Telecom Sense

BIF-PIB Redux: Doo. Dah. Dippity!

No reason to even apologize about the fact that I haven't been blogging much recently (relative to my normal furious pace of about 1 every 10 days)--and I'm not apologizing.  I could make a lot of excuses (and, believe me, I do!).  But, hey, there just hasn't been a whole lot of FCC Policy to be blogging about.  Don't take my word for it--even Harold Feld 
says so--and he's a prodigious blogger.  Blame Chairman Genachowski.  My personal laziness is purely coincident.

However, I do have one slightly timely follow-up point on my last post on video competition.  Earlier this week, Mr. "PIB" (Party in Back, in the mulletary sense of the term) made his appearance on the Comcast-NBC merger.  How so?

Well, Congressman Rick Boucher, Chairman of the House Energy and Commerce Committee's Subcommittee on Communications, Technology, and the Internet concluded his investigation into the Comcast-NBC Universal merger and deemed it to be not a threat to competition.  In fact, he sent letters to the Department of Justice's Antitrust Division and to the FCC, urging expeditious approval of the merger to "ensure continued consumer access to content." 

Who could argue?  After all, the antitrust and consumer protection laws were founded on the principle that the best way to ensure that consumers receive maximum access to a good or service was to let one company control as much of that market as possible.  Or maybe that was the principle on which the Hudson's Bay Company, and the British East India Company were founded.  Hmmm?  One or the other . . .  

Competition or mercantilism, toe-may-toe, toe-mah-toe . . . . No matter; the top dog on this subject matter at the House of Representatives told the reviewing agencies to fold up tent, conclude that the industry is competing like heck out there, approve the merger, and crack open a cold Bud Light!  This is some serious political cover:  the political version of "The Eagle Has Landed." 

Of course, I could always be wrong, and the reviewing agencies could continue their own investigations, and make an independent assessment of how the merger will affect competition in the markets for video programming and video distribution.  But . . . why would they bother?  It's summertime and the livin' is easy.

Now, we just sit back and watch, listen and learn, as the story unfolds about the competitive irrelevance--nay, benefits--of vertical concentration in the subscription video market.  But be careful out there, partner, with trying to make a general assumption about vertical integration in communications markets.  Woe to anyone who makes that same mistake about vertical contracts between service providers and handset manufacturers in the mobile wireless market!  The Party in Back is strictly for incumbent video providers and programmers . . .

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.  

A Funny Thing Happened . . . Part 2

Meanwhile, . . . back at the ranch . . . given the potential for inter-governmental "enforcement competition", it is helpful to look at what the FCC's existing longitudinal data sets are showing regarding the performance of markets that, unlike the wireless applications market, are firmly under the jurisdiction of the Commission.  Does the FCC have information that could lead a "fact-driven" agency competitor (like the Antitrust Division or the FTC) to believe that the Commission has any "infra-marginal" markets that might look like good "acquisition targets?"

The following slide was presented by the Media Bureau to the FCC at the Commission's first open meeting at the beginning of this year.  This slide graphically illustrates the price performance of several different communications services from 1995 through 2008 vs. the Consumer Price Index ("CPI").  In the relevant time period, the CPI for all products and services (including food and energy) increased by about 38%.  During this period, the price of most major communications services--including mobile wireless service--declined in absolute terms, not just relative to the CPI.  Every service, that is, except cable television service--which increased by about three times the rate of inflation (122% vs. 38% for the CPI).   The Commission attributed this poor performance to a lack of competition in the market for subscription TV services.  Below is "Slide 5" of the Media Bureau's presentation on January 15th, and was based on data presented in the Commission's Report on Cable Industry Prices ("Cable Price Report"), which was released on the following day.
 
 So, could the FTC and/or the Antitrust Division sense an opportunity to expand their own jurisdiction?  Well, since the FCC's wireless focus seems to be on vertical integration between handset providers, wireless data applications providers (or at least one provider), and wireless service providers, does the Commission's cable data tell us anything about the effect that vertical integration (with set-top box providers and programmers) has had on the relative poor performance of cable prices?  As a matter of fact, the Commission's data does shed some light on the degree to which vertical integration is responsible for the poor performance of the cable market.
Continue reading A Funny Thing Happened . . . Part 2

Cablevision Spins Off MSG, But Has the Blizzard Started?

If you haven't noticed yet, you probably shouldn't rely on me for your telecom news--because I'm really not that timely.  Nonetheless, if you read at all, God bless you, brother (or sister); without you, I wouldn't even have a reader.  So, for all my whining about subscription TV prices and practices, I would be remiss in not reporting what's come out in the last week on our subscription TV vertical foreclosure issue. 

Cablevision has decided to spinoff its MSG programming unit to its shareholders as a separate property. Contrary to some speculation, though, the spinoff in itself does not solve the potential antitrust problem of vertical foreclosure faced by competitors that are unable to obtain all of MSG's programming because the management of MSG and Cablevision will be the same.  Still, though, by separating MSG as a standalone programmer, it will become more obvious over time how much this business is losing if it continues to refuse revenue from subscription television providers like AT&T, DirecTV, RCN, and Verizon in service territories where these companies do not even compete with Cablevision's subscription television service.

This will take a little time, though.  But, if the transaction requires any license transfers, it should be easier for all downstream competitors in the MSG programming area to get access to all of MSGs programming on reasonable terms.  If an FCC license transfer proceeding is necessary, one can expect competitors to demand, and likely be successful, at getting access to cable programming at the same terms available to other competitors, as a condition to merger approval.  My guess is that the Commission would be sympathetic to these requests. 

Alternatively, if the FCC's cable ownership caps are overturned by the Court of Appeals, Cablevision might fetch a higher price from an adjacent incumbent cable company (like Time Warner Cable, or Comcast), and its shareholders might benefit more by holding MSG and becoming "arms merchants"--capitalizing on a regulatory environment that seems likely to promote increased subscription TV competition. So, the Blizzard hasn't started yet, but the temperature and the barometer are both falling. . .

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. 

Continue reading How Content Integration Has Produced Consumer Welfare Disintegration . . . or How Come Prices Keep Going Up Even with Telco Video Entry?