The Video Marketplace Is Competitive

Video Competition
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Pasadena, California Imposes Heavy Tax on Video Streaming Services

In September, the city of Pasadena, CA imposed a 9.4% tax on video streaming services, such as Netflix, HBO Go, and Hulu. The tax will go into effect on January 1, 2017. As more and more consumers “cut the cord,” cites throughout the country are turning to video streaming services to make up for the loss in tax revenue that previously was generated from pay-TV services. State and local governments instead should work to reduce taxes on all video services, allowing consumers to access as much content as possible.

Netflix Wants the FCC to Investigate Data Caps

Earlier the month, Netflix submitted comments to the FCC with regards to the Commission’s Twelfth Broadband Progress Notice of Inquiry. In the comments, Netflix asked the FCC to “take into account the impact of data caps—and low data caps in particular—on a consumer’s ability to watch Internet television using a mobile network.”

This is a clear example of rent-seeking. Netflix would benefit from an FCC rulemaking that would limit the use of data caps by fixed and/or mobile providers, because it would enable consumers to spend more time streaming Netflix. However, consumers who do not use Netflix or infrequently use mobile data – often low-income consumers – are better off buying a fixed amount of mobile data each month as opposed to paying extra for unlimited data. Additionally, the FCC is currently investigating zero-rated services, which are a complement to data caps. It would be costly and contradictory for the Commission to investigate and possibly regulate two services which work in conjunction with each other.

New Netflix and Comcast Agreement Shows Market Innovation

On July 5, 2016, news broke that Comcast will enable consumers to access Netflix on their set-top boxes. This agreement between Comcast and Netflix is an example of how multichannel video programming distributors (MVPDs) are innovating their services to meet consumer preferences for online video.

In February 2016, the FCC issued a notice of proposed rulemaking which would mandate video devices to allow for 3^rd party access to MVPD subscribers. However, these regulations would lock in old technologies and would not allow the market to develop into an app-based service, which will enable online platforms and third party content to reach consumers through an MVPD service. It is important that similar agreements occur in the form of market innovation so consumers can choose which services they value the most, not through top-down FCC regulations imposing unnecessary costs onto MVPDs. 

Press Statement Regarding Netflix's Throttling of Its Videos

Here is my statement of the press regarding the discovery that Netflix has been throttling its videos accessed by subscribers of AT&T's and Verizon's wireless services: 

“There are many different reasons to be concerned about the discovery that Netflix has been engaged over a period of years in throttling the speed of its videos accessed by Verizon and AT&T wireless subscribers. First is just Netflix’s complete lack of transparency about the practice, especially in light of its strident advocacy against treating Internet communications differentially. Netflix’s hypocrisy in this regard is pretty stunning, if perhaps not surprising.

Second is the light Netflix’s actions shed on the FCC’s faulty approach to ‘Open Internet’ regulation. The FCC only concerns itself with practices of the ISPs, not the so-called edge providers, and this leads to a double standard. I’m not in favor of most of the FCC’s newly-adopted Internet regulation (except reasonable disclosure requirements), and I don’t really want to see Netflix’s practices regulated by the FCC either. But by acting in the way it does, the FCC lends itself to becoming part and parcel of Netflix’s hypocrisy.

Third, you can bet you will see this double-standard — and the hypocrisy — recur, sooner or later, in the realm of privacy regulation, where the FCC wants to adopt a regime that will facilitate differential privacy regulation for Internet market participants.”

“House of Cards” Illegally Distributed Throughout the World

On Friday February 27^th, Netflix released the third season of “House of Cards” for subscribers to binge watch over the weekend. However, according to Variety, almost 700,000 people illegally downloaded the show’s newest season within the first 24 hours of its release. This is twice as many pirates (or illegal downloaders) as the show’s second season and the distribution of downloads was spread throughout the world.

Top ten nations with illegal downloaders of “House of Cards” Season Three:
1. China – 60,538
2. US – 50,008
3. India – 47,106
4. Australia – 40,557
5. Poland – 37,552
6. UK – 32,703
7. Canada – 27,584
8. France – 27,151
9. Greece – 20,551
10. Netherlands – 20,402

I would think that Netflix’s content would be pirated less often than most video content, because users can view it anytime and because Netflix allows up to four devices to stream from the same account at the same time. However, residents of five of the top ten countries –China, India, Australia, Poland, and Greece – do not have access to Netflix’s service yet.

Some of these countries do not rank very high in the Global IP Center’s International IP Index, so while an expansion of Netflix’s service could help diminish the number of illegal downloaders, it would not completely eliminate it. Of course, this is obvious because the United States, which ranks first in the International IP Index and where Netflix’s service is prevalent, had the second most illegal downloaders.

Theft of intellectual property should never be excused. With that said, more ubiquitous access to Netflix’s offerings on a legal basis might disincentivize people from pirating content. Not only might Netflix benefit from expanding its service, but artists and creators throughout the world would have a greater incentive to produce more content as piracy decreases.

As for the piracy that is occurring despite access to Netflix’s service, ongoing tools and initiatives, such as WheretoWatch.com, Rightscorp, and Brand Integrity Program Against Piracy, are working to reduce the size and scope of illegal content markets. (See this FSF blog for more.)

Netflix does have a plan in place to reach 200 countries by 2017, and hopefully, if implemented, it will reduce the amount of pirated content in the future. Strong IP rights are important for ensuring that content providers, artists, innovators, and marketers can earn a return on their ideas and labor, incentivizing more innovation, investment, and economic growth.  

Netflix’s New Deal with iiNet Violates Net Neutrality

According to Gigaom, Netflix announced it will be coming to Australia and New Zealand on March 24^th. Netflix also announced that it reached a deal with the Australian ISP iiNet to exempt all Netflix traffic from data caps. These deals, referred to as “zero-rating” plans, provide additional options for consumers. However, this deal would violate Net Neutrality because it discriminates against all content other than Netflix.

This would not be controversial since it is occurring in Australia if Netflix had not vocalized its support for Net Neutrality rules. The Verge contacted Netflix about its contradiction and it responded with the following message:

Zero rating isn’t great for consumers as it has the potential to distort consumer choice in favor of choices selected by an ISP. We’ll push back against such efforts, but we won’t put our service or our members at a disadvantage.

Read more about zero-rating plans with relation to Net Neutrality in Randolph May’s Perspectives from FSF Scholars entitled “Net Neutrality v. Consumers.”

The Comcast/TWC Merger Proposal: An Antitrust-Based View

Representatives from Comcast and Time Warner Cable [TWC] testified at the House Judiciary Committee hearing on May 8 defending the proposed merger of the two companies. The proposed transaction occurs at an especially interesting time, with the FCC proposing new net neutrality rules at the May 15 Open Meeting and the recent announcement that AT&T and DIRECTV are proposing to merge.

Consumer groups, some members of the media, and members of Congress on both sides of the aisle have weighed in with differing visions of the future of the Internet and paid television service if their arguments do not win the day. But amidst all the hype and rhetoric, it is important to remember that any analysis of the proposed merger should be grounded in traditional antitrust principles, that the market affected by a transaction or regulation be clearly defined, and that consumer welfare be a top consideration of any proposal.

While the proposed merger between AT&T and DIRECTV may impact the competitive assessment relevant to the Comcast/TWC proposal, and vice versa, in this piece I want to focus primarily on the testimony presented at the May 8 House Judiciary Committee hearing. At that hearing, Professor C. Scott Hemphill explained why, in his view, the merger of Comcast/TWC would not pose anticompetitive concerns. In his written testimony, Professor Hemphill considered the application of antitrust law to Internet service providers (ISPs) and video distributors:

Antitrust law has a critical role to play in preserving competition. Competition benefits the economy through low prices, efficient production, and innovative new products and services. Antitrust law accomplishes this, in relevant part, by prohibiting mergers that may “substantially . . . lessen competition” or “tend to create monopoly.” Some of the concerns raised about this merger are best framed as antitrust objections.

Professor Hemphill found that most objections to the proposed merger were based on analogies in which foreclosure threats were high—threats that he contends are not applicable to the proposed merger due to differences in the nature and structure of video and broadband markets. Mr. Hemphill elaborated in his live testimony that “there is not so much a threat of foreclosure, but an ongoing fight among powerful firms that make possible the dramatic growth of online video” and other innovations.

Allen Grunes, partner at the law firm Gorey and Gorey LLP, also grounded his testimony in antitrust law. He advanced arguments that the merger would enable input foreclosure, customer foreclosure, and harm competition based on bargaining theory. Professor Hemphill addressed each of those arguments by analyzing the effect of a merged Comcast/TWC on individual markets.

First, Professor Hemphill addressed concerns about the merged company dominating content distribution. He explained that most mergers that receive antitrust scrutiny are combinations of rivals. But Comcast and TWC are not rivals because they do not overlap in any geographic territory. As such, output markets – or the markets for products and services sold by the parties – will not be negatively affected. Consumers will still have the same choice of multichannel video programming distribution service post-merger. 

Second, he explained that antitrust concerns are not present regarding the market for video programming. Post-merger, Comcast/TWC will not acquire increased “monopsony” power, which would theoretically incentivize Comcast/TWC to artificially decrease its demand for programming to drive down the costs the company would have to pay for programming. Unlike in certain markets, like the labor market for example, where competitors can drive down wages by reducing hiring, Comcast/TWC would not be able to manipulate demand for programming by purchasing less. This is because sales of video programming do not decrease the amount of programming available for sale; Comcast and TWC do not compete for rights to a scarce resource. Programmers would still have the power to bargain for and demand the same prices for their content post-merger.

Further, in negotiations for video programming, a merged Comcast/TWC likely would not have sufficiently greater bargaining power with programmers or the ability to cause anticompetitive harm due to its enlarged subscriber base. In order to cause such harm, the merged company would have to be so large that a programmer would be unable to effectively function without Comcast/TWC’s business. The post-merger company will lack the requisite scale to pose such harm.

In their joint written testimony, Comcast CEO David Cohen and Time Warner Cable Chairman and CEO Robert Marcus confirmed that the merged company will only account for 30% percent of cable customers after it divests subscribers to Charter. As Christopher Yoo, a member of the Free State Foundation’s Board of Academic Advisors, explained, critics must overcome one “potentially insuperable obstacle” in order to argue that a company of this scale would create anticompetitive harms to video programmers:

On two occasions, the FCC attempted to institute rules prohibiting cable operators from controlling more than 30% of the nation’s multichannel video subscribers in order to protect the interests of video programmers. On both occasions, the courts invalidated the rules because the FCC’s rationale for imposing the 30% limit was arbitrary and capricious. In both cases, the court indicated that the available evidence suggested that cable operators could control much larger shares of the national market without harming video programmers, driven largely by the advent of competition from direct broadcast satellite (DBS) providers, such as DIRECTV and the Dish Network. Given that the merging parties have committed to reduce their holdings so that the resulting company will control no more than 30% of the national market, these court decisions essentially foreclose arguments that anticompetitive harms to video programmers would justify blocking the merger.

Third, Professor Hemphill found that the transaction is unlikely to lessen competition by enabling foreclosure in the market for programming or in the market for distribution. A company that is able to foreclose competition would aim to inhibit the “competitive prospects of rivals,” which would result in harm to competition, innovation, and ultimately to consumers. A merged Comcast/TWC would not have the incentive or the ability to undermine its rivals’ ability to compete.

Professor Hemphill explained that the merged company would not likely withhold programming from other distributors in order to drive up prices for other MVPDs. Programmers like ESPN will still possess strong bargaining power post-merger. And, new models have emerged in the video marketplace, which enable companies to compete with content producers in new ways. For example, distributors like Netflix that produce their own online-only programming are becoming major content providers and are thriving. Netflix has garnered a larger U.S. base of video customers than Comcast and TWC combined.

Parties that oppose the merger have raised concerns that Comcast/TWC would have the incentive to foreclose the growing online video distribution [OVD] market by taking aim at companies like Netflix. Merger critics fear that the merged company would choke off the broadband Internet access on which Netflix and other OVDs rely. For instance, in a May 7 letter to Chairman Goodlatte and Ranking Congressman Conyers, Consumers Union expressed concerns about the effect approval of the Comcast/Time Warner Cable merger would have on the merged company’s market power, ability to raise prices, and its incentives to act as a “gatekeeper” for video and broadband consumers. 

These concerns are unfounded. First, online video services contribute much value to broadband Internet and harming the OVD business would drive away broadband subscribers who love their Netflix and similar services. As David Cohen and Robert Marcus stated in their joint written testimony: “We have no interest in degrading our broadband services to disadvantage OVDs or providers of other content and services. That would only harm the attractiveness of our fastest-growing business – high-speed data – and simply makes no business sense.”

Next, Comcast’s regulatory commitments made as a condition of its NBC-Universal acquisition prevent it from blocking or discriminating against any content provider. Some witnesses at the May 8 House Judiciary hearing, particularly Dave Schaeffer CEO of Internet backbone provider Cogent Communications, decried the recent Comcast-Netflix interconnection agreement as evidence of Comcast’s intent to disadvantage OVDs and providers of other content and services. However, as Professor Hemphill explains, paid peering is “a new variant of an old business practice” – paying for interconnection – and peering agreements should instead be seen as “a sign that the market is working well. The proposed merger does not change that.” Indeed, paid peering is “a means to put a price on the additional capacity demands resulting from the increased popularity of online video. It is efficient for the distributor and its end-users, considered collectively, to pay for that capacity, rather than spreading the expense among all ISP customers. Doing so better aligns use with cost and incentivizes both investment and economical use.”

The proposed Comcast/TWC merger may create some uncertainty regarding the future form of the broadband marketplace, including the PayTV market segment. But this is not a reason in and of itself for regulators to be concerned; rather the proposed merger is mainly a function of the constantly evolving marketplace.

What is clear is that the broadband marketplace, and the video segment of that market, are both fiercely competitive today. And these markets have grown and developed without unnecessary and burdensome regulatory interference. Businesses are efficiently negotiating to reach agreements that enable companies to roll out innovative distribution platforms and business models to compete for and meet the needs of consumers.

The proposed merger of Comcast/TWC is a transaction that should allow the merged company to react to new consumer behaviors and demands. Based on well-established antitrust principles, the proposed merger of Comcast/TWC likely will not harm these vibrant marketplaces.