Comcast-TWC and the Broken Market for Program Carriage

Posted By on Mar 12, 2014 | 4 comments


A tweet over the weekend about a Milwaukee paper’s editorial on the proposed Comcast-TWC merger had me thinking it was probably time for another posting on that topic.  The editorial repeated the typical (misplaced) concerns over “net neutrality” but then also went on to suggest an odd pair of proposed concessions Comcast should make relating to video:

Comcast and Time Warner should eliminate forced bundling and allow a la carte purchasing and smaller bundles; they could agree not to discriminate in Internet pricing and to sell access to the Net without a cable TV bundle; and they should divest all of their programming assets.

This had me thinking it was time to again explain, this time with some more detail, how cable bundles are actually controlled at the wholesale level, by programmers (cable networks/channels), rather than by cable (or satellite, or telco) operators.  For the above excerpt clearly reflects a lack of understanding of the cable operators’ role in that process.

Upon re-reading the editorial the next day, however, I noticed that there was a link to the Forbes commentary by Warren Grimes from which the above proposals were drawn.  And in reading that, I realized that while Professor Grimes is, in my view, off-base on some concerns, he does understand the basic issues in play at the wholesale level, when it comes to channel bundling.  (Rather, it was the Milwaukee paper that misunderstood, in paraphrasing his suggestions in a fashion that didn’t make sense.)  Grimes also clearly recognizes that the most important television-related concerns around this merger relate to programming, not distribution.

Still, the impact of the merger on the problems as they already exist at the wholesale level would be minor, and the solution Grimes proposes (blocking the merger) would be wholly inadequate in addressing those much larger, existing problems.  Furthermore, it seems likely that many will have misunderstood Grimes’ commentary on the problem, just as the Milwaukee paper did. And with many politicians still clearly lacking any real understanding of the issues  (see for example recent coverage of Al Franken’s statements), it still seems worthwhile to post an explanation of the problems that exist, as well as a discussion of changes policy makers ought to consider in order to meaningfully address such.

The Problem with the Cable (and Satellite, and Telco) Bundle

The heading above says a lot, in itself.  That the same basic bundle problem exists across all distributors—with every cable provider (whether incumbent or overbuilder) and every satellite and telco provider—demonstrates that the problem is not at the distributor level.  When it comes to video, each of these companies are fierce competitors.  Virtually all markets have at least three competitors, and in many markets there are now four competitors—all competing for subscribers in a market that is at best stagnant, and more likely, actually declining in total subscribers.  Accordingly, this is fierce competition where one operator’s gain is normally another operator’s loss.

This kind of competitive market is normally extremely good at addressing consumer wants.  In a free market, one or more of the competitors will seek advantage by offering something different from the others, seeking to satisfy a consumer need or desire.  And yet, the clear consumer desire for smaller bundles, of popular channels, at lower cost continues to go unserved.  And even as high costs and a struggling economy have caused that desire to reach the level of a need, there still has been no meaningful change.

The reason this happens is simple: the distributors simply lack the power to substantially change the bundles.

Understanding why is the key to understanding what will and what won’t make the situation worse, and what would be necessary to make the situation better.

Programmer Leverage

With all those hundreds of channels that get packaged together, there are actually relatively few major programmers that account for almost all of them.  Here’s a list of the largest programmers, and some of their channels/brands (with either full or partial ownership):

Disney: ABC, ESPN, A&E, Biography Channel, History Channel, H2, Military Channel, Crime & Investigation, Lifetime, Disney channels, ABC Family, Fusion

CBS: CBS, The CW, Showtime, CBS Sports, The Movie Channel, Smithsonian Channel

NBCUniversal [owned by Comcast]: NBC, Telemundo, Bravo, The Weather Channel, CNBC, MSNBC, E!, Esquire, Golf, Oxygen, G4, Sprout, USA, NBCSN, Syfy, Universal, Comcast Sportsnet channels (regional sports networks)

Fox: Fox, FX, Fox News, Fox Business, Fox Sport channels (regional sports networks), Speed

Viacom: MTV, Comedy Central, Nickelodeon, CMT, Spike, TVLand, VH1, Epix

Time Warner: HBO, Cinemax, CNN, HLN, TBS, TNT, TCM, Cartoon Network, Adult Swim, truTV, Boomerang

Discovery: Discovery channels, American Heroes, Animal Planet, Science Channel, TLC, Oprah Winfrey Network, Velocity

Scripps: HGTV, DIY, Food, Cooking, Travel, Great American Country

AMC: AMC, IFC, Sundance, WE

If you noticed that most of these programmers have at least one or two channels that you consider essential, and then many others that you don’t, you can see the problem.  Every programmer has at least one “must have” channel—a channel which, if it were permanently dropped from a cable/satellite/telco provider’s lineup, would cause a large number of consumers to consider the service unacceptable, and switch to another provider.  This gives the programmers tremendous leverage.  The distributors need those “must have” channels to compete, and the programmers know it.  So the programmers are in an extremely strong position to extort what they want.

Now, extort is a strong word, but unfortunately it’s an accurate one.  The script is, by now, well-established, and goes something like this:

Step 1: Set your carriage agreement to expire shortly before some major television event.  For example, the Superbowl, the World Series, the Oscars, or perhaps the start of a new season of a very popular program.  This ensures maximum pressure from politicians and the public, if there is a blackout.

Step 2: Make sure that only one of the several competitors is expiring at that time.  For example, at one time, it’s a major cable operator.  At other times it will be the various other satellite and telco operators (but always one at a time).  This isolates the distributor, ensuring that customers have alternative providers to switch to, if there is a blackout.

Step 3: Extract your pound of flesh.  The distributor is now caught between a rock and a hard place.  Either they capitulate to the programmer’s demands, and suffer customer wrath down the road when rates rise (and for many years now, also a financial impact due to absorbing some of those increases, themselves), or they hold out, and suffer a blackout.  The blackout will mean subscriber losses, as some customers switch to other providers, and a negative impact to the customer relationship with those who remain—but if the distributor can hold out long enough, may end with slightly better terms for the new carriage agreement.

It’s worth noting that these channel blackouts are almost always harder on distributors than programmers.  The programmers lose a fraction of their advertising audience (since the blackout affects just one of many distributors), whereas the blackout typically affects the distributor’s entire customer base.  Then also, when the blackout ends, the programmer immediately gets all of their advertising audience back, whereas the distributor doesn’t get back their former customers who switched to a competing provider.

Perhaps the biggest irony of this process is that, while the process is overwhelmingly controlled by programmers, consumers almost always blame their distributor for the loss of a favorite channel.

Retransmission Consent and the Explosion of Channels

Over the last two decades, as DBS satellite distribution came into its own with high-capacity digital systems, and cable systems vastly expanded their capacity by also adopting digital delivery, the programmers have used their leverage not just to increase prices on existing channels, but also to gain carriage for new channels.

Furthermore, programmers virtually always demand the carriage of those channels in low tiers, that are distributed to the vast majority of subscribers.  The reason for this is simple: not only do they typically get paid a monthly fee for each subscriber, but they also sell advertising based on audience size.  So they always want the largest subscriber base possible, and that requires getting bundled into a low tier.

In fact, the major broadcast television networks, ABC, CBS, NBC, and Fox—each of which owns many local broadcast stations (e.g., WABC, WNBC, etc.) in major markets—initially used retransmission consent negotiations to launch new cable networks, rather than to seek direct subscription fees for their broadcast channels.  These stations were the original, and still the most powerful, “must have” channels.

For those who aren’t familiar with it, retransmission consent was introduced in the early 90s, when Congress changed the law, allowing local broadcast stations to require cable operators to negotiate a carriage agreement in order to carry their signals.  Previously, cable operators carried local broadcast stations (and actually were required to carry them) under a compulsory license, with no negotiations required.

And if you look at the lists above,  you’ll notice that the longest lists belong to the companies that own broadcast networks. (In fact, it’s also worth noting that CBS was part of Viacom, prior to 2006.)  This is not by accident.  It is a direct product of the leverage those networks were given by the introduction of retransmission consent.

In more recent years, having pushed channel expansion about as far as they could, the broadcast networks have turned to charging direct subscription fees for carriage of their channels.

The net result of all this was the explosion of channels that get bundled into the most widely distributed channel tiers, and the tremendous inflation of the cost for those channel bundles.

How to Fix the Problem

When Warren Grimes wrote:

…the merging parties should demonstrate their good faith by voluntarily eliminating forced bundling and allowing all distributors to offer consumers a la carte or smaller customized bundles.

and:

…the two firms could eliminate substantial anticompetitive effects of this proposed union by agreeing to divest all of their programming assets.

he was getting at precisely the problem at the wholesale level, in the program carriage market, where programmers constrain the ability of distributors to offer more flexible packages to consumers.  (The Milwaukee paper clearly misunderstood this, instead taking taking the former statement to be a suggestion for what Comcast and Time Warner Cable should do in their capacity as distributors, rather than what they should do in their capacity as programmers.)

The trouble with Grimes’ proposed fixes is that they either don’t do enough (if Comcast agreed to meaningful changes, it wouldn’t address the same issue with respect to all other major programmers), or do nothing at all (if Comcast and TWC actually divested their programming assets, that would do nothing at all to solve the problem).

What is truly needed to address this problem is meaningful reform of the program carriage market.

If policy-makers mean to be serious about doing something, they should consider the following potential reforms:

1) Repeal retransmission consent

Retransmission consent is, quite simply, a completely failed policy, and is the single greatest cause for what has happened to cable bundles and rates over the last two decades.  What’s more, the very notion of retransmission consent goes against the basic social compact whereby broadcasters were given (for free) extremely valuable broadcast bandwidth, in exchange for agreeing to provide free (advertising-supported) programming to consumers.

Retransmission consent should be repealed.

If broadcasters want to charge subscription fees in addition to collecting advertising revenue, then they should be required to convert to cable networks, and give back their broadcast spectrum.  (Those who still receive over-the-air broadcasts would be unhappy, if they did.  But given that only a single digit percentage of households still rely solely on over-the-air reception, it’s time to stop requiring the rest of us to pay through the nose in order to subsidize that over-the-air service.  What’s more, if broadcasters did convert to cable networks, getting television broadcast spectrum back would be a huge boon to government coffers, and to other industries that desperately need additional spectrum, for much more efficient uses.)

2) Prohibit channel tying

Programmers should never be able to use a must have channel to force carriage of additional channels.  In a normal world, this would be treated as a per se antitrust violation.  Each channel should be separately licensed (meaning that programmers cannot offer discounts on one channel for carrying another).

This would also create a more level playing field for independent programmers to negotiate carriage, in competition with the major programmers.

3) Prohibit or strictly limit penetration requirements and discounts

Programmers force distributors to bundle channels into widely distributed tiers by requiring minimum percentage penetrations of the subscriber base, by offering hugely discounted rates for high penetrations (or conversely, offering only ridiculously inflated rates for lower penetrations), or occasionally, by charging a flat rate, independent of how many subscribers actually receive the service.

These practices should all be either prohibited entirely, or strictly limited.

An effective regulatory limitation would be to allow low-cost channels to offer discounts for wide distribution, but to disallow high-cost channels from doing such.  After all, bundling does actually offer benefits for consumers, and having a large subscriber base does enable channels to earn higher advertising revenues, offsetting the need for subscription fees. The impact, however, of forcing very expensive channels, such as sports networks costing several dollars per month, into base channel bundles is very different from the impact of having channels costing only cents per month included in such.  So allowing the lowest cost channels to keep their subscription costs low by offering volume discounts is likely a reasonable policy.

What’s more, a well-crafted policy could actually help to drive subscription fees lower.  For example, a policy that allowed only channels with subscription fees lower than average to offer penetration discounts would create ongoing pressure for channels seeking carriage in low tiers to reduce their prices, in order to qualify.

4) Prohibit discriminatory pricing

Larger distributors have more negotiating clout than smaller distributors, so they get better pricing.  This creates a fundamental impetus toward consolidation among distributors.

But as a matter of public policy, why should, say, a small rural cable operator—and its customers—have to pay more than a large operator, like Comcast, to receive the same content?  And is there any good that comes from having direct competitors pay vastly different rates, based on their size?

Unless there is some good policy reason to encourage the massive consolidation that this inevitably encourages—and I don’t believe many would argue there is—this kind of price discrimination should be prohibited.  It does direct harm to consumers and competition.

Rather, programmers should be required to make their best rates available to all distributors, on a non-discriminatory basis.  If a programmer wants to give Comcast a great deal to gain carriage, then they have to offer the same deal to all other distributors.  Programmers would retain the right to set their own terms and prices, but not the right to discriminate in setting terms and prices.

 

Enacting policy-changes along these lines would address what have become systematically anti-competitive business practices by programmers, that have resulted in dramatic harm to consumer interests for two decades now.  It is high time for policy-makers to act in a meaningful way to address those harms.

 

  • Apparently it is the author of this story that doesn’t get it, or he is an apologist for Comcast. To begin the comment: “Virtually all markets have at least three competitors, and in many markets there are now four competitors—all competing for subscribers in a market that is at best stagnant, and more likely, actually declining in total subscribers. ”

    I live in Silicon Valley and previously in Virginia. Neither Los Altos Hills, or Virginia Beach had three services available to me. Los Altos Hills had one and there were credit checks that prevented at least one neigbor of mine from getting service altogether. Comcast was not even considering it even though the homes were all in the multi-million dollar range and the most expensive house in the U.S. was in the neighborhood. AT&T bought old copper lines from Verizon to deliver the signal from the pedestal.

    Verizon left the area after dumping the old lines. In Virginia Beach, my sister had a chice of Cox or Verizon Fios, but we had only cox to choose from. The other companies all said that Internet access, nor standard cable networks were available. The building I lived in also prohibited any type of dish and my condominium faced the opposite direction from satellite coverage. I was a broadcast engineer and I did not give up easily, but eventually I had to. In Los Altos, the hills and tress made same same coverage prohibitive. For a while I used only an old rooftop antenna and even ell coverage was abominable. Virtually all markets have competition huh? At least three, if not four? Dream on.

    Next…

    What you and other seem to miss, is that this merger is not necessary but by all means, it should go through if Comcast is willing to do what is in the customers best interest. Have they already been roped into long term contracts? Yes, but they also want this merger. I don’t know, nor do I care if you have any interest in this merger happening without restriction. You simply need to be corrected.

    Would it cost Comcast a prohibitive amount of money to change the dynamic of their business. I would wager, it would. But that is not our concern as customers. We can also argue if they do or d not have us over a barrel since Comcast is verticlally integrated, and owns significant content, including cable networks and they are the nations dominant distributor. They already bought NBCU and they still have access to cash for TWC.

    Yes, they make deals with others to carry their programming and they pay to carry others, but if we are dumb enough to let this trend continue based on the weak premise you just provided, we will surely pay the price for our ignorance. Again, would it be cost prohibitive? Probably. But is that my problem? No, my problem is that we are being gouged and being led around like Cattle because we have no real choice. Maybe you receive a discount that I don’t but it affects you too. Maybe of these restrictions were required for merger they would back out of the deal. Let me guess. That would cripple the U.S. economy right? Give me a break.

    Next…

    As tomyourmpoint that it’s a dwindling market. Over the top (online content distribution) is a tiny fraction of the overall market for these very reasons. They are required to pay prices for content, that others receive even though they already get steep discounts because of the size of their networks. This is unfortunately, the industry I’ve chosen for my career. They provide content to OTT distributors for higher rates and promise to lower them, but that is the real catch 22. They also charge themselves money which is a laugh since they take their large bankroll from one of their pockets and put it their other pocket. Then online provide pay outlandish prices because they can’t build comparable audiences on cheaper and less content than theyrovide and no package linear network is available online.

    Dish has made a deal for some content but many feel this is only the latest fiasco that is about to happen. For example, what happened to intel and the half billion dollar oncue system? Verizon will have the same issue with it because they won’t be able to create more competition to vertically integrated systems like Comcast or really TW either although they simply made TWC a majority subsidiary. Now they will merge and you want me to cry tears for them and the costs it will take to make this new monstrosity a reality? Alrightythen. Comcast actually ended up recently with an increase in subscribers as did a few others, yet the population is also growing.

    They are not growing at nearly the rate because of this new competition. But can you in good conscience tell anyone that this is not currently a David and Goliath situation? Who is really misguided here? Comcast has other programmer like weather channel over a barrel and ther is plenty of leverage to make sure they don’t get gouged any more than what the market will bear. But they also pass those costs on to us and as one example. Netflix upon its first renewal agreement for content in the Starz deal was offered the same content for an increase of over ten times the first contract.

    They are playing dirty pool, but even so, many, especially younger cord cutters won’t, no can’t pay for that and they move to online sources purely for the cost, not the overwhelming content selection. I guess all of that seems fair to you. Remember when you speak about Comcast. They are a programmer and they are a distributor. You imply they have control over neither, but intact, they have a significant amount of control over both. Enough to leverage both ends of the market IMO. But those who fight for our right to pay for what we consume and not for what they force us to swallow because they made so many back door agreements to get to this point, should not be criticized, at least for that. In fact, let me tell you the kicker.

    The kicker is: this idea of buy just the CHANNELS you want is not a la carte. It is merely their plan B. this BS outlook on a la carte comes right from their play book that has been so successful. let me clue you in on something. A la carte would be if we could subscribe to breaking bad,and not to AMC. They don’t even make the show any more and even play infomercials during off times. They also play movies riddled with commercials and we pay to watch them. A la carte is what Netflix ( again, they are just one example) provides. You choose what you want to watch and you have influence of when you watch it.

    There’s even more….

    Cable channels or linear as we call them are bundles in themselves. They package it and then make us buy bundles of channels we never asked for and they are not part of the same wholesale packages. We don’t for example have a espn bundle, or even a ABC/Disney/ESPN bundle do we? We get Viacom with Disney, with Fox, and many others including gems like home shopping who actually pay for carriage in the majority if not all homes. I wish I had time to say even more, but believe me there is so much more.

    As fr this story and the lessons we should derive from it….

    Possibly your heart is in the right place, but please spare us any more lessons about how it is silly to make Comcast do something they might object to to make this already inequitable merger go through. That is truly for them to evaluate ande public and even congress should hear my words, but I doubt this will ever make the slightest dent in this death star they are building. What if the deal was predicated on them providing content to online providers ( all of it, not just some), in the sake windows of time, and regardless of the catch 22 of audience size.

    At least there would be a ubiquitous competitor as you implied already existed. Then, make them offer us content on all distribution networks in real a pa carte and I don’t give a damn what it cost them. I’m still not sure why you would either. But they could always withdraw from the deal. Oh, and finally, as they agreed in the dealer NBCU, they should indefinitely adhere to net neutrality and even enhance those retrictions based on the FCC vs Verizon. Not to mention, they would be required to stay out of Hulu altogether this time not just to agree to profit from it and let others vote . Hulu is another method to regulate the flow of content online and don’t get me started about that. As I said there is a lot more, but it’s up to all of us to stand up to such things, not just me. I merely provided a starting point for an apparent uphill battle.

    Feel free to debate me, but do your research first. I think the audience has already learned enough lessons the hard way. I look forward to reading the Forbes article and the story from Milwaukee. I also urge each of you to tell you cogressman what you think the restrictions should be on this deal and inform them of what you mean by you want a la carte. Trust me, you will not kill Comcast, nor will you cripple the economy. In fact, you might be able to afford to watch some much better television than we all experience right now.

    Good luck! We’re gonna need it.

    • J. S. Greenfield

      I feel obliged to note that, with respect to the proposed Comcast-TWC merger, the point of this article was not to argue in favor of or against the merger, but rather to illuminate facts relating to some of the non-factual arguments being made.

      More importantly, the point of the article was to explain why it actually is that video channel bundles have gotten so much larger and so much more expensive over the years, how the market is broken, and the kind of meaningful interventions that would be necessary to fix such.

      So far as competition goes, my claim was that virtually all markets have at least three competitors, not that virtually all homes have access to three providers. There are always going to be some homes that cannot access one or both DBS providers, and there’s some percentage of homes that don’t have a cable provider. That doesn’t change the fact that each of those providers competes with the others in those markets, and the offers they make available are generally made available on a market-wide basis, not on a house-by-house basis.

      • I can appreciate an alternate viewpoint.

        However…

        Ironically, my comments were (as you put it) ” to illuminate facts relating to some of the non-factual arguments being made.” Also, why do we have to over-complicate the issues before these monopolies (maybe not all of them are, but there are some)? This is an issue that the markets themselves can deal with and it is not the misguided nature of the audience that is an issue. It is truly their problem and they will rap the profits from their success, or be crushed when/if competition does in fact ever reach “Virtually all markets.” Meaning interventions” by whom? You also say not ever house has this choice. Who should we complain to or have this intervention with? I apologize for my directness. But these are your actual words.

        “VIRTUALLY ALL markets have AT LEAST THREE competitors, and in many markets there are now four competitors—all competing for subscribers in a market that is at best stagnant, and more likely, actually declining in total subscribers. ”

        That is factually incorrect. I guess two example are not enough. Why do we care BTW if six people in our market had such a choice if the remainder does not? Is that really competition, even if that is the case? I just outlined an entire city/town (I actually know of others) that had only one service to “choose from” and even worse, there are people there still that not only can’t subscribe from AT&Ts strict credit criteria in that example, as I indicated. There is no wireless coverage unless you sit on your wife’s shoulders, and wrap your head in aluminum foil. Also, if you are too far from the pedestal you can’t even get service no matter what you pay from AT&T and their highly conditional service for both video, and for internet access as well.

        This area is on the border of Palo Alto and next to PARC by Xerox. This is easily considered part of our market or many consider it a market in itself (did I choose the only exception to the phrase “virtually all”). There are also many DMAs of various sizes that are quantified (maybe that is your criteria, maybe not), and I listed two that offered no such choices.

        Maybe your point was (or should have been) that only select areas have ANY competition, and you can’t be sure that this applies to or even factors into the merger, or competition in general. If an entire city or town with more than three people and a cow have no comet ion, does that mean you define markets in all cases as what’s happening in a neighboring city? Your definition of markets much less areas is highly vague IMO.

        You dramatically over-simplified the issue in my opinion. In fact, you partly glossed over one of the problems as well IMO. I think you accidentally stumbled on to a common fallacy. Or you severely over-generalized it. My point is: it has no bearing on reality. Should we care if we have no choice, but a guy in another city may?

        You also just said:

        “That doesn’t change the FACT that EACH of those providers COMPETES with the others in those markets (“virtually all” according to you), and the offers they make available are generally (not virtually all) made available on a market-wide basis, not on a house-by-house basis.”

        I think I covered why that’s not correct, but what markets do you refer to when you say “those markets?” “Virtually all” of them? “some percentage of homes don’t have a cable provider(?)” I guess zero percent is a percentage too. So I agree if that is your point now. Satellite coverage is problematic in more areas than this one market or area (however you choose to define it). The place in Virginia I mentioned is my home town and it is the highest populated city in the state. Yet our market area was once listed as one of the highest cable penetration “markets in the country.”

        That does not imply competition. Not to split hairs either. But I mentioned the old twisted pairs of ancient telephones lines that Verizon abandoned, because technically thats limited IPTV service not cable. Cable requires significant infrastructure, as does fiber to the home as another example. The services are severely limited even when they choose to adapt to the market (If they even have that choice).

        I could even debate you on the remainder of your last comment and other things in the blog, but I’ve dominated the conversation enough. I’ll levee you with one question: How to we, as the audience and sets that pay the bills actually go about these theoretical “meaningful interventions?”

        • Dale

          R Cowan, while the argument you make seems valid, Direct TV and Dish Network operate in the entirety of North America. This places two subscription services on every home on the continent. So the description of three to four competitors in virtually every market is accurate.

          Your lack of this knowledge not only makes you sound like a schil, but completely invalidates your argument as this was the only point you had against this article (excluding bias.)

          To everyone else. This article describes the problem with television programming in America and how crazy the content creators have gotten. The birth of the internet caused this being “open to everyone for the same price”, but the content creators have not pulled their head out of the sand to embrace companies like netflix and youtube.

          Wake up and smell the future, or be buried in the past.