Wednesday, May 04, 2011

Video Competition Should Lead FCC to End Old Regulation

The FCC's preparations are underway for its forthcoming Video Competition Report. The Commission confesses its information and outlook toward the video marketplace is outdated. So for what will be its 14th report analyzing the state of video competition, the Commission has issued a notice seeking information about much of the abundant variety of content, aggregation, and delivery services that characterize today's innovative video market.

Although cable video services are primarily governed by the Cable Act of 1992, the video market landscape of 2011 is fundamentally different. That changing landscape has upended many assumptions behind the 1992 Act as well as other regulations dating back to the 1990s or earlier. Direct broadcast satellite (DBS) video services are subject to antiquated regulations as well. And the more the Commission's forthcoming report recognizes the abundance of choices in today's vibrant video market – which it already does either explicitly or implicitly – the less plausible the Commission renders any continuation of old regulation based on an increasingly arcane snapshot of yesteryear's market.

In seeking an up-to-date look at video competition the Commission should use its report as the occasion to promptly begin eliminating out-of-date regulation that now hinders further innovation and competition. And, to the extent that congressional action is required to accomplish this, the Commission should recommend such deregulatory action to Congress.

The very fact that the Commission is calling for comment and information on how new forms of video content, aggregation, and delivery are impacting and providing substitutes for (multi-channel video programming distributor) MVPD services should be revealing. Implicit in the Commission's line of inquiry is the realization that the days of perceived cable monopoly are over. Although the FCC has frequently admitted that market share alone does not equate to monopoly, the chart below showing franchised cable companies' market share of MVPD subscribers conveys some sense of where the market was in the mid-1990s.

In the years immediately following, consumers in areas once served by only one incumbent cable provider began enjoying additional choices. As the next chart shows, by 2001, the competitive potential of two national direct broadcast satellite (DBS) service providers had begun to materialize.

More recently, telco providers have entered into the MVPD business with competing services. Although at this point AT&T and Verizon claim only a small percentage of MVPD subscribers compared to cable and DBS companies, such telco providers still claim approximately 6.5 million MVPD subscribers. Meanwhile, DBS has continued to make further incursions into cable companies' market share throughout the last decade.

In large part, such dramatic changes in the video marketplace prompted the U.S. Court of Appeals for the District of Columbia Circuit to declare in Comcast v. FCC (2009) that the cable bottleneck no longer exists. These changes are reflected in the final chart below based on numbers cited in the FCC's recent notice.

This last chart does not take into account other types of video services that were factored into the prior two charts, such as satellite master antenna (SMATV). More significantly, broadband-delivered video services are not factored in this market share snapshot, even though the presence of potential competition offered by broadband is now too serious to ignore.

Broadband services now provide an additional source of delivery for video programming. Consumers today obtain video content through online services such as iTunes, Netflix's subscription service, and Amazon. Hulu and a number of individual broadcast and cable TV programmer websites offer streaming content to consumers for free by using ad-supported models.

In addition, consumers have a growing variety of choices for devices to use for receiving video programming. An increasing number of "smart TVs" being brought to market, for instance, are capable of downloading video content directly from the Internet. Roku, Boxee, and Apple TV also offer content delivery services through their respective new devices. Broadband-connected video game consoles such as Sony PlayStation 3 and Xbox 360 are also increasingly popular devices for obtaining video programming. Just last week, in fact, Xbox began offering additional video content through a new Hulu Plus application. Not to be forgotten, new broadband-enabled tablet devices and smartphones are giving video consumers mobility options.

By taking into account a broader view of this rapidly changing, dynamic market, the Commission's forthcoming video competition report should be the occasion – now long overdue – for reducing regulation of cable and DBS services premised on an old, static picture of the market. A broadened perspective on video competition and substitutes should mean that outdated regulation of cable and DBS services – such as cable must-carry/retransmission consent regulation or its CableCARD regulation for cable set-top boxes – should be prime candidates for elimination. Both types of regulation are premised on an antiquated monopolistic mindset toward cable video.

It was expressly on a monopolistic premise, in fact, that must-carry regulation barely survived First Amendment challenge in a pair of 5-4 U.S. Supreme Court rulings from 1994 and 1997. In a market where conditions are competitive, however, must-carry forced-speech mandates are untenable under the First Amendment. And in Section 629 of the Telecom Act of 1996, Congress inserted a special sunset clause regarding set-top box regulation, requiring the Commission to remove regulation when there is "effective competition." The state of today's video market should prompt the Commission to invoke that sunset provision.

Now, with respect to the FCC's recent notice seeking information concerning the video marketplace, when a regulatory agency begins asking questions about successful new products and services it naturally raises worries over whether the agency might actually be seeking new rationales for expanding its regulatory authority rather than opportunities for reducing regulation in light of more competition. Might a broadened Commission inquiry into video mark the beginning of broader new regulation of the dynamic video market? Recent Commission activities – such as its adoption of regulatory conditions regarding online video in the Comcast-NBCU merger as well as its "AllVid" proposal to expand regulation of video navigation devices to all MVPDs – give real plausibility to such worries. (I discuss these in a prior FSF Perspectives paper.) Hopefully, those worries will go unrealized this time.

And, hopefully, in re-examining its old cable and DBS regulations in light of new marketplace conditions, the Commission will act consistent with the President's Executive Order for improving regulation and regulatory review. The President's Order calls on federal agencies to review their regulations to remove barriers that are needlessly hurting businesses and our economy, and to ensure that existing regulations "promot[e] economic growth, innovation, competitiveness, and job creation … [and] use the best, most innovative, and least burdensome tools for achieving regulatory ends." In February, Chairman Julius Genachowski stated he "expect[s] the FCC to perform its responsibilities consistent with the principles in the executive order."

The Commission's report should provide us with a fresh set of numbers about competitive conditions regarding several aspects of today's dynamic video market. And the report will give the Commission the perfect opportunity to finally face up to what common sense observation of today's video market reveals: rapid innovation and competition prevails, the old cable bottleneck doesn't exist, and outdated regulation of cable and DBS service based on a legacy monopolistic outlook is ill-suited for the current competitive environment. Consistent with the principles in the President's Executive Order, the Commission should use its report to remove old regulatory barriers rather than erect new ones that could stifle further innovation and competition in the video market.