The Proposed Comcast-NBC Universal Combination: How It Might Affect the Video Market
Congressional research reportJan 11, 2011
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The Proposed Comcast-NBC Universal
Combination: How It Might Affect
the Video Market
-name redactedSpecialist in Telecommunications Policy
January 11, 2011
Congressional Research Service
7-....
www.crs.gov
R41063
CRS Report for Congress
Prepared for Members and Committees of Congress
The Proposed Comcast-NBC Universal Combination
Summary
The proposed combination of Comcast, the largest distributor of video services in the United
States, and NBC Universal (NBCU), a major producer and aggregator of video content, would
create a huge, vertically integrated entity with potentially enormous negotiating power at a time
when market forces already are altering traditional content provider/distributor relationships.
Comcast would own or control media and entertainment properties of significant scope and scale.
Despite the size and reach that Comcast would be afforded, there is so much uncertainty in the
video market that the proposed combination has elicited a wide range of predictions about (1)
how it would affect that market; (2) how it would affect the long-standing public policy goals of
competition, diversity of voices, and localism; and (3) whether the merger would prove beneficial
to Comcast’s shareholders.
From one perspective, the scope of the combination would be so broad that, in addition to
requiring careful scrutiny of its competitive effects, it potentially could affect market structure
and relationships in ways that have implications for a wide range of media rules, regulations, and
policies, including program carriage rules, program access requirements, retransmission consent
rules, long-standing policy supporting free over-the-air broadcast television, and even network
neutrality and open access policies. From another perspective, the recent history of failed megamergers in the communications sector suggests that the vertically integrated post-merger entity
may have so many parts with conflicting market incentives that it proves impossible to craft an
internally consistent profit-maximizing business strategy, no less exploit market power to
undermine competition.
There is consensus that the Department of Justice (DOJ) and the Federal Communications
Commission (FCC) are likely to approve the combination subject to merger conditions and/or
license conditions—intended to protect competition, diversity of voices, and localism—that may
significantly affect the impact of the combination. It is possible, however, that such conditions
might have the effect both of protecting the public against significant harms created by the
combination and of limiting potential benefits created by the combination.
The traditional business models of just about every participant in the video market are potentially
challenged by structural market changes and as a result the current environment is characterized
by very contentious programmer-distributor negotiations and a multitude of novel new ways to
distribute content as incumbents and new entrants experiment with new business models.
The issues likely to require the most attention of the DOJ and the FCC include whether Comcast
would be able to use its vertically integrated position to deny rival distributors (including
independent Internet video distributors and over the top service providers) access to programming
or to raise the cost of that programming; whether Comcast would be able to use its vertically
integrated position to favor the programming of NBCU at the expense of independent
programmers; whether Comcast would have the incentive to use the merger to change NBC into a
cable network, at the expense of local programming; and whether a combined Comcast-NBCU
might have the unique ability to craft new business models that benefit consumers.
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The Proposed Comcast-NBC Universal Combination
Contents
Introduction ................................................................................................................................1
Structural Changes in the Video Market.......................................................................................2
Changes in Traditional Video Business Models ...........................................................................6
Broadcast Networks and Their Affiliated Local Broadcast Stations ........................................6
The Large MVPDs, the Large Programmers, and TV Everywhere ....................................... 13
Claims About How the Proposed Comcast-NBCU Combination Would Affect the Video
Market ................................................................................................................................... 18
Claim: Comcast Would Be Able to Use its Vertically Integrated Position to Deny
Rival Distributors Access to Programming or to Raise the Cost of That
Programming ................................................................................................................... 18
Comcast vs. Other MVPDs ........................................................................................... 19
Comcast and Other MVPDs vs. Independent Internet Video Distributors and Over
the Top Service Providers........................................................................................... 22
Claim: Comcast Would Be Able to Use Its Vertically Integrated Position to Favor the
Programming of NBCU at the Expense of Independent Programmers............................... 23
Claim: Comcast Will Use the Merger to Change NBC into a Cable Network, at the
Expense of Local Programming ....................................................................................... 24
Claim: A Combined Comcast-NBCU Might Have the Unique Ability to Craft New
Business Models That Benefit Consumers ........................................................................ 26
Reported Merger Conditions ..................................................................................................... 27
Tables
Table 1. Television Advertising Expenditure Components ...........................................................8
Table 2. Advertising-Supported Cable Network Revenue Mix, 1989-2008...................................9
Table 3. Estimated Cash Retransmission Consent Fees, 2006-2015, by MVPD Type ................. 11
Contacts
Author Contact Information ...................................................................................................... 28
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The Proposed Comcast-NBC Universal Combination
Introduction
The proposed combination of Comcast, the largest distributor of video services in the United
States, and NBC Universal (NBCU), a major producer and aggregator of video content, would
create a huge, vertically integrated entity1 with potentially enormous negotiating power at a time
when market forces already are altering traditional content provider/distributor relationships.
Comcast would own or control media and entertainment properties of significant scope and scale,
including:
•
Comcast’s cable systems, which currently serve 24.2 million subscribers, making
Comcast the largest provider of multichannel video programming distribution
(MVPD) services in the United States;
•
Comcast’s broadband network, which passes more than 50 million homes and
provides high speed Internet service to just under 15 million households, making
Comcast the largest residential information service provider (ISP) in the United
States;
•
A number of national cable networks, including NBC’s USA, Bravo, CNBC,
MSNBC, Oxygen, and Syfy networks and Comcast’s E!, Style, Golf Channel,
and Versus networks, as well as minority interests in the A&E, Biography,
History Channel, Weather Channel, and Lifetime cable networks, and small
interests in the Big Ten, NHL, and MLB cable networks;
•
Comcast’s 10 regional cable sports networks;
•
The NBC national broadcast television network, including NBC News (a leading
source of global and national news with top-rated news programming), NBC
Universal Sports and Olympics (which holds contracts to broadcast the 2010
Winter Olympics and 2012 Summer Olympics, NBC Sunday Night Football,
NHL/Stanley Cup, the PGA Tour, the U.S. Open, the Ryder Cup, Wimbledon,
and the Kentucky Derby), and NBC Entertainment;
•
NBC’s Telemundo national broadcast television network, the second-largest
Spanish language programming network in the United States;
•
NBC’s ten owned and operated local broadcast stations, which carry the NBC
network programming in large U.S. markets, including New York, Los Angeles,
Chicago, and Philadelphia;
1
Specifically, Comcast and General Electric (GE) have signed a definitive agreement to form a joint venture that will
be 51% owned by Comcast, 49% owned by GE, and managed by Comcast. The joint venture will consist of the NBCU
businesses (currently primarily owned by GE) and Comcast’s cable networks, regional sports networks, and certain
digital properties and unconsolidated investments. Comcast’s cable systems will remain separate, but both the cable
systems and the joint venture will be managed by Comcast. GE will be entitled to cause the joint venture to redeem
one-half of GE’s interest after three and a half years and the remaining interest after seven years and Comcast has
certain rights to purchase GE’s interest in the venture at specified times. See “Comcast and GE to Create Leading
Entertainment Company,” Comcast Investor Relations, December 3, 2009. At least one industry analyst, Jason Bazinet
of Citigroup, reportedly has indicated that Comcast would have both the ability and the incentive to own 100% of the
joint venture by 2014. See Mike Farrell, “Analyst: Comcast Could Own 100% of NBCU by 2014,” Multichannel News,
December 16, 2009.
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•
NBC’s 16 owned and operated local broadcast stations, which carry the
Telemundo network programming in cities with large Spanish-speaking
populations, including Los Angeles, New York, Miami, Houston, Chicago, and
Dallas;
•
NBCU’s large television production operations, which produce broadcast
network programming, NBCU Television Distribution’s broadcast program
syndication operations, and a 3,000-title library of television episodes;
•
NBCU’s Universal Pictures and Focus Features, which produce theatrical and
non-theatrical films, as well as Universal Studio Home Entertainment’s extensive
movie library with more than 4,000 titles;
•
Digital media properties, including CNBC.com, iVillage, NBC.com, Fandango,
and Daily Candy, which together generate more than 40 million unique users
each month; and
•
NBC’s 30% interest in Hulu.com, a website that offers free, advertisingsupported streaming video of broadcast and cable television programs.
Despite the size and reach that Comcast would be afforded if the deal is completed, there is so
much uncertainty in the video market that the proposed combination has elicited a wide range of
predictions about (1) how it would affect that market; (2) how it would affect the long-standing
public policy goals of competition, diversity of voices, and localism; and (3) whether the merger
would prove beneficial to Comcast’s shareholders.
From one perspective, the scope of the combined entity would be so broad that, in addition to
requiring careful scrutiny of its competitive effects, it potentially could affect market structure
and relationships in ways that have implications for a wide range of media rules, regulations, and
policies, including program carriage rules, program access requirements, retransmission consent
rules, long-standing policy supporting free over-the-air broadcast television, and even network
neutrality and open access policies. From another perspective, the recent history of failed megamergers in the communications sector suggests that the vertically integrated post-merger entity
may have so many pieces with conflicting market incentives that it proves impossible for
executives to craft an internally consistent profit-maximizing business strategy, much less exploit
market power to undermine competition.
There is consensus that the Department of Justice (DOJ) and the Federal Communications
Commission (FCC) are likely to approve the combination subject to merger conditions and/or
license conditions—intended to protect competition, diversity of voices, and localism—that may
significantly affect the impact of the combination. It is possible, however, that such conditions
might have the effect both of protecting the public against significant harms created by the
combination and of limiting potential benefits created by the combination.
Structural Changes in the Video Market
With or without the Comcast-NBCU combination, the video market is in a state of flux.
Significant technology-induced structural changes on both the supply side and the demand side of
the market are fragmenting audiences, affecting the level of revenues generated, and shifting the
flow of those revenues among industry players. Long-standing business models of both content
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providers and distributors are being challenged. The impact of the proposed merger on the video
market and on public policy goals will be affected by these dynamic forces currently at play.
Some of the structural changes are the result of independent new competitors entering the market.
Others are the result of firms that already had a strong market presence expanding or extending
into new activities.
On the distribution side, technological innovation has generated major new entry. In the early
1990s, when many of the regulatory rules affecting content-distributor relationships were
adopted, there was little competition to cable in the MVPD market. In June 1994, fewer than 2
million households subscribed to satellite television service, and most of those used the C-band
technology; fewer than 70,000 were served by direct broadcast satellite (DBS), which was still in
its infancy. 2 Telephone companies were not offering video services at all. Cable dominated, with
59.5 million basic cable customers in 1994,3 out of a total of 94.2 million television households.4
Most cable subscribers had not retained their rooftop broadcast television antennas; if their cable
company chose not to carry a particular local broadcast station’s signal, many subscribers no
longer were able to receive the broadcaster’s programming (including the advertising) and had no
alternative source for that programming. Since the cable company’s carriage decision heavily
determined the number of viewers that would view a broadcaster’s programming and advertising,
it enjoyed a very strong negotiating position vis-à-vis the broadcaster.
In contrast, today most American households have access to the two major DBS providers,
DirecTV and Dish Network; there are more than 31 million subscribers to satellite video service.
In addition, at mid-year 2009, Verizon’s FiOS television service was available to 10.3 million
households and purchased by 2.5 million households,5 and AT&T’s U-verse service, at the end of
the third quarter of 2009, was available to approximately 20 million households and purchased by
1.8 million households.6 The FiOS and U-verse services are not available in the same markets.
Thus most households have access to at least three MVPD providers and MVPDs that fail to carry
“must-have” broadcast (or other) programming that their competitors offer may find themselves
at a significant competitive disadvantage. Hence broadcasters and other programmers are in a
strengthened negotiating position vis-à-vis MVPDs.
At the same time, consumer electronics manufacturers have added a number of streaming video
capabilities to a range of devices that allow consumers to easily connect their televisions to the
Internet. Such devices include Internet-ready high definition televisions (HDTVs), DVRs, BluRay DVD players, video game consoles (including Xbox 360, PlayStation 3, and Wii), and
dedicated boxes (such as the $80 WiFi- or Ethernet-enabled Roku player). These devices provide
access to numerous video on demand (VOD) services, including Netflix, Amazon Video,
2
Satellite Broadcasting & Communications Association, “Satellite Subscribers History,” based on data obtained
through MediaBiz: Competitive Intelligence, available at http://www.sbca.org/receiver-network/industry-satellitefacts.htm.
3
NCTA, “Basic Video Customers, 1975-2008,” based on data from SNL Kagan, available at http://www.ncta.com/
Stats/BasicCableSubscribers.aspx.
4
Television Bureau of Advertising, “Media Trends Track—TV Basics: Television Households,” compiled from The
Nielsen Company-NTI, September each year, and presented at http://www.tvb.org/rcentral/mediatrendstrack/tvbasics/
02_TVHouseholds.asp.
5
Reported in Stacey Higginbotham, “Is Verizon FiOS Putting the Hurt on Cable,” http://gigaOM.com/2009/07/27/isverizon-fios-putting-the-hurt-on-cable/, July 27, 2009.
6
Reported in http://www.UverseUsers.com, October 22, 2009.
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MLB.com, and YouTube. They have created an entirely new way to distribute video. The
introduction of the highly mobile Apple iPad provides another alternative for consumers to watch
video over the Internet through a WiFi/3G-enabled device that is considerably larger than the
iPhone, Android phone, or iPod Touch. One of Apple’s potential advantages is the iTunes Store,
which is capable of supplying a significant amount of additional content to consumers. All of
these products (including home computers and laptops) allow consumers at home and on the road
to access a potentially unlimited supply of programming available over the Internet. It is not clear
whether Internet-based VOD services will gain sufficient access to desirable programming—and
particularly to the “must-have” programming that a significant portion of viewers require from
their video service. Nevertheless, the emergence of Internet-enabled, HDTV-quality Internet
service could ultimately prove to be disruptive to MVPDs and over-the-air broadcasters.
On the content side, structural changes have been fragmenting audiences for more than two
decades, but just when that fragmentation seemed to be abating, new market forces have been
created to continue the trend. The initial cause of audience fragmentation was the successful entry
of cable networks. As these networks proliferated they also evolved from primarily offering rerun broadcast or theatrical film programming to offering substantial amounts of original
programming. Today there are more than 500 cable networks, 35 of which come into more than
90 million households and another 42 that come into more than 50 million households.7 More
than 85% of all television households in the United States subscribe to MVPD service8 and the
average television household receives 130 television channels. 9
As recently as the early 1990s, the then-three major broadcast networks (ABC, CBS, and NBC)
and their affiliates commanded approximately 49% of U.S. television home set usage; today, the
four major broadcast networks (with the successful entry of FOX) and their affiliates command
only approximately 25%.10 Other broadcast stations command an additional 13% of television
usage. In contrast, advertising-supported cable networks commanded just 20% of television set
home usage in the early 1990s, but today the several hundred advertising-supported cable
networks command approximately 48% of usage, and pay cable networks an additional 4%.
Many of the successful cable networks are owned in whole or in part by companies that also own
a major broadcast network.
Audiences are unlikely to be further fragmented by additional cable network entry. There does not
appear to be consumer demand for additional program offerings over yet more cable networks. 11
Rather, a growing number of consumers, especially younger viewers, want to be able to watch
popular programming at a time and place that is convenient for them. Instead of a fixed, linear
schedule of programming, they are time-shifting their viewing through the use of DVRs and
video on demand (VOD) offerings. They also are location-shifting, through video streaming and
other Internet-based video services, game consoles, and mobile video. These alternatives are still
7
SNL Kagan, Broadband Cable Financial Databook, 2009 edition, “Census of Basic Cable TV Services (Mil.),” at pp.
14-17.
8
Based on data from “Pay TV Subscriber History” in SNL Kagan, Broadband Cable Financial Databook, 2009, at p.
9.
9
“Stations and Channels Receivable Per TV Household,” in Nielsen Company, Television Audience Report 2008,
downloadable from http://blog.nielsen.com/nielsenwire/media_entertainment/more-than-half-the-homes-in-us-havethree-or-more-tvs/.
10
Media Dynamics, Inc. TV Dimensions 2006, Annual Report.
11
In 2009 (admittedly a particularly harsh economic year) there were only two major new network launches,
Retirement Living TV and the MLB. See SNL Kagan, Broadband Cable Financial Databook, 2009 edition, at p. 6.
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in their infancy and it is not clear which will grow (and by how much) at the expense of
traditional broadcast and cable networks. But they have become significant enough that Nielsen
Research has begun to prepare quarterly reports on “Three Screen” video viewing—television,
computer, and cell phone. According to a recent Nielsen report:12
•
The 292 million people in the United States with a television on average each
week spend 31 hours and 35 minutes watching traditional television, but just 32
minutes watching time shifted television. They spend 4 hours and 6 minutes
using the Internet, but only 22 minutes of that time watching video on the
Internet, and just 3 minutes watching video on a mobile phone. Thus, time shifted
television watching, Internet video watching, and mobile phone video watching
still represent a very small portion of total video watching.
•
But alternative forms of video watching are growing faster than overall video
watching. The number of people who time shifted increased by 26.9% from
3Q08 to 3Q09. In that same period, the number of people who watched video on
the Internet increased by 14.8% and the number of people who watched video on
a mobile phone increased by 53%. On a monthly basis, the 47% of the population
(138 million people) who watch video on the Internet spend on average 3 hours
and 24 minutes during the month doing so; the 5% of the population (15.7
million people) who watch mobile video in the United States spend on average 3
hours and 15 minutes during the month watching video on a mobile phone.
These new time- and location-shifting means of receiving video further fragment video
audiences. When a particular program is offered—and viewed—over multiple platforms, it may
be possible to add up the total audience for that program, but the market impact will not be the
same as if that aggregate audience was all viewing the program over a single platform. Viewers
may be valued differently by advertisers depending on the platform used to view the
programming; some platforms can be more readily employed than others to generate per viewer
fees; and the multiple platforms will be competing with one another and thus the sum of their
negotiating strength in the market will be lower than that of a platform provider with the full
audience.
Nielsen has begun measuring time-delayed as well as traditional television viewing, 13 and some
industry players are pressing Nielsen to speed up its efforts to construct cross-platform ratings. 14
But there is evidence that the audience for time-shifted programming is qualitatively different in
that it is likely to view fewer advertisements. 15 If identical programming generates less revenue
from newly fragmented portions of the audience, then the fragmentation will have a real financial
12
The Nielsen Company, “A2/M2 Three Screen Report,” Volume 6, 3rd Quarter 2009, updated December 18, 2009.
See Brian Steinberg, “Nielsen Reverses Decision to Drop Live Local TV Ratings,” Advertising Age, December 16,
2009.
14
See Kevin Downey, “TV Pushes Cross-Platform Ratings in ’10,” TVNewsCheck, December 23, 2009, available at
http://www.tvnewscheck.com/articles/2009/12/23/daily.4/. See also Brian Stelter, “Nielsen to Add Online Views to its
Ratings,” New York Times, December 2, 2009.
15
See, for example, Diego Vasquez, “Fact is, far fewer see ads in DVR’d shows,” Media Life Research, January 8,
2010, available at http://www.medialifemagazine.com/artman2/publish/Research_25/
Fact_is_far_fewer_see_ads_in_DVR_d_shows.asp. See also, Brian Steinberg, “Nielsen Reverses Decision to Drop
Live Local TV Ratings,” Advertising Age, December 16, 2009, in which it is explained that media buyers were up in
arms when Nielsen intended to provide only a single aggregate figure for live viewership and time shifted viewership,
rather than disaggregating the two, arguing that users of DVRs are lower-valued because they skip past advertising.
13
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impact on programmers as well as distributors. For example, the proliferation of Internet sites—
both those offering video services and others—has created a huge supply of potential online
advertising sites and as a result has tended to depress the rates for advertising on the Internet.16 To
the extent consumers shift from traditional television viewing to non-traditional viewing, and the
latter generates lower advertising (or subscription) revenues per viewer, this audience
fragmentation will reduce the profitability of the existing business models employed by network
providers and MVPDs, alike. There is one countervailing market force, however. It appears that
increasing the number of platforms over which video (television and film) programming is
available increases the total number of minutes of viewing, and thus partially constrains the fall in
revenues.
Changes in Traditional Video Business Models
The traditional business models of just about every participant in the video market are potentially
challenged by these structural market changes and as a result the current environment is
characterized by very contentious programmer-distributor negotiations and a multitude of novel
new ways to distribute content as participants experiment with new business models.
Broadcast Networks and Their Affiliated Local Broadcast Stations
The broadcast television industry (both broadcast networks and their affiliated local broadcast
stations) has long relied on a business model with a single primary source of revenues—
advertising. The networks put together a schedule of national network programming, with certain
hours set aside for local programming. Some number of minutes per hour of the national network
schedule are set aside for national advertising, which generates revenues for the network, and
additional minutes per hour are set aside for local advertising, which generates revenues for the
local station. In addition, the local station generates advertising revenues from ads placed in the
local programming portion of the schedule. When the broadcast signal is carried by an MVPD
that serves the broadcast station’s market, the local station and its broadcast network indirectly
benefit because they can include the MVPD subscribers who view that station in their audience
share when setting their advertising rates. Since MVPD subscribers often do not have rooftop
antennas to receive high quality local broadcast signals over-the-air, if an MVPD did not carry a
local broadcast station’s signals, subscribers would be less likely to view that station’s
programming.
The Cable Television Consumer Protection and Competition Act of 1992,17 enacted in part to
constrain the negotiating power enjoyed by cable systems (most of which faced no competition in
the MVPD market at that time), in effect established a new property right for broadcast stations
by setting carriage and compensation requirements for cable systems (later extended to satellite
systems as well) for the retransmission of local broadcast station signals that were otherwise
available free over-the-air. These statutory rules created a potential new source of revenues for
broadcasters. Every three years, each local commercial broadcast station must choose between (1)
negotiating a retransmission consent agreement with each cable system operating in its service
16
See CRS Report R40908, Advertising Industry in the Digital Age, by (name redacted).
P.L. 102-385. These new rules were placed into sections 325 and 614 of the Communications Act, as amended
(47 U.S.C. §§ 325 and 534).
17
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area, whereby if agreement is reached the broadcaster is compensated by the cable system for the
right to carry the broadcast signal, and if agreement is not reached the cable system is not allowed
to carry the signal; or (2) requiring each cable system operating in its service area to carry its
signal, but receiving no compensation for such carriage. The latter option is frequently chosen by
small independent television stations with relatively small audiences that might otherwise not be
carried by the MVPDs in their market. But since both network programming and local news and
sports programming tend to be highly valued by television viewers, virtually all local network
affiliates choose the “retransmission consent” option, rather than the “must carry” option, and
demand compensation from MVPDs for carriage of their programming.
From 1992 through 2005, the compensation that local network affiliates received for
retransmission consent rarely took the form of cash payments from MVPDs. Rather, in most
cases, the local affiliate gave its network the right to negotiate retransmission consent directly
with the MVPDs; in exchange, the affiliate station made lower cash payments to its network for
the network programming (or, in some cases, received cash payments from the network). Each of
those networks (ABC, CBS, FOX, and NBC) are subsidiaries of large producers and aggregators
of video programming, which own multiple cable networks as well as their broadcast network.
During this period, these large programmers tended to follow a two-fold business plan: (1) to get
the widest possible carriage of their cable networks by MVPDs, and (2) to use their brand identity
(ESPN, Disney, FOX, etc.) to create—and get MVPD carriage of—additional cable networks
with slightly different target audiences. To further their corporate parents’ business plan, the
broadcast networks, rather than seeking cash payments from MVPDs, sought compensation in the
form of MVPD carriage of these cable networks.
Starting in 2005, some local broadcast stations (and one broadcast network, CBS, on behalf of its
owned and operated affiliate stations) began to seek cash retransmission consent compensation, 18
motivated by four market developments. First, the parent companies of the broadcast networks
largely had attained their business goal of creating a number of branded cable networks with very
high levels of household penetration. Many of their cable networks were carried by most of the
large MVPDs, with aggregate household penetration of more than 80 million households,19 and
no longer required the leverage from retransmission consent negotiations to retain that carriage.
Other forms of compensation, such as cash, became more attractive.
Second, starting with the dot.com recession of 2001 and continuing through the decade
(especially in 2008), it became clear that advertising revenues were increasingly sensitive to the
economic business cycle and (more recently) were stagnant or falling due to structural changes in
the broadcast market. As shown in Table 1, broadcast television advertising revenues were
becoming increasingly dependent on the alternate year in-flows from the Olympics and political
campaigns, and while they were growing through 2008, their declining rate of growth reflected
the defection of audiences to cable networks. In the current economic downturn, broadcast
revenues have actually fallen substantially and due to structural changes in the market are not
projected to rebound. As a result, broadcasters have a strong incentive to seek non-advertising
revenues.
18
For a discussion of these changes in retransmission consent compensation, se CRS Report RL34078, Retransmission
Consent and Other Federal Rules Affecting Programmer-Distributor Negotiations: Issues for Congress, by (name redac
ted).
19
SNL Kagan, Broadband Cable Financial Databook, 2009 Edition, “Census of Basic Cable TV Services (Mil.),” at
pp. 14-17.
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Table 1.Television Advertising Expenditure Components
(millions of dollars)
Year
Network
Broadcast
Television
Network
Broadcast—
Olympics
Local
Broadcast
Television
Local
Broadcast—
Political
National
Syndication
National
Cable
Television
Local
Cable
Television
1998
11,474.6
485.7
13,750.6
648.6
2,049.7
7,227.1
1890.5
1999
12,367.7
0.0
15,232.8
79.1
2,098.4
8,804.6
2,298.3
2000
13,582.6
785.0
16,351.7
676.0
2,162.0
9,660.3
2,491.0
2001
13,345.0
0.0
15,012.6
151.6
2,070.6
9,870.6
2,756.7
2002
14,113.0
606.1
15,808.4
911.5
1,643.6
11,191.8
3,055.0
2003
14,404.9
0.0
16,729.1
169.3
1,951.8
12,475.6
2,869.5
2004
15,143.4
704.3
16,192.1
1,504.5
2,233.5
13,840.7
3,101.2
2005
15,529.1
0.0
17,484.9
424.4
2,152.0
15,290.8
3,321.6
2006
15,501.9
650.0
16,169.9
2,100.0
1,969.3
15,971.9
3,346.2
2007
15,515.2
0.0
17,614.5
677.3
1,974.2
17,053.0
3,713.2
2008
14,676.9
600.0
14,817.4
2,000.0
1,934.8
17,885.7
3,337.1
2009 est.
13,334.0
0.0
11,751.3
911.6
1,792.4
17,186.9
2,787.4
2010 est.
12,998.6
487.5
11,499.2
2,390.3
1,672.2
18,050.0
2,914.9
2011 est.
12,889.1
0.0
11,616.7
1,241.5
1,636.8
19,148.4
3,036.5
2012 est.
12,775.1
621.7
11,763.1
2,591.4
1,599.4
20,316.1
3,169.0
2013 est.
12,655.8
0.0
11,939.8
1,499.4
1,560.0
21,559.6
3,313.4
2014 est.
12,579.4
498.9
12,195.5
2,664.7
1,524.2
22,975.6
3,484.5
Source: Television Bureau of Advertising, Media Trends Track, “TV Basics: Television Ad Expenditure
Components,” based on data from Magna Global, available at http://www.tvb.org/nav/build_frameset.aspx, then
go to “research central,” then to “media trends track.” then to “TV basics,” then to “TV ad expenditure
components,” viewed on January 21, 2010. The National Broadcast Television and National Cable Television data
exclude online advertising revenues; the Network Broadcast Olympics data exclude incremental Olympics
advertising revenues; the Local Cable Television data exclude local political advertising revenues.
Third, the advertising-supported cable networks were flourishing from their business model that
included both advertising revenues and per subscriber license fees charged to MVPDs for
carrying the network programming. As shown in Table 2, beginning in 2001, subscriber fees
became a larger source of revenues for these cable networks than advertising. Broadcasters had
every incentive to emulate the cable networks’ two-revenue-source business model. Broadcast
network programming, and even certain local broadcast station programs, continued to attract
significantly larger audiences than cable network programming. According to a Television Bureau
of Advertising tabulation of Nielsen ratings data, excluding the programming on premium (nonadvertising supported) cable channels such as HBO and Showtime, the 255 individual television
programs with the largest audience ratings in the 2005-2006 television season all were broadcast
programs; only 10 of the 586 highest-rated programs were cable programs.20 For the most
20
Television Bureau of Advertising, Ratings Track, “Full Season Broadcast vs. Subscription TV Primetime Ratings:
2005-2006,” based on data from Nielsen Media Research, Galaxy Explorer, Primetime Viewing Sources Report,
available at http://www.tvb.org/nav/build_frameset.aspx, then go to “research central,” then to “ratings track,” then to
“prior seasons archives,” then to “2005-2006 season.”
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recently completed season, 2008-2009, the highest-rated advertising-supported cable show ranked
number 80, the second-highest rated ranked number 103, and the third ranked number 195.21
Moreover, there was market evidence that viewers valued the programming of local broadcast
stations and were willing to pay for it. When satellite carriers were first allowed to retransmit the
signals of local broadcast stations, they typically offered their subscribers these signals for an
additional fee of $5 per month, and take rates were quite high.
Table 2. Advertising-Supported Cable Network Revenue Mix, 1989-2008
(billions of dollars)
Year
Total Revenues
Net Advertising
License Fees
Other
1989
$2.2
$1.2
$1.0
$0.0
1990
$3.0
$1.6
$1.4
$0.1
1991
$3.6
$1.8
$1.6
$0.1
1992
$4.2
$2.1
$1.9
$0.2
1993
$4.8
$2.4
$2.2
$0.2
1994
$5.6
$2.8
$2.5
$0.2
1995
$6.7
$3.4
$3.0
$0.3
1996
$8.1
$4.2
$3.6
$0.4
1997
$9.9
$5.0
$4.4
$0.4
1998
$12.0
$6.2
$5.3
$0.5
1999
$14.5
$7.6
$6.2
$0.7
2000
$17.0
$8.9
$7.5
$0.7
2001
$18.4
$8.8
$8.9
$0.7
2002
$20.5
$9.2
$10.5
$0.7
2003
$24.1
$10.8
$12.4
$0.9
2004
$27.4
12.1
$14.4
$0.9
2005
$31.1
$13.9
$16.0
$1.1
2006
$34.5
$15.2
$18.0
$1.4
2007
$38.6
$16.6
$20.4
$1.6
2008
$42.2
$17.8
$22.8
$1.6
Source: SNL Kagan, Economics of Basic Cable Networks, 2009 Edition, at p. 2.
Fourth, with the successful competitive entry of two satellite providers and the announced plans
of Verizon and AT&T to begin offering video service, cable operators began to face competition
in the MVPD market. When negotiating retransmission consent agreements, broadcasters with
must-have programming, especially sports programming, were in a much stronger negotiating
position since any MVPD that failed to reach agreement with the broadcaster, and therefore could
21
Television Bureau of Advertising, Ratings Track, “Top-rated programs of 2008-09 in Households,” based on data
from Nielsen Galaxy Lightning estimates (Live and Same Day), 9/22/08-5/20/09, available at http://www.tvb.org/nav/
build_frameset.aspx, then go to “research central,” then to “ratings track,” then to “prior seasons archives,” then to
“2008-2009 season.”
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not carry the broadcaster’s programming, risked losing subscribers to competitors who did carry
that must-have programming. In particular, the new entrants—primarily Verizon and AT&T, but
also to some extent the satellite operators—felt a strong need to carry as much programming as
possible to attract subscribers and were willing to pay cash for broadcast programming as a cost
of offering the triple play of video, telephone, and Internet access service. Once one MVPD
agreed to make cash payments for retransmission consent, it became easier for broadcasters to
demand similar payments of the other MVPDs. Thus, changing market forces are providing
broadcasters with the ability, as well as the incentive, to demand per subscriber cash license fee
payments.
The MVPDs, to varying degrees, have resisted broadcaster attempts to impose these cash
payments. In 2005-2007, there were publicly contentious retransmission consent negotiations—
some of which resulted in impasses, with MVPD subscribers losing access to certain
programming for as long as several months. These negotiations involved, among others, Nexstar
and Cox, CBS and several large cable operators, DISH Network and Hearst-Argyle/Lifetime,
Sinclair and Mediacom, and Sinclair and Suddenlink.22 Recently, contentious negotiations
between FOX and Time Warner Cable and between Sinclair and Mediacom have played out in the
press, and induced Members of Congress, the FCC, and state legislators to beseech the parties to
reach an agreement, before being resolved either at the last minute or after a very short extension
beyond the expiring contract date.
In December 2009, the major MVPDs submitted to the FCC a study that they commissioned of
the current retransmission consent regime. 23 It provided estimates made by SNL Kagan (Kagan),
a data collection and analysis company whose data are widely used by the industry, of cash
retransmission consent fees. These estimates are reproduced in Table 3. Note that the DBS
providers were quicker to make cash payments than the cable operators, but Kagan projects a
much faster rise in future cash payments by the cable operators. It is interesting that these
estimates, made in midyear 2009, now appear to be low, based on the demands that FOX was
making in its recent negotiations with Time Warner Cable and the statements of other major
networks that they would seek cash payments similar to those received by FOX in their future
retransmission agreements. In its negotiations, FOX was seeking $1 per month per Time Warner
subscriber. Although the terms of the agreement were not made public, many industry observers
believe that FOX will initially receive approximately $0.50 per month per Time Warner Cable
subscriber, but that rate will escalate over several years to $0.75.24 Assuming that each of the four
major networks was able to get that same level of payment,25 that would initially generate
retransmission consent fees of $2.00 per month, or $24.00 per year per household. For the
22
For a discussion of these contentious negotiations, see CRS Report RL34078, Retransmission Consent and Other
Federal Rules Affecting Programmer-Distributor Negotiations: Issues for Congress, by (name redacted).
23
Michael L. Katz, Jonathan Orszag, and Theresa Sullivan, An Economic Analysis of Consumer Harm from the
Current Retransmission Consent Regime, commissioned by the National Cable & Telecommunications Association,
DirecTV, and DISH Network, and submitted on December 16, 2009, to the Federal Communications Commission in
MB Docket No. 07-269, Annual Assessment of the Status of Competition in the Market for the Delivery of Video
Programming, and in response to NBP Public Notice #26, GN Docket Nos. 09-47, 09-51, 09-137 (A National
Broadband Plan for Our Future).
24
See, for example, Claire Atkinson, “Cable Nets Gird for Carriage Crisis: Broadcasters’ push for retrans cash may
hurt smaller players,” Broadcasting & Cable, January 9, 2010.
25
This might be an overstatement to the extent that FOX currently has higher rated programming than all networks
except CBS, but might be an understatement to the extent that broadcasters could negotiate even higher rates from
smaller MVPDs.
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approximately 100 million households that subscribe to MVPD service, that would amount to
$2.4 billion per year. When the fee increases to $0.75, it would generate $3.6 billion per year in
revenues. Even the lower figure is significantly higher than the Kagan estimate. Given that Kagan
has estimated that in 2010 there will be 13 advertising-supported cable networks with average
monthly license revenue fees of $0.50 or more (ranging up to $4.41 for ESPN),26 and none of
these cable networks attract audiences anywhere near as large as the four broadcast networks do,
an assumption of per subscriber license fees of $0.50-$0.75 per broadcast network per month may
be conservative.
Table 3. Estimated Cash Retransmission Consent Fees, 2006-2015, by MVPD Type
(millions of dollars)
Year
Cable
DBS
Telco
Total
2006
$44.3
$168.7
$1.6
$214.6
2007
$86.0
$216.6
$10.9
$313.5
2008
$188.9
$277.7
$33.5
$500.1
2009
$315.2
$352.1
$71.4
$738.7
2010
$424.0
$390.0
$119.1
$933.1
2011
$573.8
$425.9
$161.3
$1,161.0
2012
$639.6
$451.3
$192.6
$1,283.5
2013
$709.4
$467.7
$220.3
$1,397.4
2014
$835.8
$484.7
$245.0
$1565.5
2015
$861.9
$500.7
$267.4
$1,630.0
Source: Michael L. Katz, Jonathan Orszag, and Theresa Sullivan, An Economics Analysis of Consumer Harm from the
Current Retransmission Consent Regime, using data from SNL Kagan, “Broadcast retrans fees on track to break $1
bil. by 2011,” Broadcast Investor: Deals & Finance, June 30, 2009.
In reviewing these estimates, it is best to focus on the trend and not on the exact numbers,
however, because in practice these retransmission consent agreements cover many variables and
it is not possible to separate out per subscriber cash payments from other compensation.
Typically, the give and take of negotiations yields a single overall payment to the broadcaster, but
that single payment represents an amalgam of parameters. Even if the broadcaster is a pure
broadcast player, without cable networks, its payment from the MVPD will cover, among other
items, (1) the right to retransmit the broadcaster’s signal during the scheduled viewing of the
program; (2) the right to offer some portion of the broadcast programming as part of the MVPD’s
video on demand service; (3) a certain amount of MVPD advertising on the broadcast station; (4)
the channel placement of the broadcaster’s signal on the MVPD tier; and (5) carriage of the
broadcaster’s multicast sub-channels (which could require a payment by the broadcaster for
carriage or payment to the broadcaster, depending on perceived demand for the programming on
the sub-channel). By consolidating all of these into a single payment, when a broadcaster and an
MVPD report their costs and revenues to the Securities and Exchange Commission, they have the
flexibility (and perhaps the incentive) to attribute the retransmission consent cash payment
differently. The networks will have the incentive to attribute as much of the total retransmission
26
SNL Kagan, The Economics of Basic Cable Networks, 2009 Edition, at p. 53.
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payment as possible as cash payment, since this might help them obtain higher cash payments in
future negotiations with other MVPDs; the MVPDs will have the opposite incentive.
There is another dimension to the changing business model concerning retransmission consent—
the portion of these revenues that flow to the local broadcast stations (the entities that, by law,
have the right to seek retransmission compensation from MVPDs) and the portion that flows to
the broadcast networks. As local stations have negotiated large increases in cash compensation
from MVPDs, their networks have sought to get a share. ABC was reported to be seeking half of
its affiliates’ retransmission consent revenues.27 If the networks demand a portion of these
revenues, that places greater pressure on the local stations to push for higher cash payments from
MVPDs. Most observers believe that the broadcast networks and their local station affiliates will
come to some agreement on how to apportion these revenues since they enjoy a symbiotic
relationship that benefits both and both contribute to the must-have programming that MVPDs
need—the highly demanded national news, entertainment, and sports programming and the
highly demanded local news, weather, and sports programming.
The business relationship between MVPDs, broadcast networks, and their local station affiliates
may change in yet another way. With the deployment of digital technology, local broadcast
stations now can—and do—broadcast multiple video streams. Many stations already are
broadcasting their primary video stream in high definition and one or more secondary video
streams in standard definition. But since 85% of all households subscribe to MVPDs and
typically do not have rooftop antennas, many if not most households do not receive high quality
broadcast signals over-the-air, relying instead on their MVPD to carry the local broadcast signals.
The must carry requirement in the Communications Act28 is limited to the “primary video,”
however, and therefore local stations must negotiate carriage of their non-primary signals with the
MVPDs serving their market. This typically occurs as yet another factor in the retransmission
consent negotiations for the primary video stream. Local stations may choose to obtain less cash
from MVPDs in exchange for the MVPDs carrying their non-primary signals. The major
networks with whom they are affiliated for programming on their primary video stream may
prefer to maximize cash retransmission payments.
Local stations must make decisions about what type of programming they broadcast over their
non-primary video streams. Although there have been some exploratory efforts by the broadcast
networks and their local affiliates to jointly create programming for these non-primary signals,
network-affiliate ventures have focused more on how to jointly use national and local
programming effectively on their websites.29 Alternatively, local stations can carry the
programming of existing broadcast networks that don’t have a local affiliate in the market (such
as CW or My Network Television Networks) and more than a dozen start-up broadcast networks
seek carriage of their syndicated programming (much of it re-run television programming and old
movies) on local stations’ non-primary signals. 30 Some industry observers have argued that the
27
Linda Moss, “ABC Seeks Half of Affiliates’ Retrans Take,” TVNewsCheck, January 6, 2010. See also Mike Farrell,
“Retrans Cost on the Rise: Networks Now Looking for a Share of Affiliates’ Take,” Multichannel News, October 10,
2009.
28
47 U.S.C. § 534(b)(3)(A).
29
See Anne Becker and Allison Romano, “NBC U Starts Broadband Business,” Broadcasting & Cable, September 18,
2006, for an early example.
30
See, for example, Kevin Downey, “TV Works to Grow Diginet Revenue,” TVNewsCheck, January 13, 2010,
available at http://www.tvnewscheck.com/articles/2010/01/13/daily.3/.
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best way for local broadcast stations to remain viable is to focus on unique local programming, 31
and perhaps to maintain a non-primary channel that has primarily local content. But such
programming is expensive to produce and many local stations can barely afford to maintain the
current level of local programming on their primary signals.
There is one additional market dynamic pushing the broadcasters to seek a per subscriber license
fee. Historically, even as their audience has been diverted to cable programming, the broadcasters
have maintained their position as providers of programming appealing to mass audiences. The
programming for which consumer demand is both broadest and most intense is major sports
programming. Broadcasters have been willing to pay very high rates for exclusive rights to
broadcast the key sporting events of professional and university sports leagues, major tennis and
golf tournaments, and the summer and winter Olympic Games. Recently, the bids have been so
high that the winning network has not necessarily been able to recover its costs from the
advertising revenues generated, even including advertising generated by the broadcaster’s website
coverage and other tie-ins.32 The broadcasters, however, have been able to use their exclusive
carriage of these live sports events to market their other programming. To the extent that the
decline in advertising revenues is structural, and unlikely to recover, rather than cyclical,
broadcasters may find it more difficult to bid against cable sports networks, such as ESPN or
FOX Sports, for the rights to these events. On the other hand, by successfully obtaining those
rights, broadcast networks gain exclusive access to must-have programming that they can use to
boost their position in retransmission negotiations.
The Large MVPDs, the Large Programmers, and TV Everywhere
Based on revenues, the business model long employed by the cable operators (and largely
followed by the satellite operators and telephone companies when they entered the MVPD
market) continues to be robust. Kagan projects continued, if slower, growth, as total subscriptions
no longer increase, but revenues per subscriber do. The revenues of multi-system cable operators
grew from $31.1 billion in 1998 to $85.3 billion in 2008, and are forecast to grow at an annual
rate of 4% to $128.6 billion in 2019.33 Kagan projects that much of the continued growth will
come from video services, with the greatest growth in high definition, DVR, and interactive
services, which also enjoy higher profit margins than the other cable services. It expects the
proportion of residential cable revenues attributable to high speed data, home networking, and
telephony to fall from 31.8% of total cable residential revenues in 2009 to 28.4% in 2019. On one
hand, Kagan presents optimistic projections and forecasts that capital expenditures will decrease
and free cash flow will rise. On the other hand, Kagan states that “investors have not shown
overwhelming support for the sector due to the competitive environment and projections for
slowly declining basic sub[scription]s,” which are projected to fall from 63.2 million in year-end
2009 to 60.7 million by 2019.34 It is the perception of the investor community that the MVPD
business model is starting to be challenged by competitive entry and by changes in how
households are demanding video services.
31
See, for example, Mark K. Miller, “Stations Seen Winning with Localism,” TVNewsCheck, January 19, 2010,
available at http://www.tvnewscheck.com/articles/2010/01/19/daily.5/.
32
See, for example, “NBC more optimistic about Olympics ad sales,” Radio Business Report/Television Business
Report, January 18, 2010, which reports that NBC will lose $200 million for the carriage of the 2010 Winter Olympics.
33
SNL Kagan, Broadband Cable Financial Databook, 2009 Edition, at pp. 7-8.
34
Ibid, at p. 5.
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For many years, the MVPDs have required subscribers to purchase a large bundle of program
networks made available as tiers, in part because consumer demand for these large tiers tends to
be relatively price inelastic (insensitive to changes in price) and in part because these tiers
facilitate the cross-marketing of program networks, which benefited both those large MVPDs and
those large programmers that had financial interests in multiple branded cable networks.35 They
resisted making program networks available on an a la carte basis, with certain exceptions. One
exception was for specialty programming that appealed to small audiences with very intense
demand that was even less price sensitive than that for a bundle of program networks. For
example, foreign language networks and certain sports programming were more profitably sold
separately on small specialty tiers, such as a Korean or Chinese language tier. A second exception
was edgy programming that included language or sexual content that might be offensive to some
portion of subscribers and thus was offered on premium subscription channels, such as HBO and
ShowTime. But even in those cases households had to subscribe to a large tier to be eligible to
purchase the smaller specialty tier or premium channels.
As the demand for time shifting became more evident, MVPDs responded by increasing the
portion of their capacity used for video on demand offerings, many of which were made available
on a pay per view or other payment basis, though some were made available for free. But, again,
these VOD offerings are only available to households that also subscribe to a large tier. The shift
toward greater VOD offerings is perceived by some as a two-edged sword, however, because
while it may increase total revenues or at least reduce disconnects (by providing an alternative to
DVDs and Internet video streaming), it potentially undermines the long-standing business model
of offering linear program schedules and demonstrates that MVPDs have the wherewithal to do a
la carte pricing.
The MVPDs do face several threats, if not to the viability of their business model, then to their
current profitability. As competition has developed in the MVPD market, programmers—cable
networks as well as broadcast networks—have enjoyed a stronger negotiating position and have
been able to increase their per subscriber license fees. Just as there have been contentious
retransmission consent negotiations between broadcasters and MVPDs that have escalated to the
public’s attention, and sometimes resulted in a broadcast station’s programming being pulled
from an MVPD’s service offering, so have there been contentious negotiations between cable
networks and MVPDs, some of which have resulted in impasses with programming pulled. For
example, as a result of an impasse between Scripps Networks Interactive Inc. and Cablevision
Systems Corp. over fees for HGTV and the Food Network, 3.1 million Cablevision subscribers in
the metropolitan New York area lost access to those networks in January 2010. The per subscriber
license fee revenues generated by advertising-supported cable networks increased from $10.5
billion in 2002 to $22.8 billion in 2008 and Kagan projects they will grow to $45.4 billion in
2018.36 Given the negotiating strength of programmers with must-have programming, a
significant portion of these license fees will flow to a small number of sports networks, notably
ESPN, FOX Sports, the NFL Network, and the MLB Network.
35
Large tiers that bundled multiple program networks also provided new independent networks with a somewhat less
burdensome way to inform subscribers of their existence—partly through subscriber channel surfing and partly by
paying for advertising on other networks carried on the same tier—than a pure a la carte system would, though in both
cases the most difficult task of an independent programming network is to obtain carriage by the MVPD in the first
place.
36
SNL Kagan, Economics of Basic Cable Networks, 2009 Edition, at pp. 16-17.
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Interestingly, it is possible that these increases in per subscriber fees for both cable networks and
broadcast networks could lead MVPDs to reconsider their long-standing large tier business model
and instead offer smaller tiers or a la carte pricing. A recent “analysis” piece by Yinka Adegoke of
Reuters37 cited comments by Cablevision Systems Corp. Chief Executive Jim Dolan that the
traditional television bundle has become outdated and “inefficient” and by Time Warner Cable
chief executive Glenn Britt that the prospect of rising program costs might result in cable
companies offering “smaller packages.” Presumably, a shift to small tiers would be motivated by
the desire to decrease payments to program networks.
But recent cable industry experience negotiating for the carriage of must-have programming
suggests that it may be difficult to limit fee payments for such programming. In 2008-2009, the
National Football League launched the NFL Network, which offered eight regular season NFL
football games, but otherwise did not have programming that might be categorized as must-have.
To maximize its total subscriber fee revenues, the NFL sought carriage by MVPDs year-round on
their expanded basic tier, that is the tier with the largest number of subscribers. The major cable
companies resisted, insisting that they carry the network on premium sports tiers, at a higher price
per subscriber, but limited to those subscribers who purchase the sports tier and who (if they
primarily are football fans) might cancel the NFL Network subscription at the end of the football
season. After contentious negotiations and some lawsuits, the cable companies now carry the NFL
Network on their largest tiers (although likely at a lower per subscriber fee than the NFL had
originally sought). Presumably, the MVPDs were forced to concede because they needed access
to the eight games on the NFL Network, or because of concern that an impasse could harm future
access to other must-have NFL programming. Thus, it would appear that even if the MVPDs
reduce the size of their tiers, they are likely to feel compelled to offer must-have programming on
the basic tier with the largest number of subscribers rather than on a specialized tier, if to do
otherwise would place them at risk of losing subscribers to competing MVPDs.
The more likely impact of MVPDs moving to smaller tiers is that they would simply discontinue
carrying less popular programming networks on their tiers, placing great pressure on those
networks to soften their demands for subscriber fees. The MVPDs might make those niche
networks available as a la carte offerings, if enough subscribers had sufficiently intense demand
to be willing to pay a high monthly a la carte fee for the programming, or as VOD offerings, or
they might drop them entirely.
The MVPDs and investors appear to be concerned about (1) the demand shift away from fixed,
linear scheduled programming toward programming on demand, unconstrained by time or
location; (2) the potential ability of new technologies capable of offering “over the top” television
services to meet this demand more effectively than the MVPDs; and (3) how the major
programmers will respond to the shift in demand and entry of over the top service providers.
Although, as discussed above, time shifting and location shifting still represent a small portion of
total video viewing, those changes are occurring largely among younger viewers who are most
highly prized by advertisers and who may never develop loyalty to a linear schedule of
programming. The large programmers and the large MVPDs have substantial commonality of
interests, but the programmers may seek to respond to shifts in demand in ways that are not
equally favorable to MVPDs.
37
Yinka Adegoke, “Cable fee battles point to smaller TV bundles,” Reuters News Article, January 12, 2010.
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The major programmers have every incentive to seek to forestall major changes to their current
business model. Kagan analyzed the 175 top cable networks and found that 19 had cash flow
margins above 50%, another 31 were in the 40%-50% range, and the average cash flow margin
for all 175 networks was 36.9%.38 Kagan projected that in 2013 50% of the networks will have a
margin in excess of 40% and another 28% would have margins between 30% and 40%; about 6%
will have margins below 10%, primarily independent networks having difficulty gaining
distribution. Given the current pattern of increasing per subscriber charges, and less interest on
the part of large programmers to continue to proliferate branded cable networks, these gains are
possible even when production costs are rising.
It should not be surprising that mature programming networks that have achieved high household
penetration would enjoy high cash flow margins. What is significant now is that MVPDs do not
appear to seek to further proliferate branded networks, entry of independent programming
networks is very difficult, and therefore cash flow margins can be expected to remain high unless
there is a major shift in the industry that results in falling MVPD subscriptions.
Mindful of that, programmers will feel compelled to respond to changes in demand, especially if
over the top services appear to be able to better meet that demand than conventional MVPD
services can. Still, these programmers are likely to proceed with an eye on simultaneously
capturing potential new video audiences and minimizing the defection of revenue-generating
MVPD subscribers.
In that regard, the programmers are experimenting with a number of different distribution
channels and business models (for example, subscription vs. advertising-supported), forging nonexclusive relationships with both incumbent MVPDs and with new distribution service providers.
These include:
38
•
Hulu.com, a website owned by NBC, FOX, and ABC, that offers advertisingsupported streaming video of television shows and movies, largely from those
three programming companies but also from other networks and studios. Hulu
also provides web syndication services for other websites, including AOL, MSN,
MySpace, Comcast’s fancast.com, and Facebook. None of the programmers that
supply Hulu make all of their programming available to Hulu; nor do they make
their programming available exclusively to Hulu. One of the attractions of Hulu
is that it has fewer commercials than cable networks and these commercials are
clustered. Hulu is available only to users in the United States. In November 2009,
Hulu was reported to have 43.7 million users who streamed 923.8 million videos.
Hulu’s owners have suggested that they might consider adding user fees to
supplement its current advertising revenue base.
•
Netflix offers unlimited VC-1 video streaming to subscribers as part of its flat
rate DVD and Blu-ray disc rental-by-mail service. There currently are more than
17,000 movies and recorded television shows available as part of the “Watch
Instantly” video streaming service, out of the total Netflix library of more than
100,000 titles. Netflix has about 10 million subscribers, though most subscribers
probably do not stream video. Videos can be played back on the subscriber’s PC
or Mac monitor or can be shown directly on televisions using various set-top
boxes, some DVD players, or any of the three major video game consoles—
SNL Kagan, Economics of Basic Cable Networks, 2009 Edition, at p. 5.
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Microsoft’s Xbox 360, Sony’s PlayStation 3, or Nintendo’s Wii. Netflix offers
programming from NBCU, MGM, 20th Century Fox, CBS/Paramount,
ABC/Disney, Warner Brothers, Lions Gate Entertainment, New Line Cinema,
and Starz Entertainment, among others, but these programmers do not make all
of their programming available to Netflix for streaming, nor does Netflix have
exclusive access to the programming.
•
Sezmi, a subscription service that offers all of a local market’s broadcast
television signals, including DTV multicast channels, certain interactive
promotions, 23 cable networks, and 20,000 on-demand movies and television
shows. This service is intended to offer a low-price alternative to traditional
MVPD service. When its pilot was launched in Los Angeles in November 2009,
10,000 customers signed up in the first two days. National Association of
Broadcasters executives have cited Sezmi as an example of innovating with
television spectrum.39 Again, programmers do not make all their programming
available to Sezmi, nor does Sezmi have exclusive access to the programming.
•
TV Everywhere, an authentication system, developed by Comcast and Time
Warner, that allows individuals who subscribe to an MVPD service to access the
same level of service on demand via the Internet (and, eventually, via cell phone),
for no extra charge. Thus, for example, a household that does not subscribe to a
premium network, such as HBO, as part of its current MVPD service would not
be able to access HBO over the TV Everywhere service offering. Program
availability is subject to participation by the programmer that provides the
MVPD with the program. Each MVPD offers its own TV Everywhere service
(for example, Comcast calls its service Fancast Xfinity). Most of the major
MVPDs (cable, satellite, and telephone) have indicated that they plan to
participate in TV Everywhere (though to date only Comcast and DISH Network
have begun service), as have many of the large programmers. The participants
claim that the authentication system works even if a household subscribes to one
company for its MVPD service and a different company for its ISP service.
TV Everywhere has been very controversial. On one hand, it expands the availability of
programming available to current MVPD subscribers at no additional charge, clearly a benefit to
MVPD subscribers, who are thus encouraged to maintain their MVPD subscriptions. It also
provides a secure distribution system that provides programmers with some protection against
piracy. Currently, the participating programmers have not made their programming available for
Internet distribution exclusively through TV Everywhere. But critics of TV Everywhere fear that
it creates a mechanism for programmers to agree to exclusive contracts with the MVPDs in the
future, potentially denying independent video distributors access to must-have programming, and
thus erecting barriers to entry in the video distribution market, to the detriment of consumers.
They also are concerned that the participating MVPDs also are ISPs and, absent strong network
neutrality rules, could favor their video services at the expense of independent video service
providers. These critics claim that, in jointly adopting the TV Everywhere authentication system,
a small number of large programmers and MVPDs are illegally acting in concert to harm
competition and consumers.40
39
Kathy Haley, “Sezmi Pilot Attracts 10,000+ Subs in L.A.,” TVNewsChcck, January 11, 2010, available at
http://www.tvnewscheck.com/articles/2010/01/11/daily.11/.
40
See, for example, Marvin Ammori, TV Competition Nowhere: How the Cable Industry Is Colluding to Kill Online
(continued...)
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The Proposed Comcast-NBC Universal Combination
In choosing among these distribution options, one of the concerns to programmers has been the
inability to accurately measure viewership levels, which is especially important for advertisingsupported business models. 41 One observer claims that Nielsen has not been able to devise a
method for accurately measuring online viewership except when the online programming
includes exactly the same commercials as are run on the cable or broadcast programming, and
that Nielsen has not shown an interest in developing a more robust methodology.42 As a result,
critics allege that Nielsen can accurately measure viewers of services like TV Everywhere, but
underestimates viewers of services like Hulu, which runs fewer advertisements than the networks.
Advertising is more likely to flow to new distribution models whose audiences are measurable by
existing ratings services than to distribution models whose audiences are not measured by the
ratings services. Whether or not that specific allegation has merit, it highlights the potential
impact on the market of an actual or perceived inability to measure the viewership of certain
service offerings.
Claims About How the Proposed Comcast-NBCU
Combination Would Affect the Video Market
In this uncertain environment, the announced Comcast-NBCU combination has generated a wide
range of predictions about market and public policy effects. Some of these claims are specific to
Comcast—how it might use its increased negotiating strength to place itself at an advantage or its
competitors at a disadvantage, how it might use its vertically integrated structure to pursue
innovative business models, or how its vertically integrated structure might stifle its ability to act
quickly. Other claims address more broadly industry-wide responses, such as whether the
combination will trigger further consolidation.
Claim: Comcast Would Be Able to Use its Vertically Integrated
Position to Deny Rival Distributors Access to Programming or
to Raise the Cost of That Programming
Comcast faces two sets of rival distributors—(1) the satellite and telephone companies that
compete as MVPDs employing largely the same business model as Comcast, and (2) new entrants
offering a variety of video streaming services over the Internet and “over the top” services that
bring Internet video directly to the television. Both sets of rivals have voiced concern that the
Comcast-NBCU combination could restrict their access to programming or raise the cost of that
programming.
(...continued)
TV, Free Press, January 2010.
41
See, for example, Michael Manzo, “Online Content Innovation: Hulu or the Carriers?,” VON e-Newsletter,
November 24, 2009.
42
Chadwick Matlin, “Nielsen Allies with TV Everywhere. Will it Bring Down Hulu?,” published on The Big Money
from Slate, January 25, 2010, available at http://www.thebigmoney.com/blogs/hulucination.2010/01/25/nielsen-alliestv-everywhere-will-it-bring-down-hulu.
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The Proposed Comcast-NBC Universal Combination
Comcast vs. Other MVPDs
Perhaps the greatest danger that a vertically integrated company poses to a non-integrated
competitor is to deny the competitor access to must-have programming that it owns or controls.
Lack of access could even foreclose competitors from the market. Inferior or more expensive
access to that programming also could place non-integrated rivals at a competitive disadvantage.
The FCC has addressed these issues in past license transfer and rule making proceedings and has
concluded that vertically integrated MVPDs might, in certain circumstances, have both the
incentive and the ability to deny competitors access to must-have programming or to raise their
rivals’ costs for the programming. Where it has not had rules in place to address these issues it
sometimes has conditioned license transfers on prohibitions against such activities.43
Since programming is characterized by very high upfront fixed costs of production and relatively
low incremental costs for distribution, it is generally optimal for programmers to attempt to
distribute their programming as widely as possible. In some unique circumstances, programmers
can generate more profits through an exclusive distribution contract, if the distributor is willing to
pay a large premium for the exclusivity that exceeds whatever loss there would be to the
programmer from narrower distribution. This strategy may be particularly effective if the
exclusive contract has the effect of foreclosing competition to the distributor. Exclusive contracts
are more likely to occur when the programmer and distributor are part of a vertically integrated
entity; in this situation, it would not be necessary for the programmer and the distributor to
negotiate how to share the risks and gains associated with such exclusive distribution. This is less
likely to be the case, however, if the programming and distribution functions of the vertically
integrated firm are treated as separate profit centers and the programming part of the entity is not
comfortable sacrificing profits for the benefit of the distribution part of the entity.
The FCC has identified one situation where a vertically integrated cable company is likely to
benefit from exclusivity, to the detriment of competition and consumers.44 Most cable companies
tend to be clustered in small geographic areas where they enjoy fairly high market shares,
offering MVPD services in competition with satellite and telephone companies that tend to serve
much broader geographic areas. In this situation, if the local cable company owns a regional
sports network (RSN) that carries the games of local professional and major college teams, which
is must-have programming in that region, it may be able to foreclose entry into its regional
market, or limit entrants to niche positions, if it denies competing MVPDs access to the RSN.
The FCC has adopted program access rules45 that implement the directive in section 628 of the
Communications Act46 that the Commission establish rules to prevent a vertically integrated cable
operator from discriminating in the prices, terms, and conditions at which it makes its
programming available to non-affiliated MVPDs and to prohibit a vertically integrated cable
operator from having exclusive access to the programming in which it has an attributable interest.
The plain language of the statute, however, applies only if the vertically integrated company’s
43
See, for example, “Fact Sheet: FCC’s Conditioned Approval of NewsCorp-DirecTV Merger,” Federal
Communications Commission, December 19, 2003, DOC-242402.A1[1].pdf, available at http://www.fcc.gov.
44
In the Matter of Applications for Consent to the Assignment and/or Transfer of Control of Licenses: Adelphia
Communications Corporation to Time Warner Cable; Adelphia Communications Corporation to Comcast
Corporation; Comcast Corporation to Time Warner Inc.; Time Warner Inc. to Comcast Corporation, MB Docket No.
05-102, Memorandum Opinion and Order, adopted July 15, 2006, released July 21, 2006, at paras. 122-165.
45
47 CFR 76.1000-1004.
46
47 U.S.C. § 548.
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The Proposed Comcast-NBC Universal Combination
programming is transmitted to distributors via satellite. Some cable-owned programming, in
particular the programming of most RSNs, is transmitted to distributors terrestrially (typically
over optical fiber or other broadband lines), and thus the existing program access rules have not
applied to them. The FCC has investigated cable ownership of RSNs in detail in the context of
several license transfers47 and has found them to be must-have programming. As a result, the
Commission has conditioned approval of those license transfers on non-exclusivity and nondiscrimination program access requirements that apply to terrestrially delivered as well as
satellite-delivered RSNs. In the 2006 order involving the transfer of licenses to Comcast,
however, the conditions were imposed only for a six-year period and did not apply to Comcast’s
terrestrially delivered RSN in Philadelphia. The FCC recently adopted generic program access
rules for terrestrially delivered programming, concluding that they did have the authority under
section 628 to take such action.48 The FCC order likely will be challenged in court by one or more
cable companies. It is not clear that a combined Comcast-NBCU would affect Comcast’s current
incentive and ability to retain exclusive distribution of its RSNs. But if the FCC wants to make
sure that these new program access rules apply to Comcast’s terrestrially delivered RSNs
whatever the court ultimately decides, it could include them as conditions for the license transfer.
The FCC might be particularly concerned about particular markets where the combined entity
would have a major media presence, such as in Philadelphia, where NBC owns a broadcast
television station and Comcast owns the cable company and Comcast SportsNet Philadelphia.
Competing MVPDs have expressed concern that, post-combination, NBCU will discriminate
against Comcast’s competitors by charging them more than they charge Comcast for its broadcast
and cable network programming, thereby raising their costs in an anticompetitive fashion. The
FCC’s program access rules prohibit vertically integrated programmers from discriminating
against non-integrated MVPDs in the prices, terms, and conditions of sale or delivery of their
programming. In the merger application/public interest statement that Comcast, NBCU, and
General Electric jointly filed at the FCC, the companies pledged to obey the program access rules
and to extend them to the high-definition feeds of any network whose standard definition feed is
subject to the rules and to retransmission consent negotiations for their NBC and Telemundo
owned and operated stations.49 The rules create a formal process for independent MVPDs to
bring, and the Commission to adjudicate, a complaint. But some MVPDs have questioned the
effectiveness of this process.50
The rules allow for the establishment of different prices, terms, and conditions to take into
account, among other factors: actual and reasonable differences in the cost of creation, sale,
delivery, or transmission of programming; economies of scale, cost savings, or other direct and
47
See, for example, In the Matter of Applications for Consent to the Assignment and/or Transfer of Control of
Licenses: Adelphia Communications Corporation to Time Warner Cable; Adelphia Communications Corporation to
Comcast Corporation; Comcast Corporation to Time Warner Inc.; Time Warner Inc. to Comcast Corporation, MB
Docket No. 05-102, Memorandum Opinion and Order, adopted July 15, 2006, released July 21, 2006, at paras. 122165. This issue was also addressed by the FCC in the license transfer orders involving Comcast-AT&T and News
Corp.-Hughes (DirecTV).
48
In the Matter of Review of the Commission’s Program Access Rules and Examination of Programming Tying
Arrangements, MB Docket No. 07-198, First Report and Order, adopted and released on January 20, 2010.
49
In the Matter of Applications for Consent to the Transfer of Control of Licenses: General Electric Company,
Transferor, to Comcast Corporation, Transferee, Applications and Public Interest Statement, Appendix 8, “Applicants’
Voluntary Public Interest Commitments,” Commitment # 14 and Commitment # 15, submitted January 28, 2010.
50
See, for example, “ACA to FCC—Stop the Broadcasters and Media Conglomerates’ Abuse of Small Ops,” American
Cable Association Press Release, September 1, 2009.
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The Proposed Comcast-NBC Universal Combination
legitimate economic benefits reasonably attributable to the number of subscribers served by the
distributor; the amount and type of promotional or advertising services provided by a distributor;
whether a distributor purchases programming as a package or a la carte; and meeting competition
at the distributor level. All these factors make it particularly difficult to parse whether a particular
price, term, or condition in a contract is discriminatory.
There are no non-discrimination requirements imposed on non-vertically integrated programmers
and distributors; rates, terms, and conditions are based on market negotiations, with some parties
in an advantageous position and others not. Although the prices, terms, and conditions of cable
network-MVPD contracts and of retransmission consent contracts between broadcasters and
MVPDs are kept confidential, it is widely acknowledged in the industry that large MVPDs are
able to negotiate better rates and terms than smaller ones.51 For example, programmers will be
loathe to reach an impasse with a large MVPD if that would result in the programmer losing
advertising revenues and subscription revenues generated from the millions of households served
by that MVPD. Similarly, a broadcaster that controls two broadcast stations in a local market is
likely to be able to negotiate higher joint retransmission consent payments for the two broadcast
stations than if each station negotiated separately, because an MVPD in the “duopoly” market
probably cannot risk losing carriage of the signals of two local stations in the market. 52
In this market and regulatory environment, it is generally believed that Comcast obtains
programming on more favorable terms than most other MVPDs, and presumably this holds for
the NBCU broadcast and cable network programming as well as other programming. Reportedly,
parties that are in strong negotiating positions have been able to successfully negotiate “most
favored nation” (MFN) clauses in their contracts that allow them to modify their contracts to
incorporate more favorable terms that have been negotiated by their rivals. In some cases, the
party in the stronger position may be the programmer, who can demand an MFN clause.53 But in
some cases the party in the stronger position may be the MVPD, and it is possible that Comcast
already has MFN clauses in some of its contracts with programmers. Smaller MVPDs have
sought, but have not been able to get programmers to include, such clauses in their contracts.
What would it mean, then, for NBCU, post-merger, to have to provide its programming to all
MVPDs on a nondiscriminatory basis when currently the unaffiliated Comcast gets programming
on a favorable basis? How would the rules apply? If the DOJ and the FCC are concerned about
the competitive impact of more favorable contract terms for Comcast than for other MVPDs, it
might be more effective to construct specific merger or license conditions than to rely on existing
program access rules that may be difficult to apply in this situation.
51
For a detailed discussion of the factors affecting retransmission consent (and MVPD-cable network) negotiations, se
CRS Report RL34078, Retransmission Consent and Other Federal Rules Affecting Programmer-Distributor
Negotiations: Issues for Congress, by (name redacted).
52
See, for example, Mediacom Communications Corp., Complainant, v. Sinclair Broadcast Group, Inc., Defendant,
CSR No. 8333-C and CSR No. 8234-M, Ex-Parte Comments of Suddenlink Communications in Support of Mediacom
Communications Corporation’s Retransmission Consent Complaint, submitted December 14, 2009, in which
Suddenlink claims that the retransmission consent fees it has negotiated with broadcasters have been higher in those
markets where the broadcaster is negotiating on behalf of multiple stations in a market.
53
For example, in the press coverage of the recent contentious retransmission consent negotiations between News
Corp. and Time Warner Cable, it was reported that CBS has a most favored nation clause in its agreement with Time
Warner Cable, so that if Time Warner Cable increased its retransmission consent payments to FOX it would
automatically trigger an increase in payments to CBS as well. See, for example, Joe Flint, “Deadline looms for Time
Warner Cable and News Corp.,” Los Angeles Times, December 31, 2009.
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The Proposed Comcast-NBC Universal Combination
Competing MVPDs are also concerned about the incentive for a combined Comcast-NBCU to
raise prices for programming in a non-discriminatory, which would raise the costs of all
distributors. But the combined Comcast-NBCU would benefit since the increase in total NBCU
revenues would exceed the increase in Comcast costs.
Comcast and Other MVPDs vs. Independent Internet Video Distributors and
Over the Top Service Providers
The challenge for the new video distributors is to convince programmers their business model
will benefit the programmers more than the MVPD model because (1) with the new technologies
just becoming available now, the real growth in future demand will be for over the top television
services that households can access without having to subscribe to an MVPD, and (2) this
demand can be monetized to the mutual benefit of the programmers and the new distributors.
A large part of the appeal of the new distributors is lower monthly charges than now prevail for
MVPD service. But consumer decisions still are driven significantly by access to must-have
programming. Thus, except for those seeking niches in the markets, the new distributors must be
able to offer enough must-have programming to attract a threshold level audience.
The new video distributors do not have a single business model. For example, the Sezmi model
focuses on demand for the local news and sports programming offered by local broadcast stations
plus some popular cable network programs to offer a scaled down version of MVPD service. To
accomplish this, Sezmi seems to want to work with local broadcasters to maximize their mutual
value. Other new video distribution models focus more on national programming. The key in
each case, however, is to make sure that they have continued access to the must-have cable and/or
broadcast programming that they plan to feature in their service offerings.
Comcast and the other MVPDs have the incentive to convince the major programmers, who
produce most of the must-have programming, that it is in their mutual interest to maintain, and
perhaps expand upon, the MVPD business model. Since the primary threat to that model comes
from the new video distributors—the Internet video streamers and providers of over the top
television service—the MVPDs must convince the programmers that they can meet the new
demand for time- and location-shifted programming as well as the new video distributors can, and
without the uncertain revenue stream of those new distribution models. As indicated earlier,
although the advertising revenue stream generated by the current cable and broadcast business
models is slowing down, the revenue stream flowing to both broadcast networks and cable
networks from subscriber license fees paid by MVPDs is expected to continue to rise
significantly, even as new distribution services enter the market. The introduction of TV
Everywhere, supported by most of the large MVPDs and large programmers, suggests that
programmers as well as MVPDs see it in their interest to find a business model that will reduce
the number of households that disconnect from their MVPD provider, even if it does not monetize
Internet video viewing.
Currently, the programmers that have agreed to participate in TV Everywhere have not made their
programming available exclusively to the participating MVPDs. Thus must-have programming
still is available to the new video distributors. The MVPDs can be expected to push for more
exclusive contracts, however. This raises the following questions:
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The Proposed Comcast-NBC Universal Combination
•
Is there a tipping point, in terms of the percentage of must-have programming to
which a video distributor has access, below which it is not possible for a video
distributor to be viable?
•
Would the Comcast-NBCU combination increase the likelihood that major
programmers will make some or all of their must-have programming available
exclusively to TV Everywhere participants?
•
Is there a way for new video distributors to participate in TV Everywhere without
abandoning their business model?
One can expect that, given Comcast’s commitment to TV Everywhere, an affiliated NBCU would
also be committed to TV Everywhere. Perhaps more significantly, would the NBCU executives
be more likely to support an exclusive relationship with the Internet services of the MVPDs
participating in TV Everywhere—at the expense of relationships with independent Internet and
over the top video service providers—than if NBCU were unaffiliated? And if so, would a
decision by NBCU to only provide programming exclusively to the Internet services of the
MVPDs participating in TV Everywhere place pressure on other programmers to follow suit or
would one or more major programmers see it as an opportunity to forge favorable distribution
relationships with new Internet and over the top video distribution services, thereby reaching the
consumers who reject the current MVPD business model?
Claim: Comcast Would Be Able to Use Its Vertically Integrated
Position to Favor the Programming of NBCU at the Expense of
Independent Programmers
Given the high level of upfront fixed costs associated with program production and with
constructing program networks, financial viability and success depends on reaching a threshold
level of households. It is widely recognized that independent programmers typically resort to
offering an equity position to either a major programmer or to a major MVPD to help gain
carriage by enough MVPDs to attain that threshold. Although the level of vertical integration in
the video market has declined over time, there continues to be concern that independent
programmers may be precluded from the market. In recognition of this concern, Comcast has
committed, once it has competed its company-wide migration from analog to digital delivery of
programming in 2011, to add two new independently owned and operated channels to its digital
line-up each year for three years.54
One of the long-standing goals of U.S. media policy is to foster the diversity of voices. One
element of that has been to foster a wide diversity of programmers, at both the production and the
aggregation levels. The FCC has adopted commercial leased access rules that require cable
operators to set aside a certain number of channels for use by unaffiliated commercial
programmers; these rules implement section 612 of the Communications Act.55 Also, to
implement section 616 of the Communications Act,56 the FCC has adopted program carriage
54
In the Matter of Applications for Consent to the Transfer of Control of Licenses: General Electric Company,
Transferor, to Comcast Corporation, Transferee, Applications and Public Interest Statement, Appendix 8, “Applicants’
Voluntary Public Interest Commitments,” Commitment # 13, submitted January 28, 2010.
55
47 U.S.C. § 532.
56
47 U.S.C. § 536.
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The Proposed Comcast-NBC Universal Combination
regulations prohibiting MVPDs from requiring a financial interest in any program service as a
condition for carriage of the service, from coercing a programmer to grant exclusive carriage
rights, or from engaging in conduct that unreasonably restrains the ability of the unaffiliated
programming vendor to compete fairly by discriminating against the vendor on the basis of
affiliation or non-affiliation. Of course, if an independent seeks to offer an equity interest in order
to increase its likelihood of gaining carriage, that is not a violation of rules.
The combination of Comcast and NBCU may result in greater carriage by Comcast of NBCU
programming, but it is unlikely to be in contravention of any existing rules. As explained earlier,
both the major programmers and the major MVPDs appear to have exhausted the strategy of
proliferating branded cable networks. But there are two areas of potential expansion—video on
demand programming and the secondary streams of multicasting broadcast stations—where
Comcast appears to be more likely to carry NBCU programming than independent programming.
In its license transfer filing with the FCC, Comcast has attempted to disarm concern about this by
tying extensive use of NBCU programming to specific long-standing public interest goals.
Congress has long championed free over-the-air broadcasting as the primary provider of local
programming. Some observers have questioned Comcast’s commitment to over-the-air
broadcasting and questioned whether Comcast would turn NBC into a cable network. As part of
its commitment to maintain the NBC broadcast network and owned and operated stations,
Comcast has committed to expand the availability of the local news and public interest
programming currently offered by those stations on Comcast’s On Demand and On Demand
Online platforms.57 Similarly, in support of diversity, Comcast has committed to featuring
Telemundo programming, and expand the availability of mun2, on its On Demand and On
Demand Online platforms.58 Comcast also “intends” to expand the availability of over-the-air
programming to the Hispanic community by utilizing some of the available digital spectrum for
multicasting the programming of the Telemundo network and Telemundo owned and operated
stations.59 Although both local programming and diverse programming for use in VOD services
or for multicasting also are available from other, independent sources, it would be hard to
question Comcast’s use of NBCU programming to further these goals.
Claim: Comcast Will Use the Merger to Change NBC into a
Cable Network, at the Expense of Local Programming
Some observers, noting that broadcast networks traditionally have had only a single revenue
source—advertising—that currently is facing serious cyclical and structural challenges, have
predicted that Comcast might convert NBC to a cable network, abandoning its local affiliated
broadcast stations and their local programming. 60 They point to current proposals now being
57
In the Matter of Applications for Consent to the Transfer of Control of Licenses: General Electric Company,
Transferor, to Comcast Corporation, Transferee, Applications and Public Interest Statement, Appendix 8, “Applicants’
Voluntary Public Interest Commitments,” Commitment # 2, submitted January 28, 2010.
58
In the Matter of Applications for Consent to the Transfer of Control of Licenses: General Electric Company,
Transferor, to Comcast Corporation, Transferee, Applications and Public Interest Statement, Appendix 8, “Applicants’
Voluntary Public Interest Commitments,” Commitment # 7 and Commitment # 8, submitted January 28, 2010.
59
In the Matter of Applications for Consent to the Transfer of Control of Licenses: General Electric Company,
Transferor, to Comcast Corporation, Transferee, Applications and Public Interest Statement, Appendix 8, “Applicants’
Voluntary Public Interest Commitments,” Commitment # 6, submitted January 28, 2010
60
See, for example, Andrew Vanacore, “Broadcasters’ woes could spell trouble for free TV,” Yahoo! News, Dec. 29,
(continued...)
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The Proposed Comcast-NBC Universal Combination
analyzed at the FCC to allow broadcasters to sell their unused spectrum to wireless broadband
carriers as a possible vehicle for Comcast to make this transition. 61 Comcast has stated it has no
intention to do this.62
Given the strong trend, discussed earlier, for broadcasters to seek cash payments from MVPDs
for retransmission consent, the continued strong demand for local news and sports programming
and the strong branding associated with local broadcast stations, as well as the criticism Comcast
would face if it abandoned local programming and free, over-the-air programming, it seems
unlikely that Comcast would have the incentive to turn NBC into a cable network unless there
were a significant change in the market.
But that does not mean that Comcast would not seek to experiment with its acquired national and
local broadcast properties in ways that are different from current broadcast models. For example,
if Comcast believes that there is little financial benefit to proliferating additional branded
program networks, and there are no strong video demands for the extra spectrum made available
by the digital transition (despite Commitment #6 in its license transfer application to use such
spectrum to expand the availability of over-the-air programming to the Hispanic community),
then especially given its ownership of stations in major markets where spectrum is most valuable,
it might find its shareholders would benefit most if it sold the unneeded spectrum to wireless
broadband carriers. As another example, as Comcast incorporates its cable sports properties and
its broadcast sports properties, it might decide to shift some of those from broadcast to cable,
especially if it seeks to turn its Versus network into a viable competitor to ESPN.63
Comcast’s course of action for the NBC network and owned and operated local stations could be
affected by a decision that General Electric must make before the combination has been
consummated. NBC has long successfully bid for the exclusive television rights to the summer
and winter Olympic Games. Given the current economy, it appears that NBC will lose $200
million on the Winter Olympics in Vancouver, Canada, this year.64 Mindful of the bad economy,
the International Olympics Committee has delayed the bidding process for the 2016 Summer
Olympics, but the process still is likely to take place while General Electric still owns NBCU. For
the first time, golf will be a competitive sport in the 2016 Olympics. Comcast owns the Golf
Channel cable programming network. Combined broadcast and cable coverage of the golf
competition likely would generate substantial revenues for NBC, boosting how much it could bid
for the Games. If GE makes a bid for the Games, it may be at the urging of Comcast.
(...continued)
2009, available at http://www.lubbockonline.com/stories/122909/bus_540670417.shtml.
61
For a discussion of the FCC activity, see John Eggerton, “FCC’s Levin: Broadband Plans Don’t Threaten Future of
Broadcasting,” Broadcasting & Cable, December 28, 2009.
62
In the Matter of Applications for Consent to the Transfer of Control of Licenses: General Electric Company,
Transferor, to Comcast Corporation, Transferee, Applications and Public Interest Statement, Appendix 8, “Applicants’
Voluntary Public Interest Commitments,” Commitment # 1, submitted January 28, 2010.
63
See, for example, Jonathan Storm, “Many possibilities for Comcast and NBC,” philly.com, posted on December 3,
2009.
64
Andrew Krukowski, “Ebersol: NBC Will Lose Money on Games,” TVNewsCheck, January 11, 2010, available at
http://www.tvnewscheck.com/articles/2010/01/11/daily.6/.
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The Proposed Comcast-NBC Universal Combination
Claim: A Combined Comcast-NBCU Might Have the Unique
Ability to Craft New Business Models That Benefit Consumers
There has been significant concern in both the video industry and the advertising industry that as
new digital technologies to distribute video have been developed, the market has not found a way
to generate revenues—and, in particular, advertising revenues—to make these new distribution
options financially viable. 65 Some observers believe that, as the various industry players try out
new business models, there is the need for several things: (1) for the experimenters to understand
both the programmer perspective and the distributor perspective; (2) for the experimenters to
have sufficient financial staying power to give their new business model some time to incubate;
and (3) for the new business model to be employed by an entity that is a sufficiently large
presence in the market that others have to follow its lead if it is successful. A combined ComcastNBCU would meet these three criteria.
In his declaration accompanying the license transfer application, 66 Comcast Senior Vice President
for Corporate Development Robert Pick argues that the combination would “ameliorate the
negotiations friction that had made it difficult for Comcast, primarily a distribution and
communications company, to convince content owners and programmers to work with us to
create and deliver more content to consumers in a greater variety of ways.” He explains that there
are risks associated with attempting to use new business models, and that it has been his
experience that both the programmer and the distributor will seek to place the risk on the other
party, often resulting in delays that can be overcome if the risk is borne by a single company that
performs both functions. He discusses three new business models that Comcast struggled to
implement—video on demand, day and date release of new programming, and TV Everywhere—
as examples of experiments that were delayed by separate ownership of programming and
distribution due to Comcast’s need to know upfront “that it will have access to sufficient content
to make these businesses successful.” Interestingly, all three of these business models to some
extent involve “windowing”—timing when particular programming will be made available on the
various platforms. It appears that a key element that Comcast seeks is greater control over
windowing to maximize the joint return to programmer and distributor. Pick also argues that the
combination also provides additional opportunities for cross-marketing programming.
In practice, it is not clear that the merger will create the hoped-for efficiencies and eliminate
frictions between the programmers and distributors. Consider, for example, a joint profit
maximizing business strategy requiring the programming entity to sacrifice profits so that the
distribution entity can gain a greater amount of profits, in the typical environment in which
executive salaries are tied to the performance within their particular entity. Frictions may not go
away, although it will be easier for senior management to impose decisions that are not seen as
beneficial by particular parts of the company. This internal conflict can be substantial if the two
entities are of approximately the same size and contribute relatively equally to the company’s
bottom line or if the company is subject to regulation and therefore is sometimes called on to
make public its positions on issues. For example, during the late 1980s, Sprint consisted of a
number of local telephone companies that made up about half its business and a long distance
65
See, for example, Brian Steinberg, “Comcast Play for NBC Universal Is a Bet on Future of Advertising,” Advertising
Age, November 9, 2009.
66
In the Matter of Applications for Consent to the Transfer of Control of Licenses: General Electric Company,
Transferor, to Comcast Corporation, Transferee, Applications and Public Interest Statement, Appendix 7, Declaration
of Robert Pick, submitted January 28, 2010.
Congressional Research Service
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The Proposed Comcast-NBC Universal Combination
company that made up half its business. At the time, there were contentious public policy issues
at both the state and federal level about the payments that long distance companies should make
to local companies for originating and terminating long distance calls. Frequently the two sides of
the company prepared testimony outlying their position and then the testimony was withdrawn as
the company could not reach internal agreement on a position. Although many aspects of the
programmer-distributor relationship are not subject to public review, some issues, such as
retransmission consent, are. But even without a public component, the company must be able to
achieve internal agreement to move forward.
Some observers have questioned whether the merger will benefit Comcast. Martin Peers of the
Wall Street Journal states:67
But there is no question the deal will hinder Comcast’s ability to respond to the Internetdriven evolution of media. As a cable-systems company, offering both traditional TV and
broadband access, Comcast could still make money out of customers if they “cut the cord”
by switching off cable-video subscriptions and watching online video instead. As a majority
owner of NBC Universal, though, Comcast has to protect the cable-channel business model,
which needs people to keep paying subscriptions for TV.
Another significant issue is whether the more efficient business models envisioned for a
combined Comcast-NBCU can only be achieved by combining an extremely large MVPD with
an extremely large programmer, which could lead to significant consolidation in the industry if
small players are forced out of business or to marginal niches and larger players are forced to seek
merger partners in order to be able to compete with Comcast-NBCU.
Reported Merger Conditions
To neutralize political opposition to the merger and to demonstrate that the merger would foster
the long-standing public policy goals of localism, diversity of voices, and competition, Comcast
has met with representatives of many consumer and private stakeholders and agreed in writing to
meet some of their demands. For example, Comcast has agreed in writing to add four cable
networks owned, or partly owned, by African Americans over the next eight years and an
English-language channel directed toward Asian Americans.68 Comcast also has met with
officials at the DOJ and the FCC and negotiated conditions that they would agree to meet. Both
agencies are expected to approve the Comcast-NBCU merger, subject to a number of such
conditions, in late January or February.
According to a number of trade press reports,69 a draft of the FCC order has been circulated to the
Commissioners for their review. Among the conditions reported to be in the draft are:
•
A requirement that Comcast offer unbundled broadband Internet access service,
not tied to video or telephone service, to families in its cable franchise areas who
67
Martin Peers, “Comcast Risks Double Vision,” Wall Street Journal, December 4, 2009.
See, for example, Bob Fernandez, “Comcast adding networks owned by Afrian Americans and Asian Americans,”
The Philadelphia Inquirer, December 17, 2010.
69
See, for example, Bob Fernandez, “Comcast-NBCU deal includes discount broadband for poor families,” The
Philadelphia Inquirer, December 28, 2010, and Jonathan Make, “Comcast-NBCU FCC Draft Web Conditions
Abound,” Communications Daily, January 7, 2011.
68
Congressional Research Service
27
The Proposed Comcast-NBC Universal Combination
participate in the National School Lunch program, for $9.95 per month. Comcast
also would help families who qualify purchase user-ready computers for about
$150.
•
A bar on Comcast prioritizing, on its broadband network, programming from its
cable networks or from NBCU’s cable networks and television stations ahead of
unaffiliated content.
•
A requirement that the new entity license to online video distributors some
programming that may currently be available only to MVPDs that are part of TV
Everywhere.
•
A requirement that Comcast extend broadband service to 400,000 additional
homes by expanding its network over the next three years.
•
A requirement that Comcast provide broadband service to six more rural communities.
Author Contact Information
(name redacted)
Specialist in Telecommunications Policy
[redacted]@crs.loc.gov, 7-....
Congressional Research Service
28
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