How the Retransmission Fight May Affect MVPD Industry Structure…

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One of the growing hot-button issues of late has been the fight between programming networks (including traditional broadcast networks) and multichannel video programming distributors (“MVPDs”) over retransmission fees.  As we have seen with increasing frequency, as a programming carriage contract expiration deadline looms larger, either the MVPD pays up, or the channel goes dark.  Just this week, DirecTV just dropped a whopping SEVENTEEN channels owned by Viacom—running the full gamut from MTV to Comedy Central—from their lineup when the parties failed to reach a commercial agreement. In retaliation, Viacom pulled much of their coveted programming from free Internet outlets.  Needless to say, consumers were none too pleased with this outcome.

A plausible explanation of the rising tide of retransmission battles is provided in a recent paper by Drs. Michael Katz, Jonathan Orszag and Theresa Sullivan.  These economists characterize the negotiation process as a bargaining game.  In the past, the programmers were dealing mostly with a monopoly cable system, so the market power possessed by the seller (the programmer) was offset by the market power of the buyer (the cable operator), resulting in the classic “bilateral monopoly” scenario.  Today, however, consumers have options, and choose from a list of multiple MVPD providers, including cable systems, satellite systems, and telephone company entrants.  This change in market structure on the buyer side of the negotiation has shifted relative bargaining power in favor of the programmer.  That is, if one MVPD won’t make a deal, then the programmer will just negotiate with another.  Under the threat of losing customers to a rival due to the difference in offered programming, the MVPD has little option but to cave to the demands of the programmer.  Consequently, with multiple MVPDs on the buyer side, the programmer can now more readily exercise its market power and raise its license fees.

Economics has more to say about this trend in retransmission disputes.  Nobel Prize winning economist Oliver Williamson, for example, would label these disputes as a classic “hold-up” situation—that is, a situation where two parties (in this case a MVPD and a programmer) may be able to work most efficiently by cooperating, but refrain from doing so to increase their own profits.  What is the most obvious solution to such hold-up problems?  Vertical integration.  In the case at hand, one sure fire way for MVPDs to avoid a programmer holding it up is for the MVPD to vertically integrate into programming.  In light of the continued trouble over retrans, therefore, we should expect the Comcast/NBCUniversal merger to signal the beginning, and not the end, of MVPD-content mergers.

Of course, some policymakers are wary of increased vertical integration in the MVPD industry, and some of the political interest groups are strongly opposed to such integration.  Such concerns led to the program access regime codified in the 1992 Cable Act and still in force today.  Yet, so long as programmers retain their bargaining advantage, we should expect MVPDs to continue their efforts to attenuate the hold-up problem by vertically integrating into programming.  The goal is not to increase market power, but to check it, and to spare the MVPD customers from having to deal with blackouts.  Accordingly, as we contemplate both new retrains regulation and, ultimately, updating the 1992 Cable Act, we should keep these economic forces in mind.  Vertical integration into programming may have a strong pro-consumer effect, being motivated in large part by a desire to ensure access to content at reasonable prices.

I expect the MVPD industry to pursue multiple strategies to realign the respective bargaining positions vis-à-vis content providers, including various policy interventions.  Of course, whether or not a regulatory or a legislative fix can ever be designed and implemented that solves the problem remains an open question.  Given the gravity of the situation, MVPDs are unlikely to wait on the legislative and regulatory morass of our modern-day Washington.  Market solutions, including vertical integration, represent an effective and relatively quick solution to protect consumers from hold-up situations.  As such, the bigger question remains:  will policymakers let the market work?