Wednesday, February 11, 2009 - The Progress & Freedom Foundation Blog

Vertical Dis-integration

The Federal Communications Commission has now approved the license transfers necessary to accomplish the split-off of Time Warner Cable, Inc. from its parent Time Warner, Inc. The order is refreshingly clean of the sorts of extraneous conditions the agency has increasingly placed on such transaction reviews, such as the benighted XM-Sirius merger order. Although several parties to the proceeding argued that the FCC should continue to subject Time Warner Cable to program access and carriage rules designed to temper the practices of vertically integrated cable operators even after its spin-off from parent Time Warner, the agency wisely refrained from taking this course of action. The order finds that the proposed separation of the second largest cable operator from a major supplier of national and regional programming instead is "likely to benefit the public interest."

The transaction will lessen the extent to which TWC is vertically integrated with program providers and will eliminate the vertical integration of Time Warner by separating it from TWC. The Commission has made plain its concerns with vertical integration of content providers and cable operators, including concerns that affiliated entities may disfavor competing cable operators with respect to program access and competing programmers with respect to program carriage. The potential harms created by the type of integration that is being undone here are precisely the harms that we seek to remedy by the Commission's program access and program carriage rules.

The agency found that not only would the transaction undo the harm of vertical integration targeted by the program access and carriage rules, the separation of the Time Warner media content businesses from the Time Warner Cable "content delivery platform will place both companies in a better position to improve the number and quality of products and services they provide to the public. For both of these reasons, we believe that this separation should allow for increased competition in the video programming marketplace, to the ultimate benefit of consumers."

After finding that the transaction as proposed would benefit consumers, the FCC determined that it need not adopt conditions applying the program access or program carriage rules as some had suggested.

The statutory provisions reflect Congress' concern that programming vendors and affiliated cable operators and other MVPDs may have an incentive and ability to discriminate in favor of each other. After Time Warner and TWC separate, that underlying premise no longer applies. Neither RCN nor any other commenter has provided any evidence to dispute Time Warner's assertions that the transaction will separate TWC from Time Warner and that the parties will not be affiliated or have attributable interests in each other after consummation of the transaction. And the record does not indicate that, after the Applicants' separation, either firm will be able to exert significant influence over the core operations of the other. Although Time Warner and TWC will have shareholders in common, there will be no overlap of officers or directors. The mere fact that TWC and Time Warner's stock will be widely held by common shareholders, without more, does not lead us to find that the firms should be deemed affiliated, as this fact does not provide evidence that either firm will have the potential for significant influence in the other. Absent such evidence, and the commenters have presented none, there is no reason to believe either firm will have the incentive to favor the other. We therefore conclude that after Time Warner and TWC separate, neither will have the incentive to favor the other or discriminate against the other's rivals.

It is refreshing to see the FCC return to the "rule of law" and decline to attempt to expand its jurisdiction over regulated entities either through the extraction of so-called "voluntary conditions" by transaction applicants, or through the use of its "ancillary jurisdiction" to achieve ends not explicitly permitted by its governing statute.

It is also noteworthy that, once consummated, the spin-off of the cable distribution entity from Time Warner will dramatically accelerate the trend toward vertical dis-integration that I and my colleague Adam Thierer have previously written about here and here. As we noted in May 2008 with respect to the findings of the FCC's most recent video competition report, the overall number of national programming networks available in America as of June 2006 stood at 565 channels, and that of the 565 networks, 84 (14.9 percent) were vertically integrated, or affiliated, with at least one cable operator. This represented a steady decline in vertical integration from the FCC's First Annual Video Competition Report, when over 50 percent of all channels were affiliated with a cable operator.

According to the recently released Thirteenth Annual Video Competition Report, of the 84 satellite-delivered national programming networks affiliated with one or more cable operators, Time Warner had an ownership interest in 39 national networks. Once the spin-off is consummated, the number of such vertically integrated programming networks will fall to 45 (8.0 percent). Similarly, the report indicates there are 101 regional programming networks and that 57 (56.4 percent) regional networks are affiliated with at least one cable multiple system operator. As of June 2006, Time Warner had ownership interests in 15 regional networks, or 14.8 percent; post-divestiture, the number of cable-affiliated regional programming networks will drop to 42 (41.6 percent). Surely these striking declines in vertical integration of cable operators and cable programming networks should begin to inform FCC policymaking and lay the groundwork for a through re-evaluation of those provisions of the Cable Act premised on competitive problems posed by vertical integration in the cable industry, including, but not limited to, the cable ownership cap and the "70/70" leased access inquiry.

posted by Barbara Esbin @ 2:29 PM | Cable , Mass Media , The FCC