Vertical integration in the television sector can be harmful and lead to foreclosures among independent broadcasters, says a new report commissioned by the Independent Broadcast Group.
In the report Hal J. Singer, a managing director at Navigant Economics and expert on vertical integration in the United States, critiques a report submitted by Bell Canada on April 27 for the CRTC"s review of the regulatory framework relating to vertical integration.
Jeffrey Church, a professor at the University of Calgary's Department of Economics and a director with the Berkeley Research Group, wrote Bell"s report. Church argues that vertical integration is beneficial for consumers in most cases because it provides efficiencies that lead to "lower costs, improvements in product quality, and introduction of new products."
Church wrote that those efficiencies arise because vertical integration enhances the coordination between a company"s upstream and downstream activities.
In his report Church went on to write that issues which arise due to vertical integration between content carriers and broadcasters should be evaluated on a case-by-case basis. "Such a policy framework makes it more likely that the relatively few instances in which the conduct of a vertically integrated firm is anticompetitive can be identified from the usual expectation that vertical integration and exclusion are beneficial," he wrote.
But in his critique Singer says Church failed to account for the tiering of channels, where independent broadcasters can end up relegated to cable or satellite packages that have fewer subscribers. "The theoretical conclusions reached by Professor Church -- that vertical foreclosure is unlikely because MVPDs (multichannel video programming distributors) lack the incentive to engage in such conduct -- cannot be squared with the mounting empirical evidence of discrimination in the United States," wrote Singer.
"If the independent network is placed on a tier with 10 percent penetration while the affiliated network is placed on a tier with 90 percent penetration, then advertisers will be disinclined to purchase ads on the independent network," Singer wrote. "Thus, tiering can be highly detrimental to an independent network."
Singer wrote that the Bell report ignores that in the U.S. the FCC has received testimony from several national cable networks stating that they are only "viable for ratings and advertising purposes" once they are distributed to 40% of U.S. households. "As long as an independent network's reach remains substantially below this critical level of national households, it is restrained in its ability to compete effectively for advertisers and programmers, many of which view national distribution as a prerequisite for making a network a meaningful contender," wrote Singer.
Church argued that it is against the best interests of a vertically integrated distributor to force unaffiliated broadcasters into foreclosure for anticompetitive reasons. "The one monopoly theorem suggests that a monopolist distribution platform prefers competition and variety in programming if it increases the willingness to pay of consumers for its distribution platform," he wrote.
Independent broadcasters create value through their programming which can allow the vertically integrated distributor to raise the costs for its services accordingly.
In the Independent Broadcast Group report Singer describes a number of case studies in the U.S. where the foreclosure of an independent broadcaster occurred due to anticompetitive reasons.
Singer goes over the case of Carolinas Sports Entertainment Television (C-SET), a regional sports network that launched in 2004 in North Carolina. The network aired Charlotte Bobcats games along with college and high school sports, motor sports, and minor league baseball and hockey.
Time Warner, the incumbent cable operator in the Carolinas, did not carry C-SET on its analog tier and instead put the channel on its digital tier where it had access to 600,000 customers instead of more than 1.6 million on the more popular tier.
C-SET reportedly folded after 10 months because it could not secure enough advertising revenue from the smaller tier to stay afloat. The network incurred losses of $15 million, and let go of more than 20 employees. C-SET then sold its rights to the Bobcats games to News 14 Carolina, a network associated with Time Warner that was carried on the analog tier.
"As a consequence of a VICO's (vertically integrated cable operator) discriminatory tiering policy, an independent network can be restrained in its ability to compete effectively for viewers, advertisers, and programmers," Singer wrote.
Singer concluded that society at large should be concerned about vertical integration in the broadcasting sector because the independent networks are those that are most likely to innovate while networks affiliated with cable and satellite distributors are more prone to stagnate.
"The pre-conditions for anti-competitive customer foreclosure are present in the broadcasting market in Canada," said Bill Roberts, president of ZoomerMedia's TV division and a member of the IBG in an e-mail to Cartt.ca. "We pointed out the four main problems that Hal Singer notes with the Church/Bell study in our comments to the CRTC. The Church study focuses, to a large extent, on "input" and not "customer" foreclosure - meaning that it spends very little time on the issues that are of the most concern to independent broadcasters.
"The seriously flawed Bell report doesn't look at tiering issues at all, which is really where independent broadcasters face the greatest difficulties," added Roberts. "Last, the Bell/Church study is a theoretical exercise that doesn't look at actual instances of misconduct."
Final written replies for the CRTC"s vertical integration hearing are due Friday, July 8.
Source: Cartt | July 6, 2011
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