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This recent story (paywalled) about the financial challenges YouTube TV and other “virtual cable” providers face is a good illustration of some points we’ve been making at Public Knowledge for a while. As the story notes, “these streaming services have yet to figure out how to make money. In fact, the more people they sign up, the more money they lose. That’s because the services are paying more for programming than what they’re charging consumers.”
Why is this? Basically, the incentives of large content providers and big cable make offering viewers more choice very difficult. Large content providers bundle their programming together, and require that cable companies put their channels—even the less popular ones—in lower tiers where they get more subscribers. This ends up costing viewers a lot, but cable companies themselves take a margin on this so they profit, too. It’s a symbiotic relationship.
To keep it going, the largest cable companies in turn require that content providers (large and small) give them “most favored nation” status, meaning that new entrants can’t get better deals, both in terms of cost but also in terms of on-demand rights and so on. (Some programmers might want to give discounts to new entrants to create more competition.) Some of the large incumbent distributors, such as big cable companies, may also simply pay smaller programmers less, or just drop them, if they make their programming available online in any way.
Virtual cable services show that it’s not impossible, provided you have a company that is willing to lose money on every subscriber for a while, which is not something you can count on forever. There’s a reason why many online video services, such as Netflix and Amazon, focus more on back-catalog and original programming, instead of competing head-to-head with cable.
If policymakers want to ensure that “skinny bundles,” more consumer choice including a la carte options, and other innovative services are available, they should consider changes to the policies that make competing in this space so difficult, and keep prices high even in traditional cable (which remains an extremely popular, profitable, and stable service). I’ll review some of these below:
- Eliminate basic tier buy-through rules
This one should be easy: It’s actually illegal for cable companies to allowing customers to opt out of paying for local broadcast stations—the very ones they can get for free with an antenna. Let’s change that.
- Program access for online service
Video distributors that meet the category of “multichannel video programming distributor”—cable and satellite providers, mostly—are prohibited from discriminating against each other in certain ways—for example, by refusing to carrying programming unless they get an exclusives. But no such rules protect online video services. That should be changed, too.
- Distant signal
Cable companies are forbidden from carrying the signals of out-of-market broadcasters, even if such carriage would otherwise be allowed under the law. Rules like this are designed to protect local network franchises (which are often owned by companies like Sinclair) from competition. There is no reason for the law to do this.
- Set-top box
Public Knowledge has spent many long, disappointing years trying to get the Federal Communications Commission to enforce the law, which requires that viewers be able to access their subscription video programming on the device of their choice. Opening up device competition is still a good idea, which would get rid of cable’s monopoly on the user interface and would facilitate competition and choice in a number of ways.
- Block mergers
We’ve let too many media and cable mergers, among others, go through, predictably leading to high prices, companies with excessive leverage forcing people to subscribe to their programming, and a slow level of innovation, especially when compared with other media and technology markets. Antitrust enforcers should look at this record and review future mergers with a much more skeptical eye.
- Limit MFNs
Most-favored nation clauses in business contracts aren’t bad in every circumstance, but in the world of cable there’s reason to think they do much more harm than good. Whether by regulation, statute, or extending and modifying current merger conditions and consent decrees, policymakers should step in and prevent MFNs from holding back new services.
- À la carte (and pricing transparency)
Like MFNs, programming bundles aren’t always bad. But like MFNs, they’ve been taken too far in the cable space, and the time has come for regulators to require that video services give viewers more choice and flexibility, including à la carte options. This may require a systemic approach—programmers themselves may have to offer more transparent pricing, and their contracts with cable companies should allow for viewers to opt out of paying for programming they don’t want.
No single one of these ideas is a magic bullet. But video competition policy shouldn’t depend on hoping that large tech companies will enter the marketplace and just lose money indefinitely, trying to offer the kinds of services that viewers want.
Image credit: Flickr user nrtphotos