The FCC last night, after a daylong struggle to reach consensus, took several actions of significance to cable operators and programmers.  First, the FCC adopted rules that it characterized as necessary to ensure that cable subscribers with analog televisions will be able to view local broadcast signals after the February 17, 2009 digital transition and a related further notice of rulemaking to address the economic impact of these rules on small cable operators.  Second, the agency also approved an order that extended for five years the ban on exclusive affiliation agreements involving satellite-delivered, vertically integrated programming and modified certain procedural rules for resolving program access complaints.  Third, the FCC announced a new rulemaking proceeding to consider further substantive and procedural changes to the program access rules, such as closing the so-called “terrestrial loophole” and barring broadcasters and cable programmers from “tying” two networks (i.e., forcing an MVPD to agree to carry one network in order to obtain the right to carry another network or broadcast station).   Although the Commission had been expected also to adopt an order extending to incumbent cable operators certain of the franchise reforms that were adopted for new entrants late last year, action on that item was postponed.

I. DUAL CARRIAGE

According to the FCC, analog-only cable subscribers constitute approximately 35 percent of the nation’s television homes (i.e., do not have a television or cable converter capable of receiving a digital signal).  Citing statutory provisions that were adopted prior to the development of digital television that require cable operators to provide subscribers with “viewable” local broadcast signals, the FCC adopted rules under which local broadcast signals are entitled to both analog and digital carriage unless the cable operator goes “all digital” prior to the transition deadline.  This “dual carriage” obligation will sunset in three years (February 18, 2012) unless the FCC acts affirmatively to extend it. 

In addition, the FCC provided potential relief to systems with limited channel capacity (552 MHz or less) by allowing them to request a waiver of the viewability requirement.  This action prompted a dissent from Commissioner Adelstein, who argued that limited capacity systems should have been automatically exempted from the rules.  The FCC also confirmed that cable systems must carry high definition (“HD”) broadcast signals in HD format and reaffirmed the current “material degradation” standard under which the picture quality of retransmitted broadcast signals must be equal to or better than the quality of non-broadcast video programming carried by the system.

The FCC’s action on dual carriage is generally regarded as a victory for the cable industry in that the proposal pushed by Chairman Martin would have established a permanent “dual carriage” obligation and would not have provided any relief for limited capacity systems.  Chairman Martin’s proposal also called for the adoption of a material degradation standard under which cable operators would have had to retransmit all of the “bits” in a broadcast digital signal – a requirement that would have prevented operators from using bandwidth-conserving compression technologies and could have easily been stretched into a multicast carriage obligation.

Finally, the FCC indicated that it would issue a further notice of rulemaking seeking comment on additional ways of minimizing the economic impact of the dual carriage requirement on small cable operators.  This further notice may also raise other questions.  It is not clear how long it will be before the staff releases the full text of the dual carriage order and further rulemaking, since changes were being made up until the last minute.

II. PROGRAM ACCESS

Section 628 of the Communications Act bars cable operators from entering into exclusive distribution agreements with vertically-integrated, satellite-delivered programming networks.  This prohibition originally was scheduled to “sunset” in 2002, but was extended for five years.  As was expected, the FCC yesterday decided to extend the exclusivity ban for another five years, finding that despite the growth of competition, cable operators continue to have the ability and incentive to withhold “essential” programming from other multi-channel video distributors. 

The FCC also adopted certain modifications to its program access complaint procedures, particularly with respect to the production of information relevant to the resolution of a complaint.  Although the FCC indicated that it would take steps to ensure that the confidentiality of sensitive business information is protected, Commissioners Adelstein and Copps expressed concern that this expanded “discovery” provision could go too far in requiring cable operators and programmers to provide complaining multichannel video providers with extensive information about other program affiliation agreements.

The new rulemaking that the FCC started in connection with the program access rules seeks comment on a pair of procedural issues: (1) whether the filing of a program access complaint in connection with proposed changes to an existing contract should trigger an automatic stay of the new provisions and (2) whether an arbitration-type step should be added to the complaint resolution process. 

Even more significantly, the notice of proposed rulemaking also addresses substantive issues, including whether the FCC can and should apply the program access rules to DBS, whether program access restrictions should apply to vertically-integrated services that are distributed terrestrially as well as to satellite-delivered services, whether the FCC should require programmers to deal with entities that provide service through a shared headend, and whether broadcasters and cable programmers should be required to offer their services on a “stand-alone” basis rather than forcing multichannel video distributors to purchase “undesired” programming in return for the right to carry desired programming.  As described, this latter proposal is directed at the wholesale distribution of programming and does not directly propose to require programmers to make their services available for retail distribution on an a la carte basis.

III. INCUMBENT CABLE OPERATOR FRANCHISE REFORM AND OTHER ISSUES.

Late last year, as part of the order adopting franchise reforms for new video entrants, the FCC commenced a proceeding to extend similar reforms to incumbent operators.  At the time, statements were made promising that action on this proceeding would be completed by September 2007.  And in fact, consideration of an order in the franchise reform proceeding originally was originally included on the agenda for yesterday’s meeting.  However, the franchise reform item was pulled from the agenda and, while it still could be adopted before the end of the month, its exact status is uncertain.  In addition, two other items of interest to cable are circulating among the Commissioners and could be decided in the near future.  One is an order that reportedly would deny a request by Comcast for a declaratory ruling that The America Channel is not a regional sports network for purposes of applying certain conditions imposed on Comcast and Time Warner as part of the FCC order approving the Adelphia transactions.  The other pending item is an order that would ban existing and future exclusive contracts between cable operators and the owners of multiple dwelling unit buildings.  This item raises several difficult legal issues (including whether the FCC has jurisdiction to void such contracts and whether it can only bar such contracts prospectively). 

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The Court of First Instance of the European Communities ruled that the Commission had committed an infringement by forcing Akzo and subsidiary Akcros Chemicals to allow investigators a cursory look at documents and by not allowing them to contest the action.

However, it added: "The Court concludes that the infringements on the part of the Commission ... did not result in unlawfully depriving them of (lawyer-client) protection in respect of those documents, since, as has been held, the Commission did not err in deciding that none of those documents in fact fell within the scope of that protection."

The firms can appeal against legal points of the ruling.

A spokesman for Akzo said it would study the ruling and could not say whether it would appeal.

CNET Networks said Tuesday that the Securities and Exchange Commission ended an inquiry into the company's stock option grants.

Regulators won't take any action against San Francisco-based CNET, which is a media company.

CNET's founder Shelby Bonnie quit as chairman and CEO last October -- on the same day the company said it had back dated some stock options grants between its 1996 IPO and 2003.

The costs of the ensuing stock options investigation and related litigation cost CNET Networks $2.9 million in the second quarter, ended June 30, and pushed it to a $76,000 loss.

CNET's loss would have been greater but for a $1.6 million gain on private investments, which partially offset the costs of its stock options investigation.

Neil Ashe, Bonnie's replacement as CEO, said it was a "transition year" for his company.

Another law firm has filed an investor suit against Motorola Inc., claiming executives didn’t tell the market how bad things were last fall as sales began to slow.

Schiffrin Barroway Topaz & Kessler LLP filed suit last Wednesday in U.S. District Court for the Northern District of Illinois on behalf of investors who bought Motorola shares between July 19, 2006, and Jan. 4.

Motorola’s shares peaked at $26.30 on Oct. 13. On Monday, the stock price was below $17 per share.

The suit claims Motorola did not disclose problems with its product line and geographic challenges in Europe that led it to miss its forecasts in the third and fourth quarters.

Named in the suit are CEO Edward Zander; Ron Garriques, former head of mobile devices; David Devonshire, former chief financial officer; Greg Brown, then-executive vice-president of networks; Daniel Moloney, president of connected home solutions; Richard Nottenburg, chief strategy officer; and Padmasree Warrior, chief technology officer.

“We will vigorously defend ourselves against these claims,” a Motorola spokeswoman said.

Executives, excluding Mr. Zander, sold more than $26 million worth of stock during the period, according to the suit.

The Schiffrin law firm is based in Radnor, Pa. Last month, the law offices of Bernard Gross, based in Philadelphia, and Brodsky & Smith of Bala Cynwyd, Pa., each filed suit, also seeking class-action status.

Roche is seeking to acquire Tucson, Arizona-based Ventana, which makes diagnostic tests, for $75 a share. Ventana had wanted to apply an Arizona law that makes it harder for companies to be bought, but the judge ruled that it could not use that law, Roche said.

In a separate case, Roche is also contesting a so-called poison pill defense by Ventana, which would give Ventana shareholders rights to buy new shares at half price if Roche acquires 20 percent of the company.

Roche said on Tuesday it extended by four weeks the expiry of its tender offer to September 20 from August 23.

Online brokerage giants TD Ameritrade Holding (AMTD) and E-Trade Financial (ETFC) have been holding talks for weeks about a possible merger, The Wall Street Journal reported Wednesday.
The discussions currently are focused on making sure both companies agree on strategy, and the companies aren't yet close to a deal, the Journal reported, citing unnamed people familiar with the matter.

A spokeswoman for E-Trade said the firm's management team believes there is "tremendous value in consolidation that aligns business strategy and operational synergies and will do what is in the best interest of its customers." A spokeswoman for Omaha-based Ameritrade said the company has talked to and continues to talk to industry peers.

The companies previously have discussed an alliance but never reached a deal. This time, however, there is the added pressure of two hedge funds with big stakes in Ameritrade that have publicly urged the two companies to talk.

Jana Partners and S.A.C. Capital Advisors, which claim to collectively own 8.4% of Ameritrade shares, have been urging Ameritrade to join forces with a major competitor such as E-Trade or Charles Schwab (SCHW) in the interests of the majority of shareholders.

On Friday, the U.S. central bank approved a half-percentage point cut in its discount rate on loans to banks to "promote the restoration of orderly conditions in financial markets."

The decision means the discount rate, the interest rate that the Fed charges to make direct loans to banks, will be lowered to 5.75 percent from 6.25 percent.

But the Fed did not change its target for the more important federal funds rate, the interest commercial banks charge each other on overnight loans. The benchmark interest rate has remained at 5.25 percent for more than a year.

In the statement announcing the interest rate cut, the Fed said it "is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets."