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.

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.

  

When Sharing Spectrum May Not Be Progress

By Gregory J. Vogt
Visiting Fellow

Progress has been slow on the President’s announced policy to allocate 500 MHz of spectrum for wireless broadband use. It is still uncertain how much spectrum can be reallocated through the broadcast incentive auction. Other good sources of spectrum, however, are now used by government and could be relocated. In particular, the FCC, with vocal industry support, has expressed interest in reallocating 1755-1850 MHz for wireless broadband use because of its compatibility with existing wireless operations.

Although there are good arguments that the entire band should be reallocated over time, the government has a real opportunity to take near term action to move existing government operations and reallocate at least a portion of this band, 1755-1780 MHz. CTIA has requested that at least the lower 25 MHz of the 1755-1850 MHz band be reallocated in the near term, pending resolution of relocation issues in the upper part of the band. The government has already stated that this 25 MHz is ready for user relocation and spectrum reallocation, and this spectrum effectively can be paired with other available spectrum to create a viable spectrum block.

A recent bill to accomplish the prompt reallocation of this 25 MHz block has recently been reintroduced in the House of Representatives on a bipartisan basis. This is a welcome development.

Notwithstanding, recent government action seems to be backpedaling on the Administration’s goals. NTIA has cast significant doubt on whether the 1755-1850 MHz band can be reallocated due to existing uses and the alleged high cost of relocation. In fact, since the PCAST Report was issued most of the Administration’s effort has been promoting sharing of this spectrum, rather than reallocation.

Sharing may be viable in some circumstances, such as with the 1695-1710 MHz band where NTIA’s sharing recommendation is based on a limited number of exclusion zones. Although allowing commercial use in these types of circumstances is encouraging, the overemphasis on sharing of all government spectrum has serious drawbacks.  

First, there are significant delays inherent in the further studies and meetings contemplated by the June 14 Presidential memo encouraging agencies to explore sharing arrangements. And establishing necessarily complicated sharing arrangements between different types of spectrum users can take years to accomplish. The last time the FCC adopted spectrum sharing between different types of users, the white spaces proceeding, six years elapsed between the NPRM and the final rules. And then the databases necessary to effect the sharing took more than two additional years to be developed, tested, and approved.

Second, resolving engineering issues associated with sharing can produce even more difficulties due to divergent uses and limited public information. Most current uses affect national security or law enforcement, all of which are important and entail legitimate confidentiality needs. Use of the 1755-1850 MHz band includes satellite, air-to-ground, wideband fixed and transportable microwave, video surveillance, and other unspecified uses. If the white spaces sharing scheme produced serious complications between known uses and single incumbent user engineering parameters, how much more difficult would efficient sharing be with less than perfect knowledge about widely divergent uses with the attendant interference protection issues?

Third, sharing raises the costs of commercial operations.  Sharing between dissimilar users likely requires operation of interference protection databases, which themselves involve costs to establish, acquire agency approval, and continually update. Others have noted that costs increase with complexity, and the number of filings surrounding the white spaces database trials and approval process attest to these added costs.

Fourth, sharing can also affect the reliability of the commercial service, which can be degraded unpredictably by government use (some of the uses are temporary and mobile), which undoubtedly will have a higher priority status. Such potential unreliability is anathema to wireline broadband services, which are widely recognized as crucial to economic growth, innovation, and public safety.

Given the level of investment required to deploy broadband, as the Free State Foundation's Seth Cooper has previously identified, reallocation makes more sense than sharing on a permanent basis. But history proves that relocation and reallocation take time – almost always considerably longer than initial rosy projections. The most recent government spectrum reallocation of the 1710-1755 MHz block, took over eleven years from the time NTIA proposed reallocation until the spectrum was first auctioned. And that reallocation took an Act of Congress to ease relocation efforts and seven more years until the government completely stopped operations in the band.

This is not meant to discourage reallocation. To the contrary, it is intended to emphasize that the government has to improve its track record in order to achieve the Administration’s professed vision for wireless broadband on a timely basis.

CTIA’s approach to reallocate the 1755-1780 MHz block as promptly as possible seems to be a reasonable step that should be embraced. Long term sharing does not appear to be the best solution to meeting the broadband goal either for this 25 MHz or the entire 1755-1850 MHz block.

New Bill in Congress to Clear and Reallocate Critical Spectrum

In a June 27 blog post, FSF President Randolph May explained his thoughts on the right policy approach toward spectrum: "Don't Equivocate. Clear and Reallocate!"

Legislation just introduced in the U.S. House falls in line with that sound approach to spectrum.

The Efficient Use of Government Spectrum Act (H.R. 2739) is sponsored by Representatives Doris Matsui and Brett Guthrie. As reported in TRDaily on July 18, the bill "would reallocate the 1755-1780 megahertz spectrum band for commercial use and direct the FCC to pair those frequencies with the 2155-2180 MHz block (AWS-3), which the Commission must auction by February 2015."

As FSF President May wrote in his blog post:

The imperative to 'clear and reallocate' spectrum is most urgent with respect to the 1755 - 1780 MHz band so that it can be paired with the 2155 - 2180 MHz ("AWS-3) band. This spectrum is ideal for wireless broadband traffic and if the two bands are auctioned together, it has been estimated the auction might raise as much as $15 billion for the U.S. Treasury.

(I also touched on the potential benefits of pairing and auctioning of the 1755-1780 MHz band with the 2155-2180 MHz band in my blog post, "FCC Preserves Path for Future Spectrum.")

FCC Reform: Return to the Rule of Law

For Deborah Taylor Tate

Congressman Greg Walden should be applauded for doggedly holding a Congressional hearing on the much needed review, reform, and reinventing of FCC procedure and process. He is expected to introduce legislation similar to the FCC Process Reform Act and FCC Consolidated Reporting Act that passed the House of Representatives last year, only to die in the Senate.

In the meantime, the FCC should not wait for legislation to pass to adopt some simple, common sense reforms of their own. In fact, first they just need to return to the "rule of law,” not the "rule of man" (With two female Commissioners, I suppose this will have to be the "Rule of Women" now!).

Too often the personality of the agency leadership has resulted in expansion – broad expansion in some cases – of the specific legal authority granted by Congress to the FCC. The office of FCC Chairman has been expanded far beyond the letter of the law. It needs to be curtailed by self-control, aside from whether a new law is passed. Some people remember a time when two or more commissioners could bring forward a proposed order or place an item on circulation. During my tenure as an FCC commissioner, even four commissioners – a bipartisan group of four – were unable to do so.

In other examples, the Chairman has expanded the agency's oversight into areas of the law which are clearly beyond any legal authority. In most of those cases, after thousands of hours of work by public employees, and taxpayer and industry dollars spent, courts generally have overturned this abuse of power. Just think if that energy and money had been used on reports to Congress, review of consumer complaints, and enforcing the law of the land.

Another specific example of this expansion of the agency's legal authority involves mergers. While we have all become accustomed to the imposition of merger conditions, those conditions should only relate specifically to a "harm" which is likely to occur as a direct result of the specific merger under consideration. Mergers conditions somehow have become “the kitchen sink” for every policy notion or alleged "wrong that needs to be corrected," whether or not they legitimately relate to the merger at hand. In addition, the merger conditions take on quasi-statutory significance and are then applied to other companies in the sector or those in the "same circumstance."

I regret that I, too, voted to approve mergers with such conditions during my tenure and hope the present FCC will use a little more restraint in what may be a very busy merger time in the days and months ahead. Certainly, competitive harms or other potential wrongs should be addressed, but only through proper legal vehicles and certainly not in the dark of night just to get a deal done.

The Free State Foundation’s President Randy May has repeatedly called upon the FCC to reform itself and his testimony at last week's House Commerce Committee hearing again addressed these important issues. FSF recently held a standing-room only luncheon on the topic of “FCC Process” where scholars, industry representatives (regulated through these processes), and former commissioners presented a number of thoughtful ideas on Commission reform.

Many of the issues mentioned address the topic of speed of process – or lack thereof – a constant criticism of the agency. I have previously suggested utilizing any and all willing commissioners to oversee an item and draft a proposed order, working in conjunction with the relevant expert staff, to speed up the time required to get an order on circulation. Oftentimes, a particular commissioner has had specific industry or issue expertise which could provide great insight along with alacrity.

Other ideas regarding expediency include setting a specific timeline for completing consideration of each order – a "shot clock" that could be keyed to the subject matter. Or the establishment of a true mediation process in appropriate cases as a way to achieve quicker turn around, allowing regulated parties to opt for mediation. Not only have trial courts learned this is often a more efficient process, but also one in which the parties often have more control over outcomes. Other creative procedures could include a "weekly docket call" to dismiss hundreds, if not thousands, of filings that have languished for years.

Often the FCC has failed to utilize its own expert advisory bodies effectively – or at all. In fact, the Commission could pose a question with a specific timeline and/or even request a list of solutions and alternatives from which to choose. Why have expert advisors if you don't utilize their real world experience and expertise? And, once delegated authority over issues or complaints has been thoroughly vetted and specifically granted by a vote of the Commission, Bureau Chiefs should utilize that authority – and nothing more – to resolve identical issues with identical decisions. This enhances both agency efficiency and provides consistent outcomes for industry. Further, in very specific cases in which a decision may actually have broad, industry-wide impact, the Commission should proactively grant broad waivers for similarly situated entities rather than clogging up the system with unnecessary and redundant case-by-case-by-case reviews.

While it may take congressional approval to change the "Sunshine Law" (which should be known as the "Unable to Communicate Law"), perhaps it will only take a dose of personal humility, a clear understanding of legal authority, and a little trust in one's fellow commissioners to make the agency operate more efficiently – so that it hums like the industries and sectors it oversees.