• FCC's Proposed Broadening of Video Rules Seems Unlikely to Spur Major Market Change

    Yesterday, FCC Chairman Tom Wheeler wrote in a blog post that he intends to start a rule making proceeding to broaden the definition of what a multichannel video programming distributor (an "MVPD," or more simply, a cable, satellite, telco operator that distributes bundles of cable and broadcast TV networks) is, to include companies that don't actually own their own delivery infrastructure. My weekly podcast partner Colin Dixon and I call these non-infrastructure companies virtual pay-TV operators, or "vPops" for short.

    This "technology-neutral" change would mean vPops using the Internet/broadband to deliver linear TV networks would also be considered MVPDs, therefore entitled to the same regulatory-mandated benefits. Wheeler characterized the move as being pro-consumer and pro-innovation and on the face of it, it definitely appears to be. But, digging deeper, it's not clear that this type of regulatory change would overcome actual market forces that will still determine the average viewer's video choices.

    Wheeler's key objective here is to allow any potential vPop (be it Aereo, Apple, Amazon, Google, Sony, Dish, etc.) that seeks to deliver linear TV networks over the Internet to have the opportunity to make deals for this programming. Under the current rules, there's no obligation for broadcasters and cable programmers to even negotiate. The proposed change would not only require them to negotiate, but to do so in good faith. These would clearly benefit vPops in getting underway.

    But if these vPop companies were offered the same type of bundled deals as existing MVPDs (or worse because they don't have much negotiating leverage), then they would similarly bear $40-$50 per month of programming cost. Add in costs for delivery, customer service, marketing, etc., and the vPop would have little flexibility to price their service much below current MVPDs.

    This is the conundrum I explained recently in "Why Virtual Pay-TV Operators Have Very Low Odds of Succeeding." Importantly, the FCC's proposed change wouldn't impact big programmers' (e.g. Disney, NBCU, Fox, etc.) ability to bundle their networks. So the FCC's change doesn't enable vPops to pick off only the networks they want, pay less for them, and then provide just them to viewers. In other words, market forces still rule.

    There's an argument to be made that since vPops don't bear some of the costs traditional MVPDs do, such as truck rolls, network maintenance/upgrades, set-top boxes, etc. they could swallow the cost of programming and still price their services below current rates by accepting a thinner profit margin. Then they'd be positioned to upsell services like more DVR storage, digital downloads and other add-ons.

    The challenge though is that existing MVPDs have been very successful enticing consumers into triple-play bundles (video/broadband/voice), so new vPops need to get consumers to break their bundle to switch their video service. This drives up the cost of the remaining broadband service, diminishing the potential cost savings. Further, in today's saturated market, gaining video subscribers has never been harder. As an example, Verizon is currently testing triple-play offers that include a $150 pre-paid VISA card and a free year of Netflix.

    Beyond all this, there's the larger question of whether vPops offering yet another bundle of linear networks would gain traction with consumers in the first place. With more viewers switching to on-demand, and OTT services like Netflix, Hulu and Amazon thriving, it seems like a purely on-demand service would in fact be more appealing.

    In short, the FCC's move to broaden the definition of MVPD to include vPops is worthwhile, but it's hard to see how it alone would spur any major changes to today's multichannel bundle or the choices consumers receive.