The CBS - TWC Dispute: Don't Be Fooled by Free Market "Negotiation" Claims

Today I have been reading bits and pieces about the "retrans dispute" between CBS and Time Warner Cable. These retransmission disputes have a way of turning nasty and leaving pay TV viewers -- such as Time Warner Cable's subscribers in this instance -- in the dark.

And by "in the dark" I mean the pay TV subscribers are threatened with the loss of programming on their local TV station, or actually lose it, and they generally are in the dark as to what's behind the dispute.

Here's a good post on the Madery Ridge website that is useful in explaining what's behind the dispute. I don't mean to endorse every assertion and interpretation contained in the post, but it does shed light on the problematic nature of CBS's claims -- and the claims that are often made by the broadcast television networks in these retransmission disputes.

Even in the face of sharply rising retransmission fees paid to broadcasters by pay TV providers, I certainly don't want to presume to judge what the right "negotiated" price should be to resolve the TWC - CBS dispute -- in other words, how much TWC must pay to continue to carry CBS's broadcast programming. But, as I have said many times in the context of discussing similar retransmission disputes,  please don't assume that what is taking place in LA is a "free market" negotiation as the broadcasters often claim. The broadcasters retain many legacy regulatory privileges -- adopted decades ago in a much different video marketplace environment -- that provide an overlay to the negotiations. These legacy regulations prevent the bargaining from being characterized as truly free market. That's why "negotiated" above is placed in quotes.

And the fact that broadcasters have obtained their spectrum for free is no small matter. In fact, it's a big deal in a world in which only 10% of American households still obtain their television programming free "over-the-air."

Along with other FSF scholars, I have written several pieces explaining why the "retrans negotiations" are not truly free market negotiations. If you need a refresher on this important point as you try to figure out the current TWC - CBS brouhaha, see here, here, and here.

  

At the Time of the Merger

In an order released on September 12, 2012, the Federal Communications Commission terminated the remaining condition attached to the proposed AOL-Time Warner merger when the agency approved the combination in 2000. The condition prohibited Time Warner Cable, then a subsidiary of Time Warner, from discriminating against any unaffiliated Internet service providers permitted to use TWC's facilities to provide Internet service to subscribers.

I'm sure the order was little noticed, even though the Commission said it was part of "our broader efforts to remove unnecessary regulations." But it warrants some attention. The agency states "changed circumstances have eliminated the rationale underlying the condition."

You can bet your house on the truth of that Commission assertion.

The Commission's September 12 order dutifully observes that:

"At the time of the merger, AOL was the world’s largest Internet Service Provider (“ISP”). Time Warner was the second largest cable provider in the United States, possessed one of the world’s largest content libraries, and controlled the nation’s second largest broadband ISP, Road Runner….[C]orporate restructuring has severed the ties among AOL, Time Warner, and TWC. In addition, AOL no longer operates as a broadband ISP."

Changed circumstances?

Time Warner, Time Warner Cable, and AOL officially severed their corporate ties in 2009, although as close observers recall, the chief corporate components of the merged entity seemingly began falling apart not too terribly long after the AOL-Time Warner merger was consummated – after an intensive FCC review that lasted over a year.

The point of taking note of the FCC's order is not to poke fun at the agency. There is a serious, important point to be made: The FCC's experience in imposing conditions on the AOL-Time Warner merger based upon its competitive assessment should cause the agency to adopt a more modest, perhaps even humble, posture with respect to its ability to discern the future parameters of the communications marketplace. The technological and marketplace dynamism demand a high degree of regulatory modesty.

Of course, the Commission was under enormous pressure from so-called consumer groups to reject the AOL-Time Warner merger proposal in light of the claimed domination of the new "media giant."

A Consumers Union representative claimed that the consolidated company "would be in a position to thwart competition in many markets across the country." A Media Access Project representative stated "the sheer size of these two companies' assets and their inadequate commitment to open access fall short of what the public interest requires and the law permits." A Consumer Federation of America representative worried that by "[c]ontrolling both content and distribution, the company [could] design interfaces that capture and lock in customers, while they lock out competitors, except on terms and conditions that are set by the entity controlling the choke point." A Center for Media Education official noted that companies that "control both conduit and content… wield tremendous power in the marketplace of ideas" and possess "the ability to shape the future of the Internet and other digital media."

These groups filed a joint petition to deny the merger, which described the "dangerous new dimension" being added to "the emerging structure of the cable TV/broadband Internet industry… by extend[ing] the reach of two huge, vertically integrated firms across the cable TV, broadband Internet and narrowband Internets." Among the "findings" cited in their petition: "The merger would allow two enormous firms to dominate the markets for broadband and narrowband Internet services, cable television, and other entertainment services, which could leave consumers with higher prices, fewer choices, and the stifling of free expression on the Internet." The petition claimed that the new "media giant" would "be able to quickly capture the new product market for interactive TV."

Pretty alarming claims. But, of course, they were all wrong. The consumer groups always have a new set of claims, of course, concerning market dominance by "media giants." But on the occasion of the FCC's elimination of a merger condition that long since had made their market dominance prognostications look silly, is it too much to expect some measure of regulatory modesty from these groups?

Perhaps so.

But the FCC is another matter entirely. It shouldn't be too much to expect the agency to reflect on the extent to which its own concerns about marketplace dominance were misplaced. A good dose of regulatory humility would be in order.

Finally, while the Commission's order refers to elimination of the AOL-Time Warner merger condition as part the agency's efforts to remove unnecessary regulations – like the formal elimination of the Fairness Doctrine twenty-five years after the FCC had said it would no longer enforce it – this belated action doesn't warrant deregulatory plaudits. Like the formal Fairness Doctrine elimination, the Commission's AOL-Time Warner action is in the nature of a pro forma "cleaning up the books."

But the commissioners should take solace. There is plenty of real regulatory reform work to be done.

TWC Research Program - Deadline Approaches

Last January I put in a plug here for Time Warner Cable's research program on digital communications, and now it is timely for another plug for this worthwhile program. The program provides stipends for research dedicated to increasing understanding of the benefits and challenges facing the future of digital technologies in the home, office, classroom and community.

The deadline for new applications is November 1. All the details about the program and the application process may be found here. Time Warner Cable's program already has produced some very good scholarly work that helps us understand key issues surrounding the use of digital technologies. With continued participation by a wide range of qualified applicants, there is every reason to look forward to the publication of more useful research in the future.

So, take note of the calendar!