Market Dynamics and Public Policy Issues in the Video Programming Industry

CRS Report for Congress
Market Dynamics and
Public Policy Issues in the
Video Programming Industry
July 28, 2003
Charles B. Goldfarb
Specialist in Industrial Organization and Telecommunications
Resources, Science, and Industry Division

Congressional Research Service ˜ The Library of Congress

Market Dynamics and Public Policy Issues in the Video
Programming Industry
In the past 15 years, the successful introduction of new technologies, coupled
with changes in government rules, has created strong market forces for fundamental
structural change in the video programming industry. About 80 percent of U.S.
households subscribe to cable or satellite systems offering multiple channels of
programming. These alternatives to broadcast television now attract more than half
the total viewing audience, although broadcast television still attracts a majority of
viewers during prime-time when popular broadcast network fare is aired. Similarly,
movie producers today receive more than twice as much revenue from the rental and
sale of video cassettes and DVDs as they do from movie theaters.
At the same time, there has been widespread vertical and horizontal integration
in the video programming industry. The industry is increasingly dominated by a
small number of firms that finance the development of new programming through a
wide variety of arrangements with content providers (including joint ventures and
direct ownership), own extensive libraries of existing programming, own a variety
of distribution channels for bringing content to the public, and also own retail
pipelines such as local broadcast stations and video store chains (and, currently
proposed, a direct broadcast satellite system).
These fundamental changes in the market structure affect the public policy
issues that Congress faces. Today, there are more pipelines into the home and more
distribution networks than ever before, but a limited number of big media players
control a large portion of both programming and distribution. This has engendered
debate on how well the existing FCC ownership rules address the impact of
consolidated ownership of programming and distribution on the public interest goals
of diversity, competition, and localism, and whether new rules that re-regulate the
industry could or should be formulated that would better serve those goals.
The purposes of this report are:
!to explain how and why underlying market forces have created
strong pressure for vertical integration across segments and
horizontal mergers within segments;
!to explain how that market consolidation could be used to benefit or
to harm consumers; and
!to identify public policy issues that may arise as a result of the
vertical and horizontal consolidation.
See CRS Report RL32027 for background and detail on the structure of the
video programming industry.

In troduction ......................................................1
Market Dynamics..................................................1
Viewers Tend to Value New Viewing Options.......................1
New Viewing Options Fragment Viewing Audiences..................4
Costs Continue to Rise for Popular Programming.....................6
Rising Costs and Fragmented Audiences May Increase Risk
That Could Be Mitigated by Consolidation.....................9
Consolidation Also Could Be Used for Strategic Purposes
That Harm Consumers....................................13
Some Fundamental Questions Remain Unanswered..................15
Public Policy Issues...............................................17
Station Ownership Rules.......................................18
Programming Ownership Rules..................................19
Non-Discriminatory Access to Programming.......................20
Retransmission Consent........................................21
A La Carte..................................................22
Programming Requirements....................................24
Fairness Doctrine.............................................25
List of Tables
Table 1. Television Viewing by Cable and Non-Cable Households,
1990-91 and 2000-01..........................................2
Table 2. End-User Expenditures on Various Video Media, 1990-2000........5
Table 3. Estimated Share of U.S. TV Home Set Usage by Program Source....6

Market Dynamics and Public Policy Issues
in the Video Programming Industry
Over the past 15 years, technology-driven market forces and changes in
government rules have led to widespread vertical and horizontal integration1 in the
video programming industry. Some of these integrated firms are very large, with
extensive holdings that cross both functional segments (i.e., content production,
distribution and packaging, and pipelines to end user customers) and technologies
(broadcast, cable, direct broadcast satellite (DBS), VCRs, and DVDs).2 This has
raised concerns in some quarters that these firms could use their market positions to
harm competition and that media concentration reduces the diversity of independent
voices and lessens sensitivity to local needs, interests, and standards. Other
policymakers have found benefit to consumers from efficiency gains made possible
by such consolidation, and have pointed to some empirical evidence that media
consolidation has increased the amount and quality of local news programming.
The purpose of this report is to describe the market dynamics driving vertical
and horizontal consolidation in the video programming industry, to show the
potential benefits and harm to consumers from such consolidation, and to identify
potential public policy issues that may be raised by the consolidation.
Market Dynamics
Viewers Tend to Value New Viewing Options
The emergence of new technologies for the provision of video programming to
end users -- cable television, direct broadcast satellite, and video cassette and DVD
rental and sales all represent relatively recent alternatives to traditional broadcast
television and movie theaters -- has increased the options available to viewers. In
2001 cable television service was available to 96.7 percent of U.S. households and

65.0 percent of households subscribed, while 17.7 percent of U.S. households

1 Horizontal integration occurs when firms that compete directly with one another combine.
Vertical integration occurs when firms that are in a supplier-customer relationship combine.
The supplying firm can be providing products (e.g., programming) or services (e.g.,
distribution services) that are inputs for the customer.
2 The structure of the video programming industry and the interrelationships among the
functional segments and technological alternatives are discussed in detail in CRS Report

subscribed to satellite service.3 The average cable system devotes 82.5 channels to
video delivery.4 In addition, in 2001, 85.2% of U.S. households had VCRs; 13.0%
had DVD players.5
Viewers clearly value these options. As shown in Table 1,6 Americans continue
to increase the amount of time they spend watching video programming, and
subscribers to multiple channel systems in particular have increased their viewing.
Table 1. Television Viewing by Cable and Non-Cable Households,
1990-91 and 2000-01
(hours per week)
1990-1991 1990-1991 2000-2001 2000-2001
B r oadcast- Cabl e B r oadcast- Cabl e
Only Household Only H o usehol ds
H o usehol ds s H o usehol ds
Total Television Viewing41.654.745.363.0
Total Broadcast Viewing41.631.945.326.8
Network Affiliatesa29.424.029.420.8
Independents b 10.3 8.1 12.9 4.7
Total Cable Viewing–22.8–36.2
Adve rtiser-Supported – 18.2 – 29.8
Premium Pay Channels–4.6–4.0
All Other Cablec–––2.4
Source: Cablevision Advertising Bureau, Cable TV Facts 1992 ed., p. 6 and 2002 ed., p. 41.
a. Network affiliates ABC/CBS/NBC in 1990-1991 and ABC/CBS/FOX/NBC in 2000-2001.
b. WB/UPN/PAX affiliates and independents.
c. This category was not listed separately in 1990-1991. It includes cable networks neither
advertising-supported nor premium pay, e.g., pay per view, home shopping.

3 Jonathan Levy, Marceline Ford-Livene, and Anne Levine, “Broadcast Television:
Survivor in a Sea of Competition,” OPP Working Paper 37, Federal Communications
Commission, September 2002, Table 1, p. 4.
4 Implementation of Section 3 of the Cable Network Consumer Protection and Competition
Act of 1992, Statistical Report on Average Prices for Basic Service, Cable Programming
Services, and Equipment, MM Docket No. 92-266, Report on Cable Industry Prices, 17 FCC
Rcd at 6313, Table 11 (2002).
5 Jonathan Levy, Marceline Ford-Livene, and Anne Levine, “Broadcast Television:
Survivor in a Sea of Competition,” OPP Working Paper 37, Federal Communications
Commission, September 2002, Table 1, p. 4.
6 Reproduced from Jonathan Levy, Marceline Ford-Livene, and Anne Levine, “Broadcast
Television: Survivor in a Sea of Competition, OPP Working Paper 37, Federal
Communications Commission, September 2002, Table 8, p.20.

The alternatives to broadcast television now attract more than half the viewing
audience, though broadcast television still attracts a majority of viewers during
prime-time when popular broadcast network fare is aired. According to the National
Cable & Telecommunications Association,7 basic cable networks and pay cable
services captured a 59 share of the viewing audience in 2002, while broadcast
stations captured only a 53 share.8 The FCC reports9 that the prime-time share of all
cable networks increased from 51.9 in July 2000 - July 2001 to 56.5 in July 2001 -
June 2002, while the prime-time share of all broadcast television networks fell from
63 to 59 during the same period.10 Similarly, the FCC reported that in 2000, of $29.9
billion in total U.S. end-user expenditures for filmed entertainment, $22.45 billion
came from home video and only $7.45 billion from box office receipts.11
Viewers also have demonstrated a willingness to pay for programming. Table

212 shows how end-user expenditures on various video media grew, in current dollars,

from 1990 to 2000. During that period, the consumer price index grew by 32.5%;13
consumer spending on each and every video medium grew at a faster pace, in most
cases at a substantially faster pace. As shown in Table 2, cable video subscription
revenues increased from $16.1 billion in 1990 to $31.9 billion in 2000, while direct
broadcast satellite subscription revenues increased from zero to $8.4 billion, and the
rental and sale of video cassettes and DVDs increased from $11.1 billion to $22.4
billion during the same period. Although the growth in demand for these new video
services siphoned off viewers of traditional video outlets, those outlets too continued
to enjoy revenue growth. As shown in Table 2, from 1990 to 2000, advertising
revenues for broadcast television and box office receipts from movie theaters

7 “Viewing Shares: Broadcast Years: 1991/92–2001/02,” Cable Developments 2003,
National Cable & Telecommunications Association, at p. 16, citing data from Nielsen Media
Research and Cable Status Report Data, published by the Cablevision Advertising Bureau
in Cable TV Facts, 1993 through 2003.
8 A program’s or network’s “share” is defined as the percentage of the television
households watching television at a given time that are tuned to that particular program or
network. The sum of all shares typically exceeds 100 because in some households there will
be multiple televisions being watched at the same time.
9 Annual Assessment of the Status of Competition in the Market for the Delivery of Video
Programming, Federal Communications Commission, MB Docket No. 02-145, Ninth
Annual Report, released December 31, 2002, at pp. 5 and 6.
10 For a more detailed discussion of broadcast and cable market shares, see CRS Report
11 Jonathan Levy, Marceline Ford-Livene, and Anne Levine, “Broadcast Television:
Survivor in a Sea of Competition,” OPP Working Paper 37, Federal Communications
Commission, September 2002, Table 2, p. 6, citing Veronis Suhler, “Communications
Industry Forecast,” July 2001.
12 Reproduced from Jonathan Levy, Marceline Ford-Livene, and Anne Levine, “Broadcast
Television: Survivor in a Sea of Competition, OPP Working Paper 37, Federal
Communications Commission, September 2002, Table 2, p.6.
13 U.S. Department of Labor, Bureau of Labor Statistics, Consumer Price Index, All Urban
Consumers, U.S. city average, All items, [],
viewed 7/28/2003.

continued to rise. In all, end user and advertising expenditures on video
programming increased from $61 billion in 1990 to $128 billion in 2000.14
New Viewing Options Fragment Viewing Audiences
Despite the increase in the overall size of the market for video programming, the
availability of additional options has resulted in the fragmentation of viewing
audiences for individual channels. As shown in Table 3,15 the market share of
broadcast television continues to fall. The three major networks and their affiliates
captured 80 to 90 percent of the audience in the 1950s through 1970s. Today, there
are seven networks, but they and their affiliates have only a 39 percent market
share.16 As described by Kagan World Media,17
Thanks to a tremendous rise in competition from cable networks, a low rating on
broadcast TV 20 years ago would be a high rating today. The top 10 average of
12.7 in the 2001-2002 season was dangerously close to the bottom 10 average of

12.0 in 1980-1981.

Although cable networks in aggregate now command half the viewing audience, that
aggregate audience is shared by more than one hundred cable networks; no single
cable network commands as much as a two percent rating.18

14 Standard & Poor’s estimated that in 2002, U.S. consumers would spend $44 billion for
TV programming (delivered via basic cable, pay cable, and satellite programming), $9
billion for theatrical movies, and $22 billion for rental and purchase of prerecorded
videocassettes and DVDs, and that the television industry also would be supported by $61
billion in advertising expenditures, yielding total industry revenue of $136 billion. Tom
Graves, “Movies and Home Entertainment,” Standard & Poor’s Industry Surveys, November

14, 2002, at p. 7.

15 Reproduced from Jonathan Levy, Marceline Ford-Livene, and Anne Levine, “Broadcast
Television: Survivor in a Sea of Competition, OPP Working Paper 37, Federal
Communications Commission, September 2002, Table 25, p.62.
16 These market shares do not match up exactly with the share of television households data
presented on p. 3 above, in part because the “share” being measured is different, in part
because the time period covered is different. But all the data show the same pattern – the
broadcast television market share is falling, and no network or individual program attracts
audiences of the size or market share that existed before the successful entry of cable and
satellite systems.
17 Kagan World Media, The Economics of TV Programming & Syndication 2002, August

2002, at p. 6.

18 According to the Television Bureau of Advertising, for the 2002-2003 season, TNT, the
highest-rated advertiser-supported cable network, had a rating of only 1.56%. (A program’s
or network’s “rating” is the percentage of total television households (approximately 107
million) viewing that program or network. In April 2003, the highest ranked ad-supported
cable program came in at number 146 for the month, with a 3.2% household rating. See
“HH Ratings - Primetime Broadcast and Ad-Supported Cable Season-to-Date 2002-2003 v.
Season-to-Date 2001-2002,” “HH Ratings - Primetime Top Ranked Ad-Supported Cable
Networks Season-do-Date 2002-2003 v. Season-to-Date 2001-2002,” and “Top 100
Programs on Broadcast & Cable: Apr-2003,” Television Bureau of Advertising,

Table 2. End-User Expenditures on Various Video Media,
(millions of current dollars)
Total Broadcast Television$26,716$32,720$44,802
Network Advertising Revenues$9,963$11,600$15,888
Syndication Advertising Revenues$1,109$2,016$3,108
Stations’ Advertising Revenues (local + national$15,644$19,104$25,806
Total Cable Video-Related Revenues$18,401$26,870$44,808
Total Cable Television Operators’ Revenuesa$16,604$22,898$3,435
Operators’ Video Subscriptionsb$16,128$21,823$31,992
Operators’ Advertising Revenues$476$1,075$2,430
Basic Cable Network Advertising Revenues$1,797$3,972$10,456
Total DBS Revenues$0$663$8,467
DBS Video Subscriptions$0$63$8,440
DBS Advertising Revenuesc$0$0$27
Total Subscription Video-Related Revenues $18,401$27,533$53,275
Filmed Entertainmentd$16,129$21,023$29,906
Box Office$5,022$5,494$7,453
Home Video$11,107$15,529$22,453
Sources: Broadcast Television Revenues: Television Bureau of Advertising, “Trends in
Advertising Volume,” [], visited June 26, 2002; Cable
Operator Revenues: Kagan World Media, The Economics of Basic Cable Networks (date and
pages not provided); DBS Revenues: Kagan World Media, The State of DBS 2002, Dec.
2001, at p. 16; Filmed Entertainment Revenues: Veronis Suhler, “Communications Industry
Forecast,” July 2001, at p. 203.
a. Only video-related revenues are listed here. Revenues from installations, equipment, and
non-video services like high-speed Internet access services and telephony are not included.
b. Includes home shopping commissions.

18 (...continued)
[ h t t p : / / www.t vb.or g/ r cent r al / vi e wer t r ack/ mont hl y/ t op100-b-c/ t op100.asp?ms = A p r -
2003.html], viewed 6/20/03. Premium cable networks, such as HBO and Showtime, that
offer premium programming for monthly subscriber charges have attained ratings of 6.0 and
higher for several successful programs, such as The Sopranos and Sex and the City. See,
e.g., “Ratings: Weekly Pay Cable,” [],
viewed 7/15/2003.

c. DBS advertising is the equivalent of cable’s “local avails,” though they are sold as
national time.
d. Filmed entertainment in this table includes movie theater box office and video stores.
The data source for filmed entertainment includes expenditures on television programming
as a third category. Because programming is an input into television, cable, and DBS
services, it is not listed separately under filmed entertainment.
Table 3. Estimated Share of U.S. TV Home Set Usage by
Program Source
(annual averages)
Ear l y Ear l y Ear l y Ear l y Ear l y Ear l y
1950s 1960s 1970s 1980s 1990s 2000s
AB C/ CB S/ NB C 60% 58% 55% 54% 31% 21%
DuM o nt 4% – – – – --
FOX/WB /UPN/PAX -- -- -- -- 2 % 8 %
Network Affiliatesa30%29%25%23%18%10%
Independent Stationsb6%11%16%20%16%11%
PBS Stations–2%4%3%3%3%
Pay Cable–––4%4%6%
Basic Cablec––1%3%20%35%
VCR Play––––5%5%
Video Games–––1%1%1%
Pay Per View–––––
Average Hours of Sete353946515462
Usage (Weekly)
Source: Media Dynamics, TV Dimensions 2001 Report (2001).
a. Includes syndicated shows.
b. Excludes WTBS and FOX or other on-air networks; includes syndicated shows.
c. Includes WTBS.
d. Less than 1 percent.
e. Counts multiple-set usage to different sources at the same time as separate exposures.
Costs Continue to Rise for Popular Programming
As entry has fragmented audiences, the costs of producing programming
continue to increase at least at the rate of inflation. Electronic Media19 estimates that

19 Michael Freeman, “TV’s new math: How the economic models for producing TV shows
have changed,” appendix to “Special Report: The New Economics of TV – Forging A

the cost of producing scripted television series for prime time has increased by about
30% since the early 1990s, and that the costs of production have increased from the
$1.1 - $1.4 million range to the $1.4 - $1.6 million range for a one hour drama and
from the $400,000 - $900,000 range to the $550,000 - $1.2 million range for a half
hour situation comedy.20
It is important to understand, however, that production costs vary from these
average levels in significant ways. On one hand, successful existing network
programs that have demonstrated the ability to generate larger audiences than the
average program – hit programs such as Friends or certain sports events – become
more expensive to produce precisely because they are successful. Costs increase as
the talent associated with those programs (athletes, actors, directors, producers) are
able to renegotiate contracts to command a larger portion of the revenues they
generate. Popular programming that attracts a large audience (or perhaps attracts a
somewhat smaller audience that has a high intensity of demand) typically generates
large revenues, either from advertisers or from direct subscriber charges. These
higher than average revenues are shared by the owners of the programming, in the
form of profits, and by the talent (actors, directors, athletes), in the form of high
renegotiated salaries that include what economists call “economic rents.” These
economic rents become part of the cost of the programming.
The costs associated with each episode of a successful network program at the
peak of that program’s popularity therefore could be many times the average costs
identified above. For example, the license fee per episode in the 2001-2002 season
was $8.2 million for ER, $5.6 million for Frasier, and $5.5 million for Friends, and
at least seven other programs has license fees per episode exceeding $2 million.21
These license fees often do not cover the full costs of production because the owners
of the programming can generate additional revenues from syndication of reruns and
from international markets. Sometimes such costs can be built into production before
a new (pilot) series has demonstrated audience appeal. Talent with a proven track
record sometimes can command high salaries in advance.
ESPN recently announced a rate increase of 20 percent, the fifth consecutive
year it has had an increase of that size.22 A portion of that increase goes to the sports

19 (...continued)
Model for Profitability,” Electronic Media, January 28, 2002.
20 Similarly, movie production costs continue to rise. Although it does not provide
quantitative data, Standard and Poor’s states that “expenses are going up due to more
frequent and spectacular special effects in action and science fiction films; projects that
must be shot on location as opposed to a controlled studio environment; and astronomical
star salaries.” Tom Graves, “Movies and Home Entertainment,” Standard & Poor’s Industry
Surveys, November 14, 2002, at p. 11.
21 Kagan World Media, The Economics of TV Programming & Syndication 2002, August

2002, at p. 16.

22 Apparently, a number of years ago many cable system operators contractually agreed to
a 20% annual escalator in ESPN license fees. This year, ESPN has offered an alternative
to the 20% escalator, offering to start dropping the rate of increase first to 16 percent

leagues and thus indirectly to the athletes. More generally, James M. Gleason,
chairman of the American Cable Association, an association of small cable operators,
claims that “programming costs for 14 top cable networks have risen 66.6% over the
past five years – an increase of more than 5 times the Consumer Price Index.”23
Presumably these networks have a substantial proportion of programming that have
successfully found audiences and these charges include the economic rents accruing
to the talent that produced the programming.
From the perspective of the viewing public, the extremely high economic rents
to talent that drive up these costs – which ultimately are passed on to consumers
through higher cable charges or higher advertising charges that raise the prices for
advertised goods and services – are beneficial if they generate additional
programming of the sort that the public prefers. If these “windfalls” are ploughed
back into the production of equally popular programming, or innovative
programming that might not otherwise be produced, the public benefits. But to the
extent most talent – athletes, writers, directors, producers, etc. – would continue to
perform at the same level even if they could not command such high prices for their
services, the public does not benefit from a system that fosters extremely high
economic rents.
At the same time, there is a lot of original programming being produced at much
lower cost directly for basic cable networks (such as Discovery and A&E) with much
smaller expected audiences and revenues.24 These independent producers are
providing hundreds of programs for dozens of series on budgets of less than
$100,000 per hour of programming.25

22 (...continued)
annually and eventually to 11 percent in exchange for wide distribution and relatively high
license fees for all its products, including ESPN Classic, start-up Spanish-language service
ESPN Deportes, and a new pay-per-view service. Further, ESPN wants long-term
commitments and pricing schedules for more-uncertain products, such as a high-definition
ESPN feed, a nascent interactive-TV product, video-on-demand packages, and a high-speed
Internet product. The 20% price increase will go into effect as of August 1, 2003, if
operators do not agree to the alternative arrangements. As of mid-July, no major multi-
system operator had agreed to those arrangements. See John M. Higgins, “ESPN, MSOs
FACE OFF:Cable operators wary of network’s proposed alternative to annual 20% license-
fee hike,” Broadcasting & Cable, April 28, 2003, at p. 1, and John M. Higgins, “Does ESPN
Have a Plan C?”, Broadcasting & Cable, July 14, 2003, at p. 10.
23 Written testimony of James M. Gleason before the Senate Committee on Commerce,
Science, and Transportation Hearing on Media Ownership, May 6, 2003
24 See, for example, John M. Higgins, “It’s Production On the Cheap,” Broadcasting &
Cable, 4.28.03, pp. 38-39.
25 The most successful of these series is “Trading Places,” a household make-over program.
It should be noted that once a production team has had a successful track record, it may be
able to demand a higher price for its services.

Rising Costs and Fragmented Audiences May Increase Risk
That Could Be Mitigated by Consolidation
Despite these cost differences, most program producers face a similar
underlying cost situation. They have substantial up-front production costs and they
do not have any prior guarantee that their programming will ever reach an audience,
no less capture such a large audience that they will be able to renegotiate a larger
portion of the revenues generated. As a result producers face very high up-front risk
and it is generally in their interest to attempt to reduce that risk. There are two
general ways to accomplish this: (1) to produce many different programs, so that the
fate of the company does not depend on the success of individual programming
projects, but rather on the overall success rate of the full portfolio of projects, and (2)
to negotiate a joint venture with a program distributor or retail provider of video
programs in which the latter makes an up-front investment in the production in return
for a share of the profits or a lower price for programming.
As a result of audience fragmentation and generally increasing programming
costs, in most situations no single retail channel (e.g., broadcast television or movie
box office) reaches enough viewers to allow the producer to fully recoup the costs of
producing the programming solely through that channel. At the same time,
advertisers seeking to reach a wide audience no longer can reach their full target
audience through advertiser-supported programming on a single channel. Thus, the
old system of producing programming primarily for one retail channel is in most
situations no longer financially viable.
These market forces are affecting market behavior and structure in several ways.
First, the pressure on program producers to expand and diversify their programming
or to enter into joint ventures with distributors or retailers has encouraged both
horizontal mergers among producers and vertical mergers with distributors and
retailers. To the extent reducing overall risk fosters the production of more programs
or the undertaking of higher-risk projects, such consolidation will benefit consumers.
Second, audience fragmentation is forcing producers to market their products26
through multiple retail channels. This is known as “windowing” when it involves
motion picture programming and “repurposing”27 when it involves television
programming. For example, a producer may schedule a new product to first be
released through first run movie theaters, then after some delay to be released on pay-
per-view cable or video channels, then after additional delay to be made available for
rental or sale at video stores, finally after yet additional delay to be shown on non-pay28

cable, DBS, or broadcast television channels.
26 For an excellent discussion of the economic forces underlying windowing, see Bruce M.
Owen and Steven S. Wildman, Video Economics, Harvard University Press, Cambridge,
Massachusetts, 1992.
27 For a detailed discussion of repurposing, see, e.g.,Michael Freeman, “Forging a Model
for Profitability,” Electronic Media, Vol. 21, Issue 4, 1/28/2002.
28 In the case of repurposing, the delays between pipelines may be quite short. In several

The reason for doing this is to take advantage of the fact that different customers
have different intensities of demand for video programming. Those with the highest
intensity pay the most to see the video in movie format at a first run theater as soon
as it is released. Those with somewhat lower intensity accept a delay and pay
somewhat less to watch the video as a movie on pay-per-view. Those willing to wait
longer and pay still less, wait until the video is available for rent or purchase at a
video store. Finally, those with the lowest intensity wait to view the programming
when it is on non-pay cable, satellite, or broadcast channels. These options allow the
viewing public to select their preferred mode of obtaining video programming, based
on their sensitivity to price and to time delay. In turn, by not having a single price
for video programming that would be lower than some viewers would be willing to
pay and higher than others would be willing to pay, this viewer selection allows
producers to maximize the revenues generated by their programs.29 Windowing
allows more programming to be profitable than would otherwise be the case and
therefore more programming is produced for viewers.
However, it is not easy to negotiate the many pricing and timing variables across
the production, distribution, and retail segments of the industry, as well as across
multiple retail channels, especially when those channels compete with one another
for audiences and, in some cases, for advertisers. One way to simplify this process
and perform windowing efficiently is to vertically integrate across the production,
distribution, and retail segments, and to consolidate across channels within a
Third, in their efforts to gain viewers among the fragmented audience, program
distributors and retailers have the incentive to take fullest possible advantage of
whatever successes they have with their existing programs. One way to do that is to
create brand identity for a network and extend that identity to affiliated networks.
For example, the Discovery Channel, once successful, spawned a number of affiliated
programming networks – Discovery Civilization, Discovery En Español, Discovery
Health, Discovery Home & Leisure, Discovery Kids, etc. These, in turn, provide the
opportunity for cross-marketing of programs among the co-branded networks. This

28 (...continued)
recent repurposing deals between broadcast networks and cable networks, the programs have
been rerun on the cable network within about a week of its initial broadcast. Apparently this
has not hurt ratings for the programs, though there is some concern that such initial
saturation will lower the value of the programming for later syndication. See, e.g., Michael
Freeman, “Special Report: The New Economics of TV – Forging A Model for Profitability,”
Electronic Media, January 28, 2002.
29 It is interesting to note that a major strategy that the networks have used to contain
programming costs – the creation of “reality television” programming – does not lend itself
to windowing since the programs lose their appeal once viewers know who won the
competition. Thus, although these programs reduce up-front production costs, they lack a
“back-end” revenue stream. Similarly, most sports programs do not lend themselves to
windowing and where they are expensive to produce this typically results in very high
charges to the retail channels that carry the sports programming, since there will be little or
no back-end revenue stream. Recent price increases in sports programming have been a
source of controversy, particularly where producers and distributors have not allowed cable
systems to place those sports programs on premium channels.

same formula has been followed by many programming networks, including FOX,
HBO, BET, ESPN, and MTV.30 Independent networks cannot perform such cross-
marketing as effectively. These branding and cross-marketing activities need not be
limited to a single industry segment and, in fact, can be facilitated by vertical
integration. Many of the most successful examples involve branding and cross-
marketing that goes beyond the video industry, into books, magazines, comic books,
newspapers, musical recordings, and amusement parks that all build off a single
recognizable character or concept. Branding and cross-marketing frequently can be
most efficiently and effectively accomplished within a single corporate family.
Fourth, given the consolidation that has occurred in cable system ownership,31
with just a handful of multi-system operators (MSOs) controlling access to the
majority of cable viewers, individual content providers need to take whatever steps
are necessary to create leverage in their dealings with MSOs, and an obvious choice
is to join forces with programming conglomerates or with the large MSOs,
themselves. Although most local cable (and satellite) systems now have capacity to
carry 80 or more networks, with more than 300 existing cable networks it is
becoming increasingly difficult for new networks to get onto systems. As start-ups
in a business with high up-front production costs, they face even more directly than
existing networks the need to get onto as many local cable systems as possible, as
quickly as possible. One strategy that new networks have used is to offer their
programming to MSOs and local cable systems without charging any per subscriber
license fee – or even paying the cable systems to carry their programming. This
limits the cable networks’ revenues to advertising revenues, and unless they are
carried by many local systems they cannot command very much in terms of
advertising rates. As a result, start-up networks have increasingly been forced to
follow one of two strategies. Some new cable networks have agreed to give the
major MSOs – especially Comcast and AOL Time Warner – substantial equity
interests in their networks in exchange for being carried on their systems.32
Alternatively, some new cable networks have agreed to give “mega-programmers”
such as Viacom, Discovery Networks, or Disney, substantial equity interests in their
networks in exchange for becoming part of those companies’ line of cable channels,
taking advantage of those larger entities’ ability to negotiate carriage with the MSOs.

30 The efficiency advantages from combining into networks or in other ways is not new.
Broadcast networks for many decades have put together weekly program schedules that are
intended to maximize viewership by carefully analyzing the optimal order in which
programs are presented in order to hold onto audiences once they have tuned into a
particular network to watch a particular program. It would be much more difficult for
individual stations to perform the market research needed to optimize program schedules.
31 The ten largest multi-system operators serve almost 60 million of the approximately 72
million households receiving basic cable service (83.3%); the five largest serve 71.2%, and
the two largest serve 45.2%. (National Cable & Telecommunications website,
[], citing data from A.C. Nielsen Media Research and Kagan
World Media, Cable TV Investor.)
32 See, e.g.,R. Thomas Umstead, “Indie Nets Face Barren Landscape: New Programming
Ventures Find It’s Hard to Stake a Digital Claim Without Corporate Ties,” Multichannel
News, 6/9/2003. “Operators are seeking steep ownership stakes in new programming
services in return for carriage.”

Data on cable network television household penetration from 1994 through 200133
show that the only new networks able to gain rapid and high levels of household
penetration during that period were owned in whole or in part by one of the major
program distributors or MSOs.
All four of these factors are at play currently in the market for cable
programming. Kagan World Media, which follows the cable industry very closely
and publishes a number of annual cable reference books, has described this situation
in several recent publications:
The environment for launching a cable network has changed dramatically over
the last decade: With cash-for-carriage fees and periods with no license fee now
common, a daunting economic equation has developed for cable network start-
ups. That’s why the majority of new networks launched have been owned by
major media companies and even well-heeled international players like the BBC
and National Geographic have chosen joint ventures rather than go it alone. It’s
simply too expensive and risky for many companies to join the long list of nets
seeking carriage, and the odds for success get better if a partner with leverage34
can team up with a powerful backer such as Discovery.
For independents, there are a number of challenges. First, they don’t have the
built-in-ad-sales and affiliate-relations infrastructure giants like Discovery
Networks and MTV Networks that enable them to launch new channels at low
cost. The media giants are also at an advantage in the programming-cost
department – they use “recycled” programming already aired on their core
networks, which results in low incremental costs. That’s why a number of the
networks listed among upcoming/pending/past launches have fallen by the
wayside. They just haven’t been able to raise the capital to make it through the35
long haul.
A network launching from scratch, without a big infrastructure in place for
administration and sales, could easily burn through more than $100 mil. to get
to breakeven, versus less than $25 mil. for a Discovery spinoff. Additionally, an
independently owned network would have a hard time getting the attention of
cable and satellite operators, as it wouldn’t have the brand-name panache of a
Discovery or MTV Networks...[T]he economics [is] so different between analog
and digital networks and between independent networks and those owned by36
media conglomerates....
It is noteworthy that this consolidation results in economies of scale and scope that
lower costs, which benefit consumers to the extent those reductions are passed
through as lower consumer rates, but at least partially at the expense of program

33 “Cable Network TV Household Penetration,” Kagan World Media, Economics of Basic
Cable Networks 2003, September 2002, at pp. 36-37.
34 Kagan World Media, Economics of Basic Cable Networks 2003, September 2002, at p.


35 Id., at pp. 12-13.
36 Kagan Media World, Benchmarking Cable Network Financial Statistics 2002, July 2002,
at p. 5.

diversity, as a major source of costs savings for Discovery and its counterparts is to
recycle old programming on their new cable channels.
One observer has raised another market-driven dynamic – to bypass existing
bottlenecks to technological advancement – that may at least be motivating the
proposed News Corp.-DirecTV merger. In his testimony at the June 18, 2003 Senate
Judiciary Committee hearing, Scott Cleland, CEO of Precursor Group, stated that the
combination of News Corp.’s content with DirecTV’s DBS distribution platform
would allow News Corp. to become “a fully digital distributor, legally bypassing the
snail-pace, snake-bit, all-cost-little-gain, migration of over-the-air broadcast analog
businesses to HDTV.” He also stated the merger would allow “more of Fox’s
programming to be transmitted over the more secure and controlled DBS distribution
platform and less over the over-the-air broadcast platform, which is increasingly
vulnerable to piracy from Napster-like file-sharing and to pricing pressure from ad-
zapping via TIVO-like technology.”
Consolidation Also Could Be Used for Strategic Purposes
That Harm Consumers
In addition to these incentives to consolidate to exploit production and
marketing economies and efficiencies that may benefit consumers, individual
companies may have incentives to expand vertically or horizontally to extend market
power in a fashion that does not benefit, and indeed may harm, consumers. These
opportunities typically arise when a company has some market power that conveys
to it the ability to dictate the terms, conditions, and/or rates at which it either buys or
sells (or refuses to buy or sell) its services or products because it enjoys a superior
market position.37 One potential source of market power is control over highly
sought after programming. Another potential source of market power is control over
scarce spectrum, such as broadcast spectrum.
When a company possesses market power that yields a superior negotiating
position, that does not, by itself, mean that consumers will be harmed. For example,
a company with popular programming might elect to follow a strategy of making its
programming available at a low price in order to garner as wide an audience as
possible and using the strength from its programming to enforce low retail rates. One
might imagine, for example, the producer of children’s movies setting and enforcing
such low rates for video cassettes.
There are situations, however, where a company has both the incentive and the
ability to use its market power in a monopolistic fashion that harms consumers. For
example, if a company has the ability to increase short term or long term profits by
tying the sales of its highly-demanded programming to purchases of its lightly-
demanded programming, and in so doing consumers do not get their preferred

37 For example, in his testimony before the Senate Judiciary Committee Antitrust
Subcommittee, Scott Cleland, CEO of the Precursor Group, identified one motivation for
News Corp.’s proposed merger with DirecTV to be “Un-leveraged to Leveraged
Distribution: NewsCorp understands that negotiating leverage increases dramatically with
other programmers, if you are also a major distributor.”

programming or are forced to pay excessively for programming, then there will be
consumer harm. There have been a number of allegations that some of the large
integrated media companies are doing this. For example, in his testimony at the May
6, 2003 Senate Commerce Committee hearing, James M. Gleason, chairman of the
American Cable Association, stated:
Obviously, some of our customers want ESPN or Fox Sports. But ABC-Disney
and Fox/News Corp. will not let us buy ESPN or Fox Sports. Oftentimes, in
order to get the local ABC or Fox affiliate, Disney and Fox will force us through
retransmission consent to take and pay for other channels we know our
customers don’t want. This abuse of retransmission consent goes further – in
order to get consent to carry a local broadcast station in one market, our members
are forced to carry Disney or Fox’s satellite programming in other markets,
where Disney or Fox do not even own the broadcast station. For example, is it
really in the public interest for all of my customers to pay for recycled soap
operas, a programming for which most of them have absolutely no interest, just
so some of my customers can be permitted to watch the ABC affiliate? Adding
to the absurdity of the situation, these conditions for carriage often outlive the
terms of the retransmission consent period for the local broadcast station by
many years. As a result, these mandated conditions clog a cable system’s
channel capacity ... while denying that capacity to independent ... programmers.
The end result is ... increased[d] costs and decrease[d] choice for consumers. It
gets worse. One solution might be to offer the expensive services in tiers or a la
carte. This would allow consumers to choose whether or not they wish to pay for
the expensive services. But all of the [integrated] programming companies force
their programming onto the lowest, basic levels of service, making our
companies and customers pay for all of their programming whether they want it
or not.
This reference to the retransmission consent requirements provides an example
of how consolidation can affect the impact of existing rules on firms’ negotiating
positions and acquisition decisions. In the early 1990s, in response to the general
concerns of all local broadcast stations that they should be able to control how their
programming is used by other parties, and to the specific concerns of the smaller
broadcast stations that they would be placed at a competitive disadvantage if the local
cable monopoly did not carry their signals, Congress enacted copyright and cable
statutes allowing each broadcast station to choose between allowing local cable
systems within its service area to carry its signal, with no compensation, under a
“must carry” obligation, and negotiating with the local cable systems compensation38
for carrying its signal, under a “retransmission consent” agreement. If no agreement
is reached, the cable system is not allowed to carry the broadcaster’s signal.
The retransmission consent requirement subsequently was extended to direct
broadcast satellite companies. The law denies the FCC the ability to regulate the
terms, conditions, and agreements of those retransmission consent agreements,
beyond a good faith negotiations standard and a prohibition on providing any pipeline
exclusive retransmission consent. Thus, there are no restrictions against a vertically
integrated company with broadcast stations and cable networks requiring local cable

38 The Cable Television Consumer Protection and Competition Act of 1992, Pub. L. No.

102-385, 106 Stat. 1460, codified at 47 U.S.C. § 521 et seq.

companies that seek to retransmit the company’s local broadcast signals also to carry
the company’s cable networks. Subsequent vertical integration has rewarded local
broadcast station owners with the ability to tie retransmission consent to carriage of
multiple cable channels owned by their parent company, a result that probably had
not been contemplated when the rules were established.
There is another powerful market dynamic driving consolidation. Mergers often
upset existing equilibrium among market participants and therefore foster additional
mergers. Thus, for example, in his testimony at the June 18, 2003 Senate Judiciary
Committee hearing, Robert Miron, chairman and CEO of Advance/Newhouse
Communications, stated that the relative equilibrium between the large programming
conglomerates and the large MSOs would be broken if News Corp. were to acquire
DirecTV, since it would give News Corp. unique access to a multi-channel pipeline
to end users that it could use as leverage when negotiating with MSOs. That is, it
could take a very tough stance when negotiating the terms, conditions, and rates at
which it would make its popular cable or broadcast network programming available
to MSOs, knowing that it could always provide the programming to end users over
its satellite system. According to Mr. Miron, this market advantage likely would
trigger an attempt by another large programming conglomerate to purchase the only
other DBS system, EchoStar, in order to obtain the same market leverage. More
generically, mergers create the need for other companies to respond in kind in order
to protect their negotiating leverage. It is therefore possible that the effect of an
individual merger on consumers, in isolation, may be positive or neutral, but that
merger could start a chain reaction of mergers that would, in aggregate, harm
consumers. No firm wants to be party to the merger that breaks the camel’s back and
elicits government rejection, however, and therefore each firm will have the incentive
to respond quickly to other mergers.
Some Fundamental Questions Remain Unanswered
Although there has been a lot of heated debate over the impact of media
consolidation, many fundamental factual and analytical questions about the dynamics
in the video programming industry remain unanswered.
!Most observers acknowledge that the high profits from successful
programs are needed to fund other programs, since much
programming does not generate enough revenues to cover all costs.
No systematic analysis has been performed, however, to determine
whether a consolidated market structure is required to generate the
cash flow needed to produce additional popular and innovative
programming. Similarly, no systematic analysis has been performed
to determine the extent that the extremely high economic rents that
currently accrue to key talent behind popular programming fosters
the production of additional popular and innovative programming –
or whether a consolidated market structure fosters those high
economic rents.

!Prices for basic cable service continue to increase at a significantly
faster rate than inflation,39 but to date no systematic analysis has
been conducted to determine the extent to which those price
increases are attributable to heavy infrastructure investment and real
increases in programming costs that have been attenuated by
efficiencies gained from consolidation vs. the extent they are
attributable to vertically integrated cable networks with successful
programming and large multi-system operators of local cable system
monopolies using their market power to maintain above-cost rates.
!In the debate about whether to allow broadcast networks to own and
operate local television stations whose signals reach more than 35
percent of total U.S. television households, one still unanswered
underlying economic question of interest to policy makers is why
ownership of these additional local stations would be more valuable
to the acquiring broadcast network than they are to the current
owner. (If they weren’t more valuable to the network, no sale would
take place.) One possibility is that the network would be able to
exploit scale or scope economies that would not be available to the
current owner and these economies would be passed through to end
users, perhaps by providing additional cash for the network to use to
bid successfully on sports programming highly valued by viewers.
Another possibility is that, unlike the current owner, the broadcast
network also own cable networks, and when negotiating a
retransmission consent agreement with a local cable system it could
not only demand a certain price for retransmission of its local
broadcast signal but also could insist that the local cable system
carry all of its cable networks and that the parent MSO carry all of
its cable networks in markets where it did not have a local broadcast
station. If the programming on these tied cable networks are less
highly demanded by the MSO’s subscribers than the programming
that would otherwise be carried, the broadcaster’s acquisition of the
independent broadcast station would harm consumers.
!Both the broadcast networks that sought to increase the 35 percent
cap and the local television stations owners who opposed lifting the
cap agreed that local television stations are highly profitable.40
Viacom President Mel Karmazin argued that broadcast networks are
not as profitable as stations and, as a result, the networks need to

39 According to the FCC’s Report on Cable Industry Prices released July 8, 2003, the
average monthly rate for cable service increased by 8.2% over the 12-month period ending
July 1, 2002. During that same period, the consumer price index increased just 1.5%.
40 For example, at the May 13, 2003 Senate Commerce Committee Hearing on Media
Ownership, Mel Karmazin, president and chief operating officer of Viacom Inc., and Jim
Goodmon, president and chief executive officer of Capitol Broadcasting Company, agreed
that local television stations are highly profitable, with profits in the range of 30 to 50
percent. They did not specify, however, whether local television stations in small markets
are profitable.

own additional local stations that generate profits in order to be able
to bid successfully against cable networks for sports events.
Without the additional funding from profitable owned and operated
stations, he claimed that sports events would end up going by default
to cable networks and thus not be available to households that
cannot afford to pay for their television programming. The local
affiliates and their broadcast networks share the need for good
network programming and the desire for the network to be able to
bid successfully. Yet the affiliates oppose allowing the network to
acquire additional local stations that might help the broadcast
networks accomplish this. An alternate way for the broadcast
networks to obtain the funds needed to compete for sports
programming is to reduce the compensation they currently pay to
their affiliates (or, in the extreme, to require the affiliates to pay
compensation to them). Affiliates oppose this as well. Given that
affiliates do have options available to them, albeit distasteful ones,
some observers have questions whether there is a public interest
reason – prospects of greater diversity, more local programming, or
lower rates for consumers – for government intervention into the
network-affiliate relationship.
Public Policy Issues
The various rules in place today were adopted to foster diversity of voices,
localism, and competition in an environment of technology-constrained availability
of broadcast spectrum. Primarily, they impose horizontal ownership limits on
entities. The one set of federal rules that explicitly addressed vertical integration –
the financial interest and syndication rules – was repealed in the early 1990s.41
The continued high profitability of local broadcast stations42 and the prices local43
broadcast stations fetch in the marketplace, indicate that broadcast television
spectrum remains scarce, and that those entities that control it (especially in large
markets) enjoy market power, even as technological alternatives now exist that
provide consumers with many new options. At the same time, there are strong
market dynamics pushing toward consolidation – both vertical and horizontal
integration. Some of those forces involve drives toward efficiency that should

41 Evaluation of the Syndication and Financial Interest Rules, 8 FCC Rcd 3282 (1993) and
Review of the Syndication and Financial Interest Rules, 10 FCC Rcd 12165 ¶ 21 (1995).
42 Data from the National Association of Broadcasters, Television Financial Report, 2001
edition, at pp. 2-3, show the profits and cash flow of commercial television stations were
positive for every market size in 2000, and were especially robust for stations in large
markets. This is consistent with the testimony of Mel Karmazin, president and CEO of
Viacom, Inc., and Jim Goodmon, president and CEO of Capital Broadcasting Company,
Inc., at the May 13, 2003 Senate Commerce Committee hearing, that local stations in
medium and large markets enjoy profits in the range of 20 to 50 percent.
43 See, for example, John M. Higgins, “Big Four Look Small in the Margin Column,”
Broadcasting & Cable, June 20, 2003, at pp. 1, 3.

benefit consumers, some involve drives toward maximum exploitation of pockets of
market power that would harm consumers.
Given these market forces and the relative absence of vertical ownership
restrictions or ownership restrictions across the old (broadcast) and new (cable and
satellite) technologies, a few big media players have come to control a significant
percentage of both programming and distribution. A question now facing policy
makers is: Could or should new rules be formulated that would better safeguard the
goals of diversity of voices, localism, and competition?
Consolidation in the video programming industry unquestionably has generated
one type of diversity – in the scope of proposals for government action (or inaction)
in the video programming market. The debate focused initially on structural rules
because those dominate under the current regulatory scheme and have been the focus
of scrutiny in the FCC’s biennial review. But a number of parties have proposed the
imposition of conduct rules. And some parties propose leaving things entirely to the
Station Ownership Rules
Ownership rules can cover a range of parameters depending on the policy goal
they are intended to foster. If the focus is on diversity of voices, ownership rules are
most likely to focus on maintaining the number of independent stations or voices.
If the focus is on competition, ownership rules are most likely to focus on some
measure of the market share or market power of entities. If the focus is on localism,
ownership rules are most likely to focus on some measure of ownership ties to the
local community. Of course, the number of stations owned by an entity also will
affect competition, and an entity that captures the largest share of the market will in
effect have the loudest voice in the market. The existing FCC rules sometimes
incorporate two or more parameters in a single rule. For example, the local television
multiple ownership rules restrict the total number of television stations an entity can
own in a market and allows only one of the stations to be among the top four in
ratings at time of purchase.
The existing local television ownership, local radio ownership, and cross
ownership rules address horizontal markets.44 Because they involve a mechanical
counting of television stations, radio stations, or newspapers (except for the “only
one in the top four” requirement in the television ownership rule), they do not give
weight to the size of the firm under scrutiny or to any market power it may have in
that market or in upstream or downstream markets.
During the most recent FCC biennial review process, Chairman Michael Powell
stated that he wanted to develop a “diversity index,” in some way analogous to the
Herfindahl-Hirschmann Index employed at the Department of Justice and Federal
Trade Commission to make preliminary judgments about whether proposed mergers

44 The national television ownership rule has a vertical element to it, in that its intent is to
limit entities’ ownership of local broadcast stations in order to limit the leverage of
broadcast television network when negotiating with non-owned affiliate stations.

required additional antitrust scrutiny, that could be applied to individual media
mergers.45 Although there was no public articulation of the diversity index, it was
suggested that the diversity index would take into account, for example, whether the
acquiring entity were an independent company or a vertically integrated media giant
with cable network and other programming interests. Critics of such an approach
claimed that any measure of diversity was inherently subjective and application of
a diversity index analysis to proposed mergers would increase uncertainty and
discourage mergers that might be beneficial. Ultimately, the FCC chose only to use
a diversity index for setting the restrictions in the rules, and explicitly refused to
apply its diversity index to individual mergers. Moreover, its diversity index did not
take into account the market share or market power of individual media outlets, but
rather gave the same weight to each television station, the same weight to each
newspaper, etc.
The only FCC rule designed, at least in part, to address the issue of concentrated
ownership of both video programming and distribution is the National Television
Ownership Rule, but that rule only addresses broadcast television, not cable or
satellite television.
Programming Ownership Rules
Although there are more pipelines into the home and more distribution networks
today than in the past, a few big media players control a large portion of both
programming and distribution. This has raised concerns in some quarters that such
vertical consolidation could threaten the diversity of voices, localism, or competition.
The Coalition for Program Diversity, an umbrella organization that includes Wolf
Films, Sony, Carsey-Werner-Mandalbach, the Directors Guild of America, the Screen
Actors Guild, and AFTRA, has proposed that the FCC adopt a rule that would require
the four major broadcast television networks to purchase 25 percent of their prime-
time programming from independent producers, which would include any studio or
production company not affiliated with a major network. The intent of the proposed
rule, which is derivative of the FCC’s old financial interest rule, is to increase
program diversity.
The Coalition members, representing writers, producers, and other creative
talent, claim that – with consolidation – decisions about airing programs are made by
a single organization or person, and once a decision is made not to include a show
in the network schedule there is a significantly lessened ability to shop the show
around to other networks or pipelines. They allege that this has reduced the amount
of innovative programming aired and fostered copy-cat programming.
Programming ownership rules do not directly address the three U.S.
telecommunications policy goals of diversity of voices, localism, and competition.
Diversity of voices has traditionally referred to news and informational voices, rather
than entertainment voices. Television broadcasters – networks and stations alike –
have always produced their own news programming. For the most part, that function

45 See Bill McConnell, “The Cap as Hot Potato,” Broadcasting & Cable, March 10, 2003,
at p. 1.

has not been left to independent producers. The networks do not produce local news
or entertainment programs and thus network vs. independent ownership of
production studios does not affect localism. Although repeal of the fin-syn rules
opened up the gates for significant vertical integration and the loss of many
independent program producers, to the extent consolidation was driven by market
forces to reduce risk and gain marketing efficiencies consumers have arguably
benefitted. The majority of complaints about abuse of market power – as opposed
to complaints about relative negotiating power – involve tie-ins made possible by
consolidation that crosses technologies, from broadcast to cable or satellite, or vice
versa. By contrast, the programming ownership rules proposed to date all are limited
to broadcast programming.
From a public policy perspective, an examination of programming ownership
rules might hinge on whether it can be demonstrated that vertical integration
somehow gives the consolidated entity the ability to command higher profits from
its successful programming but does not foster the production of more, or more
innovative (and, hence, risky) programming for consumers – and whether it also can
be demonstrated that such additional programming would be forthcoming with
programming ownership restrictions. Neither the FCC nor any other party has
performed such analysis. Nor has anybody performed analysis to determine how
consolidation across the broadcast, cable, and satellite technologies will effect the
relationship between high profits (and economic rents) for successful programming
and the supply and diversity of programming.
Non-Discriminatory Access to Programming
Most of the programming provided by the large vertically integrated cable
networks is distributed to cable systems via satellite. This programming is known
as “satellite cable programming” or (if the original programming is from a distant
broadcast station, such as the Turner “Superstation”) “satellite broadcast
programming.” The FCC has adopted program access rules designed to increase
access to video programming for all providers of multichannel video programming
by prohibiting unfair or discriminatory practices in the sale of satellite cable
programming and satellite broadcast programming distributed by a cable network
programmer (a cable network) that is vertically integrated with a cable system. The
rules prohibit unfair and discriminatory practices in the sale of satellite cable and
satellite broadcast programming and prohibit or limit the types of exclusive
programming contracts that may be entered into between cable operators and
vertically-integrated programming vendors.
The FCC program access rules do not cover all situations. For example, they
do not cover cable or broadcast programming that is distributed over terrestrial
wireline (landline) facilities rather than satellite. Also, they do not apply to cable
networks that are vertically integrated but where that integration is with a satellite
system serving end users rather than a cable system serving end users.46 Nor do they

46 In its application for approval to merge with DirecTV, News Corp., which is a
large programmer with many cable networks, agreed to abide by these rules, even

apply to local broadcast signals, which are subject to the retransmission consent
Where program access rules are in effect, they eliminate one potential harmful
impact of vertical integration – a vertically integrated company with “must have”
programming refusing to make that programming available to companies that
compete with its multi-channel program distribution (cable or satellite) unit, or
making that programming available in a discriminatory fashion at inferior terms,
conditions, or rates.
But program access rules do not protect against the vertically integrated
company making its “must have” programming available at very high rates that raise
the costs to both its own satellite or cable system and also to all other satellite and
cable systems. These high rates are a “wash” to the vertically integrated company –
the higher costs to its satellite or cable system are matched dollar for dollar by the
higher revenues for its cable network. But the higher rates represent real costs for the
competitive satellite or cable system. This can raise rivals’ costs in an
anticompetitive fashion.47
Equally important for consumer welfare, program access requirements do not
restrict vertically integrated cable networks with market power from raising rates to
all cable and satellite systems, thereby forcing them to raise rates to consumers. To
the extent consolidation strengthens firms’ market power and ability to raise prices,
program access rules do not protect against those higher rates. But any harm to
consumers will be ameliorated to the extent these higher rates generate revenues that
are used by the integrated entities to produce more, and more innovative,
Retransmission Consent
The bulk of the complaints raised by small competitors against large vertically
integrated video companies have been about the ability of the latter to tie the
purchase of “must have” programming to the purchase of less desirable
programming. As discussed above, one frequently cited mode for accomplishing this
has been the practice of integrated companies with local broadcast stations and cable
networks tying retransmission consent for the broadcast signal to carriage of an entire
suite of cable networks. It has been alleged that these tie-ins sometimes extend
beyond carriage on the local cable system to requiring multi-system operators to carry
the suite of cable networks on all their cable systems and/or for time periods that
extend far beyond the period covered by the retransmission consent. Such tie ins can

46 (...continued)
though they formally apply only to cable networks affiliated with cable systems, not
those affiliated with satellite systems.
47 See, e.g., William P. Rogerson, “An Economic Analysis of the Competitive Effects of
the Takeover of DirecTV by News Corp.,” filed in FCC Docket MB Docket No. 03-124, “In
the Matter of: General Motors Corporation, Hughes Electronics Corporation, and the News
Corporation Limited Application to Transfer Control of FCC Authorizations and Licenses
Held by Hughes Electronic Corporation to the News Corporation Ltd.”

result in cable system operators providing programming their customers do not prefer
or passing through high programming charges to customers.
The current law does not authorize the FCC to regulate the terms, conditions,
and agreements of those retransmission consent agreements, beyond imposing a good
faith negotiations standard and a prohibition on providing any pipeline exclusive
retransmission consent. If Congress chooses to restrict the ability of vertically
integrated local broadcast television licensees from tying retransmission consent to
carriage of non-broadcast programming, it would have to change current law.
A La Carte
Most cable television networks, especially those supported in part by advertising
revenues, are available to subscribers only as part of large packages of networks.
Proposals have been put forward to require local cable systems to make cable
networks available to subscribers on an a la carte basis that allows customers to
choose, and pay for, individual cable networks. These proposals have been
controversial. As discussed below, there could be both benefits and harms to
consumers if an a la carte option were mandatory.
When large media companies with multiple cable networks require local cable
system operators to purchase packages of their cable networks and/or local cable
system operators require subscribers to purchase packages of cable networks, without
an option for the purchase of individual cable networks, some purchasers will be
forced to buy more programming than they want, and perhaps at an outlay that is
greater than they would make if allowed to purchase individual networks.48 Thus,
some purchasers are worse off when forced to purchase packages than they would be
if they could purchase individual channels.
At both the Senate Commerce Committee hearing on June 4, 2003, and the
Senate Judiciary Committee hearing on June 18, 2003, Senators asked panelists their
opinions about a rule that would require large media companies that own multiple
cable networks to make their networks available to local cable systems and satellite
systems on an a la carte basis and that would require the local cable systems and
satellite systems to make those cable networks available to consumers on an a la carte
basis. The large media companies and local cable system operators could continue
to offer packages of cable networks, but would have to make the a la carte option
available. The purpose of such a rule would be twofold: to allow cable and satellite
systems to carry the programming that they think their customers prefer, without
being forced to carry less preferred programming, and to allow end user customers
to choose the programming that they prefer and not have to pay for other
Proponents of such a rule have expressed concern that absent such a rule the
large media companies could use their market power from control over “must have”

48 For most consumers, the local cable system is owned by one of the large multi-system
operators (MSOs) and the packaging decision is made at the MSO level, not at the local

programming to force cable and satellite systems to carry less popular affiliated
programming at the expense of both consumer preferences and independent
programmers. They also have expressed concern that absent such a rule consumers,
especially low income consumers, are forced to pay much higher prices for basic
cable service because the basic service package includes high-cost sports
programming that they do not care to receive. An a la carte requirement could
restrict large media companies from imposing tie-in arrangements on cable and
satellite systems (by not allowing the media companies to condition access to one
cable network on the carriage of other cable networks) and also might allow end
users to select only the programming they prefer.49
An a la carte rule also might constrain the rents that athletes, performers, and
producers earn – and that raise the costs (and prices) of such programming – if
substantial numbers of subscribers with low intensities of demand for the sports or
entertainment programming choose a la carte options that do not include the high-
cost programming. As described earlier, sports programming is highly valued by a
small portion of cable subscribers, but currently such programming often is funded
by imposing higher rates on all subscribers to enhanced basic service. If that
programming had to be supported only by subscribers with high intensity of demand,
either those subscribers would have to pay more, or the talent producing that
programming would have to accept lower rents.
But an a la carte requirement also could have some effects that would harm
consumers. Packaged service offerings make it less risky for a cable or satellite
system to introduce a new cable network. With a package, the new cable network
does not sink or swim based on its immediate audience reception. Rather, the system
owner can allow the new cable network to acquire an audience by having viewers
accidentally tune in to the network. By contrast, under a la carte, viewers must make
the up-front decision to pay for a new cable network, perhaps without having had the
opportunity to see any of its programming in advance.
Similarly, with a packaged offering, the local cable system operator can
efficiently market new networks by advertising the new networks on their existing
networks. This marketing strategy is less efficient if, as in an a la carte environment,
many of the viewers receiving the marketing messages on the existing networks are
not subscribed to the new network and therefore cannot easily check out that network
in response to the marketing message.
Also, the availability of a large package of networks will increase overall
audience size because at any particular time viewers who pay a la carte may not have
any programming they choose to view on the channels they have paid for and
therefore might turn off the television altogether, but if they had access to the basic

49 Of course, local cable system operators would select an a la carte option from the large
media companies, and subscribers would select an a la carte option from their local cable
system operators, only if the price of the a la carte option relative to the price of the
enhanced basic service package option was favorable. For example, if the per network a la
carte price were $10.00 per month and the price for an 80-channel enhanced basic service
package were $35.00, then only those customers with very narrow video tastes that are
satisfied by three networks would select the a la carte option.

enhanced service package they might find programming they enjoy when surfing all
the channels offered in the package.
As a result of these lost efficiencies, it is possible that the sum of the individual
prices for each network that a typical household subscribes to in an a la carte
environment could be higher than the single price for a basic package. At the same
time, the choices available to consumers could be reduced both because they would
only have available to them the networks they paid for and because there are likely
to be fewer new networks because of the higher risk associated with an network
launch when many subscribers make a la carte network purchases.
The extent to which these potentially harmful effects of an a la carte requirement
will actually occur will depend on the proportion of subscribers that choose the a la
carte option vs. the enhanced basic service package. If the a la carte option is chosen
only by a very small portion of subscribers with narrow video tastes that can be met
by a limited number of networks, it may only create a very weak disincentive for new
network launches. But if the a la carte option is widely selected, the disincentive
could be substantial.
Some Nielsen Media Research data presented by the Television Bureau of
Advertising50 indirectly shed light on this. Nielsen asked the question, “As the
number of channels available to a TV household increases, as it has in recent years,
what is the effect on the number of channels actually viewed?” It found that “... after
reaching the 50-channel level, additional channels produce no significant increase in
the number of viewed channels. The viewing remains in the 15- to 19-channel range.
Even the 121+ channel group averages only 17.9 viewed channels out of an average
of 195 available channels.” These data are only for a single week of viewing. It is
possible that over a longer period of time subscribers view far more channels. But
the data suggest that many subscribers do not seek the great diversity of networks
provided by enhanced basic service offerings and, if a la carte pricing were not set
in a way that made the package preferable even when subscribers only sought a
handful of networks, there could be substantial migration to a la carte purchasing,
which could discourage new network launches.
Programming Requirements
At the June 4, 2003 Senate Commerce Committee hearing, in a free-wheeling
discussion of how to ensure localism and diversity of voices, one approach
mentioned in passing was to return to the old requirement, dating from the 1970s, for
each station to provide some minimum amount of local programming (perhaps more
narrowly couched as local news and informational programming). This approach has
the advantage of ensuring a certain level and diversity of such programming. It
addresses concerns about the many broadcast television stations that are no longer

50 “TV Basics: Channels – Received vs. Viewed,” Television Bureau of Advertising,
[ ht t p: / / www.t vb.or g/ r cent r al / medi a t r endst r ack/ t vba s i cs/ 10_Channel s -RecV sV i e wed.asp] ,
citing Nielsen Media Research, National People Meter Sample, Aug. 20-26, 2001, viewed
on July 15, 2003.

locally owned and operated, and about stations getting feeds from distant locations
that purport to be local but are not.51
It is not clear what the impact of such a rule would have in the marketplace. On
one hand, in large and middle-sized markets, local broadcast television news
programming tends to be very profitable and will be offered with or without the rule.
On the other hand, in small markets, where local stations may not have the financial
wherewithal to produce local news programming, such a requirement could drive
stations out of business or could foster further consolidation with a newspaper or
with a larger television group, which could have the consequence of lessening the
diversity of voices.
Fairness Doctrine
Some observers also have suggested that the Fairness Doctrine be re-imposed.
That requirement, which was repealed in the mid-1980s,52 required broadcasters to
cover issues of public importance and also to provide “balanced” coverage of such
issues. The Commission repealed it because it tended to have an unintended effect.
In order to avoid the costs and bad publicity associated with a Fairness Doctrine
complaint, broadcasters simply shied away from controversial topics when covering
issues of public importance. Thus, rather than fostering public debate, the rule
tended to impede it.
The dynamic forces at play today in the video programming industry as a result
of technological change will continue to play out and foster further market
consolidation. That consolidation may or may not prove to be consistent with the
U.S. telecommunications policy goals of competition, diversity, and localism. As a
result, Congress is likely to continue to face important policy issues relating to the
video programming industry.

51 This concern was raised during the Senate Commerce Committee markup of S. 1264, the
FCC Reauthorization Act of 2003, on June 26, 2003.
52 Syracuse Peace Council,2 FCC Rcd 5043. This decision was based in large part on a
Commission study, known as the “1985 Fairness Report, of the impact of the fairness
doctrine on broadcast practices. See 102 FCC 2d 145 (1985).