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For Powell, ITV Regs Loom Low

11/01/2008 8:00 PM Eastern

WASHINGTON — Convinced new markets and services need time to develop unfettered, Federal Communications Commission chairman Michael Powell last week strongly suggested that the agency won't inject government regulation into the nascent interactive-television business.

In a meeting with reporters last Thursday, Powell said proponents of regulation were asking the FCC to oversee a market that barely exists and forgetting that any abuses that might occur can be cured as they arise.

"I certainly wouldn't support, standing here right this minute, government intervention because I don't know what it would be," said Powell. "I really do not know what it would be."

In January, concurrent with its approval of the America Online Inc. merger with Time Warner Inc., the FCC launched a notice of inquiry that speculated about cable operators' ability and incentive to harm ITV competitors. The notice was the brainchild of then-FCC chairman William Kennard.

Kennard, a Democrat who left office Jan. 19, agreed to investigate the ITV market in order to obtain Democratic commissioner Gloria Tristani's vote for approval of the AOL-Time Warner merger, according to cable industry sources.

The FCC remains equally divided between two Republicans and two Democrats, which means that Powell has the votes to block the FCC from adopting ITV regulations.

While the National Cable Television Association claimed ITV was so new that the FCC's effort was "pointless," The Walt Disney Co. and Viacom Inc. — two TV programmers that don't own cable systems — demanded FCC action. They claimed it was inevitable that MSOs would use control of their cable systems as a weapon against unaffiliated ITV providers.

Disney executive vice president of government relations Preston Padden insisted that a closed cable platform represented a threat to non-MSO ITV providers.

"Disney and ABC have been spending millions developing innovative, interactive-TV applications that are possible only because they're delivered over the open, dial-up Internet telephone platform," Padden said. "There's no opportunity to make that same kind of investment knowing that you have no access to customers trying to access our sites over interactive-cable platforms."

NOT GOING FISHING

During his first three months in office, Powell has made it clear that he's not looking for reasons to regulate, said Scott Cleland, CEO of the independent cable and telecom research firm The Precursor Group.

"He is a deregulator and ITV is a regulatory fishing expedition," said Cleland. "That is not his game."

Disney and Viacom made the argument that if the FCC stepped in now with modest measures, it would avoid having to take more intrusive steps later on.

Powell said he disagreed that the ITV market cried out for preventive regulation.

"To me, that's when government often is at its worst — when it's trying to regulate phantoms, you know, straw men, about what might happen as opposed to what is happening," Powell said.

ITV promises to marry Internet functionality to enhance the traditional television viewing experience, allowing consumers to buy products, call up sports statistics or switch camera angles.

In approving the AOL Time Warner Inc. merger, the Federal Trade Commission — troubled by the company's potential to dominate the ITV arena — banned the new company from interfering with services provided by Internet-service providers with carriage deals on Time Warner Cable systems.

Two weeks ago, AOL Time Warner executive vice president and general counsel Paul Cappuccio told an American Bar Association audience that the FTC's ITV conditions were improper because no one had demonstrated the existence of an ITV market that needed to be rescued from unfair competition.

"What is the theory on interactive television?" said Cappuccio. "Interactive television doesn't exist."

Richard Parker, who headed the FTC AOL-Time Warner merger review before returning to private practice, responded that he wouldn't have faced any trouble in demonstrating in court the existence of an ITV market, however embryonic.

RESTRAINING FIRST-MOVERS

"I would have said, 'Your honor, Paul Cappuccio says this doesn't exist. I am now going put on the stand somebody who is going to turn it on and do it and show you what it is and let them tell you that it doesn't exist.' " Parker said. "Is it clear exactly where this market is going? No.

"But I thought there was enough out there with your own product, AOL TV."

Competitors routinely seek government help to restrain a market leader with a first-mover advantage, according to Powell. This is especially true in a dynamic information market characterized by network effects, which means a leader's advantage grows exponentially as new customers adopt a service.

But Powell said information-market advantages tend to vanish as quickly as they arrive, and that's the justification for his support for a wait-and-see approach in the context of ITV.

"I generally, given those tradeoffs, prefer to wait for clear evidence of abuse — demonstrable — or clear and very persistent trends that you can identify as something to take an action on," Powell said ACTV Inc. president David Reese applauded Powell's stance.

"I'm much more comfortable with these business models developing based upon reasonable economics than based upon government regulation or intervention," Reese said. "And equally important, it forces the programming community and distribution community to work together collaboratively. It's the only way it's going to work."

ACTV is pitching ITV-related products to several cable operators, including its One-to-One TV application, which would allow digital cable subscribers to control camera angles during sporting events. AT&T Broadband plans to conduct a trial of the company's SpotOn targeted advertising product. NCTA president Robert Sachs said he was pleased the FCC isn't planning to plunge into the ITV arena. "If there is a market failure, then government ought to intervene and address it. But you don't regulate businesses if there's no evidence of anything dysfunctional in the market."

TRIGGER GUARDS

Many ITV companies rely on triggers embedded in the vertical blanking interval (VBI) of television signals to deliver enhanced programming and advertising. Disney and Viacom told the FCC there were especially concerned about cable MSOs' ability to disable ITV triggers.

Although RespondTV Inc. CEO David Kaiser said he supported Powell's hands-off stance on ITV regulation, he warned the FCC may have to take another look at the market if operators persistently block triggers, or if ITV players embed too many triggers without working out business relationships with distributors.

"If we start to get a situation where there is sort of an anarchy of triggers blowing, then maybe that's the time to look at regulation. Or, if we start to get to a situation where there's sort of an overly restrictive behavior by the operators, where they're trying to suck all of the value out of interactivity, than maybe that's the place for regulation. But none of those things have happened," Kaiser said.

Overall, Kaiser praised Powell's position.

"The economic models one hopes will work themselves out, where the operators are providing carriage and are getting compensated for it, and the programmers are providing audience, and they're getting compensated for it," he said.

 

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