After yesterday’s FCC meeting, it appears that Chairman Wheeler has a finely tuned microscope trained on broadcasters and a proportionately large blind spot for the cable television industry.

Yesterday’s FCC meeting was unabashedly pro-cable and anti-broadcaster. The agency decided to prohibit television broadcasters from engaging in the same industry behavior as cable, satellite, and telco television distributors and programmers. The resulting disparity in regulatory treatment highlights the inherent dangers in addressing regulatory reform piecemeal rather than comprehensively as contemplated by the #CommActUpdate. Congress should lead the FCC by example and adopt a “clean” approach to STELA reauthorization that avoids the agency’s regulatory mistakes.

The FCC meeting offered a study in the way policymakers pick winners and losers in the marketplace without acknowledging unfair regulatory treatment. It’s a three-step process.

• First, the policymaker obfuscates similarities among issues by referring to substantively similar economic activity across multiple industry segments using different terminology.
• Second, it artificially narrows the issues by limiting any regulatory inquiry to the disfavored industry segment only.
• Third, it adopts disparate regulations applicable to the disfavored industry segment only while claiming the unfair regulatory treatment benefits consumers.

The broadcast items adopted by the FCC yesterday hit all three points.

“Broadcast JSAs”

The FCC adopted an order prohibiting two broadcast television stations from agreeing to jointly sell more than 15% of their advertising time using the three-step process described above.

• First, the FCC referred to these agreements as “JSA’s” or “joint sales agreements”.
• Second, the FCC prohibited these agreements only among broadcast television stations even though the largest cable, satellite, and telco video distributors sell their advertising time through a single entity.
• Third, FCC Chairman Tom Wheeler said all the agency was “doing [yesterday was] leveling the negotiating table” for negotiations involving the largely unrelated issue of “retransmission consent”, even though the largest cable, satellite, and telco video distributors all sell their advertising through a single entity.

If the FCC had  acknowledged that cable, satellite, and telcos jointly sell their advertising, and had the FCC included them in its inquiry as well, Chairman Wheeler could not have kept a straight face while asserting that all the agency was doing was leveling the playing field. Hence the power of obfuscatory terminology and artificially narrowed issues.

“Broadcast Exclusivity Agreements”

The FCC also issued a further notice yesterday seeking comment on broadcast “non-duplication exclusivity agreements” and “syndicated exclusivity agreements.” These agreements, which are collectively referred to as “broadcast exclusivity agreements”, are a form of territorial exclusivity: They provide a local television station with the exclusive right to transmit broadcast network or syndicated programming in the station’s local market only.

Unlike cable, satellite, and telco television distributors, broadcast television stations are  prohibited by law from entering into exclusive programming agreements with other television distributors in the same market: The Satellite Television Extension and Localism Act (STELA) prohibits television stations from entering into exclusive retransmission consent agreements — i.e., a television station must make its programming available to all other television distributors in the same market. Cable, satellite, and telco distributors are legally permitted to enter into exclusive programming agreements on a nationwide basis — e.g., DIRECTV’s NFL Sunday Ticket.

If the FCC is concerned by the limited form of territorial exclusivity permitted for broadcasters, it should be even more concerned about the broader exclusivity agreements that have always been permitted for cable, satellite, and telco television distributors. But the FCC nevertheless used the three-step process for picking winners and losers to limit its consideration of exclusive programming agreements to broadcasters  only.

• First, the FCC uses unique terminology to refer to “broadcast” exclusivity agreements (i.e., “non-duplication” and “syndicated exclusivity”), which obfuscates the fact that these agreements are a limited form of exclusive programming agreements.
• Second, the FCC is seeking comment on exclusive programming agreements between broadcast television stations and programmers only even though satellite and other video programming distributors have entered into exclusive programming agreements.
• Third, it appears the pretext for limiting the scope of the FCC’s inquiry to broadcasters will again be “leveling the playing field” between broadcasters and other television distributors — to benefit consumers, of course.

“Joint Retransmission Consent Negotiations”

Finally, the FCC prohibited a television broadcast station ranked among the top four stations (as measured by audience share) from negotiating “retransmission consent” jointly with another top four station in the same market if the stations are not commonly owned. The FCC reasoned that “the threat of losing programming of two more top four stations at the same time gives the stations undue bargaining leverage in negotiations with [cable, satellite, and telco television distributors].”

As an economic matter, “retransmission consent” is essentially a substitute for the free market copyright negotiations that could occur absent the “compulsory copyright license” in the 1976 Copyright Act and an earlier Supreme Court decision interpreting the term “public performance”. In the absence of retransmission consent, compensation for the use of programming provided by broadcast television stations and programming networks would be limited to the artificially low amounts provided by the compulsory copyright license.

To the extent retransmission consent is merely another form of program licensing, it is indistinguishable from negotiations between cable, satellite and telco distributors and cable programming networks — which typically involve the sale of  bundled channels. If bundling two television channels together “gives the stations undue bargaining leverage” in retransmission consent negotiations, why doesn’t a cable network’s bundling of multiple channels together for sale to a cable, satellite, or telco provider give the cable network “undue bargaining leverage” in its licensing negotiations? The FCC avoided this difficultly using the old one, two, three approach.

• First, the FCC used the unique term “retransmission consent” to refer to the sale of programming rights by broadcasters.
• Second, the FCC instituted a proceeding seeking comment only on “retransmission consent” rather than all programming negotiations.
• Third, the FCC found that lowering retransmission consent costs could lower the prices consumers pay to cable, satellite, and telco television distributors — to remind us that it’s all about consumers, not competitors.

If it were really about lowering prices for consumers, the FCC would also have considered whether prohibiting channel bundling by cable programming networks would lower consumer prices too. For reasons left unexplained, cable programmers are permitted to bundle as many channels as possible in their licensing negotiations.

“Clean STELA”

After yesterday’s FCC meeting, it appears that Chairman Wheeler has a finely tuned microscope trained on broadcasters and a proportionately large blind spot for the cable television industry. To be sure, the disparate results of yesterday’s FCC meeting could be unintentional. But, even so, they highlight the inherent dangers in any piecemeal approach to industry regulation. That’s why Congress should adopt a “clean” approach to STELA reauthorization and reject the demands of special interests for additional piecemeal legislative changes. Consumers would be better served by a more comprehensive effort to update video regulations.

As noted here last week, as part of their Marginal Revolution University online courses, Tyler Cowen and Alex Tabarrok have been rolling out several classes on “Economics of the Media.” I think TLF readers will be interested in checking out their lessons on “Bundling” and “Cable TV Regulation” since these are topics we have frequently discussed here over the years. I’ve embedded those two presentations below, but please go the MRU site and watch all the videos in their media economics course when you get a chance. They are excellent.

Matt Yglesias today responded with a post of his own to a NYT article about sports channels and cable pricing by Brian Stelter that Yglesias believed had “bad analysis.” I’m here to defend Stelter a little bit because I think Yglesias was too harsh and that Yglesias erred in his own post about the nature of cable bundling. Yglesias’ posts on cable bundling are good, and especially valuable because his Slate and ThinkProgress audiences are not the most receptive to economic justifications for perceived unfair corporate pricing schemes. In part due to him I suspect, you rarely hear econ and business bloggers calling for a la carte pricing of cable channels.

And Yglesias is certainly right that you can’t really complain about the price of your cable package, which includes the few channels you watch plus the sports channels you don’t watch, because you obviously value the channels more than the price you pay per month, even if the sports are a “waste.” He falters when he says

So since those channels are worth $60 to you, even if unbundling happens your cable provider is going to find a way to charge you approximately $60 for them. Because at the end of the day, you’re paying your cable provider for access to the channels you do watch—not for access to the channels you don’t watch. The channels you don’t watch are just there. If the channels you do watch are worth $60 to you, then $60 is what you’ll pay for them.

It would be an amazing price discrimination scheme if it were true cable operators can figure out how to charge each subscriber the approximate price the subscriber values his favorite channels. Cable companies don’t currently have that ability. Even a la carte distributors, like Amazon Prime with their video offerings, don’t charge you exactly what you value TV shows and movies at. The efficiency of bundling cable channels arises not because cable companies are pricing everyone their reservation price, as Yglesias suggests. Bundling is efficient because in a high fixed-cost industry, like cable, cable channel bundles provide cost savings that outweigh the costs of providing “wasted” channels consumers don’t watch.

I think the main point of Stelter’s article is right and Yglesias is incorrect. It’s conceivable that most customers would actually see sustained lower cable prices if sports channels were someday offered as premium channels, like Showtime and HBO. If Stelter is faulted for anything, it’s that he mentioned the phrase “a la carte,” since it seems like his sources only alluded to a partial breakup of the current bundle–making sports a premium offering–not a wholesale a la carte offering. Stelter quoted a former DOJ antitrust lawyer and anonymous cable executives who say that increasing sports channel prices may make the cable bundle so pricey that cable operators will be forced to break up the bundle, and I see no reason to question their assessments.

I’ll attempt to illustrate what the cable executives are trying to avoid. Bundling components like cable channels lowers costs for providers. If you imagine an a la carte world, it’s plain the costs escalate. Instead of everyone picking from a menu of 3 or 4 bundles from a cable provider, every single subscriber household would have a different customized selection. Cable companies would have to ensure everyone is receiving their requested channels, frequently make corrections and updates, and incur other costs.

Not to mention, a la carte would eliminate many channels currently in existence because there is a cross-subsidy business model in place that makes low-demand channels available in the first place. (A la carte would especially harm religious, African-American, and other niche programming. Currently, these niche content creators have to market their channels only to a few cable and satellite companies for carriage. With a la carte, they would have to engage in nationwide and expensive marketing campaigns to all their likely customers, which is why these smaller firms typically oppose a la carte.) A la carte, then, is costly to both cable and content providers. Offering only a few bundles eliminates many costs.

However, when the price of the bundle increases with more expensive sports programming, as the Stelter piece describes, you lose customers because the bundle has become too expensive. Eventually, it becomes more cost-effective to spin off some sports channels as premium channels, charge those sports customers more, and offer a lower-priced package to everyone else and gain customers. And I suspect sports viewers have relatively inelastic demand (nothing ruins my fall weekend like a Bears black-out on the East Coast), so the losses from a sports unbundling could be minimal.

If there’s a lesson, it’s that this all goes back to Coase and his tautological but helpful theory of the firm. We know where efficient firm boundaries are based on where firm boundaries are. That is, the current cable packages could be disintegrated if it’s too costly to maintain them. In a dynamic market like cable, it may one day be efficient to break up the current bundle, charge everyone less, and make some sports channels premium channels.

The European Commission may order Microsoft to strip Internet Explorer from certain versions of Windows, according to a preliminary ruling against Microsoft stemming from a complaint brought by Opera. Opera claims that Microsoft is “abusing its dominant position” by bundling IE with Windows, and consequently denying consumers “genuine choice” among web browsers.

If the European Commission upholds Opera’s complaint against Microsoft, it wouldn’t be the first time Microsoft has been found guilty of antitrust violations stemming from applications bundled with Windows.

Back in 2004, the Commission ruled that it was illegal for Microsoft to bundle its Windows Media Player with Windows and ordered Microsoft to offer a Media Player-less version of the operating system. Microsoft responded by unveiling the wryly named “Windows XP Reduced Media Edition.” Unsurprisingly, the European Commission rejected the name, so Microsoft renamed the OS “Windows N.”

Despite Windows N’s fairly neutral-sounding name, consumers showed little interest in Windows N when it hit the shelves. It’s quite obvious why Windows N was a flop–why would anybody want to run an operating system lacking useful components, especially when plenty of alternatives are available online at the click of a button?

The same reasoning is sure to relegate a browserless Windows (Windows: Reduced Internet Edition, perhaps?) to commercial irrelevance. Such a product would be placed on shelves solely to satisfy regulators convinced that they’re somehow “protecting” consumers by ensuring inferior products can be had.

How would the average user even select a preferred browser in the first place without a pre-installed browser? While OEMs could always pre-install a browser, anyone who wanted to install (or reinstall) a browserless version of Windows from scratch would need to jump through hoops just to get online.

More to the point, Opera’s claim against Microsoft looks downright absurd given the reality of today’s increasingly competitive browser marketplace. Despite IE being bundled with Windows, Firefox has gained significant ground on IE in recent years. Four years ago, IE had 91% global market share, while Firefox hovered around 3.5%. Now, Firefox is almost at 21% market share, and IE recently dropped below 70%.

Firefox’s ascent did not happen because of a mass exodus of users from Windows to other operating systems. To be sure, Windows has faltered a bit as of late, but Firefox has gained the following of a massive number of Windows users who elected to download and install Firefox as a replacement for Internet Explorer. This illustrates that users are perfectly willing to pick their favorite application for a given task, even if that means downloading a third-party app on the Internet. Plenty of other programs, like VLC and Google Desktop, have taken off among Windows users even though these apps largely duplicate the functionality of bundled Windows components.

Where does all this leave Opera? Unlike Firefox, Opera is still a laggard in terms of market share. Blaming Opera’s inability to gain a large user base on the bundling of IE with Windows, however, is entirely misplaced. The folks at Opera may feel that going after Microsoft might help them peel off a few users-or, at least, get Opera’s name out there in the press-but Opera’s biggest enemy is certainly not Internet Explorer.