April 17, 2014

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TV Everywhere: Collusion Anywhere?

FreePress and the National Cable and Telecom Association (NCTA) are talking past each other about TV Everywhere, a new initiative from the cable TV industry. FreePress says TV Everywhere is the cable industry’s collusive attempt to limit competition; the NCTA says it’s an exciting new product opportunity for consumers. Let’s unpack this issue and see who might have a point, and who is blowing smoke.

We’re at a critical point in the history of television. In recent years, most people have gotten TV shows from a traditional cable or satellite service. Now more and more people are getting shows on the Internet. Cable companies need to adapt, somehow, or become dinosaurs.

Which brings us to TV Everywhere. The idea, according to the NCTA, is for cable companies to offer their residential subscribers online access to the same shows they get at home. Existing consumers get more, at no extra charge — who would complain about that? — but only if they keep buying traditional cable service.

FreePress tells a different story, in which cable industry companies have agreed among themselves that this is their sole Internet distribution strategy. If such an agreement exists, it is problematic — it looks like a classic market division agreement, which is bad for consumers and (as I understand it) presumptively illegal.

To understand why this would be bad, consider an analogy. Suppose there are only two pizza restaurants in Princeton, Alice’s Pizza and Bob’s Pizza, and neither one offers home delivery. Customers want delivery, so both restaurants are considering how to provide it. Alice and Bob meet, and they agree that Alice’s will only deliver to customers east of Nassau Street, and Bob’s will only deliver to customers west of Nassau Street. Alice and Bob have divided the market. Customers suffer because of the lack of competition.

Now obviously Alice and Bob are free to set reasonable limits on where they will deliver. Some customers may be too far away, or too difficult to deliver to for some reason. But customers would rightly complain if Alice and Bob agreed to divide the market. Even if we didn’t have smoking-gun evidence of an agreement, there might be very strong circumstantial evidence, for example if Alice offered to deliver to places five miles away while refusing to deliver to homes directly across the street from her Nassau Street restaurant, or if Alice and Bob’s restaurants were right next to each other but had totally disjoint delivery areas.

Notice too that Alice and Bob can’t get off the hook by pointing out that they are offering a new service — delivery — that they had never offered before. The problem is not that they are offering a new service, but that they have agreed not to offer certain other services.

How does this analogy apply to cable TV? Alice and Bob are like the cable companies, which are considering expanding beyond their traditional service. Home delivery of pizza is like Internet delivery of TV shows. As the cable industry expands to offer TV shows on the Internet, are they open to competing against each other, or have they agreed not to do so? If the cable companies have made an agreement to offer online TV shows only to their own residential customers, that looks like an agreement to divide the market — each company will be offering its product only in the limited geographic areas where it has a cable TV license.

So the key question — really the only one that matters, as far as I can see — is whether the cable companies have agreed not to compete. FreePress says, or strongly implies, that there is such an agreement. NCTA says there is not.

Who is right? Unfortunately the publicly available facts are consistent with either theory. Maybe TV Everywhere is just the first step and the cable companies will soon enough be competing with each other to distribute shows to Internet customers wherever they may be. Or maybe the companies have decided as a group to restrict themselves to TV Everywhere style services within geographic limits (or to otherwise restrict business models or prices).

At this point we can’t tell who is right. FreePress offers indirect but suggestive circumstantial evidence that questionable discussions might have occurred within the cable industry. The NCTA mostly just changes the subject, talking about the complexity of their industry and praising cable companies for offering shows on the Internet at all.

Unfortunately, public discourse about industry structure often confuses issues like this. We often say things like “the cable industry is worried about X” or “the cable industry wants Y”. That could be a kind of shorthand, meaning that the individual companies in the industry, facing competitive pressures, generally tend to worry about X or to want Y — perfectly reasonable market behavior. Or it could reflect an assumption that the industry acts as a unit, which of course is problematic. This ambiguity is especially common in political/policy debates, to our detriment. We’d be better off talking saying things like “cable companies worry about X” or “cable companies want Y”, just to remind ourselves that these are supposed to be independent actors who decide independently what they want.

For now, I’d say the cable companies bear watching. As the companies lay out their Internet strategies and products, I hope the antitrust authorities are watching closely. If the cable companies are really acting as competing companies, this will be obvious from their actions.

Comments

  1. Anonymous says:

    Maybe cable companies do not have a license to distribute shows to customers outside their home regions.

    • felten says:

      Even if they don’t currently have such a license, they could try to get one in the future. Indeed, in a competitive market cable companies would want to get licenses to distribute their content more broadly. If they agreed not to seek such licenses, that would just be another way of agreeing not to compete.

  2. Mike says:

    Can Carol, the town’s only pepperoni supplier, order Alice and Bob to split the town at Nassau Street or they get no pepperoni?

    • MathFox says:

      Such market division could mean that Carol would be on the hook for anti-trust violations.

      One of the issues that is currently on the table in the EU is how to get one market for copyrighted works, so that Apple can buy one redistribution licence for all EU countries, instead of having to negotiate on a country by country basis.

  3. Chip says:

    It seems to me that things get more complicated since they are also in many cases our internet company too. Can cable companies include in their internet service agreements that you can only get television network programming from the cable company itself?

  4. Wes Felter says:

    IMO the problem is not so much collusion among the cable companies but among content companies to only offer their content over cable (if such a thing exists, which is there is no evidence for). If everybody pulls out of iTunes/Hulu and only distributes through cable, that would be a real problem.

  5. Barry says:

    The pizza problem could be remedied by having a third party offer a service that orders a pizza from Alice’s or Bob’s on your behalf, picks up the pizza from their shop, and delivers it to you for a fee. Except for one little problem….

    Pizza, copyright 2010. All pepperoni reserved.

    • Anonymous says:

      Shouldn’t first sale allow that? In fact, isn’t one of the purposes of first sale supposed to be to allow anyone to buy and then resell a copyrighted thing?

    • Bryan Feir says:

      Heading off-topic, but that’s actually done in places. Here in Toronto there are at least two outfits that act as delivery agents for restaurants that want to offer delivery but don’t want to spend the time and effort maintaining their own delivery staff.

      That said, there are two outfits, and I think any given restaurant only has agreements with one or the other of them, so there are still restrictions in place. This isn’t quite the same, as nobody’s actively agreed to split the pie between them to stifle competition; just that from any given restaurant’s point of view, there’s no reason to sign agreements with two different companies to provide the same service.

  6. Fred von Lohmann says:

    There is a very different problem here. At least some consumers would be better off if they could buy programs/channels on an ala carte basis. Consider Hulu as an example of the possibilities that the Internet for that kind of competition. Unfortunately, the content companies do not want to alienate cable and satellite, which only sells programming in bundles, and which have market power in the distribution business.

    Upshot: TV Everywhere makes it vastly less likely that Internet ala carte competition will occur. Which will leave many consumers worse off.

  7. Anonymous says:

    That market power in the distribution business won’t last. The content producers now have many potential distribution channels, and web-enabled TVs are fast approaching. It won’t be much longer before the cable companies’ (and satellite companies’) distribution-channel monopoly power goes the way of the dodo.

    • Jim says:

      I agree completely with this.

      As an example – I like the Daily Show, but full cable isn’t worth it to me. I’ve stuck with my $12 very basic cable package and refused to upgrade to the “full boat” service for $50. I would have gladly paid 5 or maybe even $10 for Comedy Central, but not $38. So I did without until Hulu came along. Now I think Comcast are scumbags and I don’t need them to get the shows I want. If others feel the same way it doesn’t bode well for them.

      The trend will take 3-7 years to play out IMO, but cable TV businesses are all but cooked. Comcast seems to get this. They’re looking to defer the inevitable by buying up content, but the problem is that there’s waaaay too much content out there and any company that tries to block Internet offerings will be swept away by the tide.

      I’m not predicting any open-content euphoria or anything, these Internet offerings will come with their own restrictions (maybe DRM, at least ads), but the key is that the oligopoly on distribution is dying fast.

      • Anonymous says:

        The “open-content euphoria” is coming anyway, though.

        The distribution oligopoly is dying. And the distribution oligopoly is what sustains the content-creation oligopoly, by being able to pick the winners and losers and by funding much of the content creation themselves.

        So both oligopolies go down like dominoes, and then what do we have? A free market in content creation AND distribution. And in a free market, prices get driven down to marginal cost.

        Which, for information objects, is effectively zero already.

  8. Chuck says:

    Over-the-air TV signals are redistributed by cable and satellite under a statutory compulsory license. This law has some complicated geographic restrictions.

    Some TV programming has geographic restrictions—the NFL blacks out TV carriage of non-sold-out home games.

    It’s not clear to me how cable companies could change these geographic restrictions even if they wanted to do so.

    Chuck