The decision to forgo distribution is referred to as a “blackout” in the cable context and “blocking” in the Internet context, but the economic considerations affecting such negotiations are substantially the same.
The American Television Alliance (ATVA), a coalition comprised primarily of cable and satellite TV operators, is using the playbook of net neutrality proponents in abid to convince the Federal Communications Commission (FCC) to regulate prices for broadcast television content. The goal of ATVA’s cable and satellite members is to increase their profit margins by convincing the government to artificially lower the cost of programming they resell to consumers. I suspect the goal of ATVA’s non-profit members, e.g., Public Knowledge and New America Foundation, is to solidify the FCC’s flawed rationale for adopting net neutrality rules in 2010, which imposed restrictions on market arrangements between Internet Service Providers (ISPs) and Internet content providers without finding a market failure.
Many of ATVA’s cable members are also ISPs that have routinely argued against the imposition of net neutrality regulations in the market for Internet services. By supporting ATVA, these same companies appear to have abandoned the intellectual foundation for opposition to net neutrality. Are they now signaling their intent to embrace net neutrality regulation of the Internet?
An analysis of the similarities between the cable and Internet services markets illuminates this apparent inconsistency. Both cable and Internet services exhibit the characteristics of two-sided markets, and the economic relationships among the participants in both of these markets are substantially similar. All else being equal, consumers prefer distribution platforms (i.e., cable or ISP networks) that provide access to more rather than less content, and content providers prefer distribution on platforms with more rather than less users. As a result, either side of the market has the potential to behave anticompetitively, but only if it has substantial market power relative to the other. Recent economic literature demonstrates that, in the absence of market failure, permitting full pricing flexibility on both sides of two-sided communications markets maximizes consumer welfare by increasing investment in both network infrastructure and content.
Prominent ATVA members who are also ISPs recognized as much in their fight against net neutrality at the FCC. In its comments opposing net neutrality, Time Warner Cable argued that the “critical gap in the [FCC]‘s selective proposal to regulate broadband Internet access service providers is the absence of any assertion that they possess market power—without which, it is unclear that even manifestly harmful discrimination would warrant regulatory intervention.” (Time Warner Cable Comments at 27 (emphasis in original)) Yet, the ATVA petition, filed by Time Warner Cable at the FCC, fails to provide any economic analysis or cite any precedent finding that broadcasters exercise market power warranting government intervention in retransmission consent negotiations.
The core of ATVA’s argument is a straightforward attack on the ordinary functioning of any two-sided market – the same attack on the previously unregulated Internet made by net neutrality proponents. ATVA argues that, when a cable operator asks a broadcaster for consent to retransmit broadcast content (which is known as “retransmission consent”), the cable operator must either agree to pay the broadcasters or forgo distribution of that broadcaster’s content. Net neutrality advocates similarly argue that, if an Internet content provider were required to pay an ISP for Internet content distribution, the Internet content provider would either have to agree to pay the ISP or forgo distribution of its content. The decision to forgo distribution is referred to as a “blackout” in the cable context and “blocking” in the Internet context, but the economic considerations affecting such negotiations are substantially the same.
ATVA’s attack on retransmission consent agreements suffers from the same infirmity as the net neutrality attack on ISPs: It is a “solution in search of a problem.” As Time Warner Cable noted in its comments on net neutrality:
“Consumers have to come to expect that they can access the content and services they want, when they want. Service providers almost invariably meet those expectations, and in those isolated instances when they have not, the marketplace has exerted the discipline necessary to rectify matters.” (Time Warner Cable Comments at 18)
Those who believe in free markets should exhibit the same trust in the marketplace when addressing the issue of “black outs” for video content as they do when addressing the issue of “blocking” Internet content. Broadcasters have no greater incentive to “black out” cable viewers (and potentially lose advertising revenue) than ISPs have to “block” Internet content (and potentially lose subscription revenue).
Of course, ATVA doesn’t complain about blackouts, per se. Every blackout to date has been resolved by the marketplace without restrictive FCC rules, and even if they weren’t, consumers could still access broadcast programming over the air free of charge. ATVA’s real complaint is that broadcasters are demanding “excessive” retransmission consent fees due to the popularity of their programming – an allegation that is uncomfortably similar to the “gatekeeper” theory the FCC relied on in its net neutrality order. There, the FCC concluded that an ISP could “force” edge providers to pay “inefficiently high fees” because that ISP is “typically” an Internet content provider’s “only option” for reaching a particular end user. Both theories reflect a desire to intervene in the ordinary pricing mechanisms of two-sided markets without engaging in a thorough market power analysis. They also ignore the fact that, in a two-sided market, charging for content distribution “may well have important pro-competitive effects.” (Time Warner Cable Comments at 31)
The apparent inconsistency of ATVA members who support regulation of retransmission consent agreements while opposing net neutrality is not a new or surprising phenomenon in Washington. It is essential, however, for those who believe in liberty to recognize the danger that ATVA’s theory represents to free market principles: An ATVA win on retransmission consent would continue the expansion of FCC authority unbounded by rigorous analysis that began with the net neutrality order. With a rewrite of the Communications Act on the horizon, free market advocates cannot afford to lose this battle. If we do, we risk losing the war before it even begins.