CBIT White Paper: The Mission to Kill Broadcast Television Stations

Posted by | May 01, 2014 | Video | One Comment

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THE MISSION TO KILL BROADCAST TELEVISION STATIONS

Analyzing Pay-TV’s Bid to Control the Video Marketplace

EXECUTIVE SUMMARY

Cable and satellite TV distributors (MVPDs) have secretly declared a regulatory war on TV stations. MVPDs have marched into battles over the obscure regulatory territories of “retransmission consent”, “compulsory copyright licenses”, “broadcast exclusivity agreements”, and “basic tier” using a free market flag as their standard. But that flag is merely a cynical smoke screen for their real mission: To kill broadcast television stations altogether.

It is no coincidence that the “reforms” MVPDs seek are entirely one-sided. MVPDs want to repeal regulations that make free over-the-air television possible without repealing regulations that require TV stations to provide local programming to consumers for free. Eliminating only the regulations that benefit broadcasters while retaining their regulatory burdens is not a free market approach — it is a video marketplace firing squad aimed squarely at the heart of broadcast television.

Advertising revenue is the primary motive for this war. The compulsory copyright license prevents MVPDs from inserting their own ads into broadcast programming streams, and retransmission consent prevents them from negotiating directly with the broadcast networks for available advertising time. If these provisions were eliminated, MVPDs could negotiate directly with broadcast networks for access to their television programming and appropriate a substantial portion of TV station advertising revenue, which was approximately $19.6 billion in 2013.

Adopting the MVPD version of video regulation “reform” would not kill broadcast programming networks. They always have the option of becoming cable networks and selling their programming and advertising time directly to MVPDs or distributing their content themselves directly over the Internet.

The casualty of this so-called “reform” effort would be local TV stations, who are required by law to rely on advertising and retransmission consent fees derived largely from national broadcast network programming for their survival. Policymakers should recognize that killing local TV stations is the ultimate goal of current video “reform” efforts before they make piecemeal changes to the law. If policymakers intend to kill TV stations, they should not attribute the resulting execution to the “friendly fire” of unintended consequences. They should recognize the legitimate consumer and investment-backed expectations created by the current statutory framework and consider appropriate transition mechanisms after a comprehensive review.

Retransmission Consent Prices Are Not Excessive

The fatal flaw in the ostensible motivation for video regulation “reform” — that retransmission consent fees are “excessive” — is the lack of any credible evidence that TV stations are in fact charging higher prices for access to their signals than cable networks are charging for comparable programming. A comparison of cable network licensing fees and retransmission consent fees shows that TV stations are actually charging less for retransmission consent than cable networks are charging for their own comparable programming. This pricing evidence indicates either (1) that retransmission consent fees are too low, or (2) that fees for cable network programming are excessive. Either way, retransmission consent fees cannot be considered “excessive.”

According to SNL Kagin data, MVPDs paid an average of $1.50 per subscriber for access to the top 10 cable network channels in 2012. In comparison, MVPDs paid only $0.61 per subscriber for consent to retransmit the signals of the top 10 TV station groups. If this is evidence that retransmission consent fees are “excessive”, cable network programming fees must be considered astronomically “excessive”.

The disparity between retransmission consent and cable network programming prices cannot be explained by the popularity or higher cost of cable network programming. Analysts have estimated that broadcast programming captures 35% of MVPD viewership but accounts for only 7% of MVPD programming fees, and the FCC reports that broadcast network programming typically costs more to produce and license than comparable cable network programming.

There simply is no credible evidence that retransmission consent prices are “excessive”. To the contrary, the relatively high audience shares and higher production costs of broadcast network programming suggest that retransmission consent prices should be at least as high as the prices MVPDs willingly pay for similar cable network programming — yet retransmission consent fees are typically much lower than cable network licensing fees.

Broadcast Network Programming Does Not Have Market Power

There is also no evidence that broadcast network programming has market power. The video programming market is competitive, with relatively low concentration and diverse ownership. In comparison, the MVPD market segment is relatively concentrated. According to the FCC, at least seven different programming networks account for roughly 95% of television viewing hours. But FCC data also indicate that more than 90% of subscribers are served by only three MVPDs — the incumbent cable operator and the two DBS operators. It is implausible to conclude that TV stations could wield market power against an MVPD market segment that is twice as concentrated.

TV Stations Do Not Have Unfair Bargaining Power

There is similarly no rationale (or rationally consistent basis) for the assertion that must carry, basic tier, and broadcast exclusivity regulations provide TV stations with unfair bargaining power. A thorough analysis demonstrates that:

  • Must carry has no impact on retransmission consent negotiations at all;
  • Arguments against basic tier contradict the fundamental premise of retransmission consent “reform”; and
  • Broadcast exclusivity regulations do not unfairly advantage TV stations in any way whatsoever.

Must Carry Has No Impact on Retransmission Consent Negotiations

As legal matter, a TV station that elects retransmission consent is no longer entitled to must carry for three years. If retransmission consent negotiations fail, the TV station is legally prohibited from forcing an MVPD to carry its TV signal until the current election period expires. If a TV station elects must carry instead, MVPDs are legally exempt from paying any compensation to that station for the retransmission of its signal. Because retransmission consent and must carry are mutually exclusive as a matter of law, it is legally impossible for must carry to have any impact on retransmission consent negotiations.

Arguments Against Basic Tier Contradict the Fundamental Premise of “Reform”

The fundamental premise of MVPD arguments for retransmission consent “reform” is that the popularity of broadcast programming allows TV stations to exercise market power during retransmission consent negotiations. If that premise were correct, the basic tier requirement would have no impact on retransmission consent prices. TV stations could rely on their market power to force MVPDs to place broadcast programming on the basic tier with or without a legal requirement.

Regulations Enforcing Broadcast Exclusivity Agreements Do Not Unfairly Advantage TV Stations

The essence of the MVPD argument against FCC “non-duplication” and “syndication” rules is that exclusive agreements between TV stations and broadcast programming networks are inherently unfair — an argument that is manifestly inconsistent with the rights of MVPDs to enter into exclusive programming agreements. MVPDs have not explained how their exclusive programming agreements could be considered fair and beneficial to consumers if broadcast exclusivity agreements are inherently unfair. If they cannot provide a rational explanation for disparate treatment — other than “it would be profitable for the MVPD market segment” — their arguments against FCC enforcement of broadcast exclusivity agreements should not be given serious consideration.

To the extent this particular playing field is not level, it tilts against TV stations, who are subject to far stricter limits on exclusive programming agreements than MVPDs. TV stations are permitted to enter into agreements for territorial exclusivity only and are subject to a “significantly viewed” limitation that favors the interests of MVPDs. Though MVPDs are permitted to enter into exclusive programming agreements on a nationwide basis that preclude any other MVPD from airing the same programming, the Communications Act prohibits TV stations from entering into exclusive retransmission consent agreements in all circumstances.

This regulatory disparity arguably provides MVPDs with an advantage in retransmission consent negotiations, because no MVPD faces any risk that a TV station will enter into exclusive agreements with other MVPDs.

Competition Among MVPDs Is Largely Irrelevant to Broadcast Regulation

Though Congress adopted the 1992 Cable Act primarily to address cable’s market power, increased competition among MVPDs has not eliminated the rationale supporting the Act’s broadcast regulations. Regulations that are intended to ensure that TV stations can generate advertising revenue remain necessary to balance regulatory restrictions on broadcast business models — independent of the level of competition among MVPDs — unless and until policymakers eliminate corresponding regulations that are intended to preserve free over-the-air television.

Without retransmission consent, TV stations may not be able to attract high-quality broadcast programming from national networks, because those networks would no longer be able to derive substantial revenue from programming distribution rights.

Cable programming networks have demonstrated that, in a competitive distribution market, programming can be monetized through a combination of license fees and advertisements, which serves to maximize their overall revenue. As competition for video advertising has increased, broadcast networks have adopted the cable programming model and sought to increase their retransmission consent revenue. If retransmission consent were eliminated — and the incremental ad revenue generated by over-the-air distribution is less than the combined revenue from license fees and advertising available through direct distribution by MVPDs — broadcast networks would have incentives to stop distributing their programming over-the-air and become cable networks.

The economic incentives of video programmers makes it very unlikely that eliminating retransmission consent would ultimately benefit consumers through lower MVPD subscription prices. If broadcast networks become cable networks, MVPDs would still have to pay them for the right to transmit their programming — albeit, the payments would be called “licensing fees” rather than “retransmission consent fees” and would be paid directly to the former broadcast programming networks. But the millions of households that currently rely on over-the-air broadcast programming would lose access to local news, emergency alerts, and “prime time” programming.

Though it is unlikely that consumers would benefit from retransmission consent “reform”, TV stations would almost certainly be harmed. Many TV stations would likely go out of business without access to “prime time” broadcast network programming. Though local news and other programming is valuable enough that some stations might survive, it is unlikely that local programming alone would generate enough revenue to support competition among multiple TV stations in a single market and the diversity of local news programming that competition produces.

Reform Is Aimed at Killing Broadcast Television Stations

The analysis in this paper demonstrates that (1) the claim that retransmission consent prices are “excessive” is not credible, and (2) so-called video “reform” efforts are focused almost exclusively on eliminating regulations that benefit TV stations while retaining those that prevent them from competing in the MVPD or other communications market segments. MVPDs have focused particular effort on eliminating  retransmission consent, which enables TV stations to access broadcast network programming, despite the fact that retransmission consent prices are lower than the licensing fees MVPDs pay for comparable cable network programming, and MVPDs would have to pay broadcast networks for their programming even if they converted into cable networks. This analysis thus begs the question policymakers should be asking: Why have MVPDs made this one-sided version of video “reform” their highest legislative and regulatory priority?

An analysis of business models in the video marketplace suggests that the cost of retransmission consent is not their primary motive: The ultimate goal is to kill TV stations for their advertising revenue.

Advertising represents a significant growth opportunity for MVPDs. Though MVPD advertising revenue has traditionally been relatively small, it has grown annually at double digit rates in recent years. The prospect of continued advertising growth has prompted MVPDs to invest in a joint sales platform that allows competing MVPDs to package their advertising opportunities for sale on a unified, nationwide basis.

This growth opportunity for MVPDs is constrained, however, by their inability to sell advertising for broadcast network programming. When MVPDs buy programming from cable networks directly, they can negotiate for a split of the available advertising time. But when they buy broadcast programming from local TV stations through retransmission consent, there is no available advertising time. It has already been split between TV stations and broadcast networks through their affiliation agreements, and the compulsory copyright license prohibits MVPDs from inserting their own ads into broadcast programming streams in any event.

The advertising revenue generated by broadcast programming is significant — at least $35.8 billion in 2011 for both TV stations and broadcast programming networks. TV stations sold $10.3 billion that year in local advertising alone, which is more than double the $4.2 billion in advertising revenue generated by cable operators that year. According to BIA Kelsey data, TV stations generated a total of $19.6 in advertising revenue in 2013.

The fundamental inability of MVPDs to share in billions of dollars worth of broadcast advertising revenue is the real driver of their dissatisfaction with retransmission consent rights. MVPDs see TV stations as unnecessary middlemen in the programming supply chain who prevents them from making money on advertising slots during broadcast network programming. If MVPDs could obtain programming from broadcast programming networks directly, MVPDs would realize the revenue generated by the advertising split, not TV stations. Satisfying MVPD’s desire to buy programming from broadcast networks directly and share the advertising split, however, would likely be the end of most TV stations, who rely on advertising to generate revenue and retransmission consent to attract broadcast network programming.

The MVPD approach to video regulation “reform” — e.g., arguing for the elimination of regulations that benefit TV stations while retaining corollary, harmful regulations — is a classic “have your cake and eat it too” strategy aimed at killing TV stations. A policy change of this magnitude should be debated transparently and comprehensively, not rushed through STELA bearing a false “market failure” flag. If Congress intends to eliminate TV stations, it should at least recognize the legitimate consumer and investment-backed expectations created by the current statutory framework and consider appropriate transition  mechanisms. The Communications Act update would provide an appropriate legislative vehicle for that consideration. STELA reauthorization does not.

INTRODUCTION

Congress removed several government barriers to competition in the video marketplace in the 1990s. Since then, the video market has become increasingly competitive.

  • Verizon, AT&T, Google, and others are providing video distribution services in direct competition with incumbent cable and satellite TV operators;
  • Netflix, Amazon, Hulu and others are providing video services online and producing their own original television series and movies; and
  • Television stations are providing multicast and mobile TV services over-the-air.

The increased competition in this and other communications markets prompted the House Communications and Technology Subcommittee to begin the process of examining and updating the Communications Act (“#CommActUpdate”).

Representative Fred Upton, Chairman of the House Energy and Commerce Committee, and Representative Greg Walden, Chairman of the Energy and Commerce Subcommittee on Communications and Technology, initiated this process to “bring uniformity and predictability” to the laws governing different segments of the communications market.[1] They recognize that piecemeal changes to the Communications Act have resulted in “nuanced laws governing different forms of communication [that] are woefully out of sync with each other.”[2]

They also recognize that, because the communications sector and the laws governing it are complex and interconnected, “we need a broad, open conversation” to “honestly consider the sweeping changes many have long sought.”[3] The #CommActUpdate represents the Committee’s commitment to stop “tinker[ing] around the edges” and consider the communications laws comprehensively.[4]

In the interim, Congress is considering whether to reauthorize the Satellite Television Extension and Localism Act (STELA), which will expire on December 31, 2014, unless Congress reauthorizes it.[5]

STELA is only the most recent in a series of acts permitting satellite video distributors to deliver local and distant broadcast television signals to their subscribers under both the Copyright Act and the Communications Act. Previous versions were also set to expire without Congressional reauthorization. When Congress considered reauthorization of the last version, it missed the deadline due to debates regarding other issues in the video marketplace. “At one point Congress had to go, metaphorically hat in hand, to rights holders to ask them to continue to make their programming available to satellite [TV] operators even though the [compulsory copyright] license had technically expired.”[6]

Many have urged Congress to avoid a similar debacle this time by limiting the STELA debate to a “clean” reauthorization bill.[7] Considering other issues in the broader #CommActUpdate process would enable timely action on STELA and give Congress an opportunity to consider comprehensively the potential ramifications of other changes to the laws governing video competition.

Multichannel video programming distributors (MVPDs) are nevertheless pushing Congress to transform the STELA reauthorization process into a debate about retransmission consent, which is the process by which MVPDs obtain the legal right to retransmit broadcast television signals, and other issues that relate to video programming rights. This has led Congress to ask whether it should “adopt reforms to retransmission consent” or address other video issues through the STELA reauthorization process.[8]

The answer is “No.” The available evidence does not support claims that retransmission consent is harming competition or consumers. An analysis of business models in the video marketplace and relevant provisions in the Communications Act suggests that the ultimate goal of retransmission consent “reform” is to kill free over-the-air television so that MVPDs can appropriate TV station advertising revenue for themselves. A policy change of this magnitude should be considered in the comprehensive #CommActUpdate process, not in abbreviated STELA process.

Part I of this paper describes the primary participants in the video marketplace and their current business models. Part II discusses horizontal competition among video distributors in the MVPD and TV station market segments, and Part III discusses vertical relationships between video distributors and programming vendors. Part IV analyzes the arguments for “reforming” retransmission consent and other video programming regulations, and Part V discusses the motivation of MVPDs for this “reform” effort.

This paper relies primarily on data published by the Federal Communications Commission (FCC) in its most recent report on video competition.[9]

PART I: PARTICIPANTS AND BUSINESS MODELS IN THE VIDEO MARKET

The video marketplace is a two-sided market with video programming vendors on one side and distributors on the other.

The FCC divides the distribution side of the market into three market segments that reflect its own policy choices and provisions in the Communications Act that expressly govern video distributors:

  1. multichannel video programming distributors (MVPDs),
  2. online video distributors (OVDs), and
  3. broadcast television stations (TV stations).[10]

Each of these video distribution market segments is subject to different regulatory requirements. Titles III and VI of the Communications Act govern TV stations and MVPDs, respectively, and OVDs are currently unregulated.[11]

The Communications Act provides different rights and obligations for particular types of participants within the MVPD and TV station segments. For example, cable, satellite, and open video system (OVS) operators are subject to different regulatory requirements even though they are all considered MVPDs that compete in the video distribution market.

The FCC generally does not engage in direct economic regulation of video programming vendors, who comprise the other side of the video market. They are regulated as a de facto matter, however, through the regulations applicable to video distributors. This de facto regulation has a substantial influence on their ownership structures and their choices of video distribution platforms.

Video Programming Distributors

This paper focuses on economic regulation of the relationships among MVPDs, TV stations, and video programming vendors, particularly in relation to the issue of retransmission consent, which has dominated recent debates about video regulation “reform”.

Because OVDs generally do not stream live broadcast television programming and are not currently treated as MVPDs by the FCC, this paper does not consider video competition issues that are specific to OVDs.

Multichannel Video Programming Distributors

MVPDs are facilities-based distributors of multiple channels of video programming who charge consumers directly to view video programming.[12] This market segment includes cable,[13] satellite TV (also known as direct broadcast satellite or DBS),[14] and OVS operators.[15]

The Communications Act requires that cable, OVS, and DBS operators obtain some form of government approval before initiating service.

Cable Operators: Cable operators must obtain franchises from local franchising authorities (LFAs) before initiating service.[16] Each state determines which of its political jurisdictions (e.g., state, county, city, or town) are authorized to grant cable franchises.[17]

Open Video System Operators: OVS operators must obtain FCC certification before initiating service.[18] Although the Communications Act does not expressly require an OVS operator to obtain a local franchise, a Federal court has held that the Communications Act does not preempt LFAs from requiring an OSV operator to obtain a local franchise in addition to the required Federal certification.[19]

DBS Operators: DBS operators must obtain an FCC spectrum authorization before launching and operating a satellite system.[20] DBS spectrum licenses are not subject to competitive bidding at auction,[21] and no local authorization is required to provide DBS service.[22]

Tiered Programming

MVPDs typically offer video programming on a subscription basis in one or more packages of channels known as “tiers”.

The Communications Act requires cable operators to provide their subscribers a separately available “basic tier” to which consumers must subscribe for access to any other tier.[23]

The basic tier must include:

  • All local over-the-air broadcast TV signals,
  • Any other broadcast TV signals the cable operator chooses to provide (other than “superstations”), and
  • Any “public, educational, and governmental” (PEG) access programming required by the LFA.[24]

Cable operators can choose to include additional video programming or other services on the basic tier so long as they are in compliance with the minimum requirements.[25]

MVPDs typically offer one or more “premium” programming tiers in addition to the required basic tier.[26]

Pay-Per-View and Video on Demand

MVPDs also offer pay-per-view (PPV) and video-on-demand (VOD) services that allow consumers to select and watch programming on request.[27] The Communications Act generally prohibits cable operators from (1) requiring a subscription to a premium tier as a condition of access to programming on a per channel or per program basis (the “tier buy-through prohibition”), or (2) discriminating between subscribers who subscribe only to the basic tier and other subscribers with respect to PPV rates.[28]

TV Everywhere

MVPDs have recently begun providing “TV Everywhere” services, which provide their subscribers with access to both linear (e.g., live broadcast television programming) and VOD programs on a variety of in-home and mobile Internet-connected devices.[29] MVPDs restrict TV Everywhere services to their subscribers using an authentication process.[30] With the exception of sports, most live video content delivered to mobile devices is currently restricted to viewing while in the home.[31]

Set Top Boxes

Consumer premises equipment (CPE) “is an integral part of viewing video programming,” and “interoperability of CPE can impact the ability to consumers to seamlessly switch providers.”[32] This and other regulatory issues related to CPE in both the MVPD and TV station market segments are generally not addressed in this paper.

Service Bundling

MVPDs typically sell bundled packages of video, Internet access, and telephone services. Cable and OVS operators typically offer Internet access and telephone services using the same distribution infrastructure.[33] DBS operators typically offer these additional services through partnerships with other satellite or terrestrial operators.[34]

Subscription Fees and Advertising

MVPD revenue derived solely from video services totaled about $180.2 billion in 2011.[35] Subscription fees are the primary source of revenue for video programming services provided by MVPDs. Cable operators also derive revenue from the sale of local advertising during cable network programming, which totaled about $4.2 billion in 2011.[36]

cbit-Figure 1

Broadcast Television Stations

Broadcast television stations primarily distribute video programming for free “over-the-air” using terrestrial wireless facilities.[37] Television stations must obtain a construction permit from the FCC before they begin constructing a station.[38] Once its station is constructed, a TV station “permittee” must obtain an FCC license to begin broadcasting.[39] Unlike DBS licenses, spectrum licenses for broadcast TV stations are subject to competitive bidding at auction.[40]

In 2011, broadcast TV stations earned approximately 86% of their revenue through the sale of advertising time for over-the-air programming.[41] A TV station’s viewership and its advertising revenue are mutually dependent.[42] Television stations must attract a sizable audience to sell advertising, and they require advertising revenues to invest in programming that will attract audiences. The way in which their programming is ultimately distributed is irrelevant to this dependency: A TV station’s advertising revenue depends on its viewership irrespective of whether its programming is viewed over-the-air or on an MVPD system.

In the past, direct payments from broadcast programming networks, which were based on a station’s local market rating, were the second largest source of revenue for network-affiliated TV stations. This practice began to decline in the 1990s, however, and amounted to only $25 million in 2011 (about one-tenth of one-percent of total TV station revenue).[43]

Retransmission consent fees have replaced network compensation as the second largest source of revenue for TV stations, though such fees were only about 8% of their revenue in 2011.[44] Other sources of TV station revenue include online advertising (about 5.5%) and ancillary television revenues (about 0.5%).[45]

cbit-Figure 2

Video Programming Vendors

Video programming vendors are typically described by their primary means of distribution:

  • “Movie studios” produce movies for initial distribution by theaters,
  • “Cable networks” produce programming for initial distribution by MVPDs,
  • “Television networks” produce programming for initial distribution by TV stations on a regional or nationwide basis,
  • TV stations” produce local programming in-house for distribution in their local markets, and
  • “Syndication networks” both produce original programming and license previously aired programming for distribution by both MVPDs and TV stations.

Major video programming vendors are typically owned by conglomerates that produce and license programming for distribution on all major platforms — e.g., theaters, MVPD systems, and TV stations.[46] For example, NBC/Universal operates two broadcast networks (NBC and Telemundo), several cable networks (e.g., MSNBC, Bravo, Oxygen, and USA Network), and a major movie studio (Universal Pictures).[47]

Many video programming vendors are also affiliated with (i.e., wholly or substantially owned by) video distributors. According to the FCC’s most recent video competition report, 99 national programming networks are affiliated with the top 5 cable operators, and 62 national programming networks are affiliated with a DBS operator.[48] The FCC also reported that 188 TV stations are owned and operated (O&O) wholly or in part by at least one television network (which means many O&O stations are affiliated with multiple cable networks as well).[49] There are also TV stations that are affiliated with national or regional cable networks, but are not affiliated with any broadcast network.[50]

Video programming vendors are free to choose the primary means of distributing their programming. For example, a broadcast network could choose to become a cable network and vice versa. Their choices are influenced by the regulations applicable to their potential distributors. If regulatory changes render a particular means of distribution unattractive, video programming vendors may switch to alternative means of distribution.

In-House TV Station Programming

Television stations typically produce local newscasts, public affairs shows, and sporting events in-house for distribution in their local markets. They sell about nine minutes of advertising time per hour for their in-house programming. TV stations typically sell local advertising spots themselves or through local advertising agencies,[51] and also sell national spots through national sales representatives.[52]

Syndicated Programming

Video distributors also acquire programming from television syndicators that distribute original (“first-run syndication”) programming (e.g., gameshows) or reruns of network television series (“off-net” syndication). TV stations typically enter into “syndication exclusivity agreements” to obtain exclusive rights to distribute syndicated programming in their local markets. MVPDs also enter into agreements with syndicators.

Broadcast Network Programming

Most commercial TV stations also air at least some programming from broadcast networks. Local TV stations typically enter into “affiliation agreements” with national broadcast networks to obtain exclusive rights to distribute network programming in their local markets. These stations are known as “network affiliated” TV stations.

Advertising time for broadcast network programming is typically divided among the networks and their affiliated TV stations. TV stations are typically permitted to sell about 2.5 to 3 minutes of advertising per hour of broadcast network programming.[53] The broadcast networks sell the remaining advertising time and retain the associated revenue for themselves.[54]

Broadcast networks produce their own programming through in-house production studios and license programming from third-party studios and sports leagues.[55]

Because broadcast networks derive their revenue primarily from advertising, “prime time” network programming must appeal to a relatively broad audience and thus tends to be more expensive to produce than cable programming.[56] New broadcast series typically begin with “pilot” episodes, which are used to test potential audience reception. A drama pilot costs about $5.5 million on average to produce and a comedy pilot costs about $2 million to produce,[57] and broadcast networks typically pay about $1.5 million to license a show.[58] Despite their relatively high cost, only about half of all pilots produced are ultimately selected for a television season.[59]

Cable Network Programming

Cable programming networks operate similarly to broadcast networks, except that they derive (1) about 55% of their net revenue from licenses fees paid by MVPDs on a per subscriber basis for the right to air cable network programming and (2) about 42% from advertising.[60]

Because cable network programming is less reliant on advertising for revenue, it is typically less expensive to produce than broadcast network programing and the corresponding licensing fees are typically lower than for comparable broadcast programming. An hour-long cable network drama costs about $2 million per episode and studio licensing fees are about $1 million.[61]

Series produced by cable networks are also shorter than TV series. A cable network series consists of 10 to 13 episodes per season compared with 22 to 24 episodes for a broadcast network series.[62]

PART II: OWNERSHIP AND COMPETITION AMONG VIDEO DISTRIBUTORS

This Part provides an overview of competition in the video distribution market, including regulatory limits on (1) the ownership of video distributors and (2) competitive entry by TV stations in the MVPD market segment.

Ownership Limits

The television broadcast industry is subject to specific limits on the ownership of TV stations, the merger of broadcast programming networks, and cross ownership of TV stations with other media industries. Despite the fact that most video programming is viewed on infrastructure that is owned by MVPDs (i.e., both MVPD and online video programming), MVPDs are generally not subject to similar ownership limits.

Broadcast Ownership Limits

The broadcast ownership limits are generally not required by the Communications Act. Most broadcast ownership limits are the result of FCC policy choices that were first made when TV stations were the dominant means of distributing video programming.

Local Ownership Limit. The local ownership limit generally prohibits a single firm from owning more than one TV station in a single designated market area (DMA) and absolutely prohibits a single firm from owning more than two TV stations in a single DMA.[63] A firm is permitted to own more than one, but not more than two, television stations with overlapping coverage in the same DMA only if:

  1. At least one of the two stations is not ranked among the “top four” stations in terms of audience share; and
  2. At least eight independently owned and operating commercial or noncommercial full-power broadcast television stations would remain in the market after the combination.[64]

In effect, the first part of this rule typically prevents a single firm from owning two stations that are both affiliated with the four largest broadcast programming networks (ABC, CBS, Fox, and NBC), and the second part prevents ownership of more than one station in smaller markets, which are typically served by fewer than eight stations.[65]

Joint Sales Limit. A joint sales agreement (JSA) authorizes a broker to sell some or all of the advertising time of the brokered station.[66] The FCC recently found that JSAs “involving a significant portion of the brokered station’s advertising time convey the incentive and potential for the broker to influence program selection and station operations.”[67] Based on this finding, the FCC adopted a rule counting “television stations brokered under a same-market television JSA that encompasses more than 15 percent of the weekly advertising time for the brokered station toward the brokering station’s permissible ownership totals.”[68]

Dual Network Limit. Though this limit does not apply to broadcast networks directly, the “dual network rule” effectively prohibits a merger between or among the “top four” broadcast programming networks (ABC, CBS, Fox, and NBC) by limiting the ability of TV stations to enter into affiliation agreements.[69]

Newspaper/Broadcast Cross-Ownership Limit. The newspaper/broadcast cross-ownership limit prohibits common ownership of a TV station and a daily newspaper if the television station’s Grade A service contour completely encompasses the newspaper’s city of publication.[70] The FCC had provided for limited waivers of this rule, but the Third Circuit Court of Appeals vacated and remanded the modified rule for procedural reasons.[71]

Radio/Television Cross-Ownership Limit. The FCC limits the number of commercial radio and television stations a firm is permitted to own in the same market, with the degree of permitted common ownership varying in accordance with the size of the relevant market.

  • A single firm may own up to two television stations and four radio stations in a market, as long as at least 10 independently owned media voices would remain; and
  • A single firm may own (1) up to two television stations and six radio stations, or (2) one television station and seven radio stations, in a market as long as at least 20 independently owned media voices would remain.[72]

National Ownership Limit. The Communications Act prohibits an entity from having a “cognizable interest” in TV stations that have an aggregate national audience reach exceeding thirty-nine percent (39%) (i.e., TV stations with signals reaching more than 39% of U.S. television households).[73]

Cable Ownership Limits

In contrast to the broadcast ownership limits, cable ownership limits are generally required by statute. In the 1992 Cable Act, Congress required the FCC to prescribe reasonable cable ownership limits that would prevent cable operators from inhibiting competition and programming diversity while allowing them to obtain beneficial economies of scale.[74]

Though the Communications Act requires the FCC to prescribe cable ownership limits, in most instances, the agency has either (1) neglected to comply with its statutory duties or (2) exercised its authority to forbear from enforcing ownership limits applicable to cable operators.

National Ownership Limit. Section 613(f) of the Communications Act requires the FCC to prescribe rules establishing reasonable limits on the number of cable subscribers served by an individual cable operator through its ownership or control of local cable systems.[75] The FCC established a 30% limit on the number of households passed by a cable system in 1993, and modified it in 1999 to apply to the percentage of MVPD subscribers served by a cable operator rather than the number of households passed.[76]

The DC Circuit Court of Appeals vacated the 30% cable ownership limit in 2001, because the record did not adequately support the chosen limit.[77] The FCC re-established the 30% limit in 2008 based on more recent empirical data and additional economic analysis.[78] In 2009, the DC Circuit overturned the limit again, because the FCC had not adequately demonstrated that allowing a cable operator to serve more than 30% of all MVPD subscribers would reduce programming diversity or competition among MVPDs.[79]

Since the court issued its opinion vacating the 30% limit five years ago, the FCC has not taken any action to establish a reasonable cable ownership limit as required by the Communications Act. As a result, there is currently no cable ownership limit.

Joint Sales Limit. The FCC does not impose any limits on joint sales agreements among MVPDs. The FCC has permitted a group of the largest MVPDs — including Comcast, Time Warner Cable, DIRECTV, Cox Media, AT&T U-verse, and Verizon FIOS — to sell their advertising spots through a single broker, NCC Media, which is jointly owned by Comcast, Time Warner Cable, and Cox Media.[80]

Cable/Broadcast Network Limit. The Telecommunications Act of 1996 (1996 Act) eliminated FCC limits on cable/broadcast network cross-ownership.[81] A Federal court subsequently struck down an FCC attempt to retain cable/broadcast cross-ownership limits.[82]

Channel Occupancy Limit. Like the national cable ownership limits, the FCC has neglected to comply with its statutory duty to prescribe a reasonable channel occupancy limit. This limit is discussed in more detail in Part III, Affiliated Cable Programming Limits, infra.

Cable/TV Station Cross Ownership Limit. The 1996 Act repealed statutory provisions that had previously prohibited cross-ownership between cable operators and TV stations.[83]

Cable/Telephone Cross Ownership Limit. The Communications Act generally limits a cable operator from having more than a 10% financial or management interest in a telephone company that is providing local exchange service in the cable operator’s franchise area and vice versa.[84] It also imposes limits on joint ventures between cable operators and telephone companies.[85] In 2012, the FCC decided to forbear from applying this statutory provision to the extent it prohibits the acquisition of competitive local exchange carriers by cable operators.[86]

Cable/BRS-SMATV Limit. The Communications Act prohibits cable operators from owning a Broadband Radio Service system (BRS) (also known as a wireless cable system) or a Satellite Master Antenna Television (SMATV) system in markets that are not subject to effective competition.

Though this ownership limit is still applicable to cable operators, its impact is relatively limited. BRS has largely transitioned to providing mobile broadband services rather than wireless cable services, and SMATV systems have never has a significant role in the video marketplace.

Competition Among MVPDs

Local franchise agreements and Federal law typically prohibited competition among terrestrial MVPDs until Congress opened this segment to competitive entry in the 1990s.[87] As a result of their former government monopoly status and first mover advantages, incumbent cable operators have traditionally dominated the MVPD market segment.

MVPD Competition Nationally

Competition in this segment has increased since the 1990s. Though their market shares have declined as competition has increased, cable operators still served about 57.4% of MVPD subscribers on a national basis in 2011.[88] In comparison, DBS operators served about 33.6% and telephone companies served about 8.4% of the market.[89]

cbit-Figure 3

MVPD Competition in Local Markets

National market shares are not reliable proxies for market concentration in particular geographic markets. For that reason, the 1992 Cable Act directed the FCC to establish rules for the regulation of cable rates in local markets that lack “effective competition.”[90] The 1996 Act eliminated rate regulation of premium cable programming tiers, and the FCC has partially or wholly exempted “small cable operators” from rate regulation.[91] Only basic tier programming offered by “large” cable operators is currently subject to rate regulation.[92]

LFAs are responsible for regulating the rates charged for the basic tier in markets that are not subject to “effective competition.”[93] An LFA must obtain certification from the FCC prior to regulating the basic tier.[94] Once it is certified, a franchising authority may presume that a cable system is not subject to effective competition unless the cable operator demonstrates otherwise.

A cable operator can demonstrate that it is subject to effective competition if it satisfies any one of the following conditions:

  1. Fewer than 30 percent of the households subscribe to the operator’s cable programming service;
  2. The operator and at least one other MVPD provide comparable services to at least 50 percent of the households in the community and at least 15 percent of the community’s households subscribe to an MVPD that is not the largest in the area;
  3. A municipality offers MVPD service to at least 50 percent of its households; or
  4. A local exchange carrier (i.e., an incumbent telephone company) or its affiliate offers a comparable MVPD service by means other than DBS.[95]

In its most recent report on cable industry prices, the FCC found that only 42.3% of MVPD subscribers reside in cable communities for which effective competition has been affirmatively demonstrated.[96]

cbit-Figure 4

Competition Between MVPDs and TV Stations

The FCC has concluded that TV stations do not compete directly with MVPDs: “Broadcast television alone is not sufficiently substitutable with the services provided by MVPDs to constrain attempted MVPD price increases.”[97] The FCC premised this conclusion on its findings that TV stations offer fewer programs than MVPDs and do not provide video programming on a subscription basis.[98]

Both of these findings are the result of regulatory limitations. In most segments of the communications industry, the FCC has attempted to enhance opportunities for additional competition by eliminating unnecessary regulatory barriers, but not with respect to over-the-air television. The FCC has consistently supported policies that artificially limit the ability of TV stations to compete with MVPDs in the video marketplace, primarily to ensure that TV stations continue to provide programming for free over-the-air.

Some background regarding the development of the television broadcasting industry and broadcast regulation is necessary to understand why the government has chosen to prohibit TV stations from providing video distribution services in direct competition with MVPDs.

Early Regulation of Over-the-Air TV

Like most new communications services, radio broadcasting was not subject to regulatory oversight initially. In the unregulated era, the business model for over-the-air broadcasting was “still very much an open question.”[99] Various methods for financing radio stations were proposed or attempted, including taxes on the sale of devices, private endowments, municipal or state financing, public donations, and subscriptions.[100] “We are today so accustomed to the dominant role of the advertiser in broadcasting that we tend to forget that, initially, the idea of advertising on the air was not even contemplated and met with widespread indignation when it was first tried.”[101]

Because the business model for broadcast was still an unsettled question, Section 303 of the Communications Act of 1934 provided the FCC with broad authority to authorize over-the-air subscription television service (STV).[102] In a 1950s case addressing the FCC’s authority to permit over-the-air STV, the court concluded that, “the Act seems designed to foster diversity in the financial organization and modus operandi of broadcasting stations as well as in the content of programs, and we feel that the Commission did not exceed its authority in concluding that subscription television is entirely consistent with these goals.”[103]

Although the FCC authorized STV services in the analog television era, it strictly limited the extent to which TV stations could offer such services. Due in part to these FCC limitations, analog STV services never became widespread in the video distribution market.[104]

Potential of Digital TV

The digital television (DTV) transition provided over-the-air broadcasting with a new opportunity to provide STV services in competition with MVPDs. The FCC had initially hoped that the new capabilities provided by digital technologies would “help ensure robust competition in the video market that will bring more choices at less cost to American consumers.”[105] One such capability is digital “multicasting”, which enables a single TV station to provide multiple programming streams using only one licensed television channel.[106]

Despite this initial optimism, DTV services suffered from regulatory constraints similar to those that doomed subscription television services in the analog era. When broadcasters proposed digital STV services offering a combination of broadcast and cable network channels, Congress quickly called a hearing to express opposition to the idea and it was abandoned. Due to Congressional opposition and FCC regulatory policies, digital TV stations have been limited to the analog television business model.

Competitive Limitations on TV Stations

There is a host of de jure and de facto regulatory barriers that prevent TV stations from providing subscription services that could compete with MVPDs directly.

Free Channel Mandate. In the Telecommunications Act of 1996, Congress circumscribed the previously broad authority of the FCC over subscription television services. Section 336 of the Act, as amended, requires that the FCC ensure STV services are “consistent” with, and “avoid derogation” of, free over-the-air television services.[107] To “promote and preserve” free local television in the digital era,[108] the FCC requires TV stations to transmit at least one over-the-air video programming signal at no direct charge to viewers.[109]

Provided they are in compliance with this requirement, DTV stations are permitted to offer additional “ancillary or supplementary services.” Though such services may include subscription video programming,[110] the Communications Act prohibits them from being deemed MVPD services.[111] Among other things, this seemingly innocuous limitation prevents TV stations from invoking the program access rules to obtain access to cable network programming that could otherwise be offered as an ancillary service.

The free television mandate and regulatory limitations on ancillary and supplementary DTV services constitute a de jure prohibition on direct competition between TV stations and other video distributors who provide MVPD services.

Broadcast Ownership Limits. The stringent limits on TV station ownership are significant de facto barrier to TV station entry in the MVPD market segment. As discussed above, these ownership limits, which are inapplicable to MVPDs, prevent TV stations from (1) aggregating sufficient broadcast television band spectrum to offer provide enough channels to compete directly with MVPDs (no firm can hold more than 12 MHz in a single DMA), and (2) realizing economies of scale similar to those enjoyed by larger MVPDs.

Broadcast Spectrum Reallocations. Spectrum policies also impact the ability of TV stations to offer enough channels to compete in the MVPD market segment. Rather than provide TV stations with flexible spectrum rights that would allow them to offer new services, the government has reallocated and reassigned (or plans to reassign) substantial portions of the broadcast band for mobile, public safety, and unlicensed uses. Even if the government were to eliminate other barriers to TV station entry in the MVPD market segment, the continuing diminution of the broadcast television band is a de facto barrier to their ability to compete directly with MVPDs.

Federal Broadcast Tax. The Communications Act levies a 5% Federal tax on the gross revenues of all ancillary and supplementary services provided by TV stations, including any revenue they derive from retransmission consent fees for ancillary or supplementary services.[112] Though MVPDs are typically required to pay local franchise fees for use of the public rights of way, these fees typically do not include licensing revenue earned by vertically integrated cable networks and are often lower than 5%.

Broadcast Programming Restrictions. The Communications Act provides that the authorization of “ancillary and supplementary” services shall not be “construed as relieving a television broadcasting station from its obligation to serve the public interest, convenience, and necessity.”[113] A TV station providing ancillary and supplementary services must establish that “all of its programming services” are “in the public interest,” and any violation of FCC rules “applicable to ancillary or supplementary services shall reflect upon the licensee’s qualifications for renewal of its license.”[114] This provision is a de facto barrier to the airing of STV programming that is intended to compete with programming offered by MVPDs on premium tiers, which is not subject to “indecent” programming restrictions.

Impact of Competitive Limitations

These de jure and de facto regulatory barriers to entry in the MVPD market prevent TV stations from generating substantial revenue through subscription television services. As a result, TV stations are forced to rely on advertising and retransmission consent revenue for their survival.[115] Retransmission consent and other provisions that provide unique benefits to broadcasters are the regulatory ballast for this government mandated business model: Without them, the government mandate would sink.

The regulatory limitations on TV station entry into other communications market segments also has the effect of benefiting MVPDs by protecting them from a potentially strong competitor in the MVPD and other segments.

Competition Among TV Stations

In 2011, there were a total of 1,387 commercial TV stations operating in the 210 local TV markets.[116] This indicates there is an average of 6-7 TV stations per DMA when measured on a national basis. Although the number of TV stations in any given DMA varies, the FCC does not provide granular information on competition among TV stations in its annual video report.

Competition among TV stations is limited in scope by their government mandated business model. Because TV stations generally do not have subscribers, they compete primarily for video advertising dollars with other TV stations as well as MVPDs and online video distributors.

PART III: RELATIONSHIPS BETWEEN VIDEO VENDORS AND DISTRIBUTORS

This Part discusses vertical relationships between video vendors and distributors, which typically involve:

  • “Program access”—whether a vendor will agree to allow a particular distributor to distribute (or “access”) the vendor’s programming; and
  • “Program carriage”—whether a distributor will agree to distribute (or “carry”) a particular vendor’s programming.

Terminology. In the MVPD context, the regulations governing vertical relationships are known as the “program access” and “program carriage” rules, which apply only to cable operators and their affiliated programming vendors.

MVPDs access cable network programming through private negotiations for copyright licenses at market rates. They access broadcast programming through “compulsory copyright licenses” and “retransmission consent”.

MVPD carriage obligations for broadcast content are governed by “must carry”. Cable operators are also required to “lease” carriage to independent programmers and provide carriage for “PEG” channels.

With the exception of OVS, non-cable MVPDs are not subject to express regulations governing access to their affiliated programming or program carriage on their distribution systems.

Both MVPDs and TV stations may also enter into “exclusive” programming agreements, which typically implicate program access issues.

Substantive Issues. Though they are described using various terms, the regulations governing program access and carriage address similar substantive issues that arise in both the MVPD and broadcast contexts. These questions are whether and to what extent:

  • Programming vendors should have intellectual property rights in the content they distribute, including whether they can exercise control over its distribution (copyright, compulsory copyright licensing, and retransmission consent);
  • Programming vendors and distributors should be permitted to enter into exclusive distribution agreements (program access, non-duplication/syndication exclusivity agreements, retransmission consent);
  • Distributors could leverage their vertical integration with vendors during programing negotiations in a manner that is anticompetitive (program access, program carriage, and ownership limits); and
  • Programming vendors should be legally entitled to distribution of their programming by distributors (program carriage and must carry).

The remainder of this Part describes how the Copyright and Communications Acts answer these questions as they are currently interpreted and implemented by the Copyright Office, the FCC, and the courts.

Copyright

The Federal Copyright Act of 1976 gives the creators of video programming the right to control “public performance” of their works.[117] The concept of public performance is critical to the property rights of video programming vendors. If they did not have the ability to retain control of the distribution of their work, they would have less incentive to risk their capital on the creation of high-quality video programming in the future.[118]

Copyright for Cable Programming

Cable networks enjoy full copyright protection for their works and generally exercise unfettered control over the “public performance” of their programming.

Copyright for Broadcast Programming

Cable television was originally known as community antenna television (CATV). Early CATV systems typically received and retransmitted only over-the-air television signals. They transmitted both (1) local TV stations to consumers who could not receive satisfactory reception over-the-air, and (2) signals of “distant” TV stations that were beyond the range of local antennas.[119]

Prior to 1976, CATV systems did not pay broadcast networks or TV stations for the right to retransmit broadcast programming.[120] In the 1960s, a major film studio and a major television network filed lawsuits alleging that CATV systems had infringed on their copyrights by retransmitting their audiovisual works without permission. In separate decisions, the Supreme Court held that a CATV system’s retransmission of a local TV signal[121] or a distant TV signal[122] was not a “public performance” entitled to copyright protection,[123] which exempted cable operators from liability under the copyright laws for their retransmission of broadcast programs without consent of copyright owners.[124] “As a result of these rulings, while the broadcasting industry spent billions of dollars to create and purchase programming, cable operators could retransmit those programs at their operating cost without making any payments to program suppliers.”[125]

Congress reversed this result, in part, in the Copyright Act of 1976, which (1) expressly defines the transmission of a performance of an audiovisual work to the public as an exclusive right held by its copyright owner,[126] and (2) established a compulsory copyright license for the retransmission of local and distant broadcast signals by cable operators subject to royalty payments.[127] Compulsory copyright has since been extended to DBS operators for the retransmission of distant signals (subject to royalty payments)[128] and local broadcast signals (on a royalty-free basis).[129]

After passage of the Copyright Act of 1976, copyright owners began to receive royalty fees for distribution of their works by cable operators, but copyright owners still could not control the means by which their content could be distributed, and TV stations were not entitled to control retransmission of their signals.[130]

Retransmission Consent

When considering the 1992 Cable Act, the Senate Commerce Committee concluded that restrictions on the ability of TV stations to control their signals had “created a distortion in the video marketplace [that threatened] the future of over-the-air broadcasting . . . [by requiring that] broadcasters in effect subsidize the establishment of their chief competitors” — e.g., cable operators who sell advertising in competition with broadcasters.[131] The Senate also noted that cable networks were allowed to charge cable operators for the right to distribute cable network programming and saw no reason why programming that is initially transmitted by a TV station should be treated differently.[132]

As a result, the 1992 Cable Act provided broadcasters with the right to seek market-based compensation for the retransmission of their signals by generally prohibiting retransmission by an MVPD without a station’s consent.[133] Though a TV station’s right to control retransmission of its broadcast signal is, in effect, substantially similar to full copyright protection, it is separate from the compulsory copyright license.[134]

Local Stations: The 1992 Cable Act requires local, commercial TV stations to elect either “retransmission consent” or “must carry” (mandatory carriage) every three years. If a station elects must carry, it has given its consent to the retransmission of its signal. If a TV station elects retransmission consent, however, an MVPD must affirmatively obtain retransmission consent from the station through private agreement, which typically requires some form of compensation (e.g., direct monetary payment, advertising time, or carriage of additional channels). Whether a station elects must carry or retransmission consent, an MVPD that retransmits the station’s signal must retransmit the signal in its entirety on the basic tier.[135]

Distant Stations. With the exception of “superstations”, cable operators are also required to obtain consent to retransmit the signals of distant TV stations.[136] Satellite MVPDs, however, are not required to obtain consent for the retransmission of distant signals to unserved households.[137] Distant TV stations need not make a retransmission consent election because TV stations are not entitled to must carry rights in distant markets.

Good Faith Requirement. The Communications Act imposes restrictions on retransmission consent that are designed to promote successful negotiations between MVPDs and TV stations:

  • The parties to retransmission consent negotiation must negotiate in “good faith”;[138]
  • A TV station cannot engage in an exclusive contract for carriage of its TV signals;[139] and
  • Once a station elects retransmission consent, it is not entitled to must carry rights until the next election period.[140]

Both sides in retransmission consent negotiations also have strong economic incentives to reach a mutually acceptable deal.

TV Station Incentives. Because TV stations rely on viewership to sell advertising, and most consumers view television network programming on MVPD systems, a TV station risks losing a substantial portion of its revenue if MVPDs do not retransmit its signal.

MVPD Incentives: Because broadcast network programming is among the most popular programming, an MVPD risks losing a substantial portion of its subscribers to competitive MVPDs if it does not retransmit the signals of network-affiliated TV stations.

As a result of these incentives, most retransmission consent negotiations are concluded without incident, and when blackouts have occurred, they have typically been resolved in the marketplace.

Program Access

The Communications Act contains various provisions that address issues related to (1) the potential for competitive harm from cable operators that possess market power and have ownership interests in video programming networks (“affiliated programming”), and (2) various types of exclusive programming agreements between video distributors and programming vendors.

In the MVPD market segment, cable operators typically have ownership interests in cable programming networks (known as “vertical integration”). Congress has found that vertical integration gives cable operators “the incentive and ability to favor their affiliated programmers,” which could adversely affect competition and diversity in the video marketplace.[141] The program access rules, which are applicable only to cable MVPDs, are intended to address this concern.

To prevent these harms, Congress (1) authorized the FCC to prohibit unfair methods of competition or unfair or deceptive acts or practices  (“unfair acts”) by cable operators and their affiliated programming vendors, and (2) directed the FCC to adopt regulations prohibiting specific conduct by cable operators and their affiliated programming vendors that is presumed to cause competitive harm (exclusive contracts, undue influence, and discrimination).

General Prohibition on Unfair Acts

Congress granted the FCC broad, case-by-case authority (similar to antitrust review) to prohibit “unfair methods of competition or unfair or deceptive acts or practices” by cable operators and their affiliated programming providers that have the “purpose or effect” of hindering significantly or preventing any MVPD from providing cable or broadcast superstation programming.[142]

Presumptively Unfair Acts

Congress directed the FCC to adopt regulations prohibiting three specific unfair acts that are presumed to cause harm (similar to per se violations in the antitrust context): (1) exclusive contracts between a cable operator and a cable-affiliated programmer; (2) efforts by a cable operator to unduly influence the decision of its affiliated programmer to sell programming to competitors; and (3) discrimination by a cable-affiliated programmer in the prices, terms, and conditions for sale of programming among MVPDs.[143]

By their terms, these provisions are applicable only to “satellite cable programming” and “satellite broadcast programming” (i.e., superstations).[144] In 2010, the FCC closed this “terrestrial loophole” in part by concluding that it could address exclusive contracts for programming that is delivered terrestrially on a case-by-case basis under its broad authority to prohibit unfair acts.[145]

Affiliated Programming Limits

In addition to the program access provisions prohibiting unfair acts and certain presumptive harms, the Communications Act requires the FCC to prescribe rules “establishing reasonable limits on the number of channels on a cable system that can be occupied by a video programmer in which a cable operator has an attributable interest.” The FCC adopted a 40% limit on channel capacity in 1993, which required cable operators to reserve 60% of their channel capacity for programming by non-affiliated firms.[146] In 2001, a federal court concluded that the FCC had failed to justify the 40% limit with sufficient evidence and had failed adequately to consider in its analysis the benefits and harms of vertical integration or current MVPD market conditions.[147] The FCC sought comment on issues related to affiliated cable programming limits in 2008, but has not completed the proceeding.[148] As a result, there is currently no specific limit on vertical integration among cable operators and video programming providers.

Exclusive Programming Agreements

An exclusive contract between a video distributor and a video programming vendor has the effect of preventing all other distributors from “accessing” the exclusive programming. Though exclusive contracts between a cable operator and its affiliated programmers were once considered presumptively harmful, other MVPDs, and to a lesser extent, broadcasters, have generally been permitted to enter into exclusively programming contracts with both affiliated and unaffiliated video programming vendors.

Today, all MVPDs, including cable operators, are permitted to enter into “exclusive contracts” with affiliated and unaffiliated video programming vendors on a regional or nationwide basis.

In contrast, TV stations are prohibited from entering into exclusive contracts with MVPDs for retransmission consent, which provides MVPDs with government assurance that they can access all broadcast network programming. Broadcast and syndication networks, however, are permitted to enter into “broadcast exclusivity agreements” with TV stations on a local market basis. Exclusive agreements for broadcast network programming are known as “non-duplication” agreements (because they prevent duplication of local broadcast signals by distant stations), and exclusive agreements for syndicated programming are known as “syndication exclusivity” agreements.

Cable Exclusivity Agreements

The presumption against exclusive contracts between any cable operator and any cable-affiliated programming vendor was applicable per se in areas that were unserved by a cable operator,[149] but could be rebutted in served areas by demonstrating to the FCC that exclusivity would serve the “public interest.”[150] Congress thus recognized that some exclusive contracts provide benefits to the video programming market that offset the potential for competitive harm.[151]

Congress also recognized that increased competition in the MVPD market segment could render the presumption unnecessary. The 1992 Cable Act provided that the exclusive contract prohibition would sunset after ten years (on October 5, 2002), unless the FCC affirmatively found that it “continue[d] to be necessary to preserve and protect competition and diversity in the distribution of video programming.”[152] The FCC extended the exclusivity prohibition twice (in 2002[153] and 2007[154]), but allowed it to expire in 2012.[155]

In 2012, the FCC found that a preemptive prohibition on exclusive contracts was no longer necessary because (1) cable operators have become less dominant in the MVPD market segment nationally and (2) the FCC retains its authority to review exclusive contracts on a case-by-case basis.[156] In these circumstances, the FCC concluded that an individualized assessment of exclusive contracts in response to complaints would be more appropriate.[157]

Although cable operators and their affiliated programming vendors are now authorized to enter into exclusive contracts, the FCC established a rebuttable presumption that an exclusive contract involving a cable-affiliated regional sports network would constitute an unfair act.[158]

As noted above, non-cable MVPDs have always been permitted to enter into exclusive contracts, even with affiliated programmers, because they generally lack market power.

Broadcast Exclusivity Agreements

Similar to non-cable MVPDs, TV stations are permitted to enter into exclusive contracts for the local distribution of broadcast and syndicated network programming. TV stations typically negotiate contracts for exclusive distribution of programming in their respective local markets in order to preserve their ability to obtain local advertising revenue. Otherwise, “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.”[159] Broadcast exclusivity agreements are thus a necessary component of the government’s mandatory broadcast television business model.[160]

As discussed above, prior to adoption of the 1976 Copyright Act, cable operators did not face copyright or any other legal liability for picking up distant signals aired by broadcasters and retransmitting them throughout the country. “The distress felt by originating broadcasters whose signals were retransmitted in this way was matched only by the anger of local broadcasters in the receiving end communities, who watched the cable companies importing into their markets the very programs that they were themselves showing, and to which they had purchased exclusive broadcast rights.”[161] In 1965, the FCC determined that this practice was a form of unfair competition and adopted exclusivity rules that protected local broadcasters from the importation into their markets of distant signals that duplicated network and syndicated programming to which they had purchased exclusive rights.[162] Though the video marketplace has changed since 1965, such practices — which violate private contractual rights — remain unfair.

The currently applicable network non-duplication and syndication exclusivity rules merely permit a TV station that negotiates exclusive rights to broadcast network or syndicated programming in its local market to notify MVPDs of its contractual rights using FCC procedures and provide for FCC enforcement.[163] These procedures “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.”[164] 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.

Similarly, the FCC does not require TV stations or broadcast programming providers to enter into exclusive agreements. The FCC adopted non-duplication and syndication exclusivity procedures to assure that broadcasters, who are legally prohibited from obtaining MVPDs’ economies of scale, could enjoy the same ability to negotiate for exclusive programming rights as MVPDs.[165] The FCC’s rules merely “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.”[166]

The FCC has concluded that, if TV stations were unable to enforce exclusive contracts through FCC rules, they would be at a disadvantage compared to MVPDs.[167] MVPDs can more easily enforce exclusive contracts because (1) they are legally permitted to use digital rights management with their subscription programming and (2) to obtain reasonable economies of scale. In contrast, TV stations are (1) legally prohibited from using digital rights management to protect their programming from unauthorized retransmission, and (2) are subject to stringent ownership limits that prevent them from obtaining similar economies of scale.

Sports Broadcasts

The “sports blackout rule” prohibits a cable system located within 35 miles of the city of license of a broadcast station where a sporting event is taking place from carrying the live television broadcast of the sporting event on its system if the event is not available live on a local television broadcast station, if a blackout is requested by the holder of the broadcast rights to the event. The rule is designed to allow the holder of the exclusive distribution rights to local programming, in this case sporting events, to control, through contractual agreements, the display of that event on local cable systems. Its purpose is to promote the continued general availability of sports programming to the public. The FCC was concerned that sports teams would refuse to sell the rights to their local games to television stations serving distant markets due to their fear of losing gate receipts if the local cable system imported the local sporting event carried on the distant station.

Program Carriage

The Communications Act contains various provisions that are intended to ensure that all MVPDs (both cable and on-cable) distribute programming produced by independent programmers of various types. TV stations are not subject to analogous carriage requirements, in part due to media ownership limits and the fact that each TV station was traditionally capable of transmitting only one programming channel.

Cable Program Carriage

The Communications Act directs the FCC to “establish regulations governing program carriage agreements and related practices between cable operators or other multichannel video programming distributors and video programming vendors.”[168] The Act requires that these regulations include provisions prohibiting a cable operator or other MVPD from engaging in three types of conduct:

  1. Requiring a financial interest in a video programming vendor’s program service as a condition for carriage;[169]
  2. Coercing a video programming vendor to provide, or retaliating against a vendor for failing to provide, exclusive rights against other MVPDs as a condition of carriage;[170] or
  3. Unreasonably restraining the ability of an unaffiliated video programming vendor to compete fairly by discriminating in video programming distribution on the basis of affiliation or nonaffiliation of vendors in the selection, terms, or conditions for carriage.[171]

A programming vendor is entitled to bring a complaint against an MVPD for an alleged violation of these provisions, and the FCC has authority to provide appropriate penalties and remedies.[172]

In response to concerns that its initial program carriage rules discouraged video programming vendors from filing complaints, the FCC revised the rules in 2011.[173] Among other things, the FCC adopted a “standstill” rule, which requires an MVPD to continue carrying an unaffiliated cable network under the terms of its preexisting contract until the network’s complaint against the distributor under the program carriage regime is resolved.

A Federal court subsequently vacated the standstill rule because it was not promulgated in accordance with the Administrative Procedure Act (APA).[174] The APA requires agencies to provide notice and an opportunity for public comment before adopting a substantive (or “legislative”) rule (as opposed to a mere procedural rule).[175] The court concluded that extending the term of a contractual agreement between an MVPD and an unaffiliated video programming network “significantly affects substantive rights.”[176]

Leased Access

“To promote competition in the delivery of diverse sources of video programming and to assure that the widest possible diversity of information sources are made available to the public from cable systems,” the Communications Act requires cable operators to set-aside channels in proportion to a system’s total activated channel capacity for leased access by unaffiliated programming providers.[177]

PEG Channels

The Communications Act also permits LFAs to require that cable operators set aside channels for public, educational, or governmental use.[178] Similar to leased access programming, cable operators are generally prohibit from exercising control over the content of PEG programming.[179]

Must Carry

As an alternative to retransmission consent, local commercial television broadcast stations may elect must carry.[180] If a station elects must carry, any cable system that serves subscribers in the station’s local market is required to carry that station’s signal for free, if it has sufficient channel capacity.[181]

PART IV: THE ARGUMENTS FOR VIDEO REGULATION “REFORM”

This Part analyzes the arguments for video regulation “reform” that have received the most attention in the STELA reauthorization process. The analysis concludes that these arguments are not supported by credible evidence or a consistent rationale.

One-Sided Reform. At the outset, it is worth noting that the arguments for video “reform” are aimed exclusively at eliminating regulations that benefit TV stations, including:

  • Retransmission consent,
  • Broadcast exclusivity agreements, and
  • Basic tier.

Though they are keen to eliminate regulations that benefit TV stations, MVPDs have not proposed the elimination of regulatory provisions that limit the ability of TV stations to compete in the MVPD market segment.

To the contrary, some “reformers” are simultaneously seeking to impose even more stringent regulatory limitations on TV stations. For example, the FCC recently modified its broadcast ownership limits in order to prohibit joint sales agreements between TV stations, despite the fact that MVPDs are participating in an industrywide joint sales agreement with a single broker owned by the largest cable operators.

It is particularly ironic that, while policymakers have been increasing the regulatory burdens of TV stations, they have been steadily eliminating or declining to enforce regulations applicable to MVPDs. Since 2010, the FCC has (1) allowed the national cable ownership limit to lapse without comment; (2) permitted the cable exclusivity prohibition to expire; (3) forborne, in part, from the cable/telephone cross-ownership limit; and (4) authorized Comcast to buy NBC/Universal.

The obviously one-sided focus of the so-called video “reform” effort raises questions about its sincerity. Is “reform” really intended to foster market-based competition among video distributors? This analysis concludes that the answer is “No”.

Arguments for Reform. MVPDs make the following arguments in support of video regulation “reform”:

  1. Retransmission consent prices are “excessive” (i.e., set significantly above competitive levels as a result of monopoly or market power);
  2. Broadcast programming has market power;
  3. Broadcast regulations provide TV stations with unfair bargaining power in retransmission consent negotiations (resulting in a government-created market failure);[182] and
  4. Increased competition in the video marketplace have eliminated the need for retransmission consent (i.e., MVPDs should not have to pay for retransmission consent at all).[183]

The following analysis demonstrates that none of these arguments is supported by credible evidence or a consistent rationale.

Retransmission Consent Prices Are Not “Excessive”

The fatal flaw in this “excessive” prices argument is the lack of any credible evidence that TV stations are in fact charging higher prices for access to their signals than cable programming networks are charging for comparable programming. A comparison of cable network licensing fees and retransmission consent fees shows that TV stations are actually charging significantly less for retransmission consent than cable networks are charging for their own comparable programming. This pricing evidence indicates either (1) that retransmission consent fees are still too low, or (2) that fees for cable network programming are excessive. Either way, retransmission consent fees cannot be considered “excessive.”

U.S. Competition Laws Do Not Countenance Intervention to Remedy “Excessive” Prices

Before turning to the evidence, it is worth noting that U.S. antitrust law does not permit action solely to remedy “excessive” prices. In the U.S., the law recognizes that high prices may reflect the provision of superior products and services due to skill, foresight, and industry:

[T]he [antitrust law] does not mean to condemn the resultant of those very forces which it is its prime object to foster: finis opus coronat. The successful competitor, having been urged to compete, must not be turned upon when he wins.[184]

It is for this reason that U.S. antitrust law prohibits only exclusionary conduct aimed at inhibiting competition itself, not competitive outcomes — e.g., “excessive” prices.

There Is No Credible Evidence that Retransmission Consent Prices Are “Excessive”

If Congress nevertheless believes it is appropriate to intervene directly in the market for video programming based on pricing issues, it should first require “reform” proponents to demonstrate that retransmission consent prices are actually “excessive”. This they cannot do.

In the European Union, whose antitrust laws do permit intervention to control prices directly, such actions are rarely pursued due to the difficulty of determining what constitutes an “excessive” price.[185] To the extent such cases have been adjudicated, they have relied primarily on comparative analyses to determine whether a particular product is priced “too high”.[186]

Comparisons of pricing and production costs for broadcast and cable network programming dismantles the “excessive” pricing argument.

Available data indicates that TV stations charge significantly less for retransmission consent than cable networks charge for programming of comparable popularity. According to SNL Kagan, the top 10 cable network channels cost $1.50 per subscriber on average in 2012, whereas retransmission consent fees for the top 10 TV station groups averaged only $0.61 per subscriber.

cbit-Figure 5

This disparity between retransmission consent and cable network programming prices cannot be explained by the superior quality (i.e., popularity) of cable programming. Analysts have estimated that broadcast programming captures 35% of MVPD viewership but accounts for only 7% of MVPD programming fees.[187] According to the FCC, “broadcast content draws such significant viewership that 96 of the top 100 TV shows in the 2011-2012 season originated on broadcast television.”[188]

Another way the EU measures excessive prices is to compare prices to the cost of production.[189] Even assuming this metric is desirable or meaningful for intellectual property,[190] it does not support the contention that retransmission consent fees are “excessive”. As discussed in Part I, the FCC has found that broadcast network programming is approximately twice as expensive to produce as comparable cable programming. This evidence indicates that, if programming prices were based solely on the cost of production, retransmission consent fees would be nearly double the price of licensing fees for cable network programming (rather than approximately half as much).

To date, retransmission consent “reform” proponents have ignored these unfavorable comparisons. They have instead relied solely on a comparison of past and current prices for retransmission consent — i.e, their argument hinges on the rate of increase in retransmission consent prices. Although the EU has considered price increases relevant evidence that prices are “excessive”, the increases must be “out of proportion” with increases in the cost of production.[191]

It should be obvious that this type of comparison is inapplicable to retransmission consent prices. When Congress authorized retransmission consent in 1992, cable operators were dominant in the video distribution market. The leverage produced by their market power in the distribution market resulted in artificially low retransmission consent prices — i.e., prices that reflected their monopoly power, not the costs of producing broadcast network programming. Recent increases in competition in the MVPD market segment are rebalancing the relative bargaining power of MVPDs and TV stations toward competitive norms. A corresponding increase in retransmission consent prices is the natural result of this rebalancing, which is driving prices for broadcast programming toward the prices charged for comparable cable network programming.

Because retransmission consent prices were initially set without reference to the cost of broadcast programming, a historical comparison of retransmission consent prices and broadcast programming production costs would be meaningless. Retransmission prices have had nowhere to go but up.

Broadcast Network Programming Does Not Have Market Power

Retransmission consent “reform” proponents also argue that broadcast network programming has sufficient market power to support an indirect finding of “excessive” prices. Many economists believe that “normal” dominance is not enough to support an antitrust action for “excessive” prices based on market power; they contend that a “(near) monopoly position” or “super dominance” is required.[192]

But even if “normal” dominance were sufficient to demonstrate “excessive” pricing, the evidence would not support retransmission consent “reform”. An economic analysis conducted by Jeffrey A. Eisenach, Ph.D., demonstrates that the video programming market is competitive, with relatively low concentration and diverse ownership.[193] In its most recent video competition report, the FCC found that at least seven different programming networks account for roughly 95% of television viewing hours.[194] Video programming vendors do not have market power, and certainly do not have the “super dominance” that many EU economists consider necessary to support intervention to curb “excessive” prices.[195]

In comparison, the MVPD market segment is highly concentrated. Only three MVPDs serve more than 90% of subscribers — the incumbent cable operator and the two DBS operators.[196] The FCC found that, in 2011:

  • Cable operators, who typically do not compete with one another in the same geographic area, served 57.4% of MVPD subscribers; and
  • The two DBS operators, who are the second and third largest MVPDs, served 33.6% of MVPD subscribers.[197]

Though national market shares are not determinative of concentration in any particular local market, deployment data corroborates the conclusion that concentration in most local MVPD markets is relatively high. In 2011, only 65% of homes had access to at least three MVPDs,[198] and even in areas in which homes had access to at least four MVPDs, the FCC has determined that the Herfindahl-Hirschman Index (HHI), a common measure of horizontal market concentration, was at least 2,500 (which is considered “highly concentrated”).[199] According to SNL Kagan data, a single incumbent cable operator still has 60% or greater market shares in many DMAs.[200]

The data thus indicate that the distribution market segment is approximately twice as concentrated as the vendor segment: There are only three MVPDs serving more than 90% of subscribers compared to seven programming networks with a 95% share of viewing hours. The high levels of national and local market concentration among MVPDs tend to increase their bargaining power relative to programming vendors and TV stations. To be sure, “[s]hares of subscribers and measures of concentration are not synonymous with a non-competitive market or with market power.”[201] As noted above, however, there is also no direct evidence that retransmission consent prices are “excessive”. In these circumstances, it is implausible to conclude that TV stations are wielding market power in negotiations with MVPDs.

TV Stations Do Not Have Unfair Bargaining Power

According to MVPDs, the right of broadcasters to control the redistribution of television signals is “a wholly artificial construct that has little in common with an actual marketplace.”[202] In their view, the Supreme Court’s copyright decision that provided cable operators with their “historical ability to carry broadcast signals without affirmative consent” is the “real” construct.[203] They would have Congress turn the clock back to the days when broadcast programming was not entitled to intellectual property protections similar to those enjoyed by cable programming networks.

This recent nostalgia for the regulatory framework of days gone by ignores the economics of the video programming market. Both cable and broadcast networks currently derive revenue from their rights to control the distribution of their programming. Whether that right is called “copyright” or “retransmission consent,” the economics are substantially the same. If policymakers were to eliminate retransmission consent, fundamental fairness would require that cable network programming be subject to the limited revenue offered by the compulsory copyright license as well.

MVPDs attempt to differentiate the licensing rights of cable network programming from retransmission consent by arguing that must carry, basic tier, and broadcast exclusivity agreements provide TV stations with unfair bargaining power in retransmission consent negotiations. They imply that government regulation of broadcast programing prices (through the compulsory copyright license) is necessary to address this alleged government failure.

This government failure argument is unpersuasive. A thorough analysis demonstrates that:

  • Must carry has no impact on retransmission consent negotiations at all;
  • Arguments against basic tier contradict the fundamental premise of retransmission consent “reform”; and
  • Broadcast exclusivity regulations do not unfairly advantage TV stations in any way whatsoever.

Must Carry Has No Impact on Retransmission Consent Negotiations

Any attempt to correlate must carry with retransmission consent pricing is a red herring: Must carry has no impact on retransmission consent negotiations.

As legal matter, a TV station that elects retransmission consent is no longer entitled to must carry for three years. If retransmission consent negotiations fail, the TV station is legally prohibited from forcing an MVPD to carry its TV signal until the current election period expires. If a TV station elects must carry instead, MVPDs are legally exempt from paying any compensation to that station for the retransmission of its signal. Because retransmission consent and must carry are mutually exclusive as a matter of law, it is legally impossible for must carry to have any impact on retransmission consent negotiations.

Must carry would not provide a TV station with leverage to demand excessive prices in any event. Even if a station electing retransmission consent had a legal right to invoke must carry when negotiations fail, it would not provide the TV station additional bargaining power. The moment the TV station threatened to invoke must carry, a rational MVPD would yell, “Deal,” because it could then retransmit the programming for nothing. The price of must carry is zero — a much better deal than the MVPD could ever achieve through retransmission consent negotiations, which presume that broadcast content is worth more than nothing.

Arguments Against Basic Tier Contradict the Fundamental Premise of Retransmission Consent “Reform”

The fundamental premise of MVPD arguments for retransmission consent “reform” is that the popularity of broadcast programming allows TV stations to exercise market power during retransmission consent negotiations. If that premise were correct, the basic tier requirement would have no impact on retransmission consent prices. TV stations could rely on their market power to force MVPDs to place broadcast programming on the basic tier with or without a legal requirement. Stated another way, if TV stations already possessed sufficient market power to charge excessive prices for retransmission consent, the basic tier requirement would be superfluous as a matter of economics.

The implicit admission in MVPD complaints about the basic tier requirement is that broadcast content does not provide TV stations with market power. To the extent MVPDs have conceded that point, it may be appropriate to remove the basic tier requirement for TV stations that elect retransmission consent in markets subject to effective competition among MVPDs. In those circumstances, the basic tier requirement could have an impact on retransmission consent negotiations, at least at the margins.

That impact is likely to be de minimis in most effectively competitive markets, however, because MVPDs would have market incentives to include the most valuable broadcast programming on the basic tier in any event. If MVPDs placed the most popular broadcast programming on premium tiers, they would risk losing subscribers to their competitors.

Regulations Enforcing Broadcast Exclusivity Agreements Do Not Unfairly Advantage TV Stations

As noted in Part III, the FCC non-duplication and syndication rules do not create exclusive programming rights; the rules merely enforce private exclusivity agreements between TV stations and programmers. The fact that there are no substantive rights at stake raises an obvious question: Why have MVPDs and the FCC suddenly decided that these enforcement rules are worthy of extended debate? The corollary question is, why do TV stations care so much about FCC enforcement?

The answer to both questions is that, in the absence of the FCC’s non-duplication and syndication rules, other government regulations would inhibit the ability of TV stations to enforce broadcast exclusivity agreements. If TV stations were unable to protect their programming rights, broadcast programming would have less value, and broadcast networks would have incentives to abandon the distribution of their programming over-the-air.

FCC Enforcement Counterbalances Regulatory Limitations on the Protection of Broadcast Programming Rights

TV stations are subject to several regulatory limitations that inhibit their ability to protect their programming from unauthorized retransmission:

  • They are required to offer their programming for free over-the-air;
  • They are prohibited from using digital rights management (DRM)[204]; and
  • They are prohibited from obtaining economies of scale comparable to MVPDs and online video distributors.

These regulatory limitations act in concert to inhibit TV stations from effectively enforcing broadcast exclusivity agreements through preventative measures and in the courts.

As a practical matter, preventative measures are the most 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, which was known as the “broadcast flag”, but the DC Circuit Court of Appeals struck it down. The court determined that the FCC lacked authority to require the use of DRM in television receivers, even though the FCC mandates technical standards for TV stations.[205]

The requirement that TV stations offer their programming for free effectively prevents them from having direct relationships with end users. For example, they cannot require those who receive their programming over-the-air to agree to any particular terms of service. 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 free programming requirement and DRM prohibition 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 (or something similar), 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, TV stations are forced to rely solely on enforcement mechanisms to protect their programming rights.

Enforcement is often more costly than prevention, especially for broadcast programming. Yet another set of regulatory requirements — 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, local TV stations would be forced to defend their rights in multiple courts against significantly larger companies who have the ability to use litigation strategically.

The FCC’s non-duplication and syndication rules balance broadcast regulatory limitations by providing clear mechanisms for TV stations to communicate their rights to MVPDs, with whom they have no direct relationship, and deterring the potential for strategic litigation. There is nothing unfair about FCC enforcement in these circumstances.

Complaints About Broadcast Exclusivity Agreements Are Inconsistent with Regulation in the MVPD Market Segment

It is telling that MVPD complaints are not aimed at the efficacy or availability of the FCC’s enforcement procedures in and of themselves. Their real complaint is against the substance of broadcast exclusivity agreements.[206] According to MVPDs, exclusive agreements between TV stations and broadcast programming networks are inherently unfair irrespective of FCC enforcement.

As discussed in Part II, however, both Congress and the FCC have found that exclusive programming contracts are not inherently unfair. MVPDs have always been free to enter into exclusive programming agreements (e.g., DirecTV’s NFL Sunday Ticket), and when they do, no other MVPD can carry that exclusive programming. Though Congress temporarily prohibited cable operators from entering into exclusive agreements with their affiliated programming providers, the FCC recently allowed that prohibition to expire, because exclusive programming agreements are often beneficial to consumers.

MVPDs have not explained how their exclusive programming agreements could be considered fair and beneficial to consumers if broadcast exclusivity agreements are inherently unfair. If they cannot provide a rational explanation for disparate treatment — other than “it would be profitable for the MVPD market segment” — their arguments against FCC enforcement of broadcast exclusivity agreements should not be given serious consideration.

The Regulatory Scheme Governing Exclusive Programming Agreements Disadvantages TV Stations

MVPDs are correct to the extent they argue that broadcasters are not playing on a level field in respect to exclusive programming agreements. But they are wrong about the direction in which the field tilts.

TV stations are subject to far stricter limits on exclusive programming agreements than MVPDs. TV stations are permitted to enter into agreements for territorial exclusivity only and are subject to a “significantly viewed” limitation that favors the interests of MVPDs. Though MVPDs are permitted to enter into exclusive programming agreements on a nationwide basis that preclude any other MVPD from airing the same programming, the Communications Act prohibits TV stations from entering into exclusive retransmission consent agreements in all circumstances.

This regulatory disparity arguably provides MVPDs with an advantage in retransmission consent negotiations, because no MVPD faces any risk that a TV station will enter into exclusive agreements with other MVPDs. Congress presumably imposed stricter limits on broadcast exclusivity agreements to ensure that all consumers have access to broadcast programming. This regulatory limitation is consistent with other broadcast regulations (e.g., basic tier and must carry, which share the same premise), but it does not put TV stations on a level playing field with MVPDs. The regulatory prohibition on exclusive retransmission consent contracts takes a valuable bargaining chip off the table when a TV station is negotiating with an MVPD.

Competition Among MVPDs Is Largely Irrelevant to Broadcast Regulation

The mantra MVPDs chant as they march into video “reform” battles is “competition, competition, competition.” They note that Congress adopted retransmission consent, must carry, and basic tier in the 1992 Cable Act, which was intended to foster competition against dominant cable operators in the MVPD market segment. They argue that, because competition has increased among MVPDs, broadcast regulations codified in the 1992 Cable Act are no longer necessary.

The Rationale for Broadcast Regulation Does Not Depend on MVPD Competition

MVPDs may want to adopt a new mantra, because competition in the MVPD market segment is largely irrelevant to broadcast regulation.

Though Congress adopted the 1992 Cable Act primarily to address cable’s market power, increased competition among MVPDs has not eliminated the rationale supporting the Act’s broadcast regulations. For example, with regard to must carry and basic tier, Congress was independently concerned that a TV station would “face decreased revenues and profits, which would reduce its ability to serve the public interest,” if it was not available for viewing on MVPD systems.[207]

Regulations that are intended to ensure that TV stations can generate advertising revenue remain necessary to balance regulatory restrictions on broadcast business models — independent of the level of competition among MVPDs — unless and until policymakers eliminate corresponding regulations that are intended to preserve free over-the-air television. As a result of those “preservative” regulations, TV stations are forced to rely primarily on advertising revenue to survive. Their advertising revenue is in turn dependent on their overall viewership, which includes all consumers who rely on MVPD systems to view programming. The relative distribution of subscribers among competitive MVPDs is irrelevant to a TV station’s overall viewership.

Without Retransmission Consent, Broadcast Networks Would Have Incentives to Abandon Over-the-Air Distribution

Competition in the video marketplace is not limited to competition for MVPD subscribers. Video distributors also compete for advertising dollars, and both cable and broadcast networks now compete for payments from their distributors as well as advertising dollars.

Without retransmission consent, TV stations may not be able to attract high-quality broadcast programming from national networks, because those networks would no longer be able to derive substantial revenue from programming distribution rights. Both broadcast networks and TV stations were historically content to rely primarily on advertising revenue because TV stations were once dominant players in the video distribution marketplace. Because nearly all viewers once relied on TV stations for video programming, broadcast networks had significant economic incentives to distribute their programming through TV stations.

The incentives for broadcast networks to distribute their programming over-the-air (rather than directly through MVPDs) has changed considerably since then. When the 1992 Cable Act was passed, only 40% of American households still relied on TV stations for television viewing; today, only about 10% of households rely on over-the-air signals.[208] Most households now view their programming on MVPD systems, and younger consumers are increasingly viewing programming primarily online.

Cable programming networks have demonstrated that, in a competitive distribution market, programming can be monetized through a combination of license fees and advertisements, which serves to maximize their overall revenue. As competition for video advertising has increased, broadcast networks have adopted the cable programming model and sought to increase their retransmission consent revenue. If retransmission consent were eliminated — and the incremental ad revenue generated by over-the-air distribution is less than the combined revenue from license fees and advertising available through direct distribution by MVPDs — broadcast networks would have incentives to stop distributing their programming over-the-air and become cable networks.

The economic incentives of video programmers makes it very unlikely that eliminating retransmission consent would ultimately benefit consumers through lower MVPD subscription prices. If broadcast networks become cable networks, MVPDs would still have to pay them for the right to transmit their programming — albeit, the payments would be called “licensing fees” rather than “retransmission consent fees” and would be paid directly to the former broadcast programming networks.

Though it is unlikely that consumers would benefit from retransmission consent “reform”, TV stations would almost certainly be harmed. Many TV stations would likely go out of business without access to “prime time” broadcast network programming. Though local news and other programming is valuable enough that some stations might survive, it is unlikely that local programming alone would generate enough revenue to support competition among multiple TV stations in a single market and the diversity of local news programming that competition produces.

PART V: KILLING BROADCAST TELEVISION STATIONS

The analysis in Part IV demonstrates that (1) the ostensible reason for video regulation “reform” — that retransmission consent prices are “excessive” — is not credible, and (2) so-called “reform” efforts are focused almost exclusively on eliminating regulations that benefit TV stations while retaining those that prevent them from competing in the MVPD or other communications market segments.

MVPDs have focused particular effort on eliminating retransmission consent, which enables TV stations to access broadcast network programming, despite the fact that retransmission consent prices are lower than the licensing fees MVPDs pay for comparable cable network programming, and MVPDs would have to pay broadcast networks for their programming even if they converted into cable networks. This analysis thus begs the question policymakers should be asking: Why have MVPDs made this one-sided version of video “reform” their highest legislative and regulatory priority?

An analysis of business models in the video marketplace suggests that the cost of retransmission consent is not their primary motive: The ultimate goal is to kill TV stations for their advertising revenue.

The MVPD and TV station market segments derive revenue from the sale of advertising time in substantively similar ways. Available advertising time (and its associated revenues) are typically split between video distributors and programming networks in both market segments.

They differ only in the degree to which they rely on advertising revenue. MVPDs derive a majority of their video revenue from subscription fees whereas TV stations derive a majority of their revenue from advertising.

The primary revenues sources of cable and broadcast programming networks reflect the revenue of their corresponding distributors (MVPDs and TV stations, respectively). Cable networks derive more revenue from license fees paid by MVPDs for programming distribution rights than from advertising sales whereas broadcast networks derive nearly all of their revenue from advertising.

Increased competition in the video marketplace is changing these traditional revenue models.

TV stations are facing increased competition for their primary revenue source—advertising—as TV viewership shifts to the Internet and other media platforms. As a result of the increased competition for advertising dollars, TV stations can no longer rely solely on their potential to generate advertising revenue to attract high-quality programming from broadcast programming networks. TV stations (and broadcast networks) have responded to this market change by diversifying their traditional revenue stream through retransmission consent and online advertising.

MVPDs are also facing increased competition for their primary revenue source—subscribers. During the decade from June 2002 to June 2012, the market share of cable operators decreased by 20% as subscribers switched to satellite and other MVPD services. Cable operators have responded to these subscriber losses by diversifying their revenue streams through broadband access, new video services (e.g., video on demand), and local advertising sales.

Advertising represents a significant growth opportunity for MVPDs. Though MVPD advertising revenue has traditionally been relatively small, it has grown annually at double digit rates in recent years. The prospect of continued advertising growth has prompted MVPDs to invest in a joint sales platform that allows competing MVPDs to package their advertising opportunities for sale on a unified, nationwide basis.

This growth opportunity for MVPDs is constrained, however, by their inability to sell advertising for broadcast network programming. When MVPDs buy programming from cable networks directly, they can negotiate for a split of the available advertising time. But when they buy broadcast programming from local TV stations through retransmission consent, there is no available advertising time. It has already been split between TV stations and broadcast networks through their affiliation agreements, and the compulsory copyright license prohibits MVPDs from inserting their own ads into broadcast programming streams in any event.

The advertising revenue generated by broadcast programming is significant — at least $35.8 billion in 2011 for both TV stations and broadcast programming networks.[209] TV stations sold $10.3 billion that year in local advertising alone, which is more than double the $4.2 billion in advertising revenue generated by cable operators that year.[210] According to BIA Kelsey data, TV stations generated a total of $19.6 in advertising revenue in 2013.

The fundamental inability of MVPDs to share in billions of dollars worth of broadcast advertising revenue is the real driver of their dissatisfaction with retransmission consent rights. MVPDs see TV stations as unnecessary middlemen in the programming supply chain who prevents them from making money on advertising slots during broadcast network programming. If MVPDs could obtain programming from broadcast programming networks directly, MVPDs would realize the revenue generated by the advertising split, not TV stations. Satisfying MVPD’s desire to buy programming from broadcast networks directly and share the advertising split, however, would likely be the end of most TV stations, who rely on advertising to generate revenue and retransmission consent to attract broadcast network programming.

A recent paper by the Free State Foundation that advocates repeal of the retransmission consent provision implicitly admits that this is the ultimate goal:

Absent regulatory intervention there would be no TV broadcast industry today, and cable operators and other MPVPs [sic] would pay nothing to broadcasters. The MVPDs would acquire program rights directly from the program content owners. Without broadcasters to tax MVPDs and viewers there would be more programming and lower program prices.[211]

This statement corroborates the substantial evidence and analysis demonstrating that the MVPD fixation on retransmission consent is not about prices — it is about increasing MVPD advertising revenues by eliminating the TV station market segment altogether.

This motivation explains the cognitive dissonance of some free market advocates who, while clamoring for repeal of retransmission consent and other regulations that are essential for the government mandated broadcast business model to function, are not advocating for repeal of that government mandate — which, incidentally, serves to protect MVPDs from additional competition.

This type of video “reform” is a nifty way of killing TV stations without expressly acknowledging it.

CONCLUSION

The MVPD approach to video regulation “reform” — e.g., arguing for the elimination of regulations that benefit TV stations while retaining corollary, harmful regulations — is a classic “have your cake and eat it too” strategy aimed at killing TV stations. A policy change of this magnitude should be debated transparently and comprehensively, not rushed through STELA bearing a false “market failure” flag. If Congress intends to eliminate TV stations, it should at least recognize the legitimate consumer and investment-backed expectations created by the current statutory framework and consider appropriate transition mechanisms. The Communications Act update would provide an appropriate legislative vehicle for that consideration. STELA reauthorization does not.

__________

1. See Reps. Fred Upton and Greg Walden, A #CommActUpdate To Promote Innovation and Economic Growth, Broadcasting and Cable (Jan. 9, 2014), available at http://bit.ly/MWZ7pf.

2. Id.

3. Id.

4. Id.

5. See Press Release, Democratic Press Office, Rockefeller, Thune, Pryor, Wicker Letter on STELA (Feb. 25, 2014) (“STELA Press Release”), available at http://1.usa.gov/1ilHdqu.

6. Staff, Editorial: A ‘Clean’ STELA, Broadcasting and Cable (Jun. 17, 2013), available at http://www.broadcastingcable.com/news/news-articles/editorial-clean-stela/114560.

7. See, e.g., id.

8. STELA Press Release, supra note 5.

9. See Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, Fifteenth Report, FCC 13-99 (2013) (“Fifteenth Report”).

10. See id. at ¶ 2.

11. The Communications Act does not define the term “online video distributor”. According to the FCC, an OVD is “any entity that offers video content by means of the Internet or other Internet Protocol (IP)-based transmission path provided by a person or entity other than the OVD . . . . [but] does not include an MVPD inside its MVPD footprint or an MVPD to the extent it is offering online video content as a component of an MVPD subscription to customers whose homes are inside its MVPD footprint.” See id., supra note 9 at ¶ 2, n. 4. The FCC has not yet determined whether OVDs should also be considered MVPDs. See id.

12. “The term ‘multichannel video programming distributor’ means a person such as, but not limited to, a cable operator, a multichannel multipoint distribution service, a direct broadcast satellite service, or a television receive-only satellite program distributor, who makes available for purchase, by subscribers or customers, multiple channels of video programming.” 47 U.S.C. § 522(13). Though this definition does not expressly require that an MVPD operate its own distribution facilities, the FCC has generally applied this definition only to facilities-based distributors. See Fifteenth Report, supra note 9, at ¶ 220 (contrasting an MVPD, “whose market typically is tied to the provider’s own facilities-based infrastructure,” with an OVD, whose “geographic market generally covers all regions capable of receiving high-speed Internet service”).

13. See 47 U.S.C. § 522(13).

14. See id. “DBS” is the FCC’s term for certain direct-to-home satellite television services within the broadcasting satellite service (BSS). This paper does not distinguish between DBS and BSS; to the extent they are used to provide MVPD services, this paper uses the term DBS to describe both radiocommunications services interchangeably.

15. See Fifteenth Report, supra note 9, at ¶ 17.

16. See 47 U.S.C. § 541(a)(1).

17. The Communications Act defines a “franchising authority” as any governmental entity empowered by Federal, State, or local law to grant a franchise. See 47 U.S.C. § 522(10).

18. See 47 U.S.C. § 573(a)(1).

19. See City of Dallas Texas v. FCC, 165 F.3d 341 at ¶ (5th Cir. 1999) (reversing an FCC rule preempting local franchise requirements for OVSs).

20. See 47 C.F.R. § 25.102(a).

21. The Open-Market Reorganization for the Betterment of International Telecommunications Act (the “ORBIT Act”) prohibits FCC auctions of orbital locations or spectrum used for the provision of international or global satellite communications services. See 47 U.S. Code § 765f. In Northpoint Technology, LTD v. FCC, 412 F.3d 145 (DC Cir. 2004), the court vacated FCC rules to auction DBS orbital slots because the FCC had not limited DBS licensees to the provision of services only to the U.S. The FCC has since determined that the potential benefits of auctioning DBS slots are outweighed by the potential harms of limiting DBS services to domestic coverage only. See Establishment of Policies and Service Rules for the Broadcasting-Satellite Service at the 17.3-17.7 GHz Frequency Band and the 17.7-17.8 GHz Frequency Band Internationally, and at the 24.75-25.25 GHz Frequency Band for Fixed Satellite Services Providing Feeder Links to the Broadcasting-Satellite Service and for the Satellite Services Operating Bi-Directionally in the 17.3-17.8 GHz Frequency Band, Report and Order and Further Notice of Proposed Rulemaking, FCC 07-76, at ¶¶ 8-10 (2007).

22. See 47 C.F.R. § 1.4000.

23. See 47 U.S.C. § 543(b)(7)(A).

24. See 47 U.S.C. § 543(b)(7)(A)(i) — (iii).

25. See 47 U.S.C. § 543(b)(7)(B).

26. See Fifteenth Report, supra note 9, at ¶¶ 81, 100-103, 113-117. This paper refers to any programming tier other than the basic tier as a “premium tier”.

27. See Fifteenth Report, supra note 9, at ¶ 101. See also Applications of Comcast Corporation, General Electric Company and NBC Universal, Inc. for Consent to Assign Licenses and Transfer Control of Licensees, Memorandum Opinion and Order, FCC 11-4 at ¶ 18 (2011) (“Comcast/NBC Order”).

28. See 47 U.S.C. § 543(b)(8).

29. See Fifteenth Report, supra note 9, at ¶ 91.

30. See id.

31. See id. at ¶ 102.

32. See id. at ¶ 354.

33. See id. at ¶ 103.

34. See id. at ¶ 117.

35. See id. at Table 10.

36. See id. at Table 20. See also Bill Niemeyer, Todays Cable TV “Revenue Split” and Why Over the Top Likely Can’t Be Ad-Supported Only (May 10, 2009) (discussing cable ad splits), available at http://bit.ly/1knYNP0.

37. See 47 C.F.R. § 73.681.

38. See 47 C.F.R. § 73.3533.

39. See 47 C.F.R. § 73.3536.

40. Broadcast TV station licenses are subject to the competitive bidding provisions in Section 309 of the Communications Act. See Implementation of Section 309(j) of the Communications Act – Competitive Bidding for Commercial Broadcast and Instructional Television Fixed Service Licenses, First Report and Order, FCC 98-194 (1998).

41. See Fifteenth Report, supra note 9, at ¶ 178.

42. See id. at ¶ 146 n. 541.

43. See id. at ¶ 204.

44. See id. at ¶¶ 178, 209-11.

45. See id. at ¶¶ 210-11.

46. See id. at ¶ 329.

47. See Comcast/NBC Order, supra note 27, at ¶¶ 13-15.

48. See Fifteenth Report, supra note 9, at ¶ 39.

49. See id. at ¶¶ 162-63.

50. See id. at ¶¶ 163-64.

51. See id. at ¶ 204.

52. See id. at ¶ 205.

53. See id. at ¶ 178.

54. See id.

55. See id. at ¶ 331.

56. See id. at ¶ 336.

57. See id. at ¶ 332.

58. See id.

59. See id.

60. See id. at ¶ 336, Table 8.

61. See id. at ¶ 335.

62. See id.

63. See 47 C.F.R. § 73.3555(b).

64. See id.

65. See Adam D. Rennhoff and Kenneth C. Wilbur, Local Ownership and Media Quality at 2 (Jun. 12, 2011), available at http://www.fcc.gov/encyclopedia/2010-media-ownership-studies.

66. See 2014 Quadrennial Regulatory Review, Further Notice of Proposed Rulemaking and Report and Order, FCC 14-28 at ¶ 342 (2014).

67. See id. at ¶ 350.

68. See id. at ¶ 340. See also 47 C.F.R. § 73.3555, Note 2(k) (codifying the rule).

69. See 47 C.F.R. § 73.658(g) (providing that “[a] television broadcast station may affiliate with a person or entity that maintains two or more networks of television broadcast stations unless such dual or multiple networks are composed of two or more persons or entities that, on February 8, 1996, were ‘networks’ as defined in [Section] 73.3613(a)(1) of the Commission’s regulations”).

70. See 47 C.F.R. § 73.3555(d)(1).

71. See Prometheus Radio Project v. FCC, 652 F.3d 431 (3d Cir. 2011).

72. See 47 C.F.R. § 73.3555(c)(2).

73. See 1996 Act at § 202(c). See also 47 C.F.R. § 73.3555(e).

74. See The Commission’s Cable Horizontal and Vertical Ownership Limits, Fourth Report & Order and Further Notice of Proposed Rulemaking, FCC 07-219 at ¶ 5 (2008) (“2008 Cable Ownership Order”).

75. See 47 U.S.C. § 533(f)(1)(A).

76. See 2008 Cable Ownership Order, supra note 74, at ¶¶ 6-7.

77. See Time Warner Entertainment Co. v. FCC, 240 F.3d 1126 (D.C. Cir. 2001).

78. See 2008 Cable Ownership Order, supra note 74, at ¶¶ 1-2.

79. See Comcast Corp. v. FCC, 579 F.3d 1, 8 (D.C. Cir. 2009).

80. See NCC Media, Essential Guide, previously available at http://nccmedia.com/planning-buying/.

81. See 1996 Act at § 202(f)(1).

82. See Fox TV Stations, Inc. v. FCC, 280 F.3d 1027 (DC Cir. 2002).

83. See 1996 Act §§ 302(b)(1), 202(i).

84. See 47 U.S.C. §§ 572(a)-(b).

85. See 47 U.S.C. §§ 572(c).

86. See Petition for Declaratory Ruling to Clarify 47 U.S.C. § 572, Order, FCC 12-111 (2012).

87. The 1992 Cable Act preempted local barriers to competition among MVPDs by prohibiting Local Franchise Authorities from granting exclusive franchises or unreasonably refusing to award an additional competitive franchise. See 47 U.S.C. § 541(a)(1). The 1996 Act subsequently removed legal barriers to entry into the MVPD market segment by incumbent telecommunications carriers. See Telecommunications Act of 1996, Pub. L. No 104-104, 110 Stat. 56, § 302.

88. See Fifteenth Report, supra note 9, at ¶ 129.

89. See id.

90. See Cable Television Consumer Protection and Competition Act of 1992, Pub. L. No. 102-385, 106 Stat. 1460 (1992) (“1992 Cable Act”).

91. The FCC remained responsible for regulating premium cable programming tiers until March 31, 1999.

92. A “small cable operator” is defined to include (1) any operator that serves fewer than one percent (1%) of all subscribers in the United States (2) that is not affiliated with entities that have gross annual revenues exceeding $250 million. In any franchise area where a small cable operator serves fewer than 50,000 subscribers, rate regulation does not apply to the operator’s basic tier if it was the only tier subject to regulation as of December 31, 1994.

93. See 47 U.S.C. § 543(a)(2).

94. See 47 U.S.C. § 543(a)(3)-(4). See also 47 C.F.R. § 76.910.

95. See 47 C.F.R. § 76.905(b).

96. See Implementation of Section 3 of the Cable Television Consumer Protection and Competition Act of 1992, Report on Cable Industry Prices, DA 13-1319 at Att. 1 (2013). The FCC notes that some communities may in fact be subject to competition sufficient to warrant a finding of effective competition, but the incumbent cable operator had not petitioned the FCC for an effective competition finding or the petition had not been granted by the cut-off date for its survey. See id. at ¶ 1, n. 4.

97. See Fifteenth Report, supra note 9, at ¶ 2, n.3.

98. See id.

99. National Assoc. of Theatre Owners v. FCC, 420 F.2d 194, 200 (DC Cir. 1969), cert. den., 397 US 922.

100. See id. at 200-202.

101. See id. at 201, n. 19 (quoting C. Siepmann, Radio, Television, and Society 7 (1950)).

102. See generally National Assoc. of Theatre Owners, 420 F.2d 194.

103. Id. at 202.

104. See generally Amendment of Part 73 of the Commission’s Rules and Regulations In Regard to Section 73.642(a)(3) and Other Aspects of the Subscription Television Service, Fourth Report and Order (Proceeding Terminated), FCC 83-485 (1983) (describing history of STV service and eliminating certain regulatory requirements applicable to STV).

105. See Advanced Television Systems and Their Impact upon the Existing Television Broadcast Service, Fifth Report and Order, FCC 97-116 at ¶ 5 (1997).

106. The FCC licenses TV channels in 6 MHz bandwidths. See 47 C.F.R. § 73.681.

107. See 47 U.S.C. §§ 336(a), (b).

108. See Advanced Television Systems and Their Impact upon the Existing Television Broadcast Service, Fifth Report and Order, FCC 97-116 at para. 5 (1997) (“First, we wish to promote and preserve free, universally available, local broadcast television in a digital world. Only if DTV achieves broad acceptance can we be assured of the preservation of broadcast television’s unique benefit: free, widely accessible programming that serves the public interest.”).

109. See 47 C.F.R. § 73.624(b).

110. See 47 C.F.R. § 73.624(c).

111. See 47 U.S.C. § 336(b). See also 47 C.F.R. § 73.624(c)(1).

112. See 47 C.F.R. § 73.624(g).

113. See 47 U.S.C. § 336(d).

114. See id.

115. See Fifteenth Report, supra note 9, at ¶ 146.

116. See Fifteenth Report, supra note 9, at Table 15.

117. See 17 U.S.C. § 106.

118. See Robert J. Shapiro and Kevin A. Hassett, The Economic Value of Intellectual Property at 6-7 (2005), available at http://bit.ly/1cxb0ZK.

119. See United States v. Southwestern Cable Co., 392 U.S. 157, 163 (1968).

120. See id.

121. See Fortnightly Corp. v. United Artists Television, Inc., 392 U.S. 390, 393 (1968).

122. See Teleprompter Corp. v. CBS, Inc., 415 U.S. 394, 396 (1974).

123. The Supreme Court had reached the opposite conclusion with respect to radio broadcasts of musical performances. In Buck v. Jewell-LaSalle Realty Co., the Court held that a hotel that retransmitted radio signals to its guests was involved in a “public performance” resulting in copyright liability. 283 U.S. 191, 195-202 (1931).

124. See Malrite T.V. of N.Y. v. FCC, 652 F.2d 1140, 1145 (2d Cir. 1981), cert. denied, 454 U.S. 1143 (1982).

125. Id. at 1145-46.

126. See 17 U.S.C. § 101 (“To perform or display a work ‘publicly’ means . . . to transmit or otherwise communicate a performance or display of the work . . . to the public, by means of any device or process, whether the members of the public capable of receiving the performance or display receive it in the same place or in separate places and at the same time or at different times.”).

127. See 17 U.S.C. § 111(c) (providing that secondary transmissions to the public by a cable system of a performance or display of a work embodied in a primary transmission are subject to statutory licensing). A cable operator obtains a compulsory license by submitting information regarding its retransmissions of broadcast signals and remitting royalty payments to the copyright office, which is responsible for distribution of fees to the copyright holders. See 17 U.S.C. § 111(d). Royalty fees are generally based on a cable system’s gross receipts from the retransmission of local broadcast signals and the number of distant signals it retransmits. See id.

128. See 17 U.S.C. § 119.

129. See 17 U.S.C. § 122.

130. See Malrite T.V. of N.Y., 652 F.2d at 1148 (holding that “retransmission consents would undermine compulsory licensing because they would function no differently from full copyright liability, which Congress expressly rejected [in the Copyright Act of 1976]”).

131. S. Rep. No. 102-92 at 35 (1991), reprinted in 1992 U.S.C.C.A.N. 1133, 1168.

132. See id.

133. See 47 U.S.C. § 325.

134. See 47 U.S.C. §§ 325(b)(6) (“Nothing in this section shall be construed as modifying the compulsory copyright license established in section 111 of title 17 or as affecting existing or future video programming licensing agreements between broadcasting stations and video programmers.”). This provision reflects the view that there are two interests involved: The interest in the signal itself, which belongs to the broadcaster, and the interest in the programs carried on that signal, which belongs to copyright holders. See House Subcommittee on Telecommunications and Finance hearings for H.R. 1303, the original companion bill to S. 12. (Jun. 27, 1991).

135. See Implementation of the Cable Television Consumer Protection and Competition Act of 1992, Report and Order, FCC 93-144 at ¶¶ 32, 164-171 (1993) (citing 47 U.S.C. §§ 534(b)(3), (7)).

136. The Senate Commerce Committee expressly “relied on the protections which are afforded local stations by the FCC’s network non-duplication and syndicated exclusivity rules. Amendments or deletions of these rules in a manner which would allow distant stations to be submitted on cable systems for carriage or local stations carrying the same programming would, in the Committee’s view, be inconsistent with the regulatory structure created [in the Senate bill].” S. Rep. No. 102-92 at 38 (1991), reprinted in 1992 U.S.C.C.A.N. 1133, 1171.

137. See Satellite Television Extension and Localism Act of 2010, Pub. L. 111–175.

138. See 47 U.S.C. §§ 325(b)(3)(C)(ii), (iii).

139. See 47 U.S.C. §§ 325(b)(3)(C)(ii).

140. See 47 U.S.C. §§ 325(b)(4).

141. See 1992 Cable Act, supra note 90, at § 2(a)(5) (“The cable industry has become vertically integrated; cable operators and cable programmers often have common ownership. As a result, cable operators have the incentive and ability to favor their affiliated programmers. This could make it more difficult for noncable-affiliated programmers to secure carriage on cable systems.”) The Senate Commerce Committee noted that “programmers are sometimes required to give cable operators an exclusive right to carry the programming, a financial interest, or some other added consideration as a condition of carriage on the cable system.” See S. Rep. No. 102-92 (1991) at 24, reprinted in 1992 U.S.C.C.A.N. 1133, 1157.

142. See 47 U.S.C. § 548(b) (“[I]t shall be unlawful for a cable operator, a satellite cable programming vendor in which a cable operator has an attributable interest, or a satellite broadcast programming vendor to engage in unfair methods of competition or unfair or deceptive acts or practices, the purpose or effect of which is to hinder significantly or to prevent any multichannel video programming distributor from providing satellite cable programming or satellite broadcast programming to subscribers or consumers.”)

143. See 47 U.S.C. §§ 548(c)(2)(A)-(D).

144. Both terms are defined to include only programming transmitted or retransmitted by satellite for reception by cable operators. See 47 U.S.C. §§ 548(i)(3), (1) (incorporating the definition of “satellite cable programming” as used in 47 U.S.C. § 605).

145. See Review of the Commission’s Program Access Rules and Examination of Programming Tying Arrangements, First Report and Order, FCC 10-17 (2010), affirmed in part and vacated in part sub nom., Cablevision Sys. Corp. v. FCC, 649 F.3d 695 (D.C. Cir. 2011).

146. See Implementation of Sections 11 and 13 of the Cable Television Consumer Protection and Competition Act of 1992 Horizontal and Vertical Ownership Limits, Second Report and Order, FCC 93-456 at ¶ 68 (1993).

147. See Time Warner Entertainment Co. v. FCC, 240 F.3d 1126, 1137-39 (D.C. Cir. 2001).

148. See 2008 Cable Ownership Order, supra note 74.

149. See 47 U.S.C. § 548(c)(2)(C) (prohibiting “practices, understandings, arrangements, and activities, including exclusive contracts for satellite cable programming or satellite broadcast programming between a cable operator and a satellite cable programming vendor or satellite broadcast programming vendor, that prevent a multichannel video programming distributor from obtaining such programming from any satellite cable programming vendor in which a cable operator has an attributable interest or any satellite broadcast programming vendor in which a cable operator has an attributable interest for distribution to persons in areas not served by a cable operator as of the date of enactment of this section”). This prohibition applied even if the cable operator that was a party to the contract was not affiliated with the cable-affiliated programming vendor that was a party to the contract. See Implementation of the Cable Television Consumer Protection and Competition Act of 1992, Report and Order, FCC 0-7-169 at ¶¶ 70-72 (2007) (2007 Cable Exclusivity Prohibition Extension Order), aff’d sub nom. Cablevision Sys. Corp. v. FCC, 597 F.3d 1306, 1314-15 (D.C. Cir. 2010).

150. See 47 U.S.C. § 548(c)(2)(D) (prohibiting “with respect to distribution to persons in areas served by a cable operator, … exclusive contracts for satellite cable programming or satellite broadcast programming between a cable operator and a satellite cable programming vendor in which a cable operator has an attributable interest or a satellite broadcast programming vendor in which a cable operator has an attributable interest, unless the Commission determines (in accordance with [Section 628(c)(4)]) that such contract is in the public interest”). Congress directed the FCC to consider specific factors when determining whether a particular exclusive contract would serve the public interest. See 47 U.S.C. § 548(c)(4).

151. Revision of the Commission’s Program Access Rules, Report and Order in MB Docket Nos. 12-68, 07-18, 05-192, Further Notice of Proposed Rulemaking in MB Docket No. 12-68, Order on Reconsideration in MB Docket No. 07-29, FCC 12-123 at ¶ 7 (2012) (“2012 Program Access Order”).

152. See 47 U.S.C. § 548(c)(5).

153. See Implementation of the Cable Television Consumer Protection and Competition Act of 1992, Report and Order, FCC 02-176 (2002).

154. See 2007 Cable Exclusivity Prohibition Extension Order, supra note 149.

155. See 2012 Program Access Order, supra note 151.

156. See id. at ¶ 2 (2012).

157. See id. at ¶ 3.

158. See id.

159. Id. at ¶ 62.

160. “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.” Id. at ¶ 42.

161. United Video v. FCC, 890 F.2d 1173, 1177 (D.C. Cir. 1989).

162. See Amendment of Subpart L, Part 11, to Adopt Rules and Regulations to Govern the Grant of Authorizations in The Business Radio Service for Microwave Stations to Relay Television Signals to Community Antenna Systems, First Report and Order, 38 FCC 683, 703-704 (1965).

163. See Amendment of the Commission’s Rules Related to Retransmission Consent, Notice of Proposed Rulemaking, FCC 11-31 at ¶ 42 (2011).

164. Amendment of Parts 73 and 76 of the Commission’s Rules Relating to Program Exclusivity in the Cable and Broadcast Industries, Report and Order, FCC 88-180 at ¶ 120 (1988).

165. See id. at ¶ 125. When the rules were adopted in 1988, cable operators were not yet subject to the 1992 Cable Act’s prohibition on exclusive programming contracts.

166. See id. at ¶ 120.

167. See id. at ¶ 62. As a practical matter, it is more difficult for local TV stations to enforce territorial exclusivity than for MVPDs who operate clustered systems on a subscription basis. See id. at ¶ 42.

168. See 47 U.S.C. § 536(a).

169. See 47 U.S.C. § 536(a)(1).

170. See 47 U.S.C. § 536(a)(2).

171. See 47 U.S.C. § 536(a)(3).

172. See 47 U.S.C. §§ 536(a)(4)-(6).

173. See generally Revision of the Commission’s Program Carriage Rules, Second Report and Order in MB Docket No. 07-42 and Notice of Proposed Rulemaking in MB Docket No. 11-131, FCC 11-119 (2011).

174. See Time Warner Inc. v. FCC, 729 F.3d 137, 168-71 (2d Cir. 2013).

175. See 5 U.S.C. § 553(b), (c).

176. Time Warner Inc. v. FCC, 729 at 168.

177. See 47 U.S.C. § 532.

178. See 47 U.S.C. § 531(a).

179. See 47 U.S.C. § 531(e).

180. Noncommercial stations do not have retransmission consent rights.

181. See 47 U.S.C. § 534(b).

182. In addition to the potential for Congressional action via STELA reauthorization or the #CommActUpdate, the American Television Alliance (ATVA), a coalition comprised primarily of MVPDs, has filed a petition at the FCC asking the agency to “reform” retransmission consent. See Time Warner Cable, Inc., Petition for Rulemaking to Amend the Commission’s Rules Governing Retransmission Consent, RM-11606 (Mar. 9, 2010) (“ATVA Petition”), available at http://apps.fcc.gov/ecfs/comment/view?id=6015545051.

183. See id. at 15, 31.

184. See United States v. Aluminum Co. of Am., 148 F.2d 416, 430 (2d Cir. 1945).

185. See Liyang Hou, Excessive Prices Within EU Competition Law, 7 European Comp. J. 47 (2011).

186. See id.

187. See Diana Marszalek, Ryvicker: Stations Losing $10.4B In Retrans, TVNewsCheck (Sept. 18, 2013), available at http://www.tvnewscheck.com/article/70559/ryvicker-stations-losing-104b-in-retrans.

188. See Expanding the Economic and Innovation Opportunities of Spectrum Through Incentive Auctions, Notice of Proposed Rulemaking, FCC 12-118 at ¶ 14 (2012).

189. See Liyang Hou, supra note 185.

190. See id.

191. See id. (noting that actions for excessive pricing inhibit innovation).

192. See id.

193. See Jeffrey A. Eisenbach, The Economics of Retransmission Consent (2009).

194. See Fifteenth Report, supra note 9, at ¶ 329.

195. See id. at 16.

196. The FCC does not report market shares with enough granularity to calculate a weighted average. The FCC also does not report the percentage of cable subscribers that reside in markets that are served by more than one cable MVPD.

197. See Fifteenth Report, supra note 9, at ¶¶ 30-31.

198. See Fifteenth Report, supra note 9, at Table 2.

199. See id.

200. See Letter from National Association of Broadcasters to Marlene H. Dortch, Secretary, FCC, MB Docket Nos. 09-182, 10-71 at 7 (Mar. 24, 2014).

201. Annual Report and Analysis of Competitive Market Conditions With Respect to Mobile Wireless, including Commercial Mobile Services, Fifteenth Report, FCC 11-103 at ¶ 54 (2011).

202. See ATVA Petition, supra note 182, at 3.

203. See id. at 2-3.

204. DRM refers to a class of technologies that are used to control the distribution and use of digital content.

205. See American Library Ass’n v. FCC, 406 F.3d 689 (2005).

206. See Free State Foundation, Understanding the Un-Free Market for Retrans Consent Is the First Step for Reforming It (2013), available at http://bit.ly/1g9muUd.

207. See S. Rep. No. 102-92 (1991), reprinted in 1992 U.S.C.C.A.N. 1133, 1172.

208. See Fifteenth Report, supra note 9, at ¶ 8.

209. See Fifteenth Report, supra note 9, at ¶¶ 204-205, Tables 20, 21.

210. See Fifteenth Report, supra note 9, at ¶ 204, Table 20.

211. Bruce M. Owen, Free Station Foundation, The FCC and the Unfree Market for TV Program Rights (2011), available at http://bit.ly/1eTdM01.

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