Killing Program Access and Broadband Competition

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Another Friday filing by the FCC: 146 pages on program access.It’s a classic on-the-one-hand-on-the-other item. This time around it’s even worse for the public, because the underlying competitive reality of the wires that run to American homes is being hidden, in two ways: First, the entire discussion is focused on the market for pay-TV, because that’s the subject of the rules being examined. That’s the wrong market definition from a consumer’s point of view. Consumers are buying both data and video in bundles, and in that bundled marketplace we don’t have competition. Removing program access protections is just going to make that uncompetitive situation even worse. Second, the information that would allow the public to understand just how powerful Comcast and Time Warner Cable are in their geographic clusters has been removed from public view.

Because it takes a few sentences to explain this stuff, the mainstream media will likely not pay attention. Maybe there’s a hardy, detail-oriented reporter out there who is willing to take this on. In hopes – here we go.

The item itself deals with a particular section of the 1992 Cable Act that bans exclusive contracts for a particular flavor of cable programming between any cable operator and any cable-affiliated programming vendor. At the time that statute was written, we didn’t have a DBS (direct broadcast satellite, like DISH today) industry and the cable operators completely dominated non-broadcast delivery of video to peoples’ homes. Congress wanted to encourage the development of DBS to compete with cable. But DBS operators couldn’t get access to cable-affiliated programming – the cable guys, who were and are deeply integrated into programming, had no incentive to sell it to them, because then they’d be helping along a competitor.

Because at the time that statute was written cable distributors received programming via satellite before sending it down wires to peoples’ homes, the law said that satellite cable programming from cable-affiliated programmers had to be made available to competitors to cable. It also banned exclusive contracts between cable distributors and cable-affiliated programmers. That seemed to leave out programming delivered to the distributors over wires – so-called “terrestrial” programming – and that loophole was exploited by the cable distributors. They refused to give access, in particular, to sports programming delivered to them over wires.

This refusal to give access to sports programming was shown to do real damage to DBS companies. Comcast’s withholding of the terrestrially-delivered Comcast SportsNet Philadelphia Regional Sports Network (RSN) from DBS operators caused the percentage of television households subscribing to DBS in Philadelphia to be 40 percent lower than what it otherwise would have been, and Cox’s withholding of its sports network did the same thing to DBS vendors in San Diego. People will choose their pay-TV package based on its sports content.

Comcast, the biggest cable company in the country (and the biggest broadband provider), owns or is affiliated with a total of 24 RSNs, and has strong geographic clusters in the mid-Atlantic, Chicago, Denver, and Northern California. Time Warner Cable, the second largest, owns or is affiliated with 20 of them, and has strong geographic clusters in five geographic areas – New York State (including New York City), the Carolinas, Ohio, Southern California (including Los Angeles), and Texas.

That’s a lot of sports. That’s also a lot of clustering. More on the clusters in a moment.

A couple of years ago, the FCC did its best to close the “terrestrial loophole” by creating a case-by-case complaint process to deal with unfair acts involving terrestrially-delivered, cable-affiliated programming, and created a presumption that not providing access to sports programming was unfair. The order from Friday essentially does the same thing for satellite-delivered programming – putting everything on a case-by-case complaint basis.

What’s been removed? A flat ban on exclusive contracts between cable distributors and cable-affiliated programmers has been lifted. The rationale is that the pay-TV market has become more competitive on a national level than it was in 1992. The DBS players have more video share. There are some telco-provided video packages. So cable is less dominant: in 2007, cable had 67% of nationwide pay-TV subscribers, and today it has 57%. Which must mean, the Commission reasons, that cable operators have a reduced incentive to enter into exclusive contracts that starve their pay-TV competitors of programming.

So, here’s the first problem. Yes, DBS companies (DISH and DIRECTV) are selling video. But they rely on synthetic bundles in order to sell data access together with video – they don’t have wires in the ground, and have to re-sell the telcos’ data services. Cable operators have upgraded their facilities to bundle their video service with two-way high-speed Internet access and telephone service over the same wire. DIRECTV and DISH can’t do this. And consumers want both data and video, in huge numbers.So when you’re sitting in your living room, and you want both pay-TV and high-speed data, you are going to choose your local cable provider. As I’ve written several times, people are abandoning DSL (from the telcos) in droves, and buying cable broadband. Only Verizon’s FiOS can compete with Comcast or Time Warner in terms of download speed (although it’s far better on uploads), and because it’s far more expensive to rip out copper and put in fiber than to upgrade cable electronics, Verizon has bowed out from the wire business. Which leaves you with your cable bundle.

Even if pay-TV, by itself, is arguably more competitive than it was in 1992, the broadband/video market is far far less competitive than it was even a few years ago. Cable dominates. The major system operators – chiefly Comcast and Time Warner – never enter each other’s territories.

If you’re going to start a competitive fiber system, you’ve got a great selling point: Only fiber installations can provide low-latency uploads as well as downloads. As businesses move to the cloud, they’ll need to upload mountains of data. (We’ve created something like 90% of all data in the last few years, and the numbers are growing quickly.) But, right now, in order to make that selling point attractive, you’ll have to also sell people pay-TV. Including sports.

Under Friday’s ruling, competitive fiber systems won’t have clear access to sports controlled by cable-affiliated programmers. And that’s going to cause them all kinds of trouble. Google is having big problems getting access to Time Warner-affiliated sports programming in Kansas City.

So: in 1992, cable had a lock on pay-TV, and was grinding American consumers and would-be competitors into the dust. To help out, Congress forced cable to give access to programming. In 2012, cable has a lock on broadband in America. Raising obstacles to getting access to sports programming is going to keep that status quo in place.

That’s the first problem with Friday’s order. It ignores the larger problem. The lawyers will say that they were dealing only with pay-TV, and that’s true, but that’s not the real concern for the country.

The second problem with Friday’s order is that it obscures cable’s dominance. I mentioned above that cable has clustered its operations and that Time Warner Cable and Comcast never enter each others’ territories.

Wouldn’t you like to know how powerful these clusters are? The FCC admits on p.13 of Friday’s order that clustering has increased since 2007. It admits on p.14 that clustering may increase a cable operator’s incentive to withhold regional programming. (It’s more worthwhile to hold onto the subscribers you have as an operator – because they get programming from you that they can’t get from another pay-TV provider – than to get broader distribution for your programming. Exclusivity and discrimination are profitable strategies for vertically-integrated distributors.)

It admits on p.14 that the national market share of competing pay-TV wired providers is a lot higher than their market share in the particular geographic regions where an incumbent cable operator is clustered. It even admits on p.13 n.68 that in 23 out of 210 market areas in the US (but it doesn’t say which ones or how big they are), incumbent cable operators have about 70% market share. When you’re that powerful, you have the ability as well as the incentive to keep competitors at bay using the sledgehammer of withholding programming from would-be broadband competitors.

But then the FCC withholds the data you’d need to understand what’s actually going on. On p.14, it states:

In the 2007 Extension Order, the Commission noted that Comcast passed more than 70 percent of television households in 30 Designated Market Areas (DMAs) and TWC passed more than 70 percent of television households in 23 DMAs. Based on the 2011 data provided by the cable operators, Comcast now passes more than 70 percent of television households in [REDACTED ] DMAs and TWC passes more than 70 percent of television households in [REDACTED: :  : ] DMAs.

Look. Clearly Comcast’s and Time Warner Cable’s competitors know exactly where these companies have clustered their operations. This isn’t competitively-sensitive information. But it is relevant to public understanding. This is a major step backwards for transparency.