The battle continues to heat up between cable operators and telephone companies hoping to get into the video business. Today's Comm Daily [Lexis subscription required] reports on Verizon's legislative efforts in California to avoid a state law that would force VZ, where it is deploying fiber to support video service, to build out to the entire franchise area served by the incumbent cable provider. Not surprisingly, the local cable association has raised concerns with Verizon's bill. The statute from which VZ would be exempted if the proposed law passes has been described as an attempt to provide market competitors a regulatory "level playing field." But that unfortunate metaphor provides little guidance on how to piece through the many complex issues related to whether and how cable and telco video competitors should be regulated.
The playing field metaphor has been correctly faulted for being useless in deciding whether to achieve the "level" result by imposing regulation on some companies, or by eliminating it from others (i.e., regulating "up" or regulating "down"). As such, policymakers who are too focused on achieving this kind of playing field risk not simply leveling the playing field but settling for too much regulation. This risk is particularly great with respect to innovative digital technologies such as video over fiber, for which additional rules often translate into deployment delays and prices too high to attract new customers.
But the more attractive nuisance posed by pursuit of level playing fields is that, although seemingly intuitive, they reduce to a flat surface a complex set of issues that is, instead, multidimensional. Cable-telco video competition illustrates this point, as it casts shadows along the three major dimensions of Internet and other evolving digital communications: infrastructure, services (or "applications") and content.
The infrastructure dimension, of course, simply acknowledges that communications -- whether involving video or other data -- must run over a physical network, whether that network is composed of wires or fibers or space through which wireless signals are propagated. As indicated, the policy challenge with respect infrastructure is to ensure that networks are built, hopefully so much so that competition among networks obviates heavy-handed regulation. Regulate too much and steps taken to protect consumers from potential monopoly abuses can inadvertently harm consumers by denying them new services. In the case of video competition, infrastructure issues include build-out requirements like those being debated in California, which have forced policymakers to wrestle with the historical fact that networks that "converge" to provide competing services often are laid out very differently. So, as Verizon contends in California, forcing a new entrant to serve the same geographic area as the incumbent may not be at all "level." Rather, it may saddle the new entrant, in light of its different network layout, with an inflated cost structure that delays or denies the benefits of competition to consumers.
Other infrastructure questions arise to the extent that, absent reform, the Communications Act treats each type of network differently in addressing the fact that the equipment for physical networks takes up space throughout a geographic region, whether on utility poles, in other public rights-of-way or on rooftops or towers. For example, although cable operators and telcos both generally must have some legal right to deploy facilities in public spaces, the methods and costs of securing these "franchise" rights are very different. Similarly, cable and telephone companies' prior status as sole providers of certain services within their geographic regions has resulted in both being subjected to various requirements that they make their networks available to third parties. Yet the broadcast "must carry" and leased access requirements faced by cable bear no other resemblance to the common carriage, interconnection and unbundling requirements faced by local telephone companies. (It is, in part, to avoid some of these latter requirements for video service that SBC has filed petitions for forbearance and for a declaratory ruling with the FCC, which strangely enough have generated little comment from cable companies.)
The services or applications dimension of cable-telco video competition evidences similar complexity. In addition to the DRM and content protection issues Patrick discusses in his blog regarding what he terms the "Visigoths" of BitTorrent, cable and telephone companies face dramatically different obligations regarding the pricing of core services on their respective networks, and a plethora of inconsistent, service-specific requirements regarding such issues as customer service, privacy, access by persons with disabilities -- the list goes on and on. This results in endless debates about how services not really contemplated by the Act should be classified under it, which is complicated further by the emergence of Internet-based competitors to cable and phone companies who provide service without building their own physical networks.
The content dimension of cable-telco competition (referring to its availability, rather than the related issue of how content is protected from unauthorized use) may prove tobe the most important aspect of cable-telco video competition -- and perhaps the trickiest dimension for purposes of ensuring regulatory rationality and even-handedness while protecting incentives to create and innovate. Certainly, telcos will require compelling video content if they are to compete with cable and DBS providers for video subscribers. To the extent content can be protected adequately on the telco fiber network, telcos theoretically should encounter relatively few problems obtaining content from video programmers not already owned by or exclusively affiliated with competing video networks. Market incentives should encourage those programmers and telcos to find mutually agreeable terms. But in the many cases where cable operators do have such ties to video programmers, market decisions are more complicated and so are the regulatory questions. On the one hand, regulators may face pressure from telcos to make such programming available to their subscribers in the hopes that competition for such subscribers will lead to more efficient pricing and innovations in technology and service offerings. On the other hand -- much like the telcos often have argued in response to calls that they share their physical networks with competitors -- forcing a cable company to share its programming risks undermining incentives for the company to invest in such resources in the first place. Moreover, such sharing mandates may undermine incentives for telcos and other companies that lust after cable's content to find other ways to compete effectively. Finally, allowing these so-called "vertical relationships" between cable operators and complementary products like video programming may itself yield economic efficiencies that benefit consumers, as I emphasized in another context.
Whether cable or telephone companies will prevail in this looming regulatory battle can't really be known at this point, but victory will no doubt turn on the strength of their respective arguments, the status of markets and technology, and the policies and predilections of the regulators who get to decide. But so long as regulators don't skew or squelch competition by trying to "level" regulatory playing fields too simplistically, one can be sure that consumers will come out winners in the field that matters most: the field of competition for video service itself. And that field is on track to add a third major video competitor where once only cable and DBS played.