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New comments by Time Warner Cable CEO back up what we already knew—incumbent companies are holding back video innovation.
It's puzzling to many observers why so many programmers don't make their content more widely available online. It seems like programmers are leaving money on the table. Shows that are available online are talked about more, watched more, and pirated less. Viewers are demanding easier access to shows that is not tethered to their home and does not require a cable subscription, yet the market is not delivering it. Why is this?
There are two big reasons. The giant content companies have a symbiotic relationship with cable. They sell programming exclusively to cable (and satellite) and charge a lot for it. This forces cable companies to raise their bills but, since they're the only source of programming people want, they're able to. There's nowhere to switch to. Only now, as cable bills are reaching unsustainable levels and cable companies are seeing that online video has the technological potential to become a competitor to cable, are some cable companies finally objecting publicly.
The second reason is more subtle. Smaller programmers don't have the ability to dictate terms to cable companies the way some large ones do. But cable is their largest customer. If a large cable company tells an independent programmer that it can't distribute its content online, then the programmer has little choice but to comply.
These issues highlight how concentrated markets prevent companies from responding to customer's needs. Concentration in the programming market leads to absurd situations like every cable subscriber, even non-sports fans, paying about $5 per month for ESPN. Concentration in the distribution market allows existing distributors to use threats and incentives to hold back the development of alternative distribution channels.
None of this is exactly new to people who have been paying attention for a while. Many of these issues were discussed during the Comcast/NBCU merger debate, for instance. But public, on-the-record evidence of these problems has been scarce. That's changing. Cablevision's antitrust lawsuit against Viacom has highlighted how large programmers force cable companies to pass along expensive bundles to their viewers. And a few recent off-the-cuff remarks by Time Warner Cable's Glenn Britt have confirmed that cable companies restrict programmers from delivering their content online.
A long-term solution to these problems has to be structural. Concentration in distribution and concentration in programming are both problems. They will be hard to fix. But there is a short-term solution as well. Under Section 628 of the Communications Act, cable and satellite companies are already prohibited by law from acting anticompetitively against each other. This is why the satellite TV industry was able to grow in the 1990s and 2000s--incumbents were not permitted to keep them from accessing programming. Section 628, though, is written in technology-neutral terms. It prohibits incumbents from taking actions "the purpose or effect of which is to hinder significantly or to prevent any multichannel video programming distributor from providing" programming. As PK has argued for a while, "multichannel video programming distributor" is a very broad term and should apply to cable-like services that are offered online. This interpretation would not affect on-demand companies like Netflix but would allow "virtual cable systems" to being offering a full range of popular programming. This would strip incumbents of the power of exclusivity and could lead to the even-wider availability of content—not just through virtual cable systems but through services like iTunes and Amazon Instant Video.
The video industry has been slow to evolve because of a complicated tangle of contracts, relationships, and regulation, made worse by consolidation and concentration. Things are getting better but the evolution is slow. There's a lot that policymakers can do to help it along, but one start would be to apply existing law to prevent anti-competitive restrictions that prevent programmers from distributing their content more widely.
Image by flickr user Deborah Lee Soltesz.