There’s Probably a Blackout in Your Television Future: Tracking New Carriage Negotiation Strategies Between Video Content Programmers and Distributors

Abstract

Video programmers and the satellite and cable operators who distribute theircontent execute contracts for the mutually profitable offering of services toconsumers. However, when programmers and distributors fail to reach closure onnew terms and conditions before the end date of an existing agreement, serviceinterruptions (“blackouts”) occur. Video consumers resent having to pay sizablemonthly subscriptions for content they temporarily cannot view, and bothprogrammers and distributors risk financial injury.Recognizing the mutual harm to all parties, video programmers and so-calledMultichannel Video Programming Distributors (“MVPDs”) usually limit thefrequency and duration of blackouts. Heretofore, MVPDs have been able to pass onto subscribers higher programming costs through increased monthly rates withoutsignificant declines in subscribership. However, the marketplace for videoprogramming has experienced significant change in recent years, calling intoquestion the continuing ability of MVPDs to raise rates annually at percentages wellabove measures of general inflation. Additionally, MVPDs have experiencedunprecedented declines in subscribership and encountered consumer resentment athaving to pay rates, often in excess of $100 monthly, for programming tierscontaining dozens of channels, many of which few subscribers have an interest inviewing.Through cord cutting and cord shaving, increasing numbers of video consumershave abandoned an MVPD subscription or downgraded to a less expensive servicetier to incur lower monthly rates. Video consumers also have shown greater interestin so-called nonlinear content, available as downloadable files and streaming ondemand from new online services, such as Amazon Prime, Hulu, and Netflix, in lieu of conventional live, linear content transmitted by television broadcasters andMVPDs. The marketplace success of nonlinear video content providersdemonstrates the growing willingness of consumers to use broadband networks forover-the-top (“OTT”) access to alternative and competitive sources.This Article identifies significant changes in the video marketplace that willtrigger more frequent and longer blackouts. The Article will explain howmarketplace changes impact the three major sources of video content that MVPDsand broadband networks deliver: (1) broadcast television channels; (2) video contenttargeted for MVPD subscribers, such as that on CNN, ESPN, and HBO; and (3)video, offered on both a linear and nonlinear basis, by new OTT ventures.For broadcast television, this Article shows how current marketplace conditionschallenge the ongoing viability of a legislatively crafted compromise that accordsbroadcasters the option of electing mandatory carriage of their signal by MVPDs (the“must-carry” requirement) in lieu of contractual “retransmission consent”negotiations. Broadcasters secure guaranteed carriage via MVPDs, and MVPDsbenefit by the conferral of a low-cost copyright license to use broadcasters’ content.For competing nonbroadcast video content, MVPDs and the manufacturers ofdevices, such as Roku, which transfer broadband video content to television sets viabroadband networks, negotiate both copyright licenses and delivery rights directlywith video programmers. This group also faces market volatility due to changes inconsumer preferences and the growing array of video content options available.The Article seeks to answer whether video programmers or MVPDs haveoverestimated their own negotiating leverage and, in turn, their ability to securefavorable contractual terms and conditions. Broadcasters historically appear to havegreater leverage, because they have exclusive control over live, “must-see,” linearcontent, such as sporting events. This advantage has motivated most broadcasters toeschew the must-carry option and elect retransmission consent negotiations. TheArticle suggests that a significant increase in blackouts has resulted from reducedopportunities for MVPDs to raise subscription rates without triggering substantialincreases in subscriber migration to other broadband-delivered program options.The Article notes that vertically and horizontally integrated MVPDs, such asAT&T and Comcast, are better situated to tolerate more frequent and lengthyblackouts. These companies can offset the adverse financial impact of MVPDsubscriber churn with blackout-free alternatives, increased subscribership of theirbroadband services and unregulated bundling of services and content for subscriberswilling to upgrade and pay a higher monthly fee. The Article closely examines arecent antitrust enforcement case that approved AT&T’s acquisition of Time Warner,with an eye toward determining whether reviewing courts understood shiftingmarketplace conditions that affect the likelihood for more and longer blackouts.The Article concludes that in the AT&T case, both the district and appellate courtswoefully underappreciated the ability of this widely diversified venture to trigger andtolerate more blackouts in its capacity as an MVPD and broadband access provider,separate and apart from its capacity as the new owner of Time Warner’s “must-see”CNN and HBO content. The courts concluded that AT&T, having largely abandonedits leverage over access to the Time Warner video content, lacked the ability to trigger blackouts. The courts emphasized the long-term carriage agreements TimeWarner had previously negotiated with unaffiliated MVPDs and AT&T’s offer tomaintain content access during arbitration of disputes occurring for seven years aftermerger approval. The courts failed to recognize the significant harm AT&T, in itscapacity as a major national MVPD, could inflict on competition and consumers byincreasing its use of blackouts for negotiating leverage.