Delivering for Television Viewers: Retransmission Consentand the US
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ANN EXURE A NERA Economic Consulting Report, "Delivering for Television Viewers: Retransmission Consent and the US Market for Video Content'. NERA ECONOMIC CONSULTING Delivering for Television Viewers: Retransmission Consent and the U.S. Market for Video Content Jeffrey A. Eisenach, Ph.D. July 2014 About the Author Dr. Eisenach is a Senior Vice President and Co-Chair of NERA's Communications, Media, and Internet Practice. He is also an Adjunct Professor at George Mason University Law School, where he teaches Regulated Industries, and a Visiting Scholar at the American Enterprise Institute, where he focuses on policies affecting the infoimation technology sector, innovation, and entrepreneurship. Previously, Dr. Eisenach served in senior policy positions at the US Federal Trade Commission and the White House Office of Management and Budget, and on the faculties of Harvard University's Kennedy School of Government and Virginia Polytechnic Institute and State University. Dr. Eisenach's consulting practice focuses on economic analysis of competition, regulatory, and consumer protection issues. He has submitted expert reports and testified in litigation matters, as well as in regulatory proceedings before the Federal Communications Commission, the Federal Trade Commission, several state public utility commissions, and regulatory bodies in Australia, Canada, and South America. He has also testified before the US Congress on multiple occasions. In 2006 he served as an expert witness for the US Department of Justice in ACLU v. Gonzalez, the landmark litigation on the constitutionality of the Child Online Protection Act. Dr. Eisenach writes extensively on a wide range of issues, including industrial organization, communications policy and the Internet, government regulations, labor economics, and public finance. He is the author or co-author of a number of books, including The Digital Economy Fact Book, The Telecom Revolution: An American Opportunity, and America's Fiscal Future: Controlling the Federal Deficit in the 1990s. In addition, he has edited or co-edited five books, including Communications Deregulation and FCC Reform: What Comes Next? and Competition, Innovation and the Microsoft Monopoly: Antitrust in the Digital Marketplace. His articles have appeared in a range of scholarly journals as well as in such popular outlets as Forbes, Investors Business Daily, The Wall Street Journal, The Washington Post, and The Washington Times. Dr. Eisenach is grateful to Mr. Dirk Van Leeuwen and Mr. Carey Ransone, both of NERA, for assistance in preparing this report, and to ITV plc, Free TV Australia and Verband Privater Rundfimk und Telemedien e.V. (VPRT) for sponsorship. FreelV Association of Commercial Broadcasters and Audiovisual Services Contents I. INTRODUCTION 1 THE STATUTORY BASIS FOR RETRANSMISSION CONSENT 3 A. Cable Carriage of Broadcast Content Before 1992 3 B. The 1992 Cable Act and Its Implementation 4 III. THE ECONOMICS OF RETRANSMISSION CONSENT 7 A. Economies of Scale in TV Broadcasting 7 B. Video Distribution as a Multi-Sided Market 8 C. Retransmission Consent as a Bargaining Market 8 IV. THE IMPACT OF RETRANSMISSION CONSENT IN THE U.S. VIDEO MARKET 10 A. Structure of the U.S. Video Content and Distribution Market 10 B. Trends in Retransmission Consent Compensation 15 C. Economic Impact of Retransmission Consent 19 D. International Benchmarks 36 V. CRITICISMS OF RETRANSMISSION CONSENT BY MVPD OPERATORS 39 VI. CONCLUSION 43 NERA ECONOMIC CONSULTING DELIVERING FOR TELEVISION VIEWERS: RETRANSMISSION CONSENT AND THE U.S. MARKET FOR VIDEO CONTENT Executive Summary Video content markets around the world are undergoing a period of profound change with an increasing number of delivery platforms fragmenting markets and challenging free-to-air broadcasting models. In the United States, the retransmission consent scheme recognizes the role broadcasters' play in investing in and delivering high-quality services to viewers and enables them to be compensated for delivering that content to competing platforms. Retransmission consent is the system under which over-the-air television broadcasters can either opt for compulsory carriage of their channels by pay TV distributors' or negotiate for compensation from pay TV distributors in return for permission to carry their signals. Prior to 1992, U.S. broadcasters had no such right: Cable television companies were allowed to carry broadcast signals for free. In passing the Cable Television Consumer Protection Act of 1992, however, Congress specifically recognized that allowing broadcasters to obtain compensation for their signals was both fair and economically efficient. In particular, Congress concluded that the inability of broadcasters to be compensated for their signals had created: a distortion in the video marketplace which threatens the future of over-the-air broadcasting.... [by supporting] a system under which broadcasters in effect subsidize the establishment of their chief competitors.2 For the first decade after retransmission consent was implemented, cable TV operators refused to pay cash compensation to broadcasters. But with the entry of satellite distributors and, later, telephone companies into TV distribution, broadcasters were successful in winning cash payments from distributors as competition in the TV distribution market increased and market power was eroded. In 2013, broadcasters received approximately $3.3 billion in retransmission consent payments. To be clear, this sum is exclusively for payments to broadcasters for free-to-air content, and does not include compensation paid to cable programming networks. This study examines the effects of retransmission consent on the U.S. market for video content. It concludes that the system has played a significant role in revitalizing the over-the-air television sector and contributed to what many in the U.S. are referring to as a "golden age of television." Specifically, as detailed herein: • Retransmission consent compensation accounted for nearly 15 percent of total broadcast television revenue in 2013, and is projected to account for 25 percent by 2019. o Retransmission consent is crucial to the economic viability of television broadcasters: it has been estimated that the elimination of retransmission consent would cut the average profit margins of As discussed detail below, in the U.S., the term "pay TV distributors" refers to firms that own cable, satellite or telephone-based infrastructure used to distribute TV programming to paying subscribers. 2 See Cable Television Consumer Protection and Competition Act of 1992 (S. Rep. No. 102-92, 102d Cong., 1st Sess., 1991; 1992 U.S.C.C.A.N. 1133) (hereafter Senate Report) at 1168. broadcast television stations by nearly 80 percent, from 14.8 percent to 3.1 percent, and ultimately force many broadcasters to exit the industry. As TV advertising revenues continue to come under pressure from new media, retransmission consent is increasingly important. • Retransmission consent compensation accounts for more than one-third of all spending on broadcast television programming, allowing broadcasters to increase program quality and compete more effectively with pay TV networks for high quality programming, including winning back widely viewed sporting events such as NFL football games. It has also resulted in a significant increase in spending on (and number of hours of) news and other public interest programming. As Fox Networks explained in a regulatory submission to the Federal Communications Commission (FCC): Today, the broadcast business is facing new challenges and it is apparent that without creating a second revenue stream, broadcasters will no longer be able to acquire major sports events and the popular entertainment programming that cons wners value and to produce local news.3 • Retransmission consent helped to fund the changeover to high-definition programming and the launch of hundreds of new "multi-cast" television services made possible by digital broadcasting technology, as well as the airing of major sports events on free-to-air television. Retransmission fees have provided the financial capability for over-the-air broadcasters to invest in content and innovation and thus compete effectively in a highly competitive market for video content. O As important as retransmission consent is to broadcasters, it accounts for less than three percent of cable operators' revenues and has little or no impact on pay TV prices. • The U.S. television sector has outperformed the rest of the developed world — much of which does not have retransmission consent or any equivalent mechanism — in terms of viewership, revenues and other key metrics, without relying on significant public subsidies. The combination of a minimal impact on pay TV prices together with the consistent delivery of high levels of investment in quality U.S. TV content demonstrates that the retransmission regime has served the public interest. As a result, it continues to command broad bi-partisan support in the U.S. Congress. As the Chairman of the House of Representatives Telecommunications Subcommittee put it in a December 2013 speech: Americans enjoy quality and choice in video programming that is the envy of consumers in the rest of the world.... At the heart of this volume of video programming and choice lies retransmission consent: a recognition of the value of video programming:1 Based on these conclusions and the other results reported herein, the U.S. retransmission consent regime provides a useful