The limitations imposed on Internet transformation by the program access rules should be removed along with other legacy regulations that are inhibiting our transition to all-IP communications.
In 1992, Congress directed the FCC to establish “program access” regulations. These regulations generally require vertically integrated cable operators (i.e., cable operators who also own video programming) to offer their programming to rivals on reasonable terms. Congress prohibited cable operators from entering into exclusive contracts with video programming affiliates because a “cable system faces no local competition,” which gave vertically integrated cable programmers “the incentive and the ability to favor” their own distribution networks. Congress recognized, however, that additional competition could render this prohibition unnecessary, and provided that the exclusivity prohibition would sunset in ten years unless the FCC finds the prohibition continues to be necessary.
The FCC extended the prohibition in 2002 for five years, and extended it for an additional five years in 2007. The exclusivity prohibition will sunset this Friday (October 5, 2012) unless the FCC extends it again. FCC Chairman Genachowski has reportedly circulated an order that would not extend it. Genachowski is right to let this legacy regulation expire.
The market for video program production and distribution doesn’t look anything like it did in 1992. Al Gore sponsored the High Performance Computing Act of 1991, which would eventually lead to the commercialization of the Internet, but the Internet as we know it today didn’t exist in 1992. PrimeStar began offering an analog satellite television service in 1991 using a three-foot satellite dish, but DirecTV wouldn’t be available until 1994, and Dish Network wouldn’t be available until 1996. And, in 1992, telephone companies, including the predecessors to Verizon and AT&T, were generally prohibited from providing video programming directly to subscribers in their telephone service areas.
It’s not 1992 anymore. In most markets, consumers can choose among a cable provider, DirecTV, Dish Network, and a wireline provider (e.g., Verizon or AT&T). Since the most recent extension of the exclusivity prohibition, there has also been a significant increase in the distribution of video content online, including Netflix, Apple’s iTunes, Amazon.com’s Prime Video, Hulu.com, and Google’s YouTube. For example, Netflix launched its streaming video service in 2007, and is now “the world’s leading Internet subscription service for enjoying TV shows and movies.” At the end of 2011, Netflix had over 21 million streaming video subscribers in the United States, and is now producing its own, unique programming. According to Netflix, consumers now enjoy “multiple entertainment video providers and can easily shift spending from one provider to another.”
With the exception of sports programming, which “may be nonreplicable,” the program access concerns that animated Congress in 1992 no longer exist. But these legacy regulations continue to impose costs on consumers. There are “obvious costs to prohibitions on vertical integration.” Though the exclusivity prohibition isn’t a per se prohibition on vertical integration, it reduces the incentive for competitive network operators to invest in their own programming. The likely result is a reduction in the quality or output of content and a reduction in consumer choice.
Note the substantial difference in approach between Netflix, an over the top provider, and Verizon and AT&T, who operate their own video distribution networks. Because Netflix is not considered a “multichannel video programming distributor” within the meaning of the Communications Act, it is not eligible for government subsidized access to programming through the program access rules. As a result, Netflix has begun producing its own video content. Verizon, AT&T, and satellite providers are, however, eligible for statutory access to cable programming, which reduces their incentives to invest in their own programming. For example, though Verizon and AT&T have both invested billions to enable the delivery of video programming over their networks, they have not made significant investments in the production of their own video content. Why should they invest in programming when the government still subsidizes access to video content produced by rival networks?
As I noted in my initial analysis of Google Fiber, increased vertical integration offers the potential to rapidly drive ultra-high-speed network deployment in the United States. The inverse is also true. Vertical integration offers the potential for increased investment in the production of high quality, unique content, but only if the market distortions caused by the exclusivity prohibition and other burdensome legacy regulations are removed. To the extent sports programming remains a potential market failure, it can be addressed through the FCC’s case-by-case review process.
Internet transformation is not limited to legacy common carrier regulations. The transition to Internet-based communications networks impacts regulations in many categories, including privacy, spectrum, and content. The limitations imposed on Internet transformation by the program access rules should be removed along with other legacy regulations that are inhibiting our transition to all-IP communications. Allowing the exclusivity prohibition to expire won’t get us all the way there, but it is a step in the right direction.