Vertical integration stifles competition

A familiar and troubling situation is re-emerging in the pay-TV industry.  It’s called vertical integration, a term that applies where one company or individual controls cable systems and very popular cable programming.  Under unified control, a cable-affiliated programmer has the incentive and ability to engage in unfair practices, such as charging its cable systems’ rivals much more for its networks than it charges itself or withholding content from online video distributors.  A recent trend toward vertical re-integration has emerged within the cable industry, requiring policymakers’ immediate attention, particularly given the possible acquisition of Time Warner Cable (TWC) by Charter, Comcast, or both in a joint takeover.

The latest outbreak of vertical integration began in 2011 when the nation’s largest cable operator, Comcast, acquired majority control of NBC Universal.  National cable networks owned or controlled by Comcast-NBCU include top-rated USA Network along with such powerful brands as CNBC, Golf Channel, Syfy, Bravo, E!, and MSNBC.

{mosads}The trend continued in early 2013 when Liberty Media purchased a controlling interest in Charter, the fourth largest cable operator.  Because media mogul John Malone holds a substantial interest in Charter through his stake in Liberty Media, and in cable programmers Discovery Communications and Starz, all are effectively operated under his control.  National programming networks that are part of this vertical behemoth include Discovery Channel, TLC, Animal Planet, The Oprah Winfrey Network, and Starz.

The cable operators and programmers involved in these recent deals don’t even capture the entire universe of cable-affiliated programming.  For instance, AMC Networks, which include AMC, home of hit series “The Walking Dead,” are affiliated with Cablevision.

Lawmakers have sought to curb vertical integration’s anti-competitive effects.  In 1992, Congress adopted program access rules to protect competition in the multichannel video programming distributor (MVPD) marketplace by preventing vertically integrated cable operators from disadvantaging rival MVPDs by overcharging them.  Merger conditions imposed on Comcast-NBCU by the FCC and U.S. DOJ demonstrate continued concern about vertically integrated operators engaging in conduct that ultimately harms the consumers of competitive pay-TV services.

Regulators reviewing the Comcast-NBCU deal also expressed new concerns about the dangers to the development of online distributors like Netflix by withholding access to, or charging discriminatory rates for, cable-affiliated programming.  To address these concerns, regulators adopted conditions requiring Comcast-NBCU to guarantee these video streaming services program access.

Even more vertical integration appears imminent.  Charter, Comcast-NBCU, or possibly both in a joint venture, are attempting to purchase TWC, the second largest cable operator.  These transactions, depending how structured, could easily result in TWC’s cable systems becoming vertically integrated with either Discovery and Starz networks or Comcast-NBCU networks.

Regulators cannot afford to sit idly by.  To start, the FCC should act on an 18-month-old request by small and medium-sized cable operators to close a loophole in its program access rules that leaves them with significantly less protection against discrimination by cable-affiliated programmers than Congress intended.

Nearly every small and medium-sized operator today — almost 900 MVPDs — purchases the bulk of its cable programming through a single buying group, the National Cable Television Cooperative (NCTC).  Although Congress explicitly instructed the FCC to ensure MVPD buying groups are entitled to file program access complaints, the agency failed to carry out this directive because it defined “buying group” in a manner that effectively omitted NCTC.

Because these small and medium-sized MVPDs rely on a buying group to license most of their programming, they receive protection from program access rules only to the extent that their buying group receives protection.  Since NCTC has no regulatory mechanism to challenge rank discrimination at the bargaining table, small and medium-sized MVPDs are denied the full protections Congress intended.

Over a year ago, the FCC initiated a rulemaking tentatively concluding that its definition of a “buying group” needs updating to include NCTC, and seeking comment on related issues.  Yet, on the eve of what would be one of the largest cable mergers ever, involving about 12 million TWC customers, the FCC still has taken no action.

As the trend toward vertical integration increases, so will the risk of harm to consumers and competition.  Before the danger to the pay-TV and online video marketplace gets any greater, the FCC should act to ensure that small and medium-sized MVPDs have the protections against discriminatory treatment Congress intended.

Polka is president and CEO of the American Cable Association.