Thursday, July 25, 2013

FCC Report Reconfirms the Reality of the Video Market's Competitiveness

In the communications context, the word "disconnect" probably brings to mind what happens when a subscriber stops paying for their telephone or cable video service. Increasingly, however, the term has come to characterize the FCC's regulatory policy toward cable and video services.
On July 22, the FCC released its 15th Video Competition Report. Last year's Report confirmed what we already knew about the video market: namely, that it's innovative and competitive. The 15th Report reconfirms those conclusions. An updated swath of data compiled in the 15th Report points – yet again – to the proliferating video choices enjoyed by consumers.
But by bolstering the case for the video market's competitiveness, 15th Report data also magnifies the serious disconnect in the FCC's video policy. Much of the FCC's video regulations are based on 1990s analog-era monopolistic assumptions about cable "bottlenecks." Prior to the 15th Report it was already obvious that last-century rationales for extensive regulation had been rendered obsolete by innovation and competition in the video market. The latest data only restates the obvious: the disconnect – like a broken chain – between 1990s monopolistic assumptions and today's competitive video market conditions is growing.

 According to 2010 numbers contained in the 14th Report, 98.5% of all households – that is, 128.8 million households – had access to at least three multichannel video programming distributors (MVPDs). And 32.5% of households – 42.9 million – had access to at least four MVPDs. The 2011 numbers contained in the 15th Report show further improvements: 98.6% – 130.7 million households – had access to at least three MVPDs, and 35.3% – 46.8 million – had access to at least four.
Market share data can easily be overemphasized as an indicator of competitiveness, especially where markets are driven by rapid changes in technology, services, and consumer behavior. Yet, even in terms of market share, data cited in the 15th Report further further reinforces the video market's competitiveness. Between year-end 2010 and June 2012, "cable MVPDs lost market share, falling from 59.3 percent of all MVPD video subscribers at the end of 2010 to 57.4 percent at the end of 2011, and 55.7 percent at the end of June 2012." Meanwhile, direct broadcast satellite (DBS) market share increased from 33.1% in 2010, to an estimated 33.6% at the end of June 2012. And "telco" MVPD entrants served 6.9% of the market in 2010, increasing to 8.4% in 2011.
Also, the 14th Report called attention to the entry and growth of online video distributors (OVDs) as a potent source of value and competition. Data in the 15th Report further highlights the increasing popularity of OVD services with consumers:
SNL Kagan estimated that there were 26.6 million Internet-connected television households (i.e., accessed via an Internet-enabled game console, OVD set-top box, television set, or Blu-ray player), representing 22.8 percent of all television households, at the end of 2011, and estimated that by the end of 2012, the number would grow to 41.6 million, or 35.4 percent of television households.
Of course, traditional TV viewing far outweighs online video viewing. A cited study by Nielsen found that in the second quarter of 2012 Americans watched an average of nearly 32 hours per week of traditional TV and 2.5 hours of time-shifted TV, but watched approximately 4.5 hours per week of video using the Internet. Nonetheless, "SNL Kagan reports that the availability of large libraries of archival content and the availability of new content, coupled with the availability of broadband and an increasing number of Internet-connected devices, has enabled OVD substitution."
Further, the 14th Report acknowledged the ongoing replacement of analog systems with digital, rapid expansion of high-definition broadcasting and TV ownership, multi-casting, digital video recorder (DVR) options, video-on-demand functions, as well as TV-Everywhere and other mobility capabilities. The 15th Report reveals across-the-board increases in deployment, functionality, and adoption of such advanced video technologies. For instance, as of 2012, more than 74% of households have sets capable of receiving digital signals, including HD signals. Nearly 44% of households have DVRs. More than 5% of MVPD subscribers qualifying for TV-Everywhere access used it to view content in the month of September 2012. By year's end 2012, more than half the geographic footprints of the top eight cable operators had transitioned to all-digital video.
Of course, the 15th Report nowhere admits the effectively competitive state of the video market. While the statute doesn't expressly require any "effective competition" conclusion, such non-responsiveness to the evidence seems counterintuitive. Perhaps the FCC avoids any such conclusion out of fear it could be used in court to challenge any number of FCC legacy cable regulations.
Still, one can reach an "effective competition" conclusion through an admittedly abbreviated analysis supplied by the FCC itself. Consider today's nationwide market for video subscription services in light of the FCC's "competing provider test" for determining whether a local franchise area is effectively competitive. According to the test, effective competition exists if at least two unaffiliated MVPDs offer comparable video services to half of the area's households and the number of households subscribing to service other than the largest MVPD exceeds 15%.
Now recall that 98.6%, or 130.7 million households, had access to at least three MVPDs. Plus, 59.3% of households subscribe to cable, 33.6% subscribe to one of two DBS providers offering service nationwide, and 8.4% subscribe to a "telco" MVPD service. The nationwide MVPD market would pass the "competing provider test" for effective competition with flying colors. At the very least, it cuts cable bottleneck assumptions to pieces.
Ultimately, the underlying premises for video regulation need to be completely reexamined by Congress.  The legacy cable and satellite video regulatory apparatus needs to be dismantled. And First Amendment concerns with government regulation of video service providers' editorial and speech activities need to be respected. A market power framework that considers anticompetitive conduct and consumer harm could supply the analytical basis for a more targeted approach that reflects actual marketplace conditions.
A First Amendment-friendly, market-power approach to video regulation was recently sketched out by D.C. Circuit Judge Brett Kavanaugh in Comcast v. FCC (2013). At issue was an FCC order requiring Comcast to carry the Tennis Channel on a particular cable channel tier, pursuant to a statutory provision regarding program carriage agreements (Section 616). "In restricting the editorial discretion of video programming distributors," wrote Judge Kavanaugh in his concurring opinion, "the FCC cannot continue to implement a regulatory model premised on a 1990s snapshot of the cable market." Over the last sixteen years, Judge Kavanaugh explained, "the video programming market has changed dramatically, especially with the rapid growth of satellite and Internet providers," the result being that "neither Comcast nor any other video programming distributor possesses market power in the national video programming market." Judge Kavanaugh therefore concluded that "[u]nder the constitutional avoidance canon, those serious constitutional questions require we construe Section 616 to apply only when a video programming distributor possesses market power."
Until Congress replaces the legacy regulatory system, we face the unfortunate prospect of a still further disconnect between "a 1990s snapshot of the cable market" and actual competitive video market conditions. Expect future Video Competition Reports detailing innovative video services, competing business models, and changing consumer habits. And, absent a course change by the FCC, expect the agency, even in the face of abundant dynamic market indicators and pro-consumer data points, to continue avoiding the obvious about today's effectively competitive video market.