FCC Inquiry Regarding Tying in Wholesale Video Programming

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Bruce M. Owen, Michael G. Baumann and Kent W. Mikkelsen have worked on scores of regulatory and antitrust matters involving media, including broadcast and cable television, radio, and newspapers. They also have expertise in issues regarding spectrum allocation and telephony.

FCC Inquiry Regarding Tying in Wholesale Video Programming
Certain cable operators (particularly those with small and rural cable systems) claim that program suppliers do not give them the option to purchase only the networks they desire but instead compel them to purchase packages of networks. The Federal Communications Commission (FCC) recently solicited comments concerning this alleged practice of bundling networks at the wholesale level (sales by a program supplier to cable operators), a practice it calls “‘take-it-or-leave-it’ tying.” There is no reason, however, for the FCC to act in response to these claims.

Available empirical evidence shows this practice to be rare or non-existent. Cable network carriage data from Fox, NBC Universal and Viacom show that the number of networks that cable systems take from each of these program suppliers varies widely. For each of these program suppliers, at least 30 percent of the small systems and operators take only one or two networks, with many different choices as to which one or two networks to carry. Fewer than 20 percent of small systems and operators take all networks from any of these suppliers, and no network from any of these suppliers is carried by all small systems or operators. Carriage of networks from other program suppliers follows a similar pattern, according to third-party data.

Even if one assumed that “take-it-or-leave-it” tying occurred, prevailing antitrust standards would find such bundling problematic only if a program supplier has market power. In this case, whether market share is measured by number of networks, number of subscribers receiving networks, network revenues or audience ratings, no program supplier has even 25 percent of the business. Concentration among program sellers is not high. Nor is there evidence that any individual network is a “must have” for cable and satellite operators, in the sense that the operator is not viable or cannot compete without the network. Without both a demonstration of market failure and a reasonable assurance that regulatory intervention would remedy that failure, no good case can be made to force firms away from the market outcome.

Moreover, even if program suppliers did engage in “take-it-or-leave-it” tying, eliminating this practice would not necessarily make cable operators or the consumers they serve better off. If hypothetical wholesale pure bundling were replaced by stand-alone network sales, some operators would benefit by purchasing fewer networks and paying less in total for programming from a particular supplier. Other operators, however, would prefer to purchase all the networks in the bundle at the bundled price but may no longer have this option because it is more expensive to buy the same networks under stand-alone prices. There is no reason to believe that regulatory intervention would improve the market outcome.

From a consumer’s standpoint, prohibiting wholesale bundling (if it existed) would change the mix of networks purchased and the prices paid by cable systems. The systems in turn would change the mix of networks they offered their subscribers and the subscription price. This change is likely to make some consumers better off and make others worse off. To illustrate, assume initially that a system facing pure bundling chooses to offer a tier of 20 networks to consumers for $10 a month. If hypothetical wholesale bundling is prohibited, the system facing stand-alone prices may find it most profitable to no longer purchase one of the networks (network A) and simply offer a tier of 19 networks for $9.50. In this case, those consumers that value network A at more than $0.50 are net worse off; those that value network A at less than $0.50 are net better off. Another possibility is that the system drops one of the original 20 networks and replaces it with another network, still charging $10 for the tier. In this case, those consumers that value the network that was dropped more (less) than they value the network that was added are worse (better) off. A prohibition on wholesale bundling would have a myriad of possible effects with an indeterminate impact on consumers as a group.

Some argue that eliminating wholesale packaging of networks may encourage a la carte network sales at the retail level, but that is unlikely. First, “take-it-or-leave-it” tying is now at most a very rare practice, while cable operators’ widespread practice of offering their subscribers multiple networks in a common tier goes back to the beginnings of cable television. Second, there is no systematic mechanism by which bundling at one level implies bundling upstream or causes bundling downstream. Even if wholesale “take-it-or-leave-it” tying took place, it would not preclude cable systems from unbundling content at the retail level. Perhaps more important, even if wholesale packaging were banned, that would not necessarily affect cable systems’ packaging to consumers.

Any allegation of tying implies that there are at least two products that could and should be sold separately but are not. In fact, the most basic component of video programming service is an apparently unitary but highly variable package of services called by such names as episode, segment, special, game or movie. Furthermore, video programming is almost always packaged when it is sold to retail distributors. For example, episodes are packaged into series. Series are bundled into daily, weekly, and seasonal schedules, or “channels.” Channels, or networks, are packaged into multichannel groups. There is no economic basis for believing that preserving the opportunity of retailers to purchase individual wholesale “channels” of programming would make consumers better off, even if that option appeared to be threatened.