Thursday, March 26, 2009 - The Progress & Freedom Foundation Blog

Sometimes Not Sharing Your Toys is the Right Approach

One of the enduring lessons of childhood is that you should share your toys. But in the realm of electronic communications networks, this rule of thumb does not always have beneficial consequences. In a 1999 U.S. Supreme Court decision overturning portions of the FCC's unbundled network element sharing rules, AT&T v. Iowa Utilities Board, concurring Justice Stephen Breyer observed:
Nor can one guarantee that firms will undertake the investment necessary to produce complex technological innovations knowing that any competitive advantage derived from those innovations will be dissipated by the sharing requirement.
Increased sharing by itself does not automatically mean increased competition. It is in the unshared, not in the shared, portions of the enterprise that meaningful competition would likely emerge. Rules that force firms to share every resource or element of a business would create not competition, but pervasive regulation, for the regulators, not the marketplace, would set the relevant terms.
A totally unbundled world--a world in which competitors share every part of an incumbent's existing system, ... is a world in which competitors would have little, if anything, to compete about.
In the 1992 Cable Competition and Consumer Protection Act (amending the 1984 Cable Act), Congress recognized that investments in cable programming networks are no different. Although cable operators were statutorily required to share access to their satellite-delivered cable programming (widely viewed networks like Turner Classic Movies, HBO, and Lifetime), they were not required to share with their multichannel video programming distribution competitors access to their terrestrially-delivered programming networks. This exception to the program access requirements, known as the "terrestrial loophole," was created to permit the cable industry to develop some unique (generally local) programming networks that they would not be required to share with competitors. Several of the larger cable multiple system operators did just that, and created highly popular round-the-clock local news and public affairs programming networks, available only over cable. The popularity of this programming has led to pitched fights between cable incumbents and their competitors over access to these popular local networks, but to date, the FCC has rebuffed most attempts to get around the exception. An interesting article entitled "Local TV is New Weapon," in the March 25th Wall Street Journal reports that Verizon is planning to launch its own local TV channel in New York City this summer. The move is a competitive response to Cablevision Systems Corp. and Time Warner Cable whose popular News 12 and New York One cable networks have helped the companies keep customers in Long Island and New York City from switching to Verizon's FiOS television service. The report further indicates that Verizon is considering rolling out the new channel, to be called "FiOS1" in other markets. Additionally, in light of the success of its local cable news channel in New York City, Time Warner Cable plans to roll out a 24-hour station in Buffalo, NY. The cable incumbent is facing mounting competition there from Verizon's FiOS video service. The WSJ also reports that on Long Island, where Cablevision is also facing increasing competition from Verizon's FiOS video product, the cable operator strengthened its local news gathering and reporting capabilities by purchasing the widely-read Long Island newspaper Newsday. The WSJ also notes that Cablevision is considering ending free access to Newsday's website and possibly offering online access as a service for Cablevision and Newsday customers.
Along with serving as differentiators for the operators, these networks are also filling a growing void in the local [media] market," said Alan Mutter, a media analyst at Tapit Partners. In turn, Mr. Mutter said, cable and phone companies may grab a bigger share of the local ad dollars that currently flow to declining papers.
This competitive response in the face of exclusive programming is exactly what Congress envisioned when it placed the "terrestrial loophole" in the Cable Act. The result, should Verizon proceed with its plans, will be a net increase in local news programming that was brought about, not through regulatory mandate, but by its absence.

posted by Barbara Esbin @ 10:07 AM | Cable , Communications , Wireline