Comcast-NBCU: FCC Conditions Deal to Promote Online Video Services; Questions Remain
Perhaps video never “killed the radio star,” but what should we expect for online video now that the joint venture between Comcast Corporation and NBC Universal, Inc. (“Comcast-NBCU”) has become a reality? This new entity may be the product of two “old media” powerhouses, but new-media concerns about online video distribution represent a major theme in regulatory approvals of the Federal Communications Commission and the U.S. Department of Justice. These new regulatory ground rules will help shape the online video marketplace – a marketplace that so far is vaguely defined and in a state of transformation.
As we’ve previously described, the FCC often uses its merger-review authority to help advance objectives that may ordinarily exceed the agency’s reach. In light of the continuing legal battles over the scope of the FCC’s legal authority to regulate the Internet, it is noteworthy that Comcast and NBCU, in an effort to obtain FCC approval, agreed to some enforceable commitments and conditions to govern the new entity’s participation in the online video marketplace. While these conditions are specific to the transaction, they will affect how Comcast-NBCU will negotiate with third parties who want access to Comcast-NBCU content.
A key question: what “marketplace”? In conditioning its approval, the FCC expressed concern that Comcast-NBCU would have the “incentive and ability” to discriminate against two FCC-defined categories of online video distributors:
- Multichannel video programming distributors (or “MVPDs”) such as cable operators, satellite providers or other providers of such multichannel programming; and
- Non-MVPD distributors of online video programming, such as standalone “over-the-top providers” like Hulu (in which NBCU has an ownership stake), Netflix, GoogleTV and iTunes.
In general, these categories contrast MVPDs (as providers combinations of linear program streams such as cable or broadcast channels of programming) with more “over-the-top” video services (such as on-demand and pay-per-view services). To complicate matters further, in a footnote, the FCC left open the possibility that certain types of OVDs also could be deemed MVPDs. The FCC determined that “regardless of whether online video is a complement or substitute to MVPD service today, it is potentially a substitute product” and sought to implement conditions to address these “nascent” online video services. The FCC’s decision has consequences for online video and in other contexts. For example, just yesterday DirecTV asked the FCC to clarify which entities constitute MVPDs for purposes of regulations involving set-top boxes.
With respect to the marketplace for online video, Cardozo Law School professor Susan Crawford's blog post on Comcast-NBCU provides an interesting analysis of the FCC’s decision to apply conditions to protect OVDs. She asserts that the FCC has “created a market” by designating OVDs as a category entitled to protection. In my view, the “OVD” designation is more like a class of service providers than a market, because the FCC declined to identify current potential substitutes for the provision of these services and implicitly raised the question of whether some OVDs compete in a separate market for the provision of multichannel programming service. For these reasons, and in light of the definitional ambiguities surrounding the “MVPD” designation, the “marketplace” for OVD services, however defined, is an evolving concept.
Acronym soup notwithstanding, the FCC sought to address Comcast-NBCU’s purported incentives to discriminate against rival OVDs (whether MVPD or not). For example, the FCC expressed concerns that Comcast-NBCU would raises prices for rivals to access its affiliated programming or would refuse to provide this programming in a timely manner or in the same quality. The FCC found that its program-access rules – i.e., rules designed to prevent vertically integrated program suppliers from improperly favoring affiliated cable operators – would not provide sufficient protection because strategies of uniform price increases would not discriminate among service providers. Instead, the FCC required Comcast-NBCU to provide affiliated programming to rival MVPDs at fair market value and on nondiscriminatory prices, terms and conditions.
For OVDs seeking access to Comcast-NBCU programming, the FCC provides the following rights.
- An OVD may decide to become an MVPD and, like other MVPDs, would be entitled to access Comcast-NBCU-affiliated content for online display at fair market value and on nondiscriminatory prices, terms and conditions.
- An OVD may request that Comcast-NBCU offer its video programming to the OVD on the same terms and conditions that would be available to an MVPD, provided that the OVD is willing to pay the economic equivalent of the price, terms and conditions on which Comcast-NBCU provides video programming to MVPDs. If the OVD qualifies, Comcast-NBCU must provide “materially” the same programming that it offers to other “similarly situated” MVPDs; however, if the other MVPD is obligated to make the programming available through a linear stream, the OVD’s obligation must be “materially similar.”
- An OVD will be entitled to access to “comparable programming” available on economically equivalent prices, terms and conditions if the OVD enters into an arrangement to distribute programming from one or more of Comcast-NBCU’s non-affiliated “peers.” Who are these peers? They include certain broadcast networks, cable programmers, production studios and film studios whose names you’ve heard before (e.g., they are affiliated with Disney, Time Warner, News Corporation, Viacom, Warner Bros., 20th Century Fox or Sony Pictures) or otherwise must be one of a handful of the largest players in their industry. Unlike the second option, this programming need not be provided in linear streams.
So what’s the upshot? Comcast describes these procedures as a “focused mechanism for online video providers to obtain access to certain NBC Universal content [that is] carefully crafted to be fair to all players.” That said, these conditions clearly serve as a filtering function to help ensure that Comcast-NBCU only has to share programming with companies that demonstrate certain “bona fides.” OVDs may opt to enforce these conditions via arbitration, but the legal text is replete withdense interpretive issues. Moreover:
- If the OVD opts to become an MVPD, that is an expensive proposition. The OVD must consider the costs of deploying networks, negotiating carriage and programming rights, and obtaining local franchises, as well as the prospects of being deemed another cable company.
- If the OVD decides to compete on an equal footing with an MVPD, that too is an expensive proposition. The MVPD must consider the costs of economically equivalent programming and the likely requirement that the programming would have to be provided as a linear stream offered on an “all or nothing” basis – i.e., akin to real-time distribution of a program channel as opposed to on-demand programming.
- If the MVPD enters into an agreement with a Comcast-NBCU “peer” for comparable programming, that is – you guessed it – an expensive proposition. This trigger requires an agreement with one of the largest industry players, who no doubt would have to be presented with a compelling business case to sign an agreement with an unaffiliated distribution partner because many of these participants already have extensive distribution channels.
In addition, Comcast provides some online programming on an “authenticated” basis to only those individuals who subscribe to Comcast MVPD service. Comcast will continue to be allowed to do so, subject to these sets of conditions. Comcast-NBCU also will not be allowed to put certain online programming behind a paywall for as long as at least one of the other major broadcast networks provides a similar service.
The FCC has tried in other ways to implement enforceable “fair play” conditions on Comcast-NBCU. Comcast-NBCU may not enter into agreements to hamper online distribution of its or another’s video programming. Comcast-NBCU also must continue to offer standalone broadband Internet access services, at reasonable prices and of sufficient bandwidth that customers can access online video services without being required to purchase a Comcast-NBCU subscription for cable television services. The company may not disadvantage rival online video distribution services through its broadband services and/or set-top boxes. Finally, Comcast-NBCU has agreed to abide by the FCC’s “Open Internet” rules (a.k.a "Net Neutrality"), and it appears that this commitment would remain even if those rules are successfully stricken or modified by judicial appeal.
As for Hulu, as a result of the FCC’s approval, neither Comcast nor NBCU will be permitted to exercise any rights to influence Hulu’s conduct or operation, but the companies may retain a purely economic interest. Recent media reports indicate that Hulu is considering an MVPD-style approach to online video distribution. Just yesterday Hulu CEO Jason Kilar posted his thoughts about the future of TV and argued that consumers, advertisers and content owners will play a more important role than distributors in the future of online video – an interesting take in light of the FCC’s actions to limit Comcast-NBCU’s oversight.
In the end, the FCC’s “transaction-specific” conditions will have major implications for the “over the top” providers who had no part in the transaction. Time will tell how the FCC’s actions, and the reactions of Comcast-NBCU and the competition, will influence the evolution of online video services. In light of this unprecedented vertical combination, all eyes will be on the industry to spot the next players in line with plans to create a similar combination of content and distribution.