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Cable Technology Feature Article

January 17, 2011

What End of "Compulsory License" Means in Video Business

By Gary Kim, Contributing Editor

In the latest example of growing financial disputes between video distributors and content owners generally, and between local TV broadcast outlets and cable TV operators specifically, Time Warner (News - Alert) Cable and Sinclair Broadcast Group have reached agreement about compensation Time Warner must pay to Sinclair for rights to carry to the broadcaster's signals. 

About four million of Time Warner Cable's customers would have been affected, had the talks broken down.

Major stations that would have been affected include the Fox stations in Buffalo, Rochester and Syracuse, N.Y., and San Antonio, Texas, the CBS station in Portland, Maine, and the ABC station in Greensboro, N.C. ABC and Fox stations would have been affected in Columbus and Dayton, Ohio. No NBC stations would have been affected.

For the better part of three decades, local TV broadcasters and cable TV operators had used a "compulsory license" framework, where cable operators agreed to carry local TV broadcast stations, with favorable placement in the channel line-up (lower numbers are better, and the same channels as used in a local market are maintained on the cable network). 

That was the compromise reached when earlier disputes about the "value" of over-the-air content occurred. These days, one might argue that the advent of online and mobile video, plus growing experimentation with business models, has changed the business video context. 

Content providers are attempting to create a separate set of economic assets in the form of digital rights to view broadcast, cable, telco or satellite TV, user-generated content and movies. That would simply follow the current way rights to show movies in theaters, on pay-per-view, hotel and airline PPV, DVD sale, cable TV and network TV are handled. Use of content in each distribution channel requires separate rights agreements. 

Separately, Sinclair and regional cable provider Bright House Networks said Friday they had reached a tentative agreement on fees. Time Warner said it expects to complete a final deal within seven days.

One might argue that the shift in compensation schemes reflects something about changes in the video business. The obvious observation is a change in the perceived value of broadcast TV signals on a cable, satellite or telco TV network, which distributors and content owners now seem to agree are "more valuable" than in the past. 

At the same time, the disputes also illustrate growing stress in the  ecosystem. Though customers always have groused about annual fee increases, the absolute size of video subscription bills might now be placing the whole business in a more-perilous state. As users become more accustomed to using alternate distribution channels, and as more professionally-produced content becomes available through online and mobile channels, the value of existing linear video subscriptions is bound to undergo new scrutiny.

So just at the point that digital rights and cable rights are in flux, a whole new class of business arrangements has just moved from "no incremental cost" to "on-going programming costs." That will put more pressure on distributors to keep raising prices. And yet it is rising prices that will keep putting pressure on linear video distributors, in the form of increased end user unhappiness. 

Ironically, growing fees for access to linear programming might also make more lucrative the value of online or mobile access. The higher the price of linear video, the higher the perceived value of alternatives. 

Oddly, higher prices for linear video, with what might be growing consumer resistance to paying the current level of fees, is creating the very underpinning for alternate, over the top forms of distribution. Linear video is creating a higher "pricing umbrella" for all video content. As monthly bills keep climbing, the perceived value, and retail price of alternatives, also rises. 

Gary Kim (News - Alert) is a contributing editor for TMCnet. To read more of Gary’s articles, please visit his columnist page.

Edited by Stefania Viscusi