July 2010 Archives

July 14, 2010 3:48 PM

The FCC's "Mulletary" Enforcement of Video Competition

When I say "mulletary", I mean like "military", but in the way of the "mullet", as in the haircut, as in "BIFPIB":  business in front, party in back.  That's right, the mullet.  Like Billy Ray Cyrus, "Joe Dirt", and every '80's metal band.  But, why in the world would I compare video competition policy enforcement to the mullet?  I'll say it again. Two words: "BIF" "PIB"--business in front, party in back.  Why?  Because when confronted with the stubborn lack of video competition, to the detriment of consumers, the Commission has steadfastly talked tough in public (on the front end), but refused to break up the party out back with the owners and distributors of cable programming.  The result?  

Just look at the chart in the last FCC Video Competition Report to Congress, where the Commission reported that subscription video, and programming are the only major services for which prices have steadily increased since the Telecom Act was adopted in 1996.  What's more, the last Video Competition Report was produced in the last administration.  So, is there a "party in back"?  When prices are climbing in a down economy, both in nominal terms, and relative to the CPI, you bet there's a "party in back"! 

Nonetheless, the tough-talking, "business in front" continues unabated.  Like the mullet militia, the Commission will almost certainly not want to be reminded of their "style" when this administration goes out of style . . . as they all must . . . whether in four, or eight, years.  Let's look at some examples of the "mulletary" enforcement of "video competition policies."

"Business in Front"

Exclusionary Programming Practices.  On January 20, 2010, the Commission adopted rules to prevent incumbent cable operators, and owners of "must have" programming (like real time sports programming), from using the so-called "terrestrial loophole" to exclude certain competitors from access to this essential programming.  This programming is considered essential because customers will not buy subscription television that does not give them access to local sports programming.  The "terrestrial loophole" was originally designed to prevent owners of closed circuit TV systems (like the live feed you might see on the "Jumbotron" at FedEx, or the Verizon Center) from being required to broadcast the entire feed (including proprietary "programming", like birthday announcements, marriage proposals, product promotion contests, etc.) to all providers of subscription television service.  The FCC has found that just because the sports program (i.e., the game) is transmitted for distribution over a wire, it does not give the owner/licensee of the sports programming the right to exclude rivals from access to this essential content.

In fact, despite the "loophole", which (according to interpretations rejected by the Commission) would allow the owner of the sports event to foreclose access to anyone that didn't own access, cable distributors that owned programming did choose to make transmission of these sports events (both conventional and high-definition feeds) available to non-competing, adjacent incumbent cable operators, but not to competitive video providers, either "in-region" or in adjacent regions.  The rules became substantially effective at the beginning of April and fully, technically effective, on June 21, 2010.

The FCC laid down the law . . . it could be said.  Yet Verizon, and AT&T, have had formal complaints pending with the Commission for over a year (since July and August of 2009) regarding their inability to get access to the high-definition feeds of local New York sports programming owned by Cablevision--even in areas where neither company competed against Cablevision.  See, Order, ¶17.

Programming/Distribution Concentration.  Let's move on to the still-pending Comcast/NBC/GE merger, where the largest owner and distributor of subscription TV programming filed a request with the FCC on January 28, 2010 for approval to acquire one of the largest network programmers.  Interesting stuff, really, because Business Week already declared the death of "free TV", even before the FCC got into the "business in front" part of the "mullet-ary" style review.   Others also expressed concern that the proposed merger would threaten "free TV." 

As a public statement, but not a binding rule, the FCC tries to hold itself to a 180 day "time clock" for reviewing mergers.  Technically, this would require the Commission to approve or reject the Comcast/NBC/GE merger in a couple of weeks.  Accordingly, the FCC hired an attorney to lead the investigation in late May.  Final comments on the merger are due in early August.

Moreover, on July 13, 2010, the FCC held a public hearing at Northwestern University regarding the consequences of the merger, chaired by Commissioner Copps.  Commissioner Copps released a public statement, concurrent with the public hearing, discussing the potentially dire consequences of the proposed merger--not only for traditional subscription television consumers, but also for the "new media" markets.   In Commissioner Copps' public statement on the hearings, he concludes, "[a]s for me, I have said before that approval of this proposed transaction would be a very steep climb."  [emphasis added]  Now that's some serious business. . . which brings us to . . . .

"Party in Back"  

Exclusionary Programming Practices.  Well . . . there is that matter of the FCC never enforcing an act of exclusion by a vertically integrated owner of cable programming and distribution--despite rules and practices to the contrary.  As I said a year ago, practices such as these--refusals to deal with some firms on terms that have been voluntarily offered to other, similarly-situated, firms--have been condemned as anticompetitive by the Supreme Court.   

They're Competing Like Heck Out There!  As part of its "business in front" approach to video competition policy, the Commission announced the previously-mentioned "public forum" to review the merger. Coincidently, though, on the same date (June 3, 2010), Communications Daily reported, "[t]he FCC is partway through trimming a backlog of requests from cable operators to be freed of local rate and equipment regulation, said commission and industry officials. The Media Bureau in recent months has stepped up approvals of petitions seeking findings of effective video competition . . . ." [emphasis added].  The story went on to note that the FCC is making "effective competition" determinations for video markets at a rate greater than once a day--as many as 30 times in May alone?!  Wow!  Is the subscription TV market "effectively competitive?"   

I don't know, but maybe the answer depends on the circumstances.  Do over 90% of cable consumers have a choice of at least one "same media" subscription video provider (as is the case in the wireless industry)?  Doubtful--but such a finding should be vital to the approval of a certain pending merger.  Why?  Because the Commission previously found that only wireline-delivered multichannel video had a price-constraining effect on the behavior of the incumbent cable provider. Video Competition Order, ¶3.  

Does the FCC have to exclude wireless-to-wireline competition?  It would seem so, because the Commission made a similar finding only a few weeks ago.  In the recent Qwest Phoenix Forbearance Order, the FCC reached the same conclusions about wireless voice as they did about wireless video when they declined to include wireless voice--even for customers that only used wireless voice--as a competitive market participant.  Qwest Phoenix Order, ¶55, n.164.

Even if not everyone agreed with the Commission on the ineffectiveness of cross-media wireless competition, the outcome would be unlikely to change in the video market.  In an article entitled "Wall Street Loves Cable. . . Still", Multichannel News recently reported one analyst's observation:

'The operating environment in cable is better,' [UBS cable analyst] [John] Hodulik said, adding that the competitive threat may have reached a crest with Verizon Communications announcing last month that it would no longer build out new FiOS markets and DirecTV being less aggressive in new subscriber additions.
Programming/Distribution Concentration.  So, how will the FCC tackle a big media merger, unpopular with consumers?  Will the "business in front" be followed by a "party in back"?  Some would say the party never ended for this industry.  Regardless, this year's Video Competition Report should be as interesting an exercise in intellectual contortions as its conclusions are predictable . . . and, no doubt, the same team will write the order approving the Comcast/NBCU/GE merger.

Still, in a transparent and data-driven world, the FCC--should they decide to approve this merger--should adopt a riff on the old English Solicitor custom . . . and wear formal wigs at the Open Meeting . . . like these.  Plus, if I had my druthers, every separate statement endorsing any conclusion of vigorous competition in the subscription TV market would have to conclude with this graphic prominently displayed.