Paying the price for sports TV: preventing the strategic misuse of the FCC's carriage regulations.

• Author: Hutson, David

1. INTRODUCTION II. LEAGUE-OWNED NETWORKS AND REGIONAL SPORTS NETWORKS A. Background: Cable Sports and Vertical Integration B. The Roots of the Dispute Between Cable Companies and League-Owned Networks C. Public Negotiations Between Cable Companies and League-Owned Networks III. THE FCC's CARRIAGE DISCRIMINATION REGULATIONS A. Carriage Discrimination Regulation in the 1992 Cable Act & Analysis of the FCC's Implementation B. Classic Sports Network v. Cablevision C. TCR Sports Broadcasting Holding v. Comcast D. Movement Within the FCC for Change to the Discrimination Regulations IV. THE FCC's CARRIAGE REGULATIONS ARE RIPE TO BE EXPLOITED BY LEAGUED-OWNED CABLE SPORTS NETWORKS IN A WAY THAT IS HARMFUL TO THE PUBLIC A. How Could League-Owned Cable Sports Networks Exploit the FCC's Regulations for Leverage in Carriage Negotiations? B. Exploitation of the FCC's Regulations by League-Owned Cable Sports Networks Could Lead to Unreasonable Price Increases for Cable Subscribers V. SOLUTIONS A. Force Divestiture of RSNs by Cable Companies Through Intervention or Non-Intervention B. A la Carte C. Add a Procedure That Allows Cable Companies to Seek Dismissal of a Complaint if Discrimination Between Networks is Reasonable D. Mandatory Arbitration is Not a Reasonable Solution for All Carriage Disputes VI. CONCLUSION I. INTRODUCTION

   Televised sporting events are an important part of American culture. Sports leagues and cable companies have embarked on courses of vertical integration (1) to reap the financial benefits of the public's love of sports. These parallel courses of vertical integration clash with the FCC's carriage regulations in a way that could cause cable prices to increase for the sports fan and non-sports fan alike.

   FCC regulations prohibit vertically integrated cable companies from discriminating between affiliated and nonaffiliated networks. Many cable companies have vertically integrated by acquiring interests in regional sports networks (RSNs). A more recent phenomenon is the creation of cable networks by college and professional sports leagues. These leagues distribute exclusive content through vertically integrated cable networks. In some instances, because of the high prices sought by the league-owned networks, they have been unable to reach carriage agreements with cable companies. The league-owned networks could argue that cable companies are in violation of the FCC's anti-discrimination regulations by carrying their affiliated RSNs on favorable terms, but denying carriage to nonaffiliated league-owned sports networks.

   This Note will argue that it would be an abuse of the FCC's regulations and against the public interest for league-owned sports networks to gain favorable carriage terms by using the anti-discrimination regulations. Sports content is expensive, and if the bargaining power of cable companies is hampered by the FCC's regulations, cable subscribers will face unreasonable price increases. The recent settlement of a carriage dispute between TCR, a cable network owned by a sports team, and Comcast, a cable company, resulted in a $2 per month increase in cable rates for 1.6 million people. If other league-owned sports networks are able to obtain similar results in their negotiations, cable subscribers, many of whom have no interest in sports programming, will face similar price increases. Despite the fact that forcing cable companies to add expensive sports networks would be against the interest of the majority of cable subscribers, the FCC has held that it is unreasonable, and therefore prohibited, for cable companies to deny carriage to expensive nonaffiliated sports networks.

   This Note will discuss a variety of possible responses by policymakers. Congress could intervene by discouraging vertical integration by cable companies or moving to an a la carte cable regime. The FCC could respond independently by making clear that its regulations only prevent unreasonable discrimination, and that discrimination by cable companies that is consistent with the public interest is not prohibited. One proposed solution to carriage negotiation impasses, mandatory binding arbitration, is an unwise idea because it unjustifiably involves the government in carriage disputes that do not result from discrimination or coercion.

2. LEAGUE-OWNED NETWORKS AND REGIONAL SPORTS NETWORKS

   1. Background: Cable Sports and Vertical Integration

      Sports are a big business. The National Football League (NFL) earns $3.7 billion annually by selling broadcast rights to its football games. (2) ESPN is able to command a broadcast license fee of $3.26 per subscriber from cable companies; YES, the network owned by George Steinbrenner which owns the rights to broadcast games played by the New York Yankees, (3) commands a $2.15 monthly license fee per subscriber. (4) By contrast, other major cable networks like USA, CNN, or TBS charge about $0.30 per subscriber per month. (5) The disparity is reflective of the importance of sports media. In an age of short attention spans and a multitude of media competing for consumer attention, broadcasters are willing to pay a premium for sports programming because of its unique ability to command a viewer's attention. (6)

      Sports leagues have attempted to capture the financial benefits of cable sports by creating vertically integrated cable networks and reserving a portion of the league's content to be exclusively broadcast on that network. (7) Cable companies have also pursued a vertical integration strategy by creating or acquiring interests in RSNs. (8) RSNs provide sports programming relevant to a particular geographic area. (9)

   2. The Roots of the Dispute Between Cable Companies and League-Owned Networks

      The trend of vertical integration between (1) sports leagues and sports networks, (10) and (2) cable companies and sports networks (11) has caused problems in negotiations between league-owned networks seeking carriage and cable companies. (12) The root of the dispute concerns whether the league-owned networks should be placed on the expanded basic tier or a special tier of service.

      Cable companies are required to offer a "basic" service tier which subscribers must purchase in order to have access to other cable programming. (13) The FCC requires that the basic tier include local broadcast networks and whatever public, educational, and governmental access channels local government requires. (14) Additional programming, including news, sports, and "superstations," is placed on expanded basic tiers--the level of cable service that most subscribers choose. Cable companies have increased the number of channels they broadcast on the expanded basic tier, but that expansion has been blamed for increases in price that are not justified by the viewership of those channels. (15) Special tiers carry programming that may be purchased separately on an a la carte basis. (16)

      Cable companies argue that the league-owned networks are asking a price that is too high compared to the value of the content they provide and refuse to provide carriage on their expanded basic service tiers. (17) Instead, they offer to carry the league-owned networks on special tiers. (18)

      League-owned networks, drawn into the television business by the prospect of fat subscriber fees, find the idea of placement on a special tier unacceptable. (19) Not only would revenue drawn from subscribers be lower, advertising would be more difficult to sell. (20) The league-owned networks point to the cable-owned RSNs, which are just as expensive in terms of license fees (21) and are placed on expanded basic service tiers, as evidence of the value of sports programming to cable companies.

   3. Public Negotiations Between Cable Companies and League-Owned Networks

      Cable companies and sports networks are vying for support in the political arena, as well as in the court of public opinion in an attempt to influence negotiations. In December of 2007, the New England Patriots football team took an undefeated record into the last week of the regular season to play the New York Giants; it was a game of national interest. (22) The game was scheduled for broadcast on the NFL Network, which was, at the time, not available on the basic expanded tier of most major cable companies. (23)

      The NFL lobbied Congress to intervene on its behalf to the FCC but was unsuccessful. (24) In fact, the lobbying seemed to backfire. Despite the NFL's efforts, many in Congress were more sympathetic toward the cable companies in the dispute. (25) Senator John Kerry threatened to hold hearings in the Senate Commerce Committee if the NFL Network did not back down and allow wider distribution of the game. (26)

      More generally, the NFL Network has also explored the possibility of filing a complaint with the FCC. (27) The NFL's legal theory is that cable companies are favoring RSNs, in which they have an interest, and denying carriage on similar terms to nonaffiliated networks. (28) Cable companies are prohibited from discriminating between affiliated and nonaffiliated networks in carriage terms. (29) The sports networks would like to be able to use this law to force their way on to the expanded basic service tier alongside the cable-owned RSNs.

      Outside the political realm, cable companies have affiliated themselves with Web pages (30) and run commercials (31) targeted at sports fans suggesting that the sports networks are greedy and dishonest, and that the content they provide is not valuable. The sports networks have also run ads designed to motivate fans to pressure their cable company into adding their network. (32)

3. THE FCC'S CARRIAGE DISCRIMINATION REGULATIONS

   In the 1992 Cable Act, Congress directed the FCC to adopt regulations prohibiting cable companies from discriminating in carriage agreements between affiliated and nonaffiliated networks. (33) The carriage anti-discrimination laws were adopted to prevent a network from gaining too much market power over...