A familiar and troubling situation is re-emerging in the pay-TV industry. It’s called vertical integration – an economic term that can be applied to situations where one company controls both cable systems with millions of customers and valuable cable programming with large viewership appeal. A company that controls cable distribution facilities and content properties is uniquely able to engage in unfair practices, such as charging rival pay-TV distributors much more for its programming than it charges itself, or withholding content from online video distributors (OVDs). A recent trend toward vertical re-integration has emerged within the cable industry, and it requires policymakers’ immediate attention, particularly given Comcast’s $45.2 billion deal to buy Time Warner Cable.
The latest outbreak of vertical integration started in early 2011 when Comcast acquired majority control of NBC Universal (NBCU) in a deal that brought together Comcast, the nation’s largest cable operator, with one of the nation’s largest programmers, NBCU. National cable networks owned or effectively controlled by Comcast-NBCU now include top-rated USA Network along with such powerful niche brands as CNBC, Golf Channel, Syfy, Bravo, E!, and MSNBC.
The trend continued in early 2013 when Liberty Media purchased a controlling interest in the nation’s fourth largest cable operator, Charter Communications. Because Liberty’s Chairman, John Malone, holds a substantial interest in Charter through his stake in Liberty Media, as well as in Discovery Communications and Starz, all of these companies are now effectively operated under unified control. The national programming networks that are part of this vertical behemoth now include Discovery Channel, TLC, Animal Planet, OWN: The Oprah Winfrey Network, and the premium service Starz.
The cable operators and programmers involved in these recent deals do not comprise the entire universe of programming that is affiliated with major cable operators. For instance, the AMC Networks — which includes AMC, home of the hit series “The Walking Dead” — are also cable-affiliated through the Charles F. Dolan family that effectively controls Cablevision.
Lawmakers are familiar with the perils of cable vertical integration and have sought to curb its anti-competitive effects. In 1992, Congress adopted program access rules to protect competition in the multichannel video programming distributor (MVPD) marketplace by preventing large vertically integrated cable operators from attempting to disadvantage rival pay-TV providers by overcharging them for affiliated cable programming. Merger conditions imposed on Comcast-NBCU by the Federal Communications Commission and the Department of Justice demonstrated that policymakers remain concerned about the incentive and ability of vertically integrated operators to engage in such conduct. Their ultimate concern, however, is with the consumers of pay-TV services, who almost invariably end up footing the bill for undue programming cost increases.
Regulators reviewing the Comcast-NBCU joint venture also expressed new concerns about the dangers that vertically integrated operators could pose to the development of innovative OVDs, like Netflix, by withholding access to, or charging discriminatory rates for, vertically integrated programming. To address these concerns, regulators adopted conditions that required Comcast-NBCU to guarantee OVDs access to its programming.
Regulators cannot afford to sit idly by with more vertical integration on the near horizon. The FCC should act on an 18-month-old request by small and medium-sized cable operators to close a loophole in its program access rules that leaves them with significantly less protection against discrimination by cable-affiliated programmers than Congress intended.
Nearly every small and medium-sized pay-TV provider in business today — a group that numbers nearly 900 companies — purchases the bulk of its cable programming through a single buying group, the National Cable Television Cooperative (NCTC). Although Congress explicitly instructed the FCC to ensure buying groups utilized by MVPDs are entitled to file a complaint under the program access rules, the agency has failed to carry out this statutory directive because the agency defined a “buying group” for this purpose in a manner that effectively excluded the NCTC.
Because small and medium-sized pay-TV providers rely on buying groups to license most of their programming, these providers receive protection from program access rules only to the extent that their buying groups are given the same protections as individual pay television providers. Because the NCTC has no regulatory mechanism to challenge rank discrimination in prices, terms and conditions sought by cable-affiliated programmers at the bargaining table, small and medium-sized pay television providers are denied the full protection Congress intended.
The FCC initiated a rulemaking more than one year ago, tentatively concluding that its definition of a “buying group” needs to be modernized to include the NCTC. Yet, on the eve of what would be one of the largest cable mergers ever, involving about 12 million TWC customers, the agency still has taken no action.
As the trend toward vertical integration increases, so will the risk that consumers and competition will be harmed. Before the danger to the pay-TV and online video marketplace gets any greater, the FCC should act quickly to ensure that small and medium-sized cable operators have the protections against discriminatory treatment that Congress intended.
–Matthew M. Polka, CEO, American Cable Association
Based in Pittsburgh, the American Cable Association is a trade organization representing nearly 850 smaller and medium-sized, independent cable companies who provide broadband services for more than 7 million cable subscribers primarily located in rural and smaller suburban markets across America. Through active participation in the regulatory and legislative process in Washington, D.C., ACA’s members work together to advance the interests of their customers and ensure the future competitiveness and viability of their business. For more information, visit http://www.americancable.org/