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FCC Ex Parte regarding the Petition for Rulemaking to Amend the Commission's Rules Governing Retransmission Consent

Submission Date: 
02/16/2011

 

February 16, 2011

Via ECFS

Marlene Dortch
Secretary
Federal Communications Commission
445 12th Street, SW
Room TW-A325
Washington, DC 20554

Re: American Cable Association ("ACA") Notice of Ex Parte Presentation; In the Matter of Rulemaking to Amend The Commission's Rules Governing Retransmission Consent; MB Docket No. 10-71.

Dear Ms. Dortch:

On February 15, 2011, Matt Polka and Ross Lieberman, American Cable Association; William Rogerson, Northwestern University; Thomas Cohen, Kelley Drye & Warren, LLP; and the undersigned met with Michelle Carey, Eloise Gore, Mary Beth Murphy, Steve Broeckaert, and Diana Sokolow, Media Bureau, and Jonathan Levy, Office of Strategic Policy.

During the meeting, ACA discussed the issues raised in its comments filed in support of the Petition for Rulemaking, including the matters of (i) retransmission consent price increases resulting from joint negotiations involving multiple "Big 4" (i.e., ABC, NBC, CBS, and FOX) broadcast affiliates in a single market, and (ii) retransmission consent price discrimination against smaller multichannel video programming distributors ("MVPDs"). As part of the discussion, Professor Rogerson presented his economic analysis of these problems contained in Attachment A to this letter. ACA also discussed how the Commission could provide effective relief with changes to the FCC's definition of "good faith" negotiations to prevent joint retransmission consent negotiations and prevent undue price discrimination against smaller MVPDs and their subscribers.

ACA stressed that it is incumbent upon the Commission, as it undertakes its first major evaluation of the retransmission consent framework, to include language in its Notice of Proposed Rulemaking that:

 

  • expressly solicits comments on carriage fee increases resulting from joint negotiations involving multiple Big 4 broadcast affiliates in a single market and price discrimination against smaller MVPDs; and
  • seeks data from MVPDs and broadcasters to analyze these issues.

 

Raising retransmission consent prices through joint negotiations. ACA described the significant problem with the current retransmission consent regime - broadcasters' use of sharing agreements or duopolies to jointly negotiation retransmission consent for multiple Big 4 affiliates in the same market. Professor Rogerson described how available evidence strongly suggests that joint control or ownership of multiple Big 4 affiliates in a single designated market area ("DMA") results in significantly higher retransmission consent fees. And, as the Commission itself has found, consumers ultimately foot the bill in the form of higher cable rates.

Although Commission rules generally prohibit common ownership of Big 4 stations in a single DMA, broadcasters circumvent this general prohibition through the Commission's waiver process, or by means of contractual agreements that offer one Big 4 station control of another in the same market. As described in ACA's Comments and Professor Rogerson's presentation, ACA has examined publicly available documents and records to compile as thorough a list as possible of all instances in which multiple Big 4 broadcast affiliates from the same DMA are under joint control or ownership. ACA has identified at least 93 instances of these sharing agreements or duopolies in 78 television markets - affecting more than 37% of the 210 DMAs - with the heaviest concentration in smaller markets. Further, ACA has identified 36 instances of two Big 4 affiliates in the same DMA operating under common ownership; and 57 instances where multiple Big 4 affiliates in the same DMA operate under some sort of sharing agreement - which typically means the stations operate under joint control for purposes of negotiating retransmission consent agreements. Based on reports from ACA members and other MVPDs, ACA can confirm that in many of the 57 instances where multiple Big 4 affiliates in the same DMA operate under some sort of sharing agreement, there was a single negotiator for both stations, and reaching carriage terms for one station was contingent upon reaching terms for the other.

Professor Rogerson explained how broadcasters' joint negotiation of retransmission consent involving multiple Big 4 affiliates in the same market can result in higher retransmission consent fees. Professor Rogerson, applying a standard modeling approach, explained that when a programmer and MVPD negotiate the fee that the MVPD will pay the programmer, they are essentially deciding how to split the joint economic gains created from having the MVPD carry the programming. This sort of bilateral bargaining situation has been extensively modeled in the economics literature. Application of the standard modeling approach used in the economics literature immediately demonstrates that a programmer selling two different programs will be able to charge more by bundling the programs together so long as the programs are substitutes in the sense that the marginal value of either of the programs to the MVPD is lower conditional on already carrying the other program. Professor Rogerson observed that the Commission endorsed this analysis of the competitive effects of joint negotiations for a Big 4 affiliate and a regional sports network in its recent Comcast-NBCU license transfer order, and noted that it is even more likely that the partial substitute's condition will be satisfied by two Big 4 broadcast stations.

In addition, Professor Rogerson discussed the significance of empirical evidence proffered in 2009 by Suddenlink Communications, demonstrating that joint negotiating significantly increases retransmission consent fees. Suddenlink had reported the results of an internal analysis it conducted showing the effect ownership status of broadcast stations has on the magnitude of retransmission consent fees. The analysis revealed that where a single entity controls retransmission consent negotiations for more than one Big 4 station in a single market, the average retransmission consent fees Suddenlink pays for such an entity's Big 4 stations (in all Suddenlink markets where the entity represents one or more stations) is 21.6% higher than the average retransmission consent fees Suddenlink pays for other Big 4 stations in those same markets. In Suddenlink's view, this is compelling evidence that an entity combining the retransmission consent efforts of two Big 4 stations in the same market is able to secure a substantial premium by leveraging its ability to withhold programming from multiple stations. Professor Rogerson also highlighted that other ACA members submitted similar analyses into the record demonstrating even higher rate increases. Professor Rogerson explained that the analyses of Suddenlink and others are completely consistent with the predictions of standard economic theory under plausible circumstances, and that this should raise the Commission's concern.

Raising retransmission consent costs through price discrimination. In its comments, ACA documented the gross disparities in retransmission fees paid by smaller MVPDs. Publicly available information, together with the experience of ACA members, indicates that smaller MVPDs pay nearly twice as much as larger MVPDs simply because they serve fewer subscribers. Professor Rogerson explained that the level of these pricing disparities greatly dwarfs any conceivable cost basis, as individual MVPDs generally make their own arrangements at their own cost to receive and download the signal of broadcast networks at their headends, and broadcasters essentially incur no additional (marginal) costs for providing their consent to MVPDs to retransmit the signals. Thus, there is no cost difference in serving smaller vs. larger MVPDs. Nor could the transaction costs of negotiating with smaller providers possibly account for these vastly higher rate levels. Rather, the rate discrimination arises solely because smaller providers lack the bargaining leverage necessary to counterbalance the market power of powerful "Big 4" broadcast network affiliates and station affiliate groups. The upshot is that different groups of viewers are being charged different prices to view the same programming, and broadcasters are able to extract substantially higher fees from smaller distributors simply because they lack the ability to withstand such increases.

Typically the vast majority of a local broadcaster's customer base is located in a more urban area served by one or two very large cable systems, with the remaining small fraction of its base located in less developed areas typically served by a much larger number of small cable systems.. Direct broadcast satellite (DBS) providers also generally serve throughout the viewing area. Professor Rogerson observed that under these circumstances, for the broadcaster the cost of failure to strike a deal with the smaller MVPDs is relatively insignificant, thus increasing the broadcaster's bargaining power, allowing it to extract higher per subscriber fees from the smaller providers. For the smaller provider, as the FCC has repeatedly recognized, failure to strike a deal means loss of "must have" programming and consequent subscriber losses.

Conclusion and recommendations. ACA stressed that now is the time for the FCC to carefully examine the damage that joint negotiations involving multiple Big 4 broadcast affiliates in a single market and discriminatory retransmission consent pricing practices inflict on small and rural cable operators and telephone carriers providing MVPD services and to take action to rebalance the competitive playing field to assure the ability of residents in small and rural markets to obtain access to programming at fair prices. Without reasonable and economic access to that video programming content, small providers will lack the ability both to enter small and rural markets and/or compete effectively against the larger providers, and to extend their reach to unserved areas on an economic basis.

When broadcasters engage in these practices, the higher fees extracted are likely passed along to consumers in the form of rate increases. However, to the extent the MVPD cannot pass the costs through to consumers in the form of higher subscription fees either because of result of competition or local economic circumstances, the higher costs are borne by the MVPD, depriving it of revenues for capital expenditures that could be used to fund system upgrades, other programming acquisitions or broadband network expansion. In the markets served by smaller MVPDs, the current retransmission consent regime not only harms MVPDs and their subscribers, but also threatens a top domestic policy priority - bringing broadband deployment to unserved areas and underserved populations.

To narrowly address the problem of joint negotiations of retransmission consent by multiple broadcasters affiliated with Big 4 networks, ACA suggested redefining the "good faith" negotiation standard to prohibit separately owned Big 4 broadcast stations in the same DMA from jointly negotiating retransmission consent fees. ACA also discussed as a possible solution to price discrimination that the Commission prohibit entirely, or place limits upon, the amount of price discrimination against smaller MVPDs.

Professor Rogerson acknowledged that under Section 325(b)(3)(C)(ii) and FCC regulations, it is not a violation of the good faith negotiation requirement for broadcast stations to charge different MVPDs different prices for retransmission consent in circumstances where such price differences are based on "competitive marketplace considerations." Because Congress has introduced the examination of "competitive marketplace considerations" into the good faith standard, he suggested the Commission is empowered to examine whether permitting separately owned programming vendors effectively to enter into price fixing agreements through "shared services" or "joint marketing" arrangements frustrates the operation of competitive markets. ACA is confident that should the Commission undertake that inquiry, it would determine that allowing broadcast stations to jointly negotiate prices frustrates, rather than permits normal competitive markets to function, and that the practice should be prohibited as a violation of the obligation to negotiate in good faith. ACA argued that such a prohibition would leave intact the other efficiencies gained when local broadcast stations pool their resources to enhance their service to the public; it would simply eliminate their ability to act in an anticompetitive fashion by jointly negotiating retransmission consent prices with MVPDs.

With respect to the problems of joint negotiations and price discrimination, ACA urged the Commission, as part of this proceeding, to gather data that would allow it to determine the extent and magnitude that both matters affect retransmission consent fees, should it determine that such information is necessary to inform its decision. ACA stated that its members would be willing to file their retransmission consent agreements with the Commission for this purpose, if they could obtain waivers from the broadcast stations of the confidentiality provisions of their contracts. ACA suggested that the Commission encourage broadcasters to grant such waivers, subject to the Commission, establishing in the NPRM confidentiality safeguards for highly sensitive data comparable to those used in its license transfer reviews and other recent matters.

ACA maintains that without exploration of these well-documented problems with the Commission's retransmission consent rules, small and rural providers will continue to be disadvantaged by changes in market structure that have fundamentally altered the balance of bargaining power between local broadcasters and MVPDs in favor of local broadcasters.

If you have any questions, or require further information, please do not hesitate to contact me directly. Pursuant to section 1.1206 of the Commission's rules, this letter is being filed electronically with the Commission.

Sincerely,

Barbara S. Esbin

Enclosure

cc (via email): Michelle Carey
Eloise Gore
Mary Beth Murphy
Steve Broeckaert
Diana Sokolow
Jonathan Levy

[FOOTNOTES OMITTED] 

AttachmentSize
2011 02 16 Ex Parte Media Bureau Retrans NPRM FINAL as filed.pdf154.83 KB

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