What’s At Stake In the Epic Battle Between TV Networks and Cable/Satellite Providers

Cable and satellite TV providers have started a fight that could fundamentally change the way television content is brought to your home. If the cable/satellite operators win this legal and market battle, they could shift a large amount power away from broadcasters and cable networks – and give viewers far more choice about what channels they pay for.

The latest skirmish came on Capitol Hill Tuesday, where both broadcasters and cable TV operators testified before the Senate Committee on Commerce, Science, and Transportation. Each side tried to blame the other for the recent rise in blackouts that are becoming a staple end-game for failed negotiations between the networks and cable/satellite providers.

Blackouts Are Only The Beginning

But blackouts are only the beginning of this battle’s implications, which include how much cable/satellite service costs and what programming is available – including subscribers’ local channels and whether users will be able to buy individual channels or just the bundles (or tiers) of channels that are typically offered today. The rise of video on the Internet is bringing these issues to a head after decades of relatively settled arrangements between the two sides.

The occasion for the hearings was the 20th anniversary of the 1992 Cable Act, but it is also pretty clear that these hearings were just a warm up for debate on S2008, the “Next Generation Television Marketplace Act,” introduced to the Senate in December by Sen. Jim DeMint (R-SC), who is also a member of the Committee. (A companion bill, HR 3675, was introduced by Rep. Steve Scalise (R-LA) at the same time.)

The Deregulation Question

Essentially, S2008 would deregulate many of the current policies enacted by the 1992 Cable TV Law, in particular the rules governing the carriage of local television signals by satellite carriers, and the regulation of rates and broadcast signal carriage.

Under the must-carry provision of the existing law, broadcasters can require satellite and cable operators to carry their signals. Broadcasters can also negotiate a retransmission consent fee with cable and satellite providers.

Then there are the compulsory license laws put together in 1976. Those laws were put in place when Congress enacted rules that said cable providers could not just grab signals over the air and rebroadcast them without paying for the rights. But, to prevent every single copyright owner of all the programming from negotiating separately for their fees, the compulsory copyright licenses made the programming – not the signal – available for free.

The DeMint bill would wipe both these sets of regulations off the books. The idea is to let negotiations for the carriage of broadcast stations take place in the same deregulated environment as negotiations for carriage of non-broadcast networks such as Discovery, Food Network or AMC.

Who’s Subsidizing Whom?

Cable TV operators would love such a change, because right now they are chafing under 20-year-old rules that they say force them to provide local TV channel service to consumers and subsidize local broadcasters.

Broadcasters, predictably, are crying foul. Such a repeal would give the cable providers too much power, they argue. And the removal of compulsory copyright would “increase the number of copyright negotiators tenfold and increase the risk of a negotiations breakdown of retransmission rights exponentially,” according to former Sen. Gordon Smith, who testified for the National Association of Broadcasters.

The cable TV providers at the hearing had little sympathy for that argument. They say the broadcasters’ consolidated negotiation power is one of the biggest factors boosting cable TV rates. Colleen Abdoulah, CEO and Chairwoman of WOW! Internet, Cable, and Phone, outright accused competing broadcasters within the same markets of colluding to raise carriage fees by anywhere from 21% to 161%.

“Over the past four years, 800 small cable providers out of business,” Abdoulah told the Committee members. “We’re already being squeezed out from retransmission fees.”

The Bundling Issue

With less regulations in place, cable TV providers are hoping to get clear of broadcasters’ use of channel bundling as a bargaining platform. Reduced channel bundling is certainly on consumers’ wish lists, since many would prefer a more a la carte arrangement where they could pay only for the individual channels they actually want to watch.

Under current regulations broadcasters, who also own many non-broadcast channels, have forced bundling, cable and satellite providers accuse. In addition to stopping any sort of a la carte arrangement, such bundling prevents providers from offering specialized tiers of content (like an “all sports” bundle).

How Common Are Blackouts Anyway?

A big focus of today’s testimony was on how to reduce content blackouts. The broadcasters say blackouts happen very infrequently; the cable/satellite providers cited 69 incidents so far in 2012.

Even Sen. John Kerry (D-MA), who doesn’t want to see wholesale deregulation, brought up the problem: “We don’t want to see the pulling of signals as a way to settle negotiation disputes,” Kerry said in his opening remarks.

While the broadcasters an cable networks looked for simple tweaks to existing law, the cable/satellite providers were adamant that broadcasters have too much power already.

“We know how this system works. I guess we prefer the devil we know,” urged Martin Franks, Executive Vice President for Planning, Policy, and Government Affairs, CBS Corporation. Franks emphasized that the actual rate of negotiation failures was minimal when compared to the number successful negotiations.

“The consumers don’t like this model,” Abdoulah countered. “Blackouts are not the only measure of success or failure. Double-digit raises in cable rates… that’s a failure.”

While both sides took potshots at each other, little mention was made of the elephant in the room: Internet based content providers such as Netflix and Hulu that are challenging the basic business models of both the broadcasters and the cable companies. So while this fracas has been bitter and expensive, it may turn that the two sides are both fighting the wrong war.