not clear. In the bargaining approach summarized in the last subsection, increased size for
an individual cable system reduces the viability of a program network if an agreement is
not reached between the two parties. This necessarily lowers the network’s “threat
point.” It also, however, lowers the threat point of the now-larger cable system, with
the net effect unclear.
Chipty and Snyder (1999) conclude that increased size downstream
can actually reduce a cable system’s bargaining power.
59
Similarly, Raskovich (2003)
builds a bargaining model with a pivotal buyer, one with whom an agreement is necessary
for a seller’s viability, and finds that being pivotal is disadvantageous as if an agreement is not
reached the seller will not trade and it is only the pivotal buyer who can guarantee this
outcome. This can reduce the incentives to merge if merging would make a buyer piv-
otal.
Inderst and Montez (2015) formalize the tradeoff articulated above and obtain
sharper results. They show that when buyer bargaining power is low, as CY found
for cable systems negotiating with large channel conglomerates, increases in size are
disadvantageous, but when buyer bargaining power is high, as CY found for cable systems
Figure 7.17 Concentration in the upstream market, 2013. Notes: Depicted is the revenue share of eight
groups of owners of broadcast and pay-television programming networks in 2013: “Big Media”
companies, Disney, Fox, Viacom/CBS, and Liberty, vertically integrated (cable) Multiple System
Operators (MSOs), Comcast, Time Warner, and Cablevision, and Others. Revenue data is from
SNL
Kagan (2014a)
; see Table 7.5 and the notes there for further details.
59
In their analysis, the size of the surplus to be split between a cable system and a programming network
depends on the shape of the network’s gross surplus function. They estimate this on 136 data points in the
1980s and early 1990s and find it is convex, implying it is better to act as two small operators than one big
one. This convexity seems at odds both with the institutional relationship between network size and
advertising revenue (which limits the ability of networks to obtain advertising revenue at low subscriber
levels) as well as claims made by industry participants and observers of the benefits of increased size.
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Handbook of Media Economics
negotiating with small channel conglomerates, increases in size do indeed lower input
prices. This implication remains to be tested.
Assessing the consequences of increased market power in programming markets is
conceptually simple, but a lack of data on transaction prices (affiliate fees) has prevented
much empirical work.
Ford and Jackson (1997) exploit rarely available programming cost
data reported as part of the 1992 Cable Act regulations to assess (in part) the impact of
buyer size and vertical integration on programming costs. Using data from a cross-section
of 283 cable systems in 1993, they find important effects of MSO size and vertical affil-
iation on costs: the average/smallest MSO is estimated to pay 11%/52% more than the
largest MSO and vertically affiliated systems are estimated to pay 12–13% less per sub-
scriber per month.
Chipty (1995) takes a different strategy: she infers the impact of system
size on bargaining power from its influence on retail prices. She also finds support for the
conventional wisdom that increased buyer size reduces systems’ programming costs.
Finally, as discussed above,
Crawford and Yurukoglu (2012) find that distributors gen-
erally have higher bargaining power than channels for small channel conglomerates, but
that the situation is reversed for large channel conglomerates. The results of
Inderst and
Montez (2015)
suggest the effects of merger depend critically on these bargaining power
estimates. Further empirical research would be welcome.
7.4.3.2 Market Power in Retail (Distribution) Markets
Similar concerns about market power arise in the downstream (distribution) market.
60
The average US pay-television market is served by a single incumbent cable television
system, two satellite distributors, and (in some markets) the former incumbent telephone
operator. When Verizon entered the video business, they were required to invest tens of
billions of dollars upgrading their physical infrastructure for the delivery of video pro-
gramming. This despite the fact that they, like AT&T, had an advantage compared to
other potential entrants in already serving the local market with telephone and Internet
access services.
61
Similarly, so-called overbuilders, independent entrants in the television
business, have struggled to gain more than a minuscule portion of the television market.
Figure 7.6 demonstrated that prices have consistently risen faster than the rate of infla-
tion in the US pay-television market.
Table 7.6, drawn from FCC reports on the status of
competition in the programming market, reports concentration measures for the industry
for several of the past 20 years. The sum of the market shares for the top 4, top 8, and top
25 MVPD providers have all increased over time, with the top 4 MVPDs serving 68% of
the market and the top 8 serving 84% in 2010. The correlation between high and rising
prices and increased concentration have driven concerns about high and rising market
60
This subsection draws on material from Crawford (2013).
61
The investment required is sufficiently expensive and uncertain that the third leading US telco, Century-
Link, has not chosen to provide a television service except in select major urban markets.
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The Economics of Television and Online Video Markets
power in distribution. Of course, Figure 7.14 also shows that cable television channels
have been spending more on programming, raising costs to downstream operators and
challenging the ability to separate out price increases due to cost increases from those
to due to market power. Furthermore, the entrance of satellite providers in the late
1990s and telco providers in the late 2000s (evident in
Figure 7.4) have prompted
policymakers to wonder if this is “enough” competition and/or whether instead price
regulations might make consumers better off.
Table 7.6 Concentration in the downstream (distribution) market, 1992–2010
Rank Company
Market
share Company
Market
share Company
Market
share
1992 1997 2000
1 TCI 27.3 TCI 25.5 AT&T 19.1
2 TimeWarner 15.3 TimeWarner 16.0 TimeWarner 14.9
3 Continental 7.5 MediaOne 7.0 DirecTV 10.3
4 Comcast 7.1 Comcast 5.8 Comcast 8.4
5 Cox 4.7 Cox 4.4 Charter 7.4
6 Cablevision 3.5 Cablevision 3.9 Cox 7.3
7 TimesM irror 3.3 DirecTV 3.6 Adelphia 5.9
8 Viacom 3.1 Primestar 2.4 EchoStar (Dish) 5.1
9 Century 2.5 Jones 2.0 Cablevision 4.3
10 Cablevision 2.5 Century 1.6 Insight 1.2
Top 4 57.2 Top 4 54.3 Top 4 52.7
Top 8 71.8 Top 8 68.6 Top 8 78.4
Top 25 – Top 25 84.9 Top 25 89.8
2004 2007 2010
1 Comcast 23.4 Comcast 24.7 Comcast 22.6
2 DirecTV 12.1 DirecTV 17.2 DirecTV 19.0
3 TimeWarner 11.9 EchoStar (Dish) 14.1 EchoStar (Dish) 14.0
4 EchoStar (Dish) 10.6 TimeWarner 13.6 TimeWarner 12.3
5 Cox 6.9 Cox 5.5 Cox 4.9
6 Charter 6.7 Charter 5.3 Charter 4.5
7 Adelphi a 5.9 Cablevision 3.2 Verizon FiOS 3.5
8 Cablevision 3.2 Bright 2.4 Cablevision 3.3
9 Bright 2.4 Suddenlink 1.3 AT&T Uverse 3.0
10 Mediacom 1.7 Mediacom 1.3 Bright 2.2
Top 4 58.0 Top4 69.6 Top4 68.0
Top 8 80.7 Top8 86.0 Top8 84.0
Top 25 90.4 Top 25 – Top 25 –
Reported are the market shares of the largest distributors of pay-television services across a selection of years between 1992
and 2010 taken from annual FCC reports on the status of competition in the pay-television market. Also reported is the
sum of the market shares for the largest 4, 8, and 25 such distributors.
Source:
FCC (1997, 1998, 2001, 2005a,c).
314 Handbook of Media Economics
Turning first to regulatory effects, Mayo and Otsuka (1991) examined pre-deregulation
cable prices in 1982 and found regulation significantly constrained their level.
Rubinovitz
(1993)
examines the change in prices between 1984 (when they were still regulated) and
1990 (when they were not), finding the increased exercise of market power was responsible
for 43% of the price increase in the period.
Crawford and Shum (2007) find that regulation
is associated with higher offered qualities, despite (slightly) higher prices.
As for satellite competition,
Goolsbee and Petrin (2004) estimate a flexible probit model
of cable and satellite bundle demand, infer (otherwise unobservable) bundle quality from
these estimates, and relate cable prices to satellite penetration controlling for quality. They
find reducing satellite penetration to the minimum observed in their data would be associ-
ated with a 15% increase in cable prices.
Chu (2010) extends this by analyzing system quality
responses and finds that, while there is widespread variation across systems in their strategic
response, on average cable prices are slightly lower, but cable quality is significantly higher.
The period since 2006 has witnessed a third wave of cable entry, that from telco oper-
ators. Industry accounts associated their entry with significant price competition, but only
for the first several years after entry. Once they established a moderate presence, the con-
ventional wisdom is that both significantly increased prices. More research on both the
short- and long-run effects of telco entry is needed.
7.4.3.3 Horizontal Merger Review
Concerns about market power both upstream and down arise most frequently in the con-
text of horizontal merger review in television markets.
62
Because most cable systems have
non-overlapping service areas, mergers between cable operators often do not reduce
competition in local pay-television markets. As such, most recent proposals have been
approved, both in the US and Europe.
63
62
I discuss vertical merger review in Section 7.5.2. See also Chapter 6 of this volume for general issues with
mergers in media markets.
63
The ComcastTime Warner Cable merger announced in February 2014 was withdrawn after news broke
in April 2015 that the US Department of Justice (DOJ) intended to challenge the merger. The concerns
raised by the merger were largely not horizontal issues in the pay-television market, but horizontal issues
in the broadband Internet access market and vertical issues arising from Comcast’s ownership of significant
programming assets. Charter Communications has since announced their intention to purchase Time
Warner Cable. Previous to this, the last big US challenge to a horizontal pay-television merger was
the EchostarDirecTV deal in 2001, which would have combined the two national US satellite operators.
By contrast, Europe has seen a horizontal merger wave in recent years (
Willems, 2014). Recent deals in
the distribution market include Canal PlusMovistar TV in Spain, Kabel UnityMedia (Liberty Media)
in Germany, ZiggoUPC Netherlands (Liberty Media) in the Netherlands, and Vodafone–ONO in
Spain. Much of this activity is transnational and may be driven by the anticipation of a single European
digital market, with Liberty Global and Vodafone leading players in collecting (and perhaps ultimately
connecting) pay-television systems across Europe.
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The Economics of Television and Online Video Markets
Conducting horizontal merger reviews would benefit from answers to several ques-
tions about television markets that the academic literature has not yet provided. Should
programming markets be defined broadly or narrowly?
64
What is the impact of increased
size on bargaining power in programming markets? Are merger-related efficiencies
likely? What of tacit collusion, upstream and/or down? Much more work is needed
to address the basic questions regularly facing regulators and competition policymakers.
7.4.4 Preference Heterogeneity and Bundling
One common feature of preferences in media markets is their heterogeneity. Some peo-
ple like to read the New York Times, while others prefer USA Today. Some like Miley
Cyrus while others prefer J.S. Bach. And some like Fox News while others like MSNBC.
Anderson and Waldfogel discuss the implications of preference heterogeneity and pref-
erence externalities in media markets, finding important connections between the size of
media markets and outcomes like the number, variety, and quality of media products
(
Chapter 1, this volume).
Television markets are both similar and different. They are similar in that consumers
of television, as in other media markets, have significant heterogeneity in their prefer-
ences. They differ, however, in that the television channels bought by consumers are
bundled together and sold as a package.
65
In this subsection, I discuss the implications
of this bundling for outcomes in television markets.
7.4.4.1 Bundling Theory
In practice, many broadcasters supply a range of content to viewers, and heterogeneous
viewers may prefer some kinds of content to other kinds. A particularly simple case is
when a viewer values each piece of content additively so that her WTP for content i
is not affected by whether she also has access to content j. In this additive case, when
the broadcaster retails its content independently, so that the price of a piece of content
is independent of her consumption of other content, then the previous analysis applies
without change. Both values and prices are additive, and there is no interaction between
different content.
64
In the BSkyBOfcom PayTV inquiry, separate programming markets were defined (narrowly) for pre-
mium movies and premium sports. In the ComcastNBCU merger, the FCC implicitly defined news
and business news markets narrowly when imposing a “neighborhooding” condition in its approval of
the proposed merger. Determining this question requires an understanding of substitutability of programs
and program networks from the perspective of viewers and, ultimately, pay-television distributors. Data
exists in principle to evaluate the former (though indeed while substitutes at any point in time, channels
may instead be complements in access decisions), while the latter depends on accurately modeling bar-
gaining outcomes, particularly households’ willingness to switch providers in the absence of content they
value.
65
Newspapers may also be considered bundles of heterogeneous content. Some of the effects discussed here
may also apply in this setting.
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