, condominium fee or homeowner’s association dues. The bulk billing arrangements usually provide the MDU with the MVPD’s basic or expanded video service and sometimes also include voice, Internet access and/or alarm monitoring services. MDU residents also have the option of purchasing additional services, such as premium channels, directly from the MVPD. Despite the MDU owner’s contract with a particular MVPD, other MVPDs are permitted to enter and wire the property to provide service to tenants. Tenants electing to obtain service from one of these other MVPDs must pay them directly.

The Commission found that benefits to MDU residents from bulk billing arrangements can include: lower service rates, the avoidance of having to establish or disconnect MVPD services, service packages tailored to their particular interests, and the avoidance of deposit requirements for residents with imperfect” credit histories. Among some identified harms were that the MVPD in the bulk billing arrangement has no incentive to offer or maintain rates and programming at market levels, is not held to performance standards, and may fail to innovate. Further, some arrangements are long term contracts, entered into by development builders and developers that may receive income from the MVPD, that cannot be nullified by the homeowners depending on whether there is a home owners association and what the terms of its organizing documents are.

The Commission ultimately concluded that the benefits to MDU residents of bulk billing arrangements outweighed the harms. The Commission considered that the prohibition of bulk billing arrangements to benefit the few residents likely to not want such arrangements would be a disservice to the public as it would typically result in higher prices for the vast majority of MDU residents unopposed to the arrangements. The Commission concluded that any harmful incidents were few, isolated, and atypical of bulk billing as a whole,” and found that bulk billing arrangements do[] not hinder significantly the entry into an MDU by a second MVPD and do[] not prevent consumers from choosing the new entrant.”

2. Exclusive Marketing Arrangements

The Commission made similar findings with regard to consumer benefits and competition when deciding not to ban exclusive marketing arrangements. Exclusive marketing arrangements are often multi-year agreements, either written or in practice, between an MDU owner and an MVPD which grant the MVPD the exclusive right to market its service to the MDU residents on the premises. In exchange for some form of consideration, MDU owners typically permit MVPDs to take actions to advertise their services, such as placing advertising materials in the MDU’s common areas and in brochures for new residents, sponsoring activities on the MDU premises, and putting brochures under residents’ doors.

As with bulk billing arrangements, the Commission found that exclusive marketing arrangements provided some benefits to consumers and did not obstruct additional MVPDs from entering and wiring MDUs or prevent residents from obtaining service from other MVPDs. The benefits to consumers were modest, such as providing readily accessible information that permitted consumers to make informed choices, the potential for lower service rates, and the ability for MVPDs to obtain financing necessary to wire MDUs based on the added expected revenue stream from exclusive arrangements. The Commission noted that some opponents of exclusive marketing arrangements said the arrangements made it costly and difficult for competitor MVPDs to market to residents. However, the Commission determined that competitor MVPDs are able to reach MDU residents via television, radio or other media, that exclusive marketing agreements did not raise service prices, and that such arrangements do not significantly deter MDU residents from selecting service from competitor MVPDs

3. Shentel’s Petition for Clarification or Reconsideration

In the Order, the Commission also denied, in full, Shentel’s Petition for Clarification or Reconsideration of the Commission’s First Report and Order which prohibited exclusivity clauses between MDUs and MVPDs that are subject to Section 628 of the 1934 Act. Exclusivity clauses are defined as agreements between MDU owners and MVPDs granting the MVPD the exclusive right to provide video programming service to the MDU. Shentel sought clarification that private cable operators (“PCOs”), including PCOs that are common carriers or affiliates of common carriers providing video service to subscribers, were not, in common with most PCOs, subject to the prohibition as long as the PCO did not utilize the public rights-of-way. The First Report and Order and the current Order did not find, as a general matter, that PCOs are subject to the ban on exclusivity clauses. The Commission’s decision to deny the Petition, was based on Section 628(j) which states that any provisions of Section 628 that apply to cable operators also apply to common carriers and their affiliates that provide video programming directly to subscribers. Rather, because Shentel’s PCO affiliate was an affiliate of a common carrier, it became subject to Section 628. The Commission also denied Shentel’s request in the alternative (in the event the Commission applied the common carrier rule) for forbearance from application of the building exclusivity prohibition to common carrier affiliates that provide video programming directly to subscribers, in part, on the grounds that the affiliate is not a telecommunications carrier, such that forbearance under Section 10 of the 1934 Act would not be available.

Please be advised that attorneys in Kelley Drye & Warren’s Communications practice group are experienced in assisting clients before the Commission on almost all issues, including contracts relating to MDU access. For further information on any of the matters discussed herein, please contact your usual Kelley Drye attorney or any member of the Communications practice group. For more information on the Communications practice group, please click here.