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A modest proposal for the next retransmission fight

It’s hard to see the outcome of the retransmission fight between CBS and Time Warner Cable as anything but a victory for the network. When the CEO on one side of the deal admits publicly “we certainly didn’t get everything we wanted,” as TWC’s Glenn Britt did Monday, it’s a pretty good sign they got their clock cleaned.

According to Broadcasting & Cable, TWC will pay CBS something in the neighborhood of $2 per subscriber per month to carry CBS-owned stations, up from something closer to 75 cents per subscriber under their previous deal. The deal also includes carriage of Showtime, including Showtime’s TV Everywhere offering Showtime Anywhere, The Movie Channel, CBS Sports Network and the Smithsonian Channel. CBS also retains most out-of-home streaming rights to its content, leaving it free to license its content to over-the-top competitors to Time Warner Cable.

With the NFL Football season getting underway in earnest next weekend, Time Warner’s capitulation was largely a formality.

The only potential silver lining for cable MSO is that the high-profile blackout brought on by the dispute, which included CBS stations in New York, Los Angeles and Dallas, as well as a nationwide blackout of CBS.com for TWC broadband subscribers, might prompt policymakers to do something about the retransmission consent rules to level the playing field between networks and pay-TV providers and prevent future blackouts.

As BTIG Research analyst Rich Greenfield has been arguing forcefully since the CBS blackout began (see here, here and here) the retransmission consent regime, originally intended to bolster local broadcast programming, has gone badly off the rails and today serves largely to aid and abet the broadcast networks’ extortion of pay-TV providers and victimization of consumers.

Unfortunately, the current system was established by Congress in 1992 and it would take a new act of Congress to change it. Given the current makeup and dysfunction of Congress, particularly in the House, it’s hard to imagine any sort of sensible policy coming from Capitol Hill anytime soon. While Greenfield and others have argued that the Federal Communications Commission has more legal authority to resolve retransmission disputes than the commission itself has claimed the current FCC is down two (out of five) commissioners and is headed by an interim chairwoman, Mignon Clyburn. Even if some commissioners are inclined to act more forcefully they will likely have to wait until the agency is up to full strength and the new, permanent chairperson is seated.

So, here’s a modest proposal that might redress some of the “disequilibrium of power” (to quote Greenfield) between the networks and pay-TV providers, at least around the margins: Have the Justice Department or Federal Trade Commission treat the common practice by media companies of bundling low-rated networks like the Smithsonian Channel in with “must-carry” channels like CBS to achieve carriage fees and channel positions those low-rated networks would not command on their own as the illegal tying arrangement they clearly appear to be.

In antitrust law, a “tying arrangement” consists of conditioning the sale of one product (the “tying product”) on the buyer’s agreement to purchase a separate product (the “tied product”). Tying arrangements are not always illegal. But when used to “maintain or augment the seller’s pre-existing market power or impair competition on the merits in the market for the tied product,” they can become per se violations of both the Sherman and Clayton antitrust acts.

Unbundling Showtime and Smithsonian from CBS, by itself, probably would not have prevented the TWC blackout. But it would have made for a cleaner negotiation and shielded TWC and its subscribers from the cost of what are essentially windfall profits for CBS.

CBS is hardly the only offender. Disney, for instance, regularly manages to tack on an additional of $0.70-$1.00 per subscriber for low-rated channels like ESPN Classic and ESPN News and ABC Family in negotiating carriage for ESPN and ABC. Unbundling them wouldn’t necessarily make ABC and ESPN cheaper than they are now, but pay-TV subscribers should not have to pay for Disney’s unearned, windfall profits as well just to watch the programming they want.

Retransmission consent is a complicated issue involving a number of competing policy interests. But there really isn’t any policy justification for allowing the sort of tying arrangements it currently helps enable. Treating the market distortions caused by channel-tying as an antitrust issue, where the authority of the Justice Department and/or FTC to act is clear and unambiguous, would not require any new act of Congress or any policy debate within the FCC related to retransmission consent and would remove at least one irritant from retrans negotiations going forward. It might also slow the rate of growth in programming costs and pay-TV subscription fees, which everyone but the networks would like to see.

Cracking down on channel-tying wouldn’t resolve all the problems related to retransmission consent. But it might tilt the playing field between the networks and distributors a little bit toward level.