TOMORROWVISION Inside: The shocking truth about the policy tweaks that could help promote online video! John Bergmayer April 2012 Public Knowledge Working Paper 00000001 TOMORROWVISION The Elevator Pitch What’s wrong with TV? The shows themselves are better than ever, but the way that viewers watch and pay for TV is stuck in the past. To fix this, policymakers should take steps to increase competition in program distribution. After a few policy changes online video services should be able to compete head-to-head with cable and satellite TV, and this increased competition will allow TV to catch up with the innovation that has marked mobile devices, consumer electronics, and broadband Internet services over the past several years. In particular: ★The FCC should issue a declaratory ruling that multichannel video programming distributors (cable and satellite TV providers, or MVPDs) may not engage in “unfair methods of competition or deceptive acts and practices” with regard to online video distributors (OVDs). ★The FCC should begin a proceeding to determine which regulations ought to apply to OVDs that choose to operate as MVPDs themselves. ★Congress and the FCC should reform the law to allow MVPDs more flexibility in carrying broadcast signals. ★The FCC should open up device competition. This paper will attempt both to diagnose why the TV marketplace is stuck with outdated distribution and business models and to explain why the above policies could be the fix it needs. † of a cable subscription that tethers them to the Introduction living room. Mobile devices and the broadband Internet have totally change the way they “TV is Broken.” The title of a recent blog consume media and communicate in every area post1 by Patrick Rhone says it all. The author is except TV. a tech blogger whose home media setup consists of an old iMac that streams video from the There are many reasons why TV is stuck in a Internet rather than a TV that plays shows from distribution and consumption model that has a cable subscription. The title refers to the not signi!cantly changed in decades—but they reaction his 4-year-old daughter had when she all boil down to a problem of incentives. The used “normal” TVs for the !rst time while on people who work in TV know that growing vacation. She wanted to watch a movie but it numbers of people, especially young people, are would keep getting interrupted by commercials. abandoning traditional TV, and they know that Or, even stranger, she couldn’t !nd anything to the industry has a poor reputation for watch at all. innovation and value. They know that something will have to change eventually. But they are in Rhone and his daughter are part of a new business and nearly any change to the way the cohort that is so annoyed by normal TV that TV industry is structured could potentially hurt they would rather do without it. They are not the bottom line of some combination of studios, the snooty stereotypes, broadcasters, or cable and familiar for years, who would satellite distributors—or all of Nearly any change to the way the tell you that they would them at once. Voluntary “rather sculpt or write in TV industry is structured could change to this industry is [their] journal or read potentially hurt the bottom line. unlikely to come as long as Proust”2 than watch TV. The some of the key players fear odd thing is that while TV they may be the losers under distribution is stuck in the stone age, TV some new regime. The industry is “caught in programs are in a golden age. While there are rights thickets, and slip[s] on muddy rules,”6and many cord-cutters3 (people who have given up as a result, it cannot make the changes it needs on subscription TV) and “cord never-havers”4 to make to stay relevant to the next generation (in John Gilles’s words, “Cable’s Lost of viewers. To continue with these perilous Generation”5), they want to watch the same metaphors, the industry needs to be pushed programs everyone else does. As a matter of fact before it falls o# a cli#. cord-cutters might watch plenty of TV programming—but on Net"ix and Hulu and not The structure of the TV industry did not cable. Or they might own a TV, but only use it just happen by itself. It is the result of decades when it is hooked up to a laptop. They just of public policy and regulation, some of it well- don’t want to deal with the hassle and expense intentioned and some of it the result of rent- 1 seeking, with good e#ects and bad. Whether these regulations are a net plus or a net minus Yesterday’s Business for society, they’re undoubtedly complex, and when some look at the ungainly mass of Models, Today regulations that govern the TV industry they are tempted to just scrap the whole lot of them.7 The TV industry today is a cumbersome but But this would come at a cost. Not only could powerful machine. Since commercial too-rapid deregulation be chaotic (people could, broadcasting’s start in the 1920s, the industry for instance, lose access to programming), but it has evolved, but it has never been disrupted— could simply allow the few companies that new technologies (such as cable, and now the bene!t most from the current system to Internet) are just brought into the fold. They withhold programming from competitors and extend and enhance incumbents but do not take other actions that are illegal today, replace them. perversely making a pro-consumer evolution of the TV marketplace less likely. The TV marketplace is a creature of government, and it is full of policies that are Thus, rather than recommending hasty designed to divvy things up among a few deregulation, hoping that the industry comes to players. Broadcast licenses are scarce its senses, or having faith that some future commodities, !ercely protected by the lucky few “disruption” will make the entire matter that have them. Cable and satellite providers are obsolete, this paper suggests ways that already- subject to rules that prevent them from existing public policies can be tweaked to force supplanting broadcasting, and themselves are the market to evolve. The purpose of these the bene!ciaries of exclusive licenses and policy changes is not to extend and update the franchise agreements that insulate them from existing media regulation paradigm so that it competition. Broadcasters themselves have an continues inde!nitely into the future. Rather, obligation to negotiate with each cable operator this paper proposes policies that are like training that wants to carry their signals. They are also wheels that should eventually come o#. A forbidden from competing in other broadcasters’ properly-structured TV marketplace should not markets by having a cable system in another require constant micromanagement. But we have city carry their signals. Cable operators are to achieve this proper structure !rst. required to share any programming they create with each other, and with satellite operators. These arrangements sometimes put di#erent industry players at odds with each other, but the result is that they are all assured viable, ongoing businesses. Any changes to this system require either regulatory changes, or the cooperation of nearly every player in the TOMORROWVISION 2 industry. The industry as a whole is subject to a Cable, the Disrupted Disrupter “tragedy of the anti-commons,”8 where the existence of multiple rightsholders, each of whom The most signi!cant of the potential rivals to must buy into any voluntary change, prevents broadcast was cable TV. Left alone, unregulated the market from evolving toward a more e$cient cable operators may have developed into a state. Instead of hoping that the players powerful alternative to broadcasting, somehow come to their senses, the rules need to distributing their own content as well as change. improving the quality of over-the-air signals. Instead, cable became an extension of The Original Sin of Media Policy broadcasting, as aggrieved broadcasters prevailed on the FCC and Congress to pass a This system began with a series of federal series of measures to make sure that cable policy choices in the 1920s and 1930s to bring systems merely extended the reach of order to the airwave. These had the e#ect of broadcasters without supplanting them. discouraging competition and experimentation in radio broadcasting, and broadcast licenses were This is a complex story and it’s true that restricted to “respectable” (or policymakers have shifted the powerful and politically- The TV marketplace is a creature focus of their attention over connected) out!ts, primarily of government, and it is full of time. For example, they have for commercial purposes. By policies that are designed to divvy gone from treating cable like a controlling who gets a license, things up among a few players. threat, to partially and for what purpose, the deregulating it with the Cable government short-circuited Communications Act of 1984, the natural evolution of the broadcasting to partially re-regulating it with the Cable medium.9 Soon after the government began to Television Consumer Protection and decide the rules of radio, the broadcasting Competition Act of 1992. But while the balance landscape was dominated by “chains” (or may change, the overall structure does not— “networks”) of stations, which broadcast the cable systems work to extend the reach of same programming nationwide. Today’s TV broadcasters rather than to compete directly networks and independent stations are the with them. A number of regulations govern how bene!ciaries of a system !rst designed to reduce they can carry broadcast content.