Congress shouldn't carry water for pay-TV

The year ended with hundreds of deals between television broadcasters and pay-TV providers successfully negotiated. No blackouts, no drama. A respected industry watcher recently remarked that, “TV blackouts are in a quiet period.” So, why is Congress proposing legislation to put the federal government in the middle of market-driven disputes?

The reason is stiffening competition in the video marketplace. Verizon, AT&T, and Google are now offering cable service, and Netflix, Amazon, and Hulu are offering award-winning original series online. Wednesday’s news that Amazon is considering adding live TV to its online video offering indicates this space is going to become even more competitive over the next few years.

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Pay-TV providers are feeling the squeeze from the increased competition and are pushing Congress to regulate their rivals. That’s why a group of pay-TV providers is lobbying for government-mandated prices for television programming distribution rights.

Reps. Steve Scalise (R-La.) and Anna Eshoo (D-Calif.) each introduced bills on the same day last month to give pay-TV providers special treatment when negotiating rights to resell broadcast programming to cable customers (rights known as “retransmission consent”).

Eshoo’s bill would set below-market government-mandated rates for broadcast television programming and require television stations to distribute their content for free online, but wouldn’t impose any limits on any other types of programming. Scalise’s bill would deregulate the pay-TV market altogether while leaving in place onerous market restrictions on TV stations.

It is no coincidence that, though each bill is styled as an effort to reform the video marketplace, they would regulate only local TV stations. The real purpose of these bills is to help Pay-TV providers maximize their profits by shifting a portion of their programming costs to broadcasters.

Until recently, incumbent cable companies were the dominant providers of pay-TV service. Their dominant market position gave them the ability to raise prices at double the rate of inflation.

As competition has intensified, incumbent cable operators have seen their share of the pay-TV market fall — from 76 percent in June 2002 to 56 percent in June 2012. Overall demand for pay-TV services is also beginning to decline as more consumers “cut the cable cord”.

Firms in declining markets often improve or maintain their profit margins by cutting costs. In most markets, this means increasing operational efficiency (e.g., by reducing travel expenses) or negotiating better deals with suppliers. In the highly regulated communications market, it often means asking the government to intervene.

Though retransmission consent rights represent a small fraction of pay-TV operating costs—about two cents of every dollar—cable operators had become accustomed to paying little or nothing to retransmit local television stations. They have traditionally threatened to “blackout” (i.e., stop carrying) television channels during retransmission consent negotiations as a means of increasing their leverage. When cable still dominated the pay-TV market, this threat was so powerful that cable operators could strike deals to carry even the highest-rated television programming for free. If a television station refused a cable operator’s preferred terms, the station risked losing substantial advertising revenue while its channel was cut off because there were no other pay-TV providers to carry its signal.

In today’s competitive pay-TV market, however, television stations have the option of calling a video provider’s bluff, as Wall Street observed when Time Warner yanked CBS—the highest rated television network in the country—off the air during a dispute about wireless distribution rights last fall. Now that there are competitive pay-TV providers in most markets, they have something to lose from a blackout too — their subscribers.

Video providers justify their request for special treatment by claiming that broadcasters are asking for too much. That doesn’t square with DirecTV’s decision to blackout the Weather Channel last week. The Weather Channel claims it was seeking a negligible increase of one cent per customer per month and that DirecTV, which is a member of the group seeking government price regulations, wanted to “roll back” its rates. A statement from DirecTV’s chief content officer indicates that it simply didn’t want to pay for the Weather Channel anymore: “When information is readily available everywhere, it’s no longer necessary for people to have to pay a premium.”

Pay-TV providers want to have it both ways. They want the ability to blackout channels they don’t think they need while asking Congress to prevent broadcasters from withholding their programming when video providers refuse to pay. Enhancing the power of pay-TV providers over programming in this way might improve their bottom line, but it wouldn’t benefit consumers. Congress should just say no.

Campbell is executive director of the Center for Boundless Innovation in Technology and former chief of the FCC’s Wireless Bureau.