Wednesday, December 08, 2010

Online Video and the Comcast – NBCU Transaction

If you want to know more about what's wrong with the FCC's merger review process, and there is plenty as I first documented in 1999, look no further than the agency's lengthy review of the proposed Comcast-NBCU transaction, and especially the entanglement of "online video" issues in the review. The Commission's regulatory venturing into this emerging market segment has contributed to the unduly prolonged merger review – which, by all rights, should be completed promptly.

It has been long-reported from "sources inside the FCC" and now assumed by almost all that the FCC will extract from Comcast some form of condition offered up "voluntarily" supposedly designed to prevent Comcast from inhibiting the development of online (or Internet or web) video. (Even as I write I am reading that Comcast is now offering up a proposed condition.) The purported rationale for such condition is to protect a rapidly-growing, alternative means of consuming video for those who do not wish to subscribe to the existing multichannel service of Comcast, or of its competitors, such as DirectTV, Dish Network, Verizon's FiOS, or the like.

Initially, it should be emphasized that such concerns more properly ought to be addressed in a generic, industry-wide rulemaking proceeding, rather than in the context of a specific merger review. But put aside for now that point of process. The FCC's venture into regulating online video says a lot about the bureaucratic imperative that continues to grip the agency in a time-warp vise, even as the communications environment becomes ever more dynamic. For rather than viewing the rapid development of online video as a reason – finally – to get serious about eliminating decades-old legacy regulations applicable to broadcasters, cable operators, and satellite providers, the FCC instead can't resist using the new means of accessing video as a rationale for extending regulation.

Now, I understand that, in theory, if Comcast possesses dominant market power as a distributor of video it might have the incentive, along with the ability, to somehow restrict the development of online video as an alternative distribution means. If Comcast possesses such market power, presumably it could try to require video content programmers to withhold content from Internet video sites if the programmers wish to have Comcast distribute their programming.

Although highly unlikely, perhaps at some point in the future the video distribution marketplace may revert to the monopolistic structure that prevailed through, say, the mid-90s. If so, I am not arguing there may not be a proper role for the FCC (or the antitrust authorities) to play in fostering competition. But such is simply not the case now.

This piece is not the place to reproduce the essence of the FCC's own series of thirteen video competition reports, which have chronicled the increasing competitiveness of the video distribution marketplace, or to repeat the contents of the almost-daily newspaper and online stories concerning the fierce competition among video providers. It should suffice to point out that when FCC Chairman Julius Genachowki testified before the Senate Commerce Committee in July 2009, he told the committee that since 1990, "an array of new choices – direct broadcast satellites, Internet-based video, mobile services, video offerings from telephone companies, and video games – have joined broadcast and cable television as a daily reality for millions of American families." In its most recently-released (and long-delayed) video competition report, the FCC stated in January 2009, based on data largely from 2006 sources, that "[t]he marketplace for the delivery of video programming services is served by a number of operators using a wide range of distribution technologies." And with respect to Internet video, the Commission concluded: "The amount of web-based video provided over the Internet continues to increase significantly each year."

Of course, since 2006, or 2009, or last week, the amount of Internet video available to consumers, much available for "free" and the remainder available at various subscription rates, has continued to expand exponentially. YouTube, is yesterday's news, of course, with the emergence of so many Internet-based video sites, such as AppleTV, Google TV, Hulu, and so forth and so on.

So, why has the FCC unduly delayed action on the Comcast – NBCU transaction while it considers online video merger conditions? Because the agency clings to the notion that, regardless of marketplace circumstances, a central part of its mission is to "level the playing field" -- to make sure that competition is "fair." Thus, it invites complaints for regulatory intervention from competitors who want the playing field "leveled" in their direction. Take, a new online video distributor being sued by many video networks, including NBCU, for alleged copyright infringement with respect to online programming distribution. According to an article in Broadcasting & Cable magazine, ivitv now comes to the FCC insisting that "Comcast's content contracts be free of exclusivity and other contractual barriers to innovation, competition, and fair value for consumers."

In light of the competitive video marketplace, it is bodacious, but not at all surprising, that ivitv would appeal to the FCC for advantages in the context of the Comcast-NBCU merger proceeding. But, frankly, it takes a certain amount of hubris on the FCC's part to indulge in the exercise.

Does the FCC think that it is in a better position than the marketplace to determine whether Comcast's (and other video distributors) contracts for content should be exclusive, and, if so, for how long? Does the agency appreciate that exclusivity – and the property rights which protect exclusivity – encourage innovation and investment in new programming? Does the FCC think it is equipped to determine a "fair" price at which video distributors who have acquired programming rights in contract negotiations ought to be required to make that programming available to online distributors?

Does the FCC believe it is better equipped to make these judgments than the marketplace it has repeatedly characterized as competitive? If so, the agency is wrong, and it should refrain from trying to do so.

And the Commission certainly should refrain from delaying any longer action on the Comcast-NBCU merger while considering issues such as online video – and net neutrality, for example - which should be considered, if at all, in generic proceedings. There is much that the FCC presently is considering in the way of expanding regulation that it should not be considering. It is time for the Commission to exhibit a seriousness of purpose by focusing more of its resources on completing with dispatch matters properly within its domain. Completing its review of the Comcast-NBCU transaction falls into this category.