PITTSBURGH, April 7, 2015 - The American Cable Association called on the Federal Communications Commission to use Section 706 along with other provisions in the Communications Act to combat surging programming costs, which are inhibiting broadband investment that would expand competitive choice and initiate new service.
"If current trends continue, already high video programming fees will continue to escalate, causing the margins from traditional pay-TV service for smaller cable operators to shrink and then dry up within five years. The FCC must use its power to restore some semblance of sanity to the out-of-control video content market or broadband investment will suffer," ACA President and CEO Matthew M. Polka said.
ACA's concerns stem from an ACA study, developed with research and supporting analysis from the business consulting firm Cartesian, to examine in depth the effect of video programming cost increases on broadband deployment scenarios with different providers and with changes in business models.
ACA set forth its analysis, findings, and recommendations in comments filed April 6. That came in connection with the FCC's effort to promote broadband deployment by relying on administrative tools furnished by Congress in response to market failures that threaten the vital national goal of universal and affordable broadband Internet access as an essential tool of commerce, education, entertainment and free expression.
Specifically, ACA called on the FCC to:
Under Sec. 706, the FCC is directed to take immediate action when it finds that deployment of advanced telecommunications capability is not reasonable and timely. Thus, the agency has both the authority and charge to address the potential harm to broadband deployment caused by high and increasing video programming costs.
ACA's call for bold action was buttressed by the Study, which analyzed the connection between rising programming costs and the ability of broadband ISPs to finance their network deployments to offer speeds greater than 25/Mbps/3Mbps, as broadband is defined by the FCC.
For nearly all cable providers, multichannel video programming is an anchor service, and video programming is the most expensive input. Already high and escalating programming costs are shrinking margins of the service and free cash flow, which can lead to reduced investment by small and medium-sized service providers in deploying high-performance broadband networks. ACA believes flawed or inadequate federal regulations contribute significantly to the rise in video programming costs and that inaction by the FCC to reform these regulations has let the problem fester.
As the Study points out, MVPDs' underlying cost of programming acquisition has been rising much more rapidly than the prices they can charge for video service. This is especially the case for smaller-scale and more rural MVPDs, which typically pay programmers fees that amount to 60% of their video revenues.
The Study probes in great depth how rising video programming fees affect the investment case for broadband by smaller-scale MVPDs in different investment situations - rural expansion, new fiber overbuilds, telephone fiber overbuild, and suburban incumbent expansion - and with different scenarios based on the evolution of video service options and consumer preferences.
The results from this modeling show that as video programming fees continue to increase and so long as consumers continue to demand (and MVPDs with fewer than 3 million subscribers supply) a triple-play bundle, free cash flow will decline, making the business case for new broadband deployment less tenable.
The Study's modeling indicates that because MVPDs will be unable to pass through their programming cost increases, their EBITDA (earnings before interest, taxes, depreciation and amortization) margins for all use cases will decrease by nearly half from 2015 to 2025. With capital expenditures taken into account, the picture becomes worse, and the business case for broadband deployment for all use cases would be expected to decline and eventually become unprofitable in the coming decade.
Although the Study indicates that MVPDs, operating in a market where consumers depend less on receiving their video service from their broadband provider, could justify more investment, it would prove challenging for smaller-scale MVPDs to shift to this model for various reasons, many of which are outside their control. It would require them to ignore the current and continuing customer demand for MVPD content as part of the triple-play bundle - and potentially the actions of their competition in response to these demands. It would jeopardize MVPDs' current prime source of revenue.
"Because of the harm to consumers and competition, the FCC has been concerned about high and increasing video programming fees for years, and it has initiated proceedings to consider how it might address this concern. Now there is additional evidence demonstrating that high and increasing video programming fees are also harming broadband deployment. As a result, the FCC should invoke its Sec. 706 authority and complete the proceedings it has initiated by adopting the proposals ACA has set forth," Polka said.
About the American Cable Association: Based in Pittsburgh, the American Cable Association is a trade organization representing nearly 850 smaller and medium-sized, independent cable companies who provide broadband services for nearly 7 million cable subscribers primarily located in rural and smaller suburban markets across America. Through active participation in the regulatory and legislative process in Washington, D.C., ACA's members work together to advance the interests of their customers and ensure the future competitiveness and viability of their business. For more information, visit http://www.americancable.org/
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