Comcast is increasingly making demands in TV programming contract negotiations that would force its smaller rivals to raise their minimum cable TV prices, a lobby group for small cable companies told the Federal Communications Commission yesterday.

The American Cable Association (ACA), which represents nearly 800 small and medium-sized cable operators, asked the FCC to investigate the practice and prohibit it under its program access rules.

The issue relates to Comcast's ownership of regional sports networks that are marketed under the brand of Comcast's NBC subsidiary. Comcast wants to redefine the so-called "minimum penetration policy," essentially making it impossible for small cable companies to sell a cheap, basic tier of TV service that doesn't include higher-priced channels, the ACA alleged. The group's filing said:

ACA believes that it is no coincidence that the programmer adopting this restrictive policy—Comcast-NBCU—is a vertically integrated provider of MVPD [multichannel video programming distribution] and broadband Internet access services. The ACA members that are being disadvantaged by this policy directly compete with Comcast for MVPD and broadband Internet access service customers. Comcast-NBCU's minimum penetration policy restricts its competitors from offering broadband Internet access service bundled with broadcast basic video service and thus restricts their ability to compete with Comcast for broadband Internet customers. While it interferes with its competitors' ability to offer consumers a broadcast basic tier of service, Comcast is aggressively marketing a bundle of networks very similar to the broadcast basic tier to its own customers through its Instant TV service.

The ACA's filing was submitted in the docket for the FCC's annual assessment of video competition. Among other things, the FCC asked for public comment on "regulations that have the most significant potential for impact on competition in the market for the delivery of video programming."

Comcast's filing in the same proceeding argued that video competition is thriving and that the FCC "should eliminate outdated legacy regulations that are no longer necessary in today’s highly competitive video marketplace." Comcast, the nation's biggest cable company with 22.5 million TV subscribers, said the FCC's program access and program carriage rules are "legacy regulations that constrain investment and innovation."

Comcast demand allegedly makes basic TV tier unviable

"Minimum penetration policies" included in programming contracts require TV providers "to distribute a cable network to a minimum specified percentage of its video subscribers," the ACA's filing explained. But in calculating that percentage of the subscriber base, almost all programmers exclude subscribers who receive only a basic tier consisting primarily of broadcast channels, the filing said.

"This option has always been of value to consumers who only wanted access to broadcast stations but had poor over-the-air reception or wanted to avoid the expense and trouble of installing a large antenna" and is growing in popularity today among people who watch online video services instead of cable channels, the ACA said.

The basic tier of broadcast channels is also known as the "lifeline" tier. Excluding lifeline subscribers from minimum penetration policies "is altogether reasonable and appropriate given the historical distinction between carriage of broadcast and cable network programming under the Communications Act and the Commission's rules," the ACA said.

But Comcast doesn't want to exclude basic tier subscribers from minimum penetration policies, making it financially infeasible for small cable companies to offer the basic tier, the ACA told the FCC:

In its RSN [Regional Sports Network] licensing agreements with a number of ACA members, however, Comcast-NBCU has insisted on including a minimum penetration requirement that does not incorporate a lifeline exclusion and on setting the penetration rate at a high enough level such that these members are no longer able to broadly sell a broadcast basic or lifeline tier service at their existing prices without automatically violating the minimum penetration requirement in their RSN agreements. This is true even if they were to include the RSN in every video bundle (expanded basic and specialty tiers) they offer except for broadcast basic service. An MVPD in this position must ultimately either raise the price of the broadcast basic tier to dampen demand for this service or essentially cease to offer a true broadcast basic tier that does not include cable programming networks. Either outcome will obviously harm consumers.

Comcast's negotiation demands have "begun to threaten some of [the ACA's] members' ability to continue to offer their subscribers access to a basic broadcast tier of service," the group said.

ACA members could also decline to carry regional sports networks, but in doing so could lose sports-watching customers who are willing to pay extra to watch local teams.

Rules need to change, group says

Comcast apparently isn't breaking any rules with these demands today, but the ACA wants the FCC to change that. Comcast's strategy "is both anti-competitive and anti-consumer and is not in the public interest," the group said.

"At a minimum, the commission should further investigate this practice," the ACA wrote. "ACA believes that should the commission do so, it will determine that the practice of imposing minimum penetration requirements in cable programming network agreements that do not contain a lifeline carve-out unreasonably limits consumer choice and competition without providing any offsetting benefits, and that this conclusion should provide a sufficient basis for the commission to prohibit this practice under the program access rules."

We asked Comcast for comment today and will update this story if we get a response.

Comcast/NBC merger conditions set to expire

The ACA also said there are a few industry changes that will make this problem worse. AT&T's pending acquisition of Time Warner Inc. will bring HBO, TBS, TNT, CNN, and other big networks under the control of a major TV provider "and thus further increase the need for continued program access protections," the group said.

Separately, the merger conditions Comcast agreed to in order to obtain government approval to purchase NBCUniversal in 2011 will expire in January 2018, the ACA wrote. These merger conditions protected smaller rivals with an arbitration requirement.

The conditions "require Comcast to agree to the submission of disputes over prices, terms and conditions of programming agreements to arbitration to determine a fair market value for the programming in the event that a private agreement cannot be reached with an MVPD seeking to license Comcast-NBCU programming," the group's filing said.

That requirement essentially "closes a loophole in program access rules" that lets cable companies that own programming "raise prices to rival MVPDs simply by charging itself an artificially high transfer price for the same programming," the ACA said.

The arbitration requirement that will soon expire is also used by the National Cable Television Cooperative (NCTC), which negotiates programming contracts in bulk on behalf of about 800 small and medium-sized cable companies. The NCTC's current agreement with Comcast is scheduled to expire less than 10 months after the Comcast/NBC merger conditions expire.

Comcast tried to get a contract without a lifeline exclusion the last time it negotiated with the NCTC, but it relented when the NCTC threatened to demand arbitration, the ACA's filing said. The ACA urged the commission to consider extending the merger conditions beyond the scheduled end date.

"Both ACA and NCTC fear that NCTC will be less able to resist Comcast's unreasonable, anti-consumer and anti-competitive demands without the threat of being able to ask to submit the dispute to baseball-style arbitration to determine fair and reasonable terms and conditions and without the ability to file a program access complaint with the Commission," the filing said.