I came across an article last week in the AV Club that caught my eye. The title is: “The Telecommunications Act of 1996 gave us shitty cell service, expensive cable.” The Telecom Act is the largest update to the regulatory framework set up in the 1934 Communications Act. The basic thrust of the Act was to update the telephone laws because the AT&T long-distance monopoly had been broken up for a decade. The AV Club is not a policy publication but it does feature serious reporting on media. This analysis of the Telecom Act and its effects, however, omits or obfuscates important information about dynamics in media since the 1990s.

The AV Club article offers an illustrative collection of left-of-center critiques of the Telecom Act. Similar to Glass-Steagall  repeal or Citizens United, many on the left are apparently citing the Telecom Act as a kind of shorthand for deregulatory ideology run amuck. And like Glass-Steagall repeal and Citizens United, most of the critics fundamentally misstate the effects and purposes of the law. Inexplicably, the AV Club article relies heavily on a Common Cause white paper from 2005. Now, Common Cause typically does careful work but the paper is hopelessly outdated today. Eleven years ago Netflix was a small DVD-by-mail service. There was no 4G LTE (2010). No iPhone or Google Android (2007). And no Pandora, IPTV, and a dozen other technologies and services that have revolutionized communications and media. None of the competitive churn since 2005, outlined below, is even hinted at in the AV Club piece. The actual data undermine the dire diagnoses about the state of communications and media from the various critics cited in the piece. 

Competition in Telephone Service

Let’s consider the article’s provocative claim that the Act gave us “the continuing rise of cable, cellphone, and internet pricing.” Despite this empirical statement, no data are provided to support this. Instead, the article mostly quotes progressive platitudes about the evils of industry consolidation. I suppose platitudes are necessary because on most measures there’s been substantial, measurable improvements in phone and Internet service since the 1990s. In fact, the cost-per-minute of phone service has plummeted, in part, because of the competition unleashed by the Telecom Act. (Relatedly, there’s been a 50-fold increase in Internet bandwidth with no price increase.)

The Telecom Act undid much of the damage caused by decades of monopoly protection of telephone and cable companies by federal and state governments. For decades it was accepted that local telephone and cable TV service were natural monopolies. Regulators therefore prohibited competitive entry. The Telecom Act (mostly) repudiated that assumption and opened the door for cable companies and others to enter the telephone marketplace. The competitive results were transformative. According to FCC data, incumbent telephone companies, the ones given monopoly protection for decades, have lost over 100 million residential subscribers since 2000. Most of those households went wireless only but new competitors (mostly cable companies) have added over 32 million residential phone customers and may soon overtake the incumbents. The chart below breaks out connections by technology (VoIP, wireless, POTs), not incumbency, but the churn between competitors is apparent.

Further, while the Telecom Act was mostly about local landlines, not cellular networks, we can also dispense with the AV Club claim that dominant phone companies are increasing cellphone bills. Again, no data are cited. In fact, in quality-adjusted terms, the price of cell service has plummeted. In 1999, for instance, a typical cell plan was for regional coverage and offered 200 voice minutes for about $55 per month (2015 dollars). Until about 2000, there was no texting (1999 was the first year texting between carriers worked) and no data included. In comparison, for that same price today you can find a popular plan that includes, for all of North America, unlimited texting and voice minutes, plus 10 GB of 4G LTE data. Carriers spend tens of billions of dollars annually on maintaining and upgrading cellular networks and as a result, millions of US households are dropping landline connections (voice and broadband) for smartphones alone.

Competition in Television and Media

The critics of cable deregulation completely misunderstand and misstate the role of competition in the TV industry. Media quality is harder to measure, but its not a stretch to say that quality is higher than ever. Few dispute that we are in the Golden Age of Media, resulting from the proliferation of niche programming provided by Netflix, podcasts, Hulu, HBO, FX, and others. This virtual explosion in programming came about largely because there are more buyers (distributors) of programming and more cutthroat competition for eyeballs.

Again, the AV Club quotes the Common Cause report: “Roughly 98 percent of households with access to cable are served by only one cable company.”  Quite simply, this is useless stat. Why do we care how many coaxial cable companies are in a neighborhood? Consumers care about outputs–price, programming, quality, customer service–and number of competitors, regardless of the type of transmission network, which can be cellular, satellite, coaxial cable, fiber, or copper.

Look beyond the contrived “number of coaxial competitors” measure and it’s clear that m ost c able companies face substantial competition. The Telecom Act is a major source of the additional competition, particularly telco TV. Since passage of the Telecom Act, cable TV’s share of the subscription TV market fell from 95% to nearly 50%.

The Telecom Act repealed a decades-old federal policy that largely prohibited telephone companies from competing with cable TV providers. Not much changed for telco TV until the mid-2000s, when broadband technology improved and when the FCC freed phone companies from “unbundling” rules that forced telcos to lease their networks to competitors at regulated rates. In this investment-friendly environment, telephone companies began upgrading their networks for TV service and began purchasing and distributing programming. Since 2005, telcos have attracted about 13 million households and cable TV’s market share fell from about 70% to 53%. Further, much of consumer dissatisfaction with TV is caused by legacy regulations, not the Telecom Act. If cable, satellite, and phone companies were as free as Netflix and Hulu to bundle, price, and purchase content, we’d see lower prices and smaller bundles. 

The AV Club’s focus on Clear Channel [sic] and now-broken up media companies is puzzling and must be because of the article’s reliance on the 2005 Common Cause report. The bête noire of media access organizations circa 2005 was Clear Channel, ostensibly the sort of corporate media behemoth created by the Telecom Act. The hysteria proved unfounded.

Clear Channel broadcasting was rebranded in 2014 to iHeartRadio and its operations in the last decade do not resemble the picture described in the AV Club piece, that of a “radio giant” with “more than 1200 stations.” While still a major player in radio, since 2005 iHeartRadio’s parent company went private, sold all of its TV stations and hundreds of its radio station, and shed thousands of employees. The firm has serious financial challenges because of the competitive nature of the radio industry, which has seen entry from the likes of Pandora, Spotify, Google, and Apple.

The nostalgia for Cold War-era radio is also strange for an article written in the age of Pandora, Spotify, iTunes, and Google Play. The piece quotes media access scholar Robert McChesney about radio in the 1960s:

Fifty years ago when you drove from New York to California, every station would have a whole different sound to it because there would be different people talking. You’d learn a lot about the local community through the radio, and that’s all gone now. They destroyed radio. It was assassinated by the FCC and corporate lobbyists.

This oblique way of assessing competition–driving across the country–is necessary because local competition was actually relatively scarce in the 1960s. There were only about 5000 commercial radio stations in the US, which sounds like a lot except when you consider the choice and competition today. Today, largely because of digital advancements and channel splitting, there are more than 10 times as many available broadcast channels, as well as hundreds of low-power stations. Combined with streaming platforms, competition and choice is much more common today. Everyone in the US can, with an inexpensive 3G plan and a radio, access millions of niche podcasts and radio programs featuring music, hobbies, entertainment, news, and politics.

The piece quotes the 2005 report, alarmed that “ just five companies—Viacom, the parent of CBS, Disney, owner of ABC, News Corp, NBC and AOL, owner of Time Warner—now control 75 percent of all primetime viewing.” Again, I don’t understand why the article quotes decade-old articles about market share without updates. There is no mention that Viacom and CBS split up in 2005 and NewsCorp. and Fox split in 2013. The hysteria surrounding NBC, AOL, and Time Warner’s failed commercial relationships has been thoroughly explored and discredited by my colleague Adam Thierer and I’ll point you to his piece. As Adam has also documented, broadcast networks have been losing primetime audience share since at least the late 1970s, first to cable channels, then to streaming video. And nearly all networks, broadcast and cable, are seeing significant drops in audience as consumers turn to Internet streaming and gaming. Market power and profits in media is often short lived.

The article then decries the loss of local and state news reporting. It’s strange to blame the Telecom Act for newspaper woes since shrinking newsrooms is a global, not American, phenomenon with well-understood causes (loss of classifieds and increased competition with Web reporting). And, as I’ve pointed out, the greatest source of local and state reporting is local papers, but the FCC has largely prohibited papers from owning radio and TV broadcasters (which would provide papers a piece of TV’s lucrative ad and retrans revenue) for decades, even as local newspapers downsize and fail. 

The article was a fascinating read if only because it reveals how many left-of-center prognostications about media aged poorly. Those on the right have their own problems with the Act, namely its vastly different regulatory regimes (“telecommunications,” “wireless,” “television”) in a world of broadband and convergence. But useful reform means diagnosing what inhibits competition and choice in media and communications markets. Much of the competitive problems in fact arise from the enforcement of natural monopoly restrictions in the past. Media and communications has seen huge quality improvements since 1996 because the Telecom Act rejected the natural monopoly justifications for regulation. The Telecom Act has proven unwieldy but it cannot be blamed for nonexistent problems in phone and TV.

For decades Congress has gradually deregulated communications and media. This poses a significant threat to the FCC’s jurisdiction because it is the primary regulator of communications and media. The current FCC, exhibiting alarming mission creep, has started importing its legacy regulations to the online world, like Title II common carrier regulations for Internet providers. The FCC’s recent proposal to “open up” TV set top boxes is consistent with the FCC’s reinvention as the US Internet regulator, and now the White House has supported that push.

There are a lot of issues with the set top box proposal but I’ll highlight a few. I really don’t even like referring to it as “the set top box proposal” because the proposal is really aimed at the future of TV–video viewing via apps and connected devices. STBs are a sideshow and mostly just provide the FCC a statutory hook to regulate TV apps. Even that “hook” is dubious–the FCC arbitrarily classifies apps and software as “navigation devices” but concludes that actual TV devices like Chromecast, Roku, smartphones, and tablets aren’t navigation devices. And, despite what activists say, this isn’t about “cable” either but all TV distributors (“MVPDs”) like satellite and telephone companies and Google Fiber, most of whom are small TV players.

First, the entire push for the proposal is based on the baseless notion that “charging monthly STB fees reveals that cable companies are abusing their market power.” I say baseless because cable companies have lost 14 million TV subscribers since 2002 to phone and satellite companies’ TV offerings (Verizon FiOS TV, Dish, Google Fiber, etc.), which suggests cable doesn’t have market power to charge anticompetitive prices. This is bolstered by the fact that the rates cable companies charge are consistent with what their smaller phone and satellite competitors charge for STBs. In fact, the STB monthly rates cable companies charge are pretty much identical to what municipal-owned and -operated TV stations charge. Even competing STB companies like TiVo charge monthly fees.

Second, as I’ve written, the FCC’s plans simply won’t work. The FCC tried “opening up” cable boxes for years with CableCard. That debacle resulted in ten years of regulations and FCC-directed standards and had only a marginal effect on the STB market. At conclusion, under 5% of the STB market went to “competitive” STB makers like TiVo. This latest plan has an even smaller chance of success because the FCC is not simply regulating cable boxes, but also boxes from satellite TV and IPTV distributors and their apps. The FCC is telling these hundreds of companies using dozens of technologies, codecs, and standards to develop interoperable standards so that other companies can retransmit the TV programming the MVPDs have bundled. It’s impractical and likely to fail, as Larry Downes noted in Recode, which is why the FCC provides few details about how this will work.

Third, what little progress the FCC does make in forcing MVPDs to make their TV programming accessible to competitors’ video apps and devices will tend to make broadband and TV less competitive. What the FCC is trying to do is force, say, Comcast’s TV programming to be available to certain application makers who want to retransmit that programming. So whatever streams to the Comcast Xfinity app will need to also work on competing apps if a competitor wants to re-bundle that programming.

The problem is that TV packages are how these companies compete and FCC rules will hinder that competitive process. TV distributors, including Netflix, purchase rights for sports and other programming to steal subscribers away from competitors. For instance, DirecTV attracts many customers solely because they have NFL Sunday Ticket and Amazon and Netflix original programming is a huge draw to their video services. TV programming and bundling that programming drives the competitive process. The Google Fiber folks likewise found out the importance of TV programming to compete. They planned originally to offer only broadband but came to find out there was little market for a broadband-only provider. Most people want TV packaged with broadband and Google was compelled by market forces to go out and purchase TV programming to attract customers. (On the other hand, some cable companies like Cable One are getting out of the TV game because programmers have significant leverage.)

Even non-MVPDs like mobile carriers and tech companies, including Twitter, Yahoo, and Facebook, are using TV programming to compete and they are investing big into video programming. Verizon Wireless has exclusive NFL programming, T-Mobile recently gave its subscribers a year of streaming access to most baseball games via a MLB.TV deal, and AT&T is giving mobile subscribers access to DirecTV programming. The point is, companies compete by experimenting with different service and program bundles. By forcing programming onto competing applications, devices, and platforms, the FCC short-circuits these competitive dynamics.

Fourth, speaking of purchasing rights, there is misinformation spreading about what TV access consumers are entitled to. For instance, there’s a recent Public Knowledge post that simply distorts the economics and law of TV licensing. Notably, the post says the FCC’s proposal “makes it easier for subscribers to control their own experience when accessing the programming that they…have paid for and to which they have lawful access.” This is simply false. Just because Walking Dead has been licensed for viewing on your television does not mean it’s lawful (or beneficial) for a TV competitor to take that same programming and send it to you via their own app.

Copyright holders re-sell the same programming to different distributors, sometimes several times over. Programmers have exclusive licensing deals with various distributors and device makers, so just because your cable contract allows you to watch it on your TV does not mean you have lawful access anywhere. For instance, the NFL has licensed Thursday Night NFL games to CBS and NBC for broadcast TV viewing, to the NFL Network for cable TV viewing, to Verizon Wireless for smartphone viewing, and to Twitter for computer viewing. Same programming, four different distribution technologies and five different companies. When programming can be easily repurposed, as the FCC would like, that upends entire business models of hundreds of media companies and distributors.

Further, it injects the FCC into copyright licensing issues. Put aside for the moment the debates, that the Public Knowledge post touches on, whether copyright holders are too restrictive. Whatever your views, reforming program licensing should come from Congress and the courts–not the FCC through this convoluted proposal. In fact, change via the courts is what Public Knowledge implicitly endorses. It was the courts–not the FCC–that made VCRs, DVRs, and DVR cloud storage legal in the face of copyright holder opposition. When the FCC last got involved in intervening in TV rights assignments in the 1960s and 1970s, the agency created broadcast retransmission rights, which have plagued communications and copyright law with complexity and lawsuits to this day.

Quite simply, the FCC is coercing companies to make their contracted-for TV content available to others who didn’t contract for it. This proposal will create a mess in television when implemented. It’s an unnecessary intervention into a marketplace–video programming–that is working. We are in what many media critics regard as the Golden Age of Television. That’s because there are so many TV distributors competing for programming. It’s a sellers’ market. The supposed problems here–high STB prices and copyright restrictiveness–are problems for competition agencies and the courts, respectively, not the FCC. The FCC wants to fix what’s not broken and start regulating apps and online video. It does nothing to improve the television market and simply makes more tech and media companies dependent on the FCC’s good graces for competitive survival.

Last Friday I attended a fascinating conference hosted by the Duke Law School’s Center for Innovation Policy about television regulation and competition. It’s remarkable how quickly television competition has changed and how online video providers are putting pressure on old business models.

I’ve been working on a project about competition in technology, communications, and media and one chart that stands out is one that shows increasing competition in pay television, below. Namely, that cable providers have lost nearly 15 million subscribers since 2002. Cable was essentially the only game in town in 1990 for pay television (about 100% market share). Yet today, cable’s market share approaches 50%. This competitive pressure accounts for some cable companies trying to merge in recent years.

Much of this churn by subscribers was to satellite providers but it’s the “telephone” companies providing TV that’s really had a competitive impact in recent years. Telcos went from about 0% market share in 2005 to 13% in 2014. This new competition can be tied to Congress finally allowing telephone companies to provide TV in 1996. However, these new services didn’t really get started until a decade ago when 1) digital and IP technology improved, and 2) the FCC made it clear by deregulating DSL ISPs that telephone companies could expect a market return for investing in fiber broadband nationwide.

UPDATE:

And below is market share data going back ten more years to 1994 using FCC data, which uses a slightly different measurement methodology (hence the kink around 2003-2004). I’ve also omitted market share of Home Satellite Dish (those large dishes you sometimes see in rural areas). Though HSD has negligible market share today, it had a few million subscribers in the mid-1990s. I may add HSD later.

The Federal Communications Commission (FCC) recently sought additional comment on whether it should eliminate its network non-duplication and syndicated exclusivity rules (known as the “broadcasting exclusivity” rules). It should just as well have asked whether it should eliminate its rules governing broadcast television. Local TV stations could not survive without broadcast exclusivity rights that are enforceable both legally and practicably.

The FCC’s broadcast exclusivity rules “do not create rights but rather provide a means for the parties to exclusive contracts to enforce them through the Commission rather than the courts.” (Broadcast Exclusivity Order, FCC 88-180 at ¶ 120 (1988)) The rights themselves are created through private contracts between TV stations and video programming vendors in the same manner that MVPDs create exclusive rights to distribute cable network programming.

Local TV stations typically negotiate contracts for the exclusive distribution of national broadcast network or syndicated programming in their respective local markets in order to preserve their ability to obtain local advertising revenue. The FCC has long recognized that, “When the same program a [local] broadcaster is showing is available via cable transmission of a duplicative [distant] signal, the [local] broadcaster will attract a smaller audience, reducing the amount of advertising revenue it can garner.” (Program Access Order, FCC 12-123 at ¶ 62 (2012)) Enforceable broadcast exclusivity agreements are thus necessary for local TV stations to generate the advertising revenue that is necessary for them to survive the government’s mandatory broadcast television business model.

The FCC determined nearly fifty years ago that it is an anticompetitive practice for multichannel video programming distributors (MVPDs) to import distant broadcast signals into local markets that duplicate network and syndicated programming to which local stations have purchased exclusive rights. ( See First Exclusivity Order, 38 FCC 683, 703-704 (1965)) Though the video marketplace has changed since 1965, the government’s mandatory broadcast business model is still required by law, and MVPD violations of broadcast exclusivity rights are still anticompetitive.

The FCC adopted broadcast exclusivity procedures to ensure that broadcasters, who are legally prohibited from obtaining direct contractual relationships with viewers or economies of scale, could enjoy the same ability to enforce exclusive programming rights as larger MVPDs. The FCC’s rules are thus designed to “allow all participants in the marketplace to determine, based on their own best business judgment, what degree of programming exclusivity will best allow them to compete in the marketplace and most effectively serve their viewers.” (Broadcast Exclusivity Order at ¶ 125.)

When it adopted the current broadcast exclusivity rules, the FCC concluded that enforcement of broadcast exclusivity agreements was necessary to counteract regulatory restrictions that prevent TV stations from competing directly with MVPDs. Broadcasters suffer the diversion of viewers to duplicative programming on MVPD systems when local TV stations choose to exhibit the most popular programming, because that programming is the most likely to be duplicated. ( See Broadcast Exclusivity Order at ¶ 62.) Normally firms suffer their most severe losses when they fail to meet consumer demand, but, in the absence of enforceable broadcast exclusivity agreements, this relationship is reversed for local TV stations: they suffer their most severe losses precisely when they offer the programming that consumers desire most.

The fact that only broadcasters suffer this kind of [viewership] diversion is stark evidence, not of inferior ability to be responsive to viewers’ preferences, but rather of the fact that broadcasters operate under a different set of competitive rules. All programmers face competition from alternative sources of programming. Only broadcasters face, and are powerless to prevent, competition from the programming they themselves offer to viewers. (Id. at ¶ 42.)

The FCC has thus concluded that, if TV stations were unable to enforce exclusive contracts through FCC rules, TV stations would be competitively handicapped compared to MVPDs. ( See id. at ¶ 162.)

Regulatory restrictions effectively prevent local TV stations from enforcing broadcast exclusivity agreements through preventative measures and in the courts: (1) prohibitions on subscription television and the use of digital rights management (DRM) prevent broadcasters from protecting their programming from unauthorized retransmission, and (2) stringent ownership limits prevent them from obtaining economies of scale.

Preventative measures may be the most cost effective way to protect digital content rights. Most digital content is distributed with some form of DRM because, as Benjamin Franklin famously said, “an ounce of prevention is worth a pound of cure.” MVPDs, online video distributors, and innumerable Internet companies all use DRM to protect their digital content and services — e.g., cable operators use the CableCard standard to limit distribution of cable programming to their subscribers only.

TV stations are the only video distributors that are legally prohibited from using DRM to control retransmission of their primary programming. The FCC adopted a form of DRM for digital television in 2003 known as the “broadcast flag”, but the DC Circuit Court of Appeals struck it down.

The requirement that TV stations offer their programming “at no direct charge to viewers” effectively prevents them from having direct relationships with end users. TV stations cannot require those who receive their programming over-the-air to agree to any particular terms of service or retransmission limitations through private contract. As a result, TV stations have no way to avail themselves of the types of contractual protections enjoyed by MVPDs who offer services on a subscription basis.

The subscription television and DRM prohibitions have a significant adverse impact on the ability of TV stations to control the retransmission and use of their programming. The Aereo litigation provides a timely example. If TV stations offered their programming on a subscription basis using the CableCard standard, the Aereo “business” model would not exist and the courts would not be tying themselves into knots over potentially conflicting interpretations of the Copyright Act. Because they are legally prohibited from using DRM to prevent companies like Aereo from receiving and retransmitting their programming in the first instance, however, TV stations are forced to rely solely on after-the-fact enforcement to protect their programming rights — i.e., protected and uncertain litigation in multiple jurisdictions.

Localism policies make after-the-fact enforcement particularly cost for local TV stations. The stringent ownership limits that prevent TV stations from obtaining economies of scale have the effect of subjecting TV stations to higher enforcement costs relative to other digital rights holders. In the absence of FCC rules enforcing broadcast exclusivity agreements, family owned TV stations could be forced to defend their rights in court against significantly larger companies who have the incentive and ability to use litigation strategically.

In sum, the FCC’s non-duplication and syndication rules balance broadcast regulatory limitations by providing clear mechanisms for TV stations to communicate their contractual rights to MVPDs, with whom they have no direct relationship, and enforce those rights at the FCC (which is a strong deterrent to the potential for strategic litigation). There is nothing unfair or over-regulatory about FCC enforcement in these circumstances. So why is the FCC asking whether it should eliminate the rules?

The D.C. Circuit has struck down as arbitrary and capricious the FCC’s “cable cap.”  The cap prevented a single cable operator from serving more than 30% of U.S. homes—precisely the same percentage limit struck down by the court in 2001.  The court ruled that the FCC had failed to demonstrate that “allowing a cable operator to serve more than 30% of all cable subscribers would threaten to reduce either competition or diversity in programming.”

The court’s decision rested on the two critical charts (both generated by my PFF colleague Adam Thierer in his excellent Media Metrics special report) at the heart of the PFF amicus brief I wrote with our president, Ken Ferree:

First, the record is replete with evidence of ever increasing competition among video providers: Satellite and fiber optic video providers have entered the market and grown in market share since the Congress passed the 1992 Act, and particularly in recent years. Cable operators, therefore, no longer have the bottleneck power over programming that concerned the Congress in 1992.

Second, over the same period there has been a dramatic increase both in the number of cable networks and in the programming available to subscribers.

Our chart shows the explosion in the number of programmers (though not the total amount of programming), as well as the falling rate of affiliation between cable operators and programmers, which was among the prime factors motivating Congress when it authorized a cable cap in the 1992 Cable Act:

These two charts show how much less defensible the FCC’s 30% cap is now than it was back in 2001. If the Court had needed still more evidence, it could have cited the broader trend towards “Cutting the Video Cord.” As we explained in our amicus brief, viewers are shifting away from cable, satellite and fiber (“Multichannel Video Programming Distributors,” in FCC-speak) towards sites like Hulu and Netflix (which we dubbed “Internet Video Programming Distributors” in the hopes that a familiar-sounding acronym might resonate inside a regulatory agency that can’t even figure out how to stream its own meetings properly). Nothing better demonstrates how the Internet is revolutionizing video distribution than the fact that Hulu.com has actually overtaken TimeWarner cable in viewership:

This ongoing series has explored the increasing ability of consumers to “cut the cord” to traditional video distributors (cable, satellite, etc.) and instead receive a mix of “television” programming and other forms of video programming over the Internet.  As I’ve argued, this change not only means lower monthly bills for those “early adopter” consumers who actually do “cut the cord”, but, in the coming years, a total revolution in the traditional system of content creation and distribution on which the FCC’s existing media regulatory regime is premised.   

This revolution has two key parts:

1. Conduits: The growing inventory—and  popularity—of sites such as Hulu, Amazon Unboxed and the XBox 360 Marketplace (or software such as Apple’s iTunes store), that allow users to view or download video content.  Drawing an analogy to the FCC’s term “Multichannel Video Programming Distibutor” or MVPD (cable, direct broadcast satellite, telco fiber, etc.), I’ve dubbed these sites “Internet Video Programming Distributors” or IVPDs.
2. Interface:  The hardware and software that allows users to display that content easily on a device of their choice, especially their home televisions.

While much of the conversation about “interface” has focused on special hardware that brings IVPD content to televisions through set-top boxes such as the Roku box or game consoles like the XBox 360, at least one company is making waves with a software solution.  From the NYT:

Boxee bills its software as a simple way to access multiple Internet video and music sites, and to bring them to a large monitor or television that one might be watching from a sofa across the room. Some of Boxee’s fans also think it is much more: a way to euthanize that costly $100-a-month cable or satellite connection. “Boxee has allowed me to replace cable with no remorse,” said Jef Holbrook, a 27-year-old actor in Columbus, Ga., who recently downloaded the Boxee software to the $600 Mac Mini he has connected to his television. “Most people my age would like to just pay for the channels they want, but cable refuses to give us that option. Services like Boxee, that allow users choice, are the future of television.” …. Boxee gives users a single interface to access all the photos, video and music on their hard drives, along with a wide range of television shows, movies and songs from sites like Hulu,Netflix, YouTube, CNN.com and CBS.com.

With 200,000 users thus far, Boxee is quickly taking off and made a big splash at CES this year.  Boxee may be a scrappy start-up but is founder realizes the revolutionary implications of his product:

Mr. Ronen also shared what he called his “politically incorrect” vision of how the Internet would upset the television business by giving people on-demand access to the array of Web content. “The challenge for the cable industry is how they grapple with the fact that this is in some way a substitution for some of the things they do,” he said.

The NYT rightly observes that, whether Boxee really takes off as the Next Big Thing, its success thus far is at least driving other “consumer electronics companies to move faster to bring the Internet to their devices.”  I suspect that what we’re seeing now is a “tipping point” on both sides of the business:  As IVPDs gain popularity and larger inventories, “interface” developers like Boxee (or others on the hardware side) will proliferate rapidly.

Continuing the “Cutting the (Video) Cord” series started by my PFF colleague Adam Thierer:  The WSJ had two great pieces yesterday about the increasing competitive relevance of television distributed by Internet—a trend that was at the heart of an amicus brief PFF recently filed in support of C omcast’s challenge of the FCC’s 30% cap on cable ownership.  The first WSJ piece declares that:

After more than a decade of disappointment, the goal of marrying television and the Internet seems finally to be picking up steam. A key factor in the push are new TV sets that have networking connections built directly into them, requiring no additional set-top boxes for getting online. Meanwhile, many consumers are finding more attractive entertainment and information choices on the Internet — and have already set up data networks for their PCs and laptops that can also help move that content to their TV sets.

The easier it is for consumers to receive traditional television programming (in addition to other kinds of video content) distributed over the Internet on their television, the less “gatekeeper” or “bottleneck” power cable distributors have over programming.  So the Netflix-capable and Yahoo-widget-capable televisions described by the WSJ piece go a long way to increasing the substitutability of what we call Internet Video Programming Distributors (IVPDs) for Multichannel Video Programming Distributors (MVPDs), such as cable, satellite television and fiber services offered by telcos such as Verizon’s FiOS.  

While such televisions are only expected to reach 14% of all TV sales by 2012, one must remember that a growing number of set-top boxes ( e.g., the Roku Digitial Video Player, game consoles like the Microsoft XBox 360 and Sony PlayStation 3, and TiVo DVRs) allow users to users to receive IVPD programming on their existing televisions.  

As we argued in our amicus brief, the immense competitive importance of IVPDs lies not in the potential for some users to “cut the cord” to cable and other MVPDs (though that will surely happen), but in the immediate impact IVPDs have as an alternative distribution channel for programmers.  In the pending D.C. Circuit case, we argue that both the FCC’s 30% cap, issued in December 2007, and the underlying portions of the 1992 Cable Act authorizing such a cap should be struck down as unconstitutional because the ready availability of IVPDs as an alternative distribution channel means that cable no longer has the “special characteristic” of gatekeeper/bottleneck power that would justify imposing such a unique burden on the audience size of cable operators.  (Of course, Direct Broadcast Satellite and Telco Fiber are also eating away at cable’s share of the MVPD marketplace.)

The second WSJ piece, an op/ed, illustrates beautifully how cable operators are already losing “market power” (or at least negotiating leverage) in a very tangible way:  they’re having to pay more for programming.  Specifically, the Journal describes how Viacom plaid chicken with Time Warner—and won.  

 The Viacom network had threatened to pull its 19 channels, including Nickelodeon with its “Dora the Explorer” and “SpongeBob SquarePants” cartoons, from the 13 million subscribers to the Time Warner Cable system…. The game of chicken included Viacom advertisements that unless Time Warner Cable agreed to pay more, it would pull the channels, encouraging viewers to call to say they wanted their MTV and other Viacom channels. One ad asked, “Why is Dora crying?” Time Warner countered that consumers would pay more if its costs rose. Bernstein Research analyst Michael Nathanson noted that neither party could afford “mutually assured destruction.” Viacom needs to find more subscription revenue as advertising revenues soften, while Time Warner Cable has to worry about satellite and telecom competitors. New media was the new factor. Many popular Viacom shows are widely available on the Web, including on its own sites. When it looked as if Comedy Central would be pulled, Wired magazine helpfully posted a guide for accessing the shows on the Web, pointing out that Jon Stewart’s “The Daily Show” can be accessed on Hulu and that “South Park” episodes are on Fancast. The best parts of “The Colbert Report” are often viewed as email attachments or as snippets on mobile phones.

So, in a nutshell, the fact that consumers could get Viacom programming available through IVPDs gave Viacom more leverage against MVPD Time Warner because it increased the credibility of Viacom’s threat to simply shut off programming to Time Warner if the cable giant didn’t cough up more cash.  While this fact seems to have carried the day for Viacom, the availability of Viacom’s content through IVPDs did have some secondary effects that also are worth noting:

During the negotiations, Time Warner Cable threatened to make it easier for its subscribers to connect laptop computers to their televisions so that Viacom shows could stream directly onto subscribers’ televisions.

This is essentially a reversal of the tactic often employed by local broadcasters in their battles with cable operators:  give your customers a set of rabbit ears so they can still get your signal if you actually take your programming off the local cable network.  While this tactic doesn’t seem to have helped Time Warner here, it does point to a long-term trend that could fundamentally change the programming marketplace:

The cable company also argued that it shouldn’t have to pay more to distribute shows that Viacom made available free in other media.

I suspect that, as IVPDs further erode the viewership of cable and other MVPDs, the MVPDs will become more desperate for content—and therefore willing to pay more for it.  But it seems likely that both of the key revenue sources for MVPDs—subscriptions and advertising—will, at some point, begin to decline as Americans spend more time watching IVPD content and become less willing to pay for expensive MVPD plans.  As this happens, cable may have less revenue to share with programmers per subscriber, even as their need for that programming grows.

So how will this all end?  I doubt anyone really knows.  But I feel reasonably comfortable making two predictions.  

First, the overall health of the video programming content market will become increasingly dependent on the profitability of advertising—for MVPDs, IVPDs as well as programmers.  This will require technological innovation to produce smarter advertising.  The better advertising is targeted to a specific consumer’s interests, the more revenue it will produce for all concerned.  But if the government short-circuits this process by hindering the evolution of targeted advertising in the name of protecting consumers’ privacy (or simply to protect them from the supposed inherent unfairness of advertising—an old Marxist shibboleth), the total amount of funding available for content could plummet.  The dynamics described so well by Chris Anderson in “Free! Why $0.00 Is the Future of Business” could drive video programmers to make their content available online for “free” (i.e., at no charge to the user) even if that content ends up producing (via advertising, etc.) significantly less revenue than it currently does on MVPDs (primarily from subscription revenue).  Plenty of smart people have explored this question and have far more intelligent things to say about it than I do.  But since the long-term trend seems to be that consumers are increasingly unwilling to pay even small sums for content, I just don’t see any alternative to increasing advertising revenues—other than public financing, which will necessarily bring with it government control and censorship.

Second, the other part of the solution to this problem will be business model innovation:  If individual consumers won’t pay for online video content, and if future ad revenues for online video content  don’t replace existing revenue streams, programmers are going to look for other sources of funding.  This dynamic seems to be on a collision course with net neutrality mandates.  The WSJ reported:

At one point, it looked as if Viacom might have escalated by trying to block Time Warner Cable broadband subscribers from accessing its Web sites to see its shows.

Whatever actually happened here, one can easily imagine a programmer like Viacom at some point in the future trying to get ISPs to start paying money per broadband subscriber for video content just as MVPDs currently pay per subscriber.  This is really the inverse of the fear generally expressed by net neutrality advocates that ISPs would try to charge programmers for the bandwidth used to transmit their content to an ISP’s subscribers.  If it’s true that programmers (the Viacoms of the world) and not distributors (Time Warner Cable the MVPD or Time Warner Cable the ISP) really have the market power, as this story suggests, then such arrangements might well be the economic salvation of content creators.  As with regulation of advertising, I only hope that government mandates against such innovation in the name of abstract “neutrality” principles don’t end up dooming us to a future where, with free market solutions (better advertising, revenue sharing with ISPs) rendered ineffective by government, government itself seems to be the only option left.

Ken Ferree and I just filed an amicus brief with the D.C. Circuit in what could be among the most important First Amendment cases involving economic regulation in years:  Comcast’s challenge to the FCC’s cap on the maximum size of a cable operator’s nationwide subscriber-audience.  While few may feel righteous indignation at limitations targeted at large corporations such as Comcast or Time Warner, the larger principle at stake here is deeply important: Will the First Amendment provide a meaningful check on what USC law professor Chris Yoo has called “architectural censorship” (i.e., so-called “structural” regulations that “have the unintended consequence of reducing the quantity, quality, and diversity of media content”).

In a nutshell, we argue that that:

1. The provisions of the 1992 Cable Act authorizing the FCC to impose a “cable cap” are outdated in world of media abundance and vibrant platform competition.
2. Because cable is no longer the unique “bottleneck” or “gatekeeper” that it was in 1992, these statutory provisions (not just the FCC’s 30% rule) must be subject to strict scrutiny under the First Amendment as a limitation on free speech.
3. Because there are “less restrictive means” of ensuring cable operators do not impede the flow of video programming to consumers, the court should strike down these provisions.
4. Even if the court upholds the statute, it should nonetheless strike down the cap issued by the FCC in December 2007 (30% of all Multichannel Video Programming (MVPD)  subscribers as based on an outdated model of the video marketplace.

I encourage you to read our brief (below).  I’ve provided a summary below, along with some additional commentary we just couldn’t cover under our 3500 word limit.

Strict Scrutiny.  Yoo’s article Architectural Censorship and the FCC is essential reading for anyone who believes that government regulations on the size and shape of the “soapbox” can have huge effects on speech itself.   Yoo argues that the First Amendment should check this kind of regulation–however “content-neutral” it might seem–under “strict scrutiny”, which requires that the government show that a regulation is the “least restrictive means” available for advancing a “compelling government interest.”  But Yoo ultimately concludes (pp. 713-718, PDF pp. 45-50) that, under existing precedent, most “architectural censorship will be effectively insulated from meaningful judicial review.”  Yoo explains that the Supreme Court’s 1983 decision in Minneapolis Star & Tribune Co. v. Minnesota Commissioner of Revenue, “appeared to entertain the possibility of subjecting structural restrictions to strict scrutiny even in the absence of facial content discrimination or content-based motive.”  But in its 1991 Leathers v. Medlock decision, the Court “foreclose[d] any prospect that Minneapolis Star and its progeny would serve as a check on architectural censorship” by limiting the Minneapolis Star line of precedents to cases where “a statute of general application affects a small number of speakers.”  The Court reaffirmed this position in its 1994 Turner I decision, when it applied intermediate, rather than strict, scrutiny to the Cable Act’s “must-carry provisions,” which require nearly all cable operators to carry certain television broadcast signals.  Intermediate scrutiny requires only that important governmental interests that are furthered by “substantially related means.”

Unfortunate as the Leathers/Turner I line of cases is for those concerned about architectural censorship, the cable cap is exactly the sort of regulation that falls within the reduced scope of Minneapolis Star as “affect[ing] a small number of speakers” because, unlike the Cable Act’s must-carry provisions, the cap limits the speech of only the very largest cable operators.  So the question of whether the Court should default to intermediate scrutiny as it did in its 2000 Time Warner I decision (when the cap was first challenged) should turn entirely on the question of whether cable still has the “special characteristic” of “bottleneck” or “gateekeeper” power despite all the changes in the media marketplace since 1992 and even in just the last eight years.

The Modern Media Marketplace.  The subscriber limitation provisions of the Cable Act were intended to prevent cable operators from “unfairly impeding the flow of video programming.”  Yet each of the key premises behind these provisions has been disproven:

1. Increased horizontal concentration of the cable industry has, far from reducing media choices, been accompanied by an explosive growth in the amount and diversity of video content available to consumers.
2. The rate of “vertical integration” (i.e., ownership of cable programmers by cable operators), which Congress feared would cause cable operators to discriminate against unaffiliated programmers, has plummeted.
3. Cable’s share of the MVPD market has also plummeted dramatically, with the two DBS providers now sharing 1/3 of the MVPD market and representing the second and third largest MVPDs

Two charts say it all.  First, from Adam Thierer’s excellent book Media Metrics, the number of programming services (cable channels) has grown by nearly six-fold by 1992, while the rate of vertical integration has plummeted:

(That chart stops in 2006 (based on 2005 data) because the FCC still has not released the 2007 Video Competition Report, which it approved in December 2007.  Since then, Time Warner Cable has been spun off of Time Warner’s content empire, so the actual affiliation rate today is likely less than 10%.)

Second, cable’s share of the MVPD market has fallen from 95% in 1992 to ~64% today:

In 1992, when consumers had only a single MVPD option, cable might fairly have been considered a “bottleneck” or “gatekeeper.”  But today, every American has at least three MVPD choices (their local cable franchisee + two DBS operators), and can also subscribe to a Telco video service such as Verizon’s FiOS.  (“Over-building” where two cable operators serve the same area is rare.)

Internet Video.  We also describe how the availability of TV content online provides yet another distribution channel for programmers:

The last two years have seen growing numbers of Americans increasingly substituting consumption of online video for MVPD video and the Internet driving popularity of MVPD content, rather than vice versa.  But only in the last year, since the adoption of the [FCC’s December 2007 order issuing the 30% cap], has the large-scale delivery of television  content online become a reality, as large numbers of programmers have begun distributing increasing numbers of complete episodes and entire series through their own websites and/or through a new class of rapidly-growing Internet Video Programming Distributor (IVPD) websites such as Netflix, Hulu, Amazon Video on Demand, iTunes, Vuze, Sony Playstation Store, the Microsoft Xbox 360 Marketplace, Joost and Veoh.  These IVPDs already offer a staggering, and growing, library of currently-airing and archived content—as much as 90% of broadcast shows and 20% of cable shows.  These sites are supported by a growing number of set-top devices (e.g., Netflix Player by Roku, TiVo) and wildly popular game consoles (e.g., Microsoft Xbox 360, Sony PlayStation 3) that allow users to play IVPD content from broadcast and cable programmers on demand on their television, while TiVo allows users to seamlessly switch between IVPD, MVPD and OTA content.

The FCC’s decision to exclude Internet video from its analysis is hardly surprising when one considers that the economic model behind the new 30% cap comes from a 2005 study based on cable market data from 1984-2001 and that the last official data released by the agency about the video marketplace date to June 2005.  But nine months later, the agency waxed ecstatic about the promise of IVPDs when doing so supported Kevin Martin’s attempts to enforce the FCC’s non-binding 2005 “Net Neutrality” policy statement:

In August 2008, the FCC even cited [the rapid emergence of IVPDs] in support of its claim of jurisdiction over Comcast’s broadband network management practices (because of alleged harm to an IVPD that distributes content through peer-to-peer file sharing):  “consumers with [broadband] service will have available a source of video programming (much of it free) that could rapidly become an alternative to cable television.”  But the immediate competitive impact of IVPDs comes not from the fact that some IVPD users are already canceling their MVPD subscriptions, but in the ease with which IVPDs can supplement an MVPD subscription—because most IVPDs are free, while those that charge for content do so on a per-episode/show basis.  Furthermore, IVPDs have little—if any—incentive not to offer a particular program because they are not subject to the same capacity constraints as MVPDs.  Thus, even if IVPD video consumption remains relatively small in its early years, IVPDs already offer programmers a strong alternative distribution channel capable of reaching all broadband users.

Less Restrictive Means. Of course, the fact that cable no longer has a special characteristic of gateekeeper or bottleneck power does not automatically render the Cable Act’s subscriber limits provisions unconstitutional; this merely means that the government must show that no less restrictive means are available to satisfy a compelling government interest.  We suggest a variety less restrictive means that could ensure competitive video distribution and programming markets.  These include dispute resolution assisted by the FCC, enforcement of existing antitrust laws, and crafting “special obligations on cable operators with more than 30% of the MVPD market to ensure that they do not unfairly impede the flow of video programming.”

Challenging The FCC’s Rule. Besides attacking the statute, we argue that the 30% cap imposed by the FCC last year is even more obviously unconstitutional than when the D.C. Circuit struck down the same limit seven years ago in Time Warner II. To many lay observers, this argument may seem like a “no-brainer” given how much more competitive the video marketplace is than it was in 2001.  But one must understand that when the Court struck down the 30% cap the first time, it did so on the grounds that the FCC’s own rationale justified not a 30% cap but a 60% cap.  The FCC had decided that the average video programmer (network) needed an “open field” of 40% of the MVPD market to be viable.  The FCC leapt from that conclusion to a 30% cap so that even if the two largest cable companies denied carriage, the programmer would still have the required 40% “open field.”  The court found that there was no evidence that the leading two cable operators would collude to deny carriage and that the statute did not “protect programmers against the risk of completely independent rejections by two or more companies.”  In other words, the purpose of the statute was not to guarantee carriage even if, for example, a cable operator decided (exercising the same constitutionally-protected “editorial discretion” enjoyed by all media) spend part of its limited system capacity carrying a network with questionable appeal, or to raise subscription rates to cover the marginal cost of carrying the network.

But the FCC has since come up with a new “open field” model that the court must consider anew.  This time, the model more clearly supports a 30% cap–but only if one accepts the premises underlying the model and the accuracy of the data put into the model, which we do not.  We argue that their model is “based on flawed assumptions about the nature of competition for video programming” and is thus incapable of “accurately reflect[ing] cable’s present (or future) bottleneck power.”

Click the button at the top right of Scribd’s handy iPaper display to switch to full page display of the brief–or click on the top left to download the PDF itself.

PFF Amicus Brief – Cable Ownership Cap http://documents.scribd.com/ScribdViewer.swf?document_id=8630011&access_key=key-2obr4z2ohtozi1gabbay&page=1&version=1&viewMode=