FCC's Video Report Reveals Disconnect Between

Market's Effective Competition and Outdated Regulation

by

Seth L. Cooper *

[Below is a short summary of this latest FSF Perspectives. A PDF version of the complete Perspectives is here.]

In July, the Federal Communications Commission released its Video Competition Report. This means the FCC may finally be moving past its repeated failures to comply with Congress's mandate to annually issue its reports. By including data about the video market up through the end of 2011, the FCC now has a Report that more accurately reflects the current video market's competitiveness.

But despite a mountain of evidence in the FCC's Video Report showing that the video market is "effectively competitive," the FCC refuses to declare it so. With its now familiar practice of refusing to recognize the competitiveness of other market segments, the FCC's posture in this regard appears calculated to bolster legacy video regulation and to provide a basis for future regulation.

Online video, for the first time a major focus of the Video Report, constitutes just one of the latest innovative breakthroughs that is reshaping the video market's landscape and offering consumers an abundance of new choices. Other developments in the video market include the rapid expansion of high-definition video, digital video recorder (DVR) options, video-on-demand functions, as well as TV-everywhere and other mobility capabilities.

Report data regarding MVPD services utterly demolishes any pretensions that the video market is now subject to a last-mile cable "bottleneck." In 2010, 98.5% of all households - that is, 128.8 million - had access to at least three multichannel video programming distributors (MVPDs). The combined market shares of the five major cable operators has dropped to 60% of the video subscriber market, with direct broadcast satellite (DBS) providers possessing 34% and recent "telephone" MVPD entrants serving 7% of the market. To put these numbers into perspective, the FCC typically deems local cable markets effectively competitive if half of its consumers are served by at least two MVPDs and if the number of households subscribing to service from a provider other than the largest MVPD exceeds 15%. MVPD penetration rates and subscribership numbers dwarf those FCC standards for assessing effective competition.

Video Report data makes evident the disconnect between the competitive state of today's market and outdated legacy video regulations that continue to restrict video services. Unfortunately, in its Report the FCC avoided making any determination as to whether the video market is, in fact, effectively competitive. It thereby avoided any admission of the non-existence of cable bottlenecks that originally formed the basis for the legacy video regulations that it continues to enforce. The Report also fit with the FCC's pattern of ignoring or downplaying the competitive effect of cross-platform competition and close substitutes - in this case, online video services. This means that video services will continue to be regulated under 1990s analog-era assumptions about cable monopolies that have no continuing basis in reality.

The Report's non-conclusions regarding video competition likewise lend a misleading surface plausibility to future attempts to regulate video services for the ostensible reason of making it more competitive. But outdated regulations impose compliance costs and also result in economic dislocations that competitive markets would avoid. In a competitive setting, market forces offer the best option for unleashing innovation and encouraging investment that result in new products and services.

Regulatory policy toward video services should be brought into alignment with the competitive conditions that actually prevail in today's market. For policymakers, this starts with squarely recognizing that the video market is effectively competitive and that cable bottlenecks do not exist. Congress and the FCC should proceed with deregulatory action that will rely more heavily on the vibrant competitive forces that have produced the abundance of innovative new video services that consumers enjoy today and which promise to deliver future breakthroughs.

* Seth L. Cooper is a Research Fellow of the Free State Foundation, a non-partisan Section 501(c)(3) free market-oriented think tank located in Rockville, Maryland.

Read the complete Perspectives with footnotes here.