Open video systems: too much regulation too late?

• Author: Botein, Michael
• Position: Telecommunications Act of 1996: Ten Years Later Symposium

There are lessons to be learned from the nonstarters in regulatory historic. A good example in the 1996 Telecommunications Act ("1996 Act") (1) was Section 653's creation of open video systems ("OVS"). (2) OVS was an attempt to create a quasi-carrier platform, more available to third parties than cable but with enough potential profit to encourage investment. At least in theory, OVS operators would be subject to less regulation than either cable systems or common carriers. OVS turned out to be a flop, however, in terms of market share. Five years after passage of the 1996 Act, OVS had a total of 60,000 subscribers and the number appeared to be declining. (3)

The experience with OVS is particularly relevant today with the potential entry of "fiber to the home" ("FTTH") from incumbent local exchange carriers ("ILECs"), such as Verizon and AT&T. Both companies are in the process of rolling out FTTH systems under rubrics such as FiOS (Verizon) or Lightspeed (AT&T), promising high-bandwidth digital video and other applications. (4) At present, these developments legal status is less than clear since debate exists as to whether FTTH could or should be regulated as cable television under the 1996 Act. (5) OVS status would be a logical approach to regulatory classification, but the ILECs apparently are not interested in it--probably for the same reasons which have dissuaded past entrepreneurs. (6)

The background of OVS is less than clear and little in the 1996 Act's sparse legislative history sheds much light. The primary impetus seems to have been cleaning up after a prior Federal Communications Commission ("FCC") regulatory experiment--video dialtone ("VDT"). This was an attempt to allow the ILECs to market video programming to the home through separate subsidiaries. (7) As with OVS, the goal was to bring new competition into the multichannel video market, which then was dominated by the cable industry. Video dialtone ultimately proved too cumbersome to be workable; however, and Congress as well as the Commission went in search of a less restrictive regulatory framework, ultimately settling on OVS. Section 653 of the 1996 Act thus explicitly invalidated the FCC's VDT rules and substituted OVS for them. (8)

Although Section 653's intent clearly was to provide regulatory relief, its language is not well crafted. As one observer noted, "[t]his is a bizarre statute...." (9) The law begins by providing that "[a] local exchange carrier may provide cable service ... through an open video system ...," but then adds that "... an operator of a cable system or any other person ..." may apply for a certificate to operate an OVS system. (10)

The statute then goes on to impose or relieve regulatory obligations by a series of cross-references. The basic requirements are that an OVS operator offer a form of leased access to third parties on "just and reasonable" "rates, terms, and conditions." (11) This looks very much like a form of common carriage under the old Midwest Video II case. (12) The Supreme Court held that the FCC's original public access channels were a form of common carriage since they required cable operators to deal with any qualified third party; (13) OVS leased access channel requirements are substantially similar. Although the Court...