At this week’s excellent State of the Net 2011 event, I participated in a panel discussion about the future of the online video marketplace. Unsurprisingly, a great deal of time was spent discussing the Federal Communications Commission’s (FCC) recent approval of the proposed merger of Comcast and NBC Universal (NBCU). On Tuesday, the agency voted 4-1 to approve the deal with myriad conditions and “voluntary” concessions being attached. The FCC voted on the matter and issued a short press release and late today issued its final 279-page order.
The Commission’s Comcast-NBCU order represents an unprecedented regulatory shakedown of a company that obviously would have done just about anything to gain approval of the deal. I believe the conditions the FCC has imposed on the deal, which are to run for seven years, are tantamount to a death by a thousand cuts for the deal and, ultimately, could lead to its failure. That’s because the requirements placed on the new entity make it practically impossible for Comcast to leverage the content it is acquiring from NBCU and profit from it such that they can recoup the significant costs associated with the deal.
In essence, Comcast-NBCU was forced to preemptively surrender much of its intellectual property rights by agreeing to share most of their content properties with others on terms someone else will determine. That’s a recipe for disaster. If Comcast-NBCU doesn’t have the right and ability to cut deals on terms that they find advantageous to the company and its shareholders, then why go through with this deal at all? Isn’t the whole point of such a deal with get some additional in-house content properties — something Comcast almost completely lacked previously — such that it would have some content gems to highlight and leverage in an attempt to attract new customers (or just keep old ones)? If someone else is constantly setting the terms of their deals, it will limit the inherent value of the IP owned by Comcast-NBCU and sap most of the value from the deal.
Particularly concerning in this regard is the language of the FCC’s order dealing with online video marketplace. As a condition of approval, the FCC’s plan requires that Comcast-NBCU:
- Provides to all MVPDs, at fair market value and non-discriminatory prices, terms, and conditions, any affiliated content that Comcast makes available online to its own subscribers or to other MVPD subscribers.
- Offers its video programming to legitimate OVDs [online video distributors] on the same terms and conditions that would be available to an MVPD.
- Makes comparable programming available on economically comparable prices, terms, and conditions to an OVD that has entered into an arrangement to distribute programming from one or more of Comcast-NBCU’s peers.
- Offers standalone broadband Internet access services at reasonable prices and of sufficient bandwidth so that customers can access online video services without the need to purchase a cable television subscription from Comcast.
- Does not enter into agreements to unreasonably restrict online distribution of its own video programming or programming of other providers.
- Does not disadvantage rival online video distribution through its broadband Internet access services and/or set-top boxes.
- Does not exercise corporate control over or unreasonably withhold programming from Hulu.
The first thing to note about this language is that, through a merger proceeding, the FCC has just inserted itself into the online video marketplace in a major way and began regulating it. Not so long ago, the idea of the FCC regulating the Net and online video would have been scoffed at and rejected as outlandish. But here we are now with the FCC knee-deep into the daily workings of the online marketplace without Congress ever having passed a law authorizing such a thing.
The second thing to note about those online video provisions is that they potentially foreshadow the rise of a compulsory license for online video distribution. In essence, to use antitrust parlance, Comcast-NBCU has a “duty to deal” its content to others on terms that regulators will police. Of course, we already have many compulsory licenses in place in America, including one for traditional cable television, so it will be tempting for some to say, ‘why not one for online video, too?’ But it seems like this would have been a good time to give good ol’ fashion market competition and contractual negotiations a chance instead. After all, where is the harm here? If NBC’s content is supposedly so valuable that Comcast will exploit it in future online video negotiations, why hasn’t NBC been exploiting that content for years already?
Of course, this exposes the real irony of all this hand-wringing about the Comcast-NBCU deal: It’s a fight about supposedly “Must See TV” that not everyone feels they must see anymore! Don’t get me wrong, NBCU does have some wonderful content in its stable of properties, and Comcast is no doubt happy to have something better than the Golf Channel under it’s corporate umbrella now. But, seriously, would the Earth spin of its axis tomorrow if Comcast suddenly decided to try to lock up all its new NBC content and refuse to deal with anyone else on equal terms? That would be highly unlikely, of course, since it would be economic suicide to restrict access to a single platform. But if they did, would anyone really care? In the modern world of content abundance and distribution platform diversity, it’s hard to image most consumers would. Comcast has bet the farm on the opposite theory — that NBCU content is still hotly demanded and will add real value to the company — and yet, even without the onerous conditions it has been forced to agree to here, the firm must know just how risky this move is for them and their shareholders. Those who lost their shirts on the failed AOL-TimeWarner and NewsCorp-DirecTV deals can attest to how illusive those so-called “synergies” can be when two very different media operations and cultures are merged. [Read my old paper on "A Brief History of Media Merger Hysteria" for all the grim details on those deals and how they went south so quickly.]
Finally, perhaps the most interesting provision in the FCC’s order is the requirement that Comcast-NBCU “makes comparable programming available on economically comparable prices, terms, and conditions to an [online video distributors] that has entered into an arrangement to distribute programming from one or more of Comcast-NBCU’s peers.” As I read it, what this means is that when competing content companies — such as Disney, News Corp., Viacom, etc. — cut deals with an online video distributors, it establishes a precedent for what is expected of Comcast-NBCU when they go to strike terms and prices with OVDs. How long will it be before this provision leads to accusations of collusion among major content companies?! Moreover, this provision is somewhat insulting since it basically assumes all content is created equal when that is most definitely not the case. When Disney is negotiating with an OVD to carry ESPN, should that deal really have any bearing on Comcast cutting a deal with someone for the Golf Channel or Versus?
There are many other provisions and conditions that I haven’t bothered detailing here, including program “localism” mandates, broadband deployment and pricing requirements, program “diversity” requirements, children’s television mandates, more “PEG” programming requirements, and more. But wait, you ask: won’t all these provisions and the others discussed above benefit consumers? It’d be nice to imagine that the FCC could work such magic by waving its regulatory wand and trying to mandate consumer benefits into existence by decree. And perhaps some of these requirements will help some consumers in a marginal way. In reality, however, healthy companies are the better way to serve customers with new and better services. Hamstringing merging entities with layers of red tape like this is particularly misguided in light of how much money is being spent to make the deal happen. Finally, regulators should just be happy that someone out there wanted to take over NBC and help the struggling media operator rebound! If regulators are really concerned about the future of “localism” or the health of traditional media operators like NBC more generally, asking for a pound of flesh through a set of “voluntary” concessions like these isn’t a good way to achieve that goal.