Toward a fairer, subscriber-empowered multichannel television regime: injecting substance into the good-faith requirement on retransmission consent negotiations.

Author:Pae, Darrel John

TABLE OF CONTENTS I. INTRODUCTION II. RETRANSMISS1ON CONSENT AND THE DUTY TO BARGAIN IN GOOD FAITH A. The 1992 Cable TV Act B. FCC's Implementation of Retransmission Consent: The Good-Faith Requirement III. WHOLESALE BUNDLING A. The Basic Configuration: Horizontal Integration and Leveraging on Intra-Corporate Holdings B. Types of Wholesale Bundling and the Maneuvers Through Which They Are Achieved C. Beyond Mere Bundling: Broadcast Networks' Increasing Market Influence over Conduct of Their Affiliates Regarding Retransmission Consent D. Some Relevant Examples IV. ANALYSIS A. Economic Analysis of the Effects of Wholesale Bundling 1. The Basics: Supply, Demand, and Consequent Welfare Reduction 2. Effects-Side Analysis: Practical Consequences of Bundling and Their Economic Bases a. Increased Operating Costs, Market Inefficiency, and Dampening of Competition b. Inflated Prices Passed on to Subscribers B. The Arguments of Local Broadcast Stations and the Media Companies Owning or Affiliated with Them V. RECOMMENDATIONS A. Singling Out the Bad Apples B. Congressional Legislation and FCC Administrative Rulemaking C. FCC Implementation: An Illustration of the New Regime VI. CONCLUSION I. INTRODUCTION

The wholesale side of multichannel television has always been a war of domination between programming networks (both broadcast and cable systems), (1) on the one hand, and cable providers and other multichannel video programming distributors ("MVPDs"), on the other. (2) Throughout the evolution of the multichannel marketplace, power has shifted back and forth between broadcasters and MVPDs because of a combination of market developments and government regulation. (3) In the past, cable operators, largely viewed as monopolists, were considered kings in whom all the bargaining power resided. (4) Congress then passed the Cable Television Consumer Protection and Competition Act of 1992, (5) which gave life to the must-carry and retransmission consent rules. That same year saw the emergence of direct broadcast satellite ("DBS") as a new industry player that would rapidly inject competition into the MVPD marketplace. (6) Since then, the dynamics between broadcast networks and MVPDs, and the landscape upon which both exist, have forever changed. Some would even argue that bargaining power has now transferred mostly to broadcast networks, seizing control from MVPDs. (7)

This Note focuses on the dynamics of multichannel video on the wholesale side. Specifically, it parses the relationship between MVPDs and broadcast networks during retransmission consent negotiations. Substantive issues faced by MVPDs during these negotiations ultimately affect the welfare and utility of consumers in terms of programming choice and the prices they pay. These effects, when amalgamated, create a "market defect" that results in "forced bundles" offered to and purchased by multichannel video subscribers. (8) This type of wholesale bundling is inimical not only to MVPDs and their business models, but also to consumers who are forced to purchase bundles containing channels that they do not demand, thereby reducing the overall utility they get from multichannel television. (9)

Part II gives a brief history of cable television, as it relates to the relationship between broadcast networks and cable providers, including a summary of the legislative history of the Cable Television Consumer Protection and Competition Act of 1992 and the FCC rules concerning retransmission consent. Part III expounds on the different iterations of wholesale bundling, its structural premise, and the various interrelated factors and marketplace developments that enable its existence. Part IV reviews certain economic analyses to shed light on how current retransmission consent practices negatively affect consumer welfare and consumer choice. Finally, Part V proposes that Congress authorize the FCC to oversee the substantive aspects of the retransmission consent process. A complementary explication on how the FCC can utilize this authority, through rulemaking, to police unfair and utility-reducing retransmission consent practices concludes the Note.


    1. The 1992 Cable TV Act

      To fully understand the nature of retransmission consent and how it works, it is helpful to look at the landscape upon which MVPDs and broadcast networks operated before the 1992 Cable TV Act's enactment. Broadcast networks produce programming that is transmitted by their respective affiliate broadcast stations to consumers for free over the air. (10) Prior to 1992, cable providers used these signals free of charge and packaged them with other programming for sale to cable subscribers. (11) For a time, broadcast networks and regulators regarded this practice as fostering the development of broadcast networks and the free programming that they produce, in that these programs were able to reach viewers who would otherwise not have access to them through their cable subscription. (12) This was very beneficial for broadcast networks because their income was mainly derived from advertising, (13) and advertising revenue is inevitably affected by the number of viewers reached by the broadcast networks' programming. As cable providers developed, however, they became vertically integrated. (14) It became common practice that one company would own both a cable provider and a cable network, (15) and Congress became wary that this relationship would result in cable providers favoring the carriage of cable programming of an affiliate to the detriment and exclusion of broadcast programming. (16)

      Thus ended the symbiotic relationship between cable providers and broadcast networks. Regulators started viewing cable networks as undermining the ongoing viability of free over-the-air broadcasters. (17) The product of this perceived threat was the Cable Television Consumer Protection and Competition Act of 1992 ("1992 Cable TV Act" or the "Act"). (18) Two of the most controversial provisions of the Act were must-carry and retransmission consent. (19) During the drafting period of the Act, the Senate Committee on Commerce, Science, and Transportation noted first that cable providers "use[d broadcast networks'] signals without having to seek the permission of the originating broadcaster or having to compensate the broadcaster for the value its product creates for the cable operator." (20) Because broadcast networks have "been granted an exclusive right by the FCC to broadcast over the limited broadcast spectrum," they have a proprietary interest in those signals that "might be threatened if others could easily duplicate these broadcasts." (21) Broadcast programming was the most popular content watched on cable TV. (22) Accordingly, cable programming (much of which was affiliated with cable operators) benefited from increased viewership when it was placed on channels adjacent to popular broadcast programming. (23) However, this meant that "broadcasters [were] in effect subsidiz[ing] the establishment of their chief competitors." (24) This free-riding by cable operators was viewed as unfair (25) and against public policy, (26) because cable providers had abandoned their classical business models--repackaging and delivering broadcast signals--and started competing in the market for TV programming. (27) These market developments, coupled with the fact that cable systems rarely had any local competition, resulted in "undue market power for the cable operator as compared to that of consumers and video programmers." (28)

      Out of the desire to curb this power and equalize the then pervading market realities, retransmission consent, one of the more controversial provisions of the 1992 Cable TV Act, was born. (29) The retransmission-consent provision provides, "No cable system or other multichannel video programming distributor shall retransmit the signal of a broadcasting station, or any part thereof, except.., with the express authority of the originating station." (30) Retransmission consent was intended to prevent a "distortion in the video marketplace which threaten[ed] the future of over-the-air broadcasting." (31) Because cable operators were already paying for the rights to cable programming, Congress found no reason why this option should not be made available for broadcast programmers. (32)

      The 1992 Cable TV Act ushered in a change to the landscape that underpinned the relationship between broadcast networks and cable providers. Cable operators were stripped of the ability to set the conditions upon which broadcast programming carriage were based. (33) As competition emerged and broadcasters were able to play cable operators and other MVPDs off against one another, cable operators were relegated to a defensive position of just anticipating what broadcast networks had in store for them, instead of being able to dictate the terms of contract and the tenor of negotiations. (34)

    2. FCC's Implementation of Retransmission Consent: The Good-Faith Requirement (35)

      Congress initially provided little guidance as to how retransmission consent negotiations were expected to transpire, aside from the three-year periodic renewal of retransmission consent and the considerations the Commission was to account for when crafting rules. (36) Specifically, Congress directed the Commission to "ensure that the regulations prescribed under this subsection do not conflict with the Commission's obligation ... to ensure that the rates for the basic service tier are reasonable." (37) The FCC also was directed to consider "the impact that the grant of retransmission consent by television stations may have on the rates for the basic service tier." (38) Beyond these obligations, the FCC was not given directives on how to regulate the manner by which retransmission consent negotiations are conducted.

      Congressional silence ended in 1999 when Congress enacted the Satellite Home Viewer Improvement Act of 1999 ("SHVIA"),...

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