FCC Majority Approves Anticompetitive Rulemaking that Would Reduce Efficiency in Video Programming and Lower Welfare

Alden Abbott —  25 February 2016

On February 18, the Federal Communications Commission (FCC) voted three-to-two in favor of a notice of proposed rulemaking (NPRM) fancifully entitled “Expanding Consumers’ Video Navigation Choices, MB Docket No. 16-42; Commercial Availability of Navigation Devices, CS Docket No. 97-80”.  The NPRM, in the words of the FCC’s press release, will “create a framework for providing innovators, device manufacturers, and app developers the information they need to develop new technologies, reflecting the many ways consumers access their subscription video programming today.”  In reality, far from “creating a framework” to spawn new technologies, this NPRM promotes uncalled-for regulatory intrusion into an increasingly dynamic and efficient market, and (as Free State Foundation President Randy May aptly put it) represents FCC “regulatory policy run amok.”  (A November 2015 article by Heritage Foundation scholar James Gattuso provides a broader and more detailed critical assessment of FCC regulation of the video programming market.)

In particular, as one legal analyst summarizes, the NPRM would require “multichannel video programming distributors (MVPDs) providers to make ‘three core information streams’ available to companies developing devices or applications that might compete with MVPDs’ set-top boxes.”  (MVPDs are providers of pay television services, such as cable television, direct broadcast satellite, fiberoptic cable (e.g., Verizon FIOS), and competitive local exchange companies.)  Specifically:

The NPRM would require the MVPDs to supply the following to potential competitors: 1) information about what programming is available to the consumer, such as the channel listing and video-on-demand lineup; 2) information about what a device is allowed to do with content, such as recording; and 3) the content itself.

This new regulatory requirement makes no sense and threatens to undermine competition and innovation.  As telecommunications scholar Randy May recently emphasized, the FCC itself adopted a rule in June 2015 establishing a presumption that local video markets, on a nationwide basis, are subject to “effective competition.”  Indeed, May noted that the FCC conceded in a February 2 appellate brief that there has been a “transformation” of the multichannel video marketplace, that “consumers have alternatives to cable,” and that “cable’s market share has sharply declined.”  (May embellished the point in stating that today “consumers  may choose among a multitude of services and devices, such as Netflix, Hulu, Amazon Fire TV, Google Chromecast, Apple TV, and Roku.  And they are doing so in exponentially increasing numbers.”)  This means that regulation in this area is inappropriate, since it is well accepted that economic regulation of competitive markets is unjustifiable.  (Indeed, even imperfectly competitive markets and monopolies should not be regulated unless regulation is likely to yield welfare outcomes that are superior to reliance on market forces, a test that is not easily met – a point made by such renowned economists as James Buchanan and A.E. Kahn.)  What’s more, FCC regulation, which tends to slow innovation, is likely to prove especially harmful in the MVPD sector, given that market’s record of rapid and continuous welfare-enhancing introduction of new and improved services.

The February 18 dissenting statements by Commissioner Ajit Pai and Commissioner Michael O’Rielly further explored the NPRM’s serious deficiencies.

After summarizing the harm caused by prior FCC regulation of video set-top boxes, Commissioner Pai stated:

[W]e are en route to eliminating the need for a set-top box. An app can turn your iPad or Android phone into a navigation device. MVPDs have deployed these apps and are in the process of developing more advanced ones.  The Commission should be encouraging these efforts.  

But this proposal would do precisely the opposite.  It would divert the industry’s energies away from app development and toward the long-term slog of complying with the Commission’s new regulatory scheme for unwanted hardware.  And the Notice goes further; it actually proposes imposing a number of regulations that would discourage the development and deployment of MVPD apps.  That’s not what the American people want. I’m confident that most consumers would rather eliminate the set-top box altogether than embrace a complex regulatory scheme that will require them to have another box in their home and won’t take effect for at least three years.

Commissioner O’Rielly focused on the economic and technical harm imposed by the NPRM, as well as its legal deficiencies:

[The proposal] could open multichannel video programming distributor (“MVPD”) networks to serious security vulnerabilities, exposing them to potential network damage and content theft.  It could strip content producers of their rights to control the distribution and presentation of their content.  It could ultimately subject over-the-top (“OTT”) providers to the same regime. . . .  Worst of all, it would certainly devalue the content produced by programmers large and small, by enabling anyone capable of writing a compliant app to turn on a free stream of video content painstakingly cobbled together by an MVPD at great expense – the ultimate free-rider problem.  MVPDs, broadcasters, and independent programmers alike would all lose some incentives to keep doing what they do, and some would opt for the sidelines, leaving consumers with fewer video options. . . .

The statutory authority on which this fantasy rests is equally as far-fetched. The section that discusses authority will long live as a testament to the level of absurdity that can be achieved in four short paragraphs when two defenseless statutes fall down a rabbit hole into a land where words have no meaning.  While billed as an attempt to enhance competition in the set top box market, the item shoots miles beyond that narrow frame on the very first page, redefining statutory terms plainly referring to hardware, such as “navigation device,” “interactive communications equipment,” and “other equipment” to mean either hardware or software (including apps). I don’t know how much clearer the terms “device” or “equipment” could be in their intent to reference tangible, physical hardware. If those words don’t work to restrict the Commission, are there any that ever could? And I don’t think that anyone here believes for a second that [the statutory language discussed] could ever have made it out of a single Congressional committee in 2014 if the members had known it would be interpreted to allow the FCC to force MVPDs to stream all of their content for free to any app developer willing to jump through a few hoops.

In sum, the FCC’s February 18 NPRM flies in the face of sound economics, video programming distribution history, and reasonable statutory construction.  If finalized, it will further reduce innovation, economic efficiency, and consumer welfare.  The three commissioners who voted for this misbegotten proposal should rethink their position and act to end this unwarranted proposed regulatory intrusion into a competitive and innovative marketplace.

Alden Abbott

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I am a Senior Legal Fellow at the Heritage Foundation. I write on antitrust, domestic and international regulatory policy, and law and economics. I am an Adjunct Faculty Member at George Mason Law School.