How Content Integration Has Produced Consumer Welfare Disintegration . . . or How Come Prices Keep Going Up Even with Telco Video Entry?
OK, yesterday's post was all about the relatively-recent propagation of companies with applications, features, or hardware designed to allow the consumer to bypass traditional subscription TV. Why the effort? Do I have to throw out the purported Willie Sutton quote? Of course, because--at least to many entrepreneurs and large businesses--this is where the money is. But why is the money here? In yesterday's post, I referred to an unsustainable program/programmer-distribution "price spiral." What I was referring to was the "clubby" kind of way in which large programmers, and large distributors of subscription programming (sometimes the same firms), have reinforced a certain mutually-beneficial co-dependence to the detriment of the consumer. It's gotten to the point that even new entry--by a Verizon, an AT&T, or other competitor--doesn't reduce prices as much as you'd think. Why? Because the programming is so darned expensive! Why? Because that's the way the status quo wants it!
The anti-consumer symbiosis goes something like this: programmers insist on price increases--either outright, or through tying more popular to less popular channels. This happens on both the "programmer-to-distributor" level (distributor has to take ESPN Classic if it wants ESPN), and on the "distributor-to-consumer" level (MSOs agree to put each other's programming into "expanded basic tier" regardless of its popularity). Content distributors, led by the regionally-dominant cable MSOs, have been only too happy to oblige with their own price increases, either by reducing the number of channels available on the "basic" tier, or simply by eliminating the basic tier altogether. No doubt, large programmers and distributors would be happy to continue this happy state of economic hegemony indefinitely.
Consumers, on the other hand, have not been so happy. The benefits to the large content providers extend beyond the immediate benefits of higher prices (which are always appreciated), but also have the effect of foreclosing other content competitors, because these same companies--by requiring distributors to carry both the "regular" digital versions of their channels AND the high definition versions, can use the same content to take up at least twice as much bandwidth on the distribution networks. Thus, large programmers protect themselves from competition from small, independent, programming by effectively "crowding out" valuable bandwidth "shelf space." This is yet another reason why the firms mentioned yesterday are trying so hard to bypass subscription TV, and deliver video content over the Internet.
For a really enlightening dialogue on the issue of Internet-distributed television/video content, it's really worth it to take a look at the dialogue between Avner Ronen, Boxee CEO, Mark Cuban of HDNet, a subscription TV channel.
For his part, Mr. Cuban argues that no Internet bandwidth delivery technology is currently robust enough to support consumer demand for devices/apps like Boxee. In other words, he says there will always be some failure point where the bandwidth does not support the application and the screen goes dark--whether it be over some part of the cable or telco network, or with too many devices in the home trying to simultaneously access the wi-fi. Additionally, he argues, people want "easy"--where someone does the work of putting together content for them, and this is why traditional "channels" delivered over traditional distribution networks are here to stay.
Mr. Cuban's argument, though, seems to betray some recognition that--while he would like to be part of the status quo ante group of "privileged programmers" who raise prices with the stroke of a pen--as a new entrant, he has been more victim than beneficiary of the "club" to which he so longingly seeks entry. It should also be noted that the medium is the message. One cannot ignore the fact that Mr. Cuban, billionaire owner of the Dallas Mavericks and HDNet, among other investments, is engaging in a public argument with the CEO of a still relatively obscure firm like Boxee. With no disrespect intended to Mr. Ronen, Mr. Cuban clearly sees something in the Boxee premise in order to spend some time in a public debate with Mr. Ronen. It is hard to imagine that Mr. Cuban does NOT mention Boxee, PlayStation, and the other bypass Internet content distributors when he is fruitlessly trying to become part of the Big Programmer-Big Cable club that just won't have him.
While I would agree that in building a "traditional" style "channel" Mr. Cuban has certainly done it right--assuming building a traditional channel is "doing it right." Mr. Cuban has stocked HDNet with tons of great, original programming targeted toward fans of the fastest growing sport in the nation--mixed martial arts, as well as producing a well-regarded weekly "hard news" show with Dan Rather. The biggest problem with Mr. Cuban's logic is that the only reason I know so much about HDNet is that I am a FiOS subscriber. The simple fact is that viewers in Fairfax County (VA) can only get his channel over Verizon's FiOS network. Cox, the incumbent cable provider seems to be bandwidth-constrained by its existing carriage agreements. So, insufficient bandwidth to support Internet-based programming may have be equally insufficient to make room for Mr. Cuban's channel--no matter how good it is. The "consumers want easy" argument also fails when the parties that choose what is "easy" are vertically-integrated incumbent operators.
This is why it is especially critical for Congress or the FCC to fix some programming practices that tend to defeat the consumer benefits of new entry. Program access rules have to be modified to prevent requiring distributors to purchase less popular channels in order to have access to "must have" channels. Similarly, Congress or the FCC must close the "terrestrial loophole", which is an area of the law that the Commission has said is unclear, and is the current subject of an FCC Rulemaking.
The lack of clarity regarding the duty of all vertically-integrated content owners has been used by incumbent video providers to foreclose new entrants (and their customers) from access to "must-have" programming (like local sports) in order for prices to be competed downward by new entrants or consumer bypass. The so-called "terrestrial loophole" refers to a provision in the law that only has only been interpreted to require content owners/programmers to deal with all purchasers for programming that is distributed, via satellite. Current technology makes it more efficient for many content owners--especially for content that is locally produced and consumed (like local sports)--to be distributed through a combination of closed circuit TV and fiber transport to broadcast aggregation points. In short, the terrestrial loophole allows content owners to refuse to deal--at any price--for programming content that is not distributed via satellite.
For example, earlier this month, in reliance on the terrestrial loophole, the FCC's Media Bureau upheld a refusal by Cox Communications to deal with AT&T for access to the Cox-owned channel that has broadcast rights to the San Diego Padres' games. Other examples of how the terrestrial loophole has worked against consumers is when Cablevision, owner of MSG Network (NY Knicks/Rangers) and 50% owner of Rainbow Networks (Boston Celtics) refused to provide Verizon with certain program access. Imagine, because of the DTV conversion, you just went out and finally bought that big high-def TV . . . only to come home and find out you don't get access to your hometown sports teams! Or you do, but not in high-def! Ouch!
The "terrestrial loophole" and its anti-consumer effects, along with program tying--in a time of national hardship--are issues that bear some attention, both because these two issues keep subscription TV prices higher than need be, and thus are a consumer-driven issues, and because these are issues for which the FCC might need help from Congress to address. To paraphrase the old SNL characters "Hans and Franz", "hear me now und believe me later", video competition will be an issue that the Congress will either choose to push the FCC to deal with this year, or risk the prospect of consumers dealing with it for them in 2010.
This fact has not been lost on the Senate Antitrust Subcommittee (of the Senate Judiciary Committee), whose Chairman, and ranking member, said in a release just yesterday,
It's good to see that some lawmakers are getting the message--and, man!, is it frustrating when they communicate it so much more succinctly than me . . .
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