Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age (24 page)

BRIAN ROBERTS'S FAVORITE SPORT MAY BE SQUASH
, but as a businessman he knows the real value in American television entertainment lies in controlling rights to football, basketball, and baseball games. If there was a guiding ethos to Comcast's pursuit of NBC Universal, it was to gain control over more sports programming. Live sports is the one thing that people can get almost nowhere else—not on DVD, not online—the only options are pay-TV or a stadium seat. Leo Hindery, a thoughtful former cable guy who has played leadership roles in TCI, AT&T Broadband, and Liberty, thinks that the winners in the media world will be those with a devoted audience. “If you own audiences viscerally, deep in their core … [that's] a relationship that has value,” he told
Bloomberg
in mid-2011. John Malone, interviewed in late 2009, sounded impressed by Comcast's NBC Universal strategy: “There's no question that if you have a strong position in sports, and you have distribution, you're kind of in the catbird seat. … Because if your competitors don't carry it, you're going to gain market share in your
distribution. If they do carry it, you're going to charge them a lot of money for it. So either way, it's kind of a nice position to be in. Trust me, I used to be there.”
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No form of programming is more visceral, addictive, and loyalty creating than sports.

In an era of disaggregation and fragmentation, watching cable sporting events is a shared pastime. Our brains love this kind of stimulation—indeed, the brain circuitry that makes us successful operates on the same kind of learning, memory, and motivation signals that sports programming provides. For a sports fan, the salient focus of any room in which a cable sports channel is playing is the screen, and we're all wired to focus on the most salient stimuli. Sports fans care intensely about access to sports programming.

The complex interplay among teams, broadcasters, cable sports channels, and video distributors over the past ten years has led to a perfect storm: content that people (particularly men aged 18–49) crave, available only over pay-TV services at ever-higher prices. In many ways, the subject of sports programming crystallizes all the convergence stories of the twenty-first century—and sports provided the motivation for the NBC Universal deal.

You might think that the league commissioners were the most influential people in sports. You would be wrong: the leaders of companies that distribute sports content call the shots. They dictate how all of us see sports and how we think about what we are seeing. (Sometimes the distributors own the teams, which further simplifies the chain of influence.) Sports fans may even prefer to watch their teams on television than in person because they want all the content that accompanies a televised game. This is why the former CBS Sports president Neal Pilson told a reporter that the Comcast-NBCU deal was “the biggest thing that's happened in my 40 years in broadcasting. No question.”
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As Rupert Murdoch told News Corp. shareholders in 1996, ownership of long-term rights to major sporting events can be used “as a battering ram” in all pay-TV operations.
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Comcast now has more battering rams in its armory.

As the FCC observed in 2004, “The basis for the lack of adequate substitutes for regional sports programming lies in the unique nature of its core component: regional sports networks typically purchase exclusive rights to show sporting events, and sports fans believe that there is no good
substitute for watching their local and/or favorite team play an important game.”
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This is true “must-have” programming. According to the Congressional Research Service, “the programming for which consumer demand is both broadest and most intense is major sports programming.”
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The effect is so strong that in the places where there is real competition between video-distribution companies (satellite, cable, telco) most viewers choose their distributor based on the availability of sports content. The numbers are eye-popping, particularly where a subscriber's home team is involved. One survey showed that “some 40–48% of cable subscribers would be less likely to subscribe to cable service if it lacked local sports [programming].” An additional 12 percent of respondents were unsure whether the absence of sports programming would affect their decision, ensuring that at least 40 percent, and possibly as many as 70 percent, of potential video-distribution subscribers would not subscribe to a service that did not have local sports programming.
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So a video distributor's ability to gain access to local sports content, and the price and other terms of conditions of access, are important factors in its ability to survive. A satellite, cable company, or phone company that drops local sports programming risks subscriber defections. Video distributors, the FCC recognizes, “will drive hard bargains to buy, acquire, defend or exploit regional sports programming rights.”
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Comcast has driven some of the hardest bargains of all; it has evolved over the years from a mere distributor of other peoples’ games to a sports-rights juggernaut.

Even before the NBC Universal transaction, Comcast had gone beyond traditional programming to become a powerhouse in sports. By August 1997, it controlled several local teams in Philadelphia as well as the rights to distribute their games—Flyers hockey games, 76ers basketball games (Comcast sold the team in 2011 but retained the rights to televise and distribute the team's games and retained ownership of the building in which the team plays), and Phillies baseball games. Across the country, it acquired extensive broadcast rights to local sports content, allowing the company to build a dizzying array of regional sports networks: Comcast SportsNet (CSN) Bay Area, CSN California, CSN Chicago, CSN Mid-Atlantic, CSN New England, CSN Northwest, CSN Philadelphia, CSN
Houston, CSN Southeast, and CSN Southwest. Comcast also holds partial ownership interests in SportsNet New York, Comcast/Charter Sports Southeast, and MountainWest Sports Network.
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Comcast has used its ownership of sports rights (and, in Philadelphia, the teams as well) to make life more difficult for its competitors. The best-known example of this is in Philadelphia, where it has denied satellite companies—competitors with Comcast for video subscriptions—access to CSN Philadelphia. Yet as described in Chapter 2, the 1992 Cable Television Consumer Protection and Competition Act forced cable distributors to give the nascent satellite companies access to their programming.
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So how was Comcast able to withhold the most important programming of all?

It did this by using a loophole in the legal structure for programming, which was interpreted by Comcast to mean that cable operators did not have to give satellite companies access to programs that originally came to the cable provider over a wire in the ground. At the time when Congress mandated that cable operators treat all their competitors fairly, most programs arrived at central cable-distribution facilities (the “headends”) by way of satellite. So Congress focused on practices by the cable distributors that would prevent a competitor (like a satellite-distribution company) from providing “satellite cable programming,” and the FCC's program-access rules initially followed that lead: if programming arrived by satellite at a cable headend, the cable operator had to make it available.
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The rules were originally written to make it possible for satellite pay-TV distributors to compete with the cable companies, and they were modestly successful along those lines: nationally, satellite distributors have about 30 percent of the video-distribution market. But programming that arrived at a headend by way of a wire was not within the scope of the program-access rules. Comcast argued that it did not need to be: from the cable company's perspective, boxing satellite companies out of access to sports programming that it owned and that came via wire should be permitted because exclusivity would enhance innovation and programming diversity.

Yet Comcast as a vertically integrated cable operator controlling rights in sports programming now has the incentive and ability to use its programming to block competition. At any rate, Comcast has made sure to transmit its sports programming in Philadelphia only through terrestrial means.
Same programming, different delivery mechanism, different access rights for satellite competitors.

Comcast's withholding of sports content has been an enormous problem for satellite video-distribution companies because they have nothing to offer subscribers who want regional sports shows in the Philadelphia area. The harm is significant: according to the FCC, Comcast's refusal to provide sports to the satellite companies has reduced satellite adoption by 40 percent in that region.
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You might think that Comcast as a rights owner would want the fees that would accompany distribution of its teams’ games, but there is more value to Comcast in foreclosing competition: directly charging 60–70 percent of video subscribers high prices for sports content is worth more to Comcast than licensing that content to its competitors. People really want sports, and satellite companies can't sign up customers without it.

Competitive wired video providers—other cable companies and telephone companies—have also suffered. At the February 2010 Senate Antitrust Subcommittee hearing, Colleen Abdoulah of WOW! was clearly frustrated by the bundles of programming Comcast required WOW!'s customers to buy in order to get access to the sports they actually wanted. “It is very difficult to compete without that kind of transparency, without that kind of market-rationalized pricing,” she said, “and it is wrong for consumers. They do not have the choice because we are told [by Comcast] how to deliver the product. We are not able to deliver it in the way the customers have asked us to deliver it.” Getting to the heart of her subject, Abdoulah went on: “Specifically, sports, if people want to just watch sports and pay more for it, we would love to put that on a tier [sell only sports programming to consumers who wanted only sports]. We are not allowed to do that.”
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But WOW! has to sell the bundles, because the mere threat that sports shows won't be available will keep subscribers from choosing its services.

Comcast sales representatives in Philadelphia told RCN subscribers several years ago that RCN might not be able to provide Comcast's local sports network (CSN Philadelphia) in the future. (RCN, the small company from Princeton that was trying to get a toehold in Philadelphia, is what is called an overbuilder by the cable industry: a small cable-distribution company that tries to compete with the big guys.) RCN alleged that Comcast limited it to untenable short-term contracts for CSN Philadelphia, knowing
that a sudden loss of this crucial local sports programming would decimate RCN's subscriber base. Comcast only stopped doing this when the Department of Justice intervened to ensure that competitors (at least, wired competitors) would have access to CSN Philadelphia. As with satellite, it is apparently more valuable to Comcast to withhold programming from its competitors than to reap the increased fees that would come from licensing the content.
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Comcast has long taken the position that the rules under the 1992 act that require it to give competitors fair access to its sports programming are no longer necessary given the success of these competitors over the years. There are dozens of ways for Comcast to redefine its obligations under the act, but for Comcast it would be even better for those obligations simply to disappear.

In order to use sports rights as a sledgehammer, Comcast has to acquire them in the first place. Hardball tactics come into play here as well. Comcast initially acquired rights to the Portland Trail Blazers in 2007, when it paid approximately $120 million for a ten-year carriage contract. Although it vowed at the time to “dramatically increase exposure for the Trail Blazers,” Comcast has not licensed CSN Northwest to its rivals, including two satellite providers and the cable system Charter Communications. Comcast has announced plans to “expand” Trail Blazers coverage by making Trail Blazers games available online—for Comcast's cable subscribers only.
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But the most colorful rights-acquisition story comes from football. Comcast has always wanted rights to more football games, and in late 2005 and early 2006 the company applied for a license from the NFL to carry a package of eight live NFL games on Versus. Versus was shown on Comcast's expanded basic tier to 21 million subscribers. But NFL did not want to license to Comcast. Instead, it wanted to license games to the NFL Network.

Comcast retaliated. Saying that “a state of war existed” between itself and the NFL, it moved the NFL Network from its digital tier, seen at the time by approximately 11 million subscribers, to a special “sports” tier that carries an additional charge and is seen by only 2 million Comcast subscribers—Siberia for sports. Former NFL commissioner Paul Tagliabue testified to the FCC that “Mr. Roberts warned me that, as a result of the League's
failure to license the eight-game package to Comcast for Versus, ‘[our] relationships with the cable industry are going to get very interesting.’” The NFL's senior vice president also testified that Roberts “threatened that, if the NFL did not license the package to Versus, Comcast would drop the NFL Network from the ‘D2’ [digital] tier and shift it to an undesirable premium sports tier” delivered to just a fraction of the Comcast households that then received the NFL Network.
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Comcast said that it had decided to reduce NFL Network penetration to save its subscribers money. Yet as NFL officials pointed out, Comcast did not actually reduce its subscribers’ fees when it retiered the NFL Network; rather, it continued to charge them the same price for fewer channels.
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