Economics of Retrans Raise Some Questions for Top FCC Economist

There are “a couple particular details of which there has not been a lot of evidence” that are important issues in understanding the finances of the retrans system, said Baker. The commission’s chief economist noted he wasn’t speaking for the regulator or the commissioners. Lawyers for broadcasters and cable operators and another economist on the panel debated how increased pay-TV competition, with the rise of DBS and now telco TV, has affected retrans.

Understanding the “pass-through rate” of retrans fees, from pay-TV providers to broadcasters, that are borne by subscribers is important, Baker said. So is understanding the “elasticity of demand” for pay-TV service to price, in terms of if and to what extent increases in customers’ monthly pay-TV bills affect their willingness to keep or to cancel service, he said. “Those are key parameters you need to understand to decide if the system” is “mostly just splitting money between the broadcasters and the MVPD” multichannel video programming distributors, Baker said.

Baker wondered what factors have accounted for the “rapid increase” in MVPD prices in recent years, noting there are many suggested explanations. Broadcasters may have increased “bargaining leverage” to get more money in retrans fees from MVPDs because there are more pay-TV competitors, he said. It’s been noted that the net amount of money paid to broadcasters from cable operators isn’t “rising rapidly, it’s just the form of payment that’s changing” as it moves to cash from other, in-kind compensation such as carrying other channels, Baker said.

In the rare instances where new retrans deals can’t be reached and broadcast programming is blacked out to a pay-TV provider’s customers, “how costly is it to consumers?” Baker asked. “There’s a lot of fussing about it, but do we really know how to measure it?” and “it’s a handful of times a year that we see these events,” he continued. He seemed to agree with a point made by some panelists, including Managing Director Jeffrey Eisenach of Navigant Economics, who has studied the issue for broadcasters. “The frequency is small and the minutes [lost] are small” as a percentage of all TV viewing and all deals, Baker said.

Baker had a several-minute exchange with panelist Antoinette Bush, a lawyer at Skadden Arps who has represented broadcast networks at the FCC, over whether consumers would gain from notification by pay-TV providers when a retrans contract is a month away from expiring. “You're going to worry consumers a month in advance?” Baker asked Bush. She earlier noted that “regulation isn’t intended to assure a specific business model” even though big pay-TV providers like DirecTV get volume discounts. “You have a much more competitive market than when the Cable Act was originally passed in 1992” allowing for broadcasters to get cash for carriage, she said.

There’s “competition breaking out all over the place,” among both pay-TV providers and broadcasters, Eisenach said. “Both players have some ‘market power.'” The “case that the plaintiffs, if you will, have failed to make is that the outcome is in any way disadvantaging consumers,” he said of retrans deals and the pay-TV providers who want the FCC to change how it handles disputes. Bigger-money retrans deals mean “the costs flow through to subscribers in the form of higher rates,” said lawyer Barbara Esbin of Cinnamon Mueller, representing small cable operators. That’s “when the operator can flow it through,” which can’t always happen in the “economically depressed areas” many smaller operators serve, she said.

With the Media Bureau planning to issue a rulemaking notice on retrans this quarter, Baker said, “we'll have an opportunity to hear from all of you who have information,” something he encouraged. Some expect the rulemaking to circulate soon (CD Jan 19 p17). As of late Friday it hadn’t, said an FCC official.