NETWORKS MAY SUFFER IF TOO MANY CABLE MSOs MERGE, FCC STUDY FINDS
Horizontal concentration in cable industry could mean problems for some programming networks because scenario could send “the wrong price signals regarding the value society places on particular types of programming,” affecting both type and quality of TV programming public receives, FCC concluded in 117-page study released Mon. Too much concentration in cable could reduce “economic efficiency,” study said, because cable operator could choose to carry less-popular network that got more of its revenue from ad dollars, rather than very popular one that relied mostly on affiliate fees and therefore would demand more money from MSO. Study didn’t examine vertical integration in which cable operators own and operate network and then choose to carry network in which it has interest instead of one that doesn’t have direct connection to MSO. Study by FCC’s Office of Plans & Policy (OPP) and Pa. State U. was based on experimental economics, which uses variety of computer models to determine how companies behave under certain, controlled conditions. Included in simulated market environment were buyers representing cable and DBS and sellers representing programming networks. Each were studied as they negotiated for programming and affiliate fees. FCC immediately put study out for public comment and said parties should comment on its value in providing evidence relevant to ownership issues raised by proposed merger of AT&T Broadband and Comcast.
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Study found that for programming network, cable operator that served 27% of entire multichannel video program distributor (MVPD) market was just as powerful as one that serves 51% of market. Findings may have implications for FCC’s pending decision on whether to extend programming exclusivity ban, which forces cable operators to sell their programming to competitors such as DBS. However, study co- author Mark Bykowsky said he didn’t know whether Commission would consider findings in that proceeding. Ban is set to expire in Oct. Study said networks with least-popular programming had difficulty earning profit no matter which market environment was considered.
Study found “a statistically significant decrease” in DBS operator’s bargaining power when 2 cable operators served 44% and 39%, respectively, of MVPD market than when largest cable MSO served 27% of market. AT&T-Comcast deal would combine nation’s first and 3rd largest cable operators and give new entity 22 million subscribers. While that represents 30% of 65 million cable customers nationwide, merger would represent 25% of entire MVPD market of 88.3 million people, according to figures previously released by companies. Reduction in bargaining power for DBS would mean satellite operators could expect to pay higher affiliate fees and therefore might have to raise rates for their subscribers, study said. Findings may be good news for proposed EchoStar takeover of DirecTV, although study said analysis “does not indicate or suggest that the FCC has made a decision regarding whether to permit a merger” between them. Interestingly, study examined single DBS operator that had 17% of MVPD market, which is roughly combined market share of EchoStar and DirecTV. Bykowsky discounted similarities to reality. Nevertheless, researchers found that buyers could negotiate lower affiliate fees in market that included 2 major cable operators and one DBS operator than in one with single large cable operator and several much smaller buyers.
Findings changed when researchers relaxed their assumption that cable operators had limited channel capacity. In those experiments, all networks were able to turn profit and cable MSOs’ bargaining power declined. Findings also changed when cable operators were allowed to include “most- favored-nation” (MFN) provision in affiliate agreement. Under such pact, network guarantees that large buyer won’t have to pay affiliate fee any higher than that paid by smaller company. Study said MFN provision “substantially increases” MSOs’ bargaining power because they were able to negotiate lower affiliate fees than small buyers. “A programming network’s ability to negotiate a high affiliate fee with a large buyer depends on the popularity of the programming network. The more popular the programming network, the higher the affiliate fee,” study said.
Asked directly what percentage of concentration among cable operators would be too much, Bykowsky said he would “love to answer that question,” but couldn’t do so in his capacity at FCC. His role, he said, is “to just provide the FCC with all this information and let them make that judgment.”
FCC asked stakeholders to comment on study’s underlying assumptions, design and methodology, as well as to draw their own conclusions, explore additional avenues for research and to consider submitting their own studies for analysis by Commission. Comments are due to FCC by July , replies Aug. 2.