It's Time for the FCC to Recognize OVDs and MVPDs Are Substitutable

Stock prices have fallen recently for some of the largest video content companies, including Disney, Viacom, CBS, and 21^st Century Fox – primarily a response to multichannel video programming distributors (MVPDs) losing 566,000 subscribers in the second quarter of 2015. This is a sign that MVPDs most likely will need to transform their programming packages in order to compete with the emerging success of online video distributors (OVDs).

For many young Americans, OVDs (such as Netflix, Hulu, or Amazon Prime) have become substitutes for the services of MVPDs. In fact, roughly 1.4 million Americans “cut the cord” in 2014 and now view content strictly through OVDs. (That number is likely to increase in 2015.) While the availability of live sports programming has been a reason for some consumers to keep an MVPD subscription, even ESPN has lost 3.2 million subscribers in just over 12 months. Despite the obvious signs of this inevitable technology transition, the Commission says it does “not have evidence” that OVDs and MVPDs are substitutes, according to the July 2015 AT&T-DIRECTV order. 

The Commission seems puzzled about the relationship between OVDs and MVPDs. It stated the following in the AT&T-DIRECTV order:

“[F]or most consumers today, OVD services are not substitutes for MVPD services. Rather, as we note in our description of current industry conditions discussed above, OVDs typically offer consumers choices that may either complement their MVPD services or compete with some portion of the services MVPDs offer, such as VOD. Indeed, despite the increased number of OVDs and increased use by consumers of OVD services, we do not have evidence on the record that any OVD would be, in the near term, a disciplining force if the combined entity were to increase price or decrease quality. However, given the development of additional and new OVD services and the proliferation of new technologies and devices that allow consumers to view video programming sold by OVDs on their computers, phones, and televisions, we acknowledge that OVDs have the potential to become substitutes for MVPD services with a market presence that is sufficient to counter effectively an increase in price or decrease in quality by the combined entity.”

It is important for the Commission to recognize OVDs and MVPDs as substitutable during its “Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming.” If the Commission continues to see the two as complements, rather than substitutes, its analysis regarding market concentration and video competition will not be accurate when considering policy implications or assessing future merger proposals.