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'Video Choice Act' is a bad deal for everybody making, selling, watching TV content

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Pay-TV providers and television broadcasters negotiated hundreds of deals last year with no blackouts.

With so many negotiations completed successfully, TV blackouts are in a quiet period. So, why is the Federal Communications Commission considering new price controls in a pending proceeding that would put the government in the middle of market-driven disputes over video content?

The state of the nation's video marketplace has suddenly drawn increased attention with the recently announced Comcast/Time Warner Cable merger and the expectation that the FCC's new chairman could signal how he intends to proceed on this issues in the coming weeks.

The answer is increasing competition among pay-TV providers. Verizon, AT&T and Google are now competing with cable, and Netflix is winning awards for its original online series, "House of Cards."

Recent news that Amazon is considering adding live TV to its online video offering heralds more competition is on the way.

The increased competition is threatening the profit margins of cable and satellite pay-TV providers, who are unaccustomed to intense market pressure.

That’s why a group of pay-TV providers is urging Congress and the FCC to regulate rates for television programming distribution rights.

Rep. Anna Eshoo, D-Calif., has already answered the call with a bill that should alarm anyone who has an interest in video content.

Though it's dubbed the “Video Choice Act,” the bill has more in common with the philosophy of Pirate Parties International than American consumer protection laws.

The bill would impose government rate-regulation on local television programming and force television networks to sell their programming rights to pay-TV providers on an “a la carte” basis.

It would also authorize the FCC to give broadcast programming rights to pay-TV providers, as well as force broadcasters to distribute their content online whenever the agency determines programming negotiations have reached an impasse.

Content owners would usually attack a bill that proposes to devalue intellectual property rights to such an extraordinary degree, but not this time.

Pay-TV providers that own content have not opposed the bill, and those that don't own content expressly support it, because the bill would restrict only programming distributed by broadcasters.

It would force television network affiliates to furnish their programming to pay-TV providers at below-market rates, while allowing cable and online programmers to set their own prices.

The resulting market distortion would maximize pay-TV profits by shifting a portion of their programming costs to broadcasters.

This comes at a time in the marketplace when TV broadcasters are compensated for their programming by pay-TV providers at rates that are sometimes two times less than lower-rated, less-popular cable channels are paid for their content.

Pay-TV providers are willing to risk the bill’s invitation to slide down the slippery slope of the Pirate Party approach to intellectual property rights so long as it helps them maintain margins in a more competitive environment.

Incumbent cable companies were once the dominant providers of pay-TV service -- and still are in rural areas -- which has allowed them to increase their subscription prices at double the rate of inflation.

As a result of increased competition, their share of the pay-TV market has fallen over the last decade from 76 percent in June 2002 to 56 percent in June 2012.

The demand for traditional pay-TV services is also beginning to decline as more consumers “cut the cable cord” and move exclusively to online video.

Firms typically maintain profit margins in a declining market by cutting costs through increased operational efficiency or improved relationships with suppliers.

But in the highly regulated communications market, firms have the option of asking the government for help through preferential regulatory treatment.

The pay-TV group petitioning the FCC for heavy-handed regulation of broadcast programming has chosen the latter option.

Even though obtaining the rights to broadcast programming represents a small fraction of pay-TV operating costs — about two cents of every dollar — incumbent cable operators had become accustomed to paying little or nothing to secure such rights.

In the past, they were able to use their dominant market position as leverage during programming negotiations by threatening blackouts.

Television stations usually caved because there were no other pay-TV providers to transmit their signals, which meant TV stations risked losing substantial advertising revenue while their channels were cut off.

As Wall Street observed when a pay-TV provider pulled the highest-rated television network off the air during programming negotiations last fall, pay-TV providers also have risks when they threaten a blackout in today's competitive marketplace.

They risk losing their subscribers who have the opportunity to switch to another provider, who do so when their contract ends or by bearing the cost of early termination fees to go to a competitor for video services.

The Eshoo bill would eliminate that risk for pay-TV providers, but would do nothing to mitigate the potential risk of lost advertising revenue faced by broadcasters.

TV stations would lose their only source of negotiating leverage, and broadcast networks would have an incentive to shift from television to cable programming, which enjoys full intellectual property protection.

That might improve profits for pay-TV providers in the near term, but it would also do grave damage to the foundational principles of intellectual property rights that drive content-creation in America, without providing any countervailing consumer benefit.

In the long term, everyone would lose.

Fred Campbell is executive director of the Center for Boundless Innovation in Technology and former chief of the FCC's wireless bureau.
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