Figure 7.19 shows the vertical links between major content conglomerates and pay-
television distributors in 2012. In the US, this includes mergers like Comcast/
TimeWarnerAdelphia (2005, approved with conditions), ComcastNBC/Universal
(2011, approved with conditions), and Comcast–TimeWarner (2014–15, challenged
and withdrawn).
89
Similarly in Europe, with major cases including the CanalSatTPS
merger (France, 2006, approved with conditions) and the BSkyBOfcom pay-television
investigation (UK, 2012, wholesale must-offer regime imposed).
Conducting vertical merger reviews would also benefit from answers to several ques-
tions about television markets that the academic literature has not yet provided. Artic-
ulating the incentives facing integrated operators to raise rivals’ costs, reduce rivals’
revenues, and/or foreclose is straightforward, but measuring the key factors can be diffi-
cult. For example, what is the cross-elasticity of demand between downstream rivals in the
absence of critical integrated content?
90
Furthermore, what are integrated firms’ dynamic
incentives to foreclosure (e.g., via changes in quality investment upstream, in infrastruc-
ture investment downstream)? How well do merger conditions and/or sector regulations
mitigate harm? And how can one measure vertical efficiencies? Further work building
knowledge that might serve as reference points to regulators, particularly but not exclu-
sively in Europe, would be welcome.
7.6. ONLINE VIDEO MARKETS
Online video means watching video programming through an Internet distribution
channel. In this sense, it is only differentiated from free or pay television by its distribution
access technology and the specific device on which it is watched. Across the world, there
are a large number of online video distributors (OVDs), distribution technologies, con-
sumer devices, and business models. This section surveys this growing industry and dis-
cusses two policy issues that touch on its development: net neutrality and foreclosure.
91
89
The analyses in these decisions often make for good reading about the relevant issues, e.g., FCC (2011b).
90
This is a key input when evaluating the incentives to foreclose a downstream rival by withholding critical
upstream content. As it is not generally measurable using existing data (as the key content is typically
everywhere available pre-merger), a structural industry model like that used by
Crawford et al. (2015)
can provide an estimate of just such a counterfactual elasticity, but the detailed modeling and estimation
involved is likely to be infeasible in the context of a typical merger review.
91
In this section, I will follow the strategy taken by FCC (2013b, pp. 111–157) and analyze only “entities
that offer video content akin to the professional programming traditionally offered by broadcast stations,
or broadcast and cable networks, and which is usually created or produced by media and entertainment
companies using professional-grade equipment, talent, and production crews that hold or maintain the
rights for distribution.” This excludes user-generated content of the type publicly available on video-
sharing sites like YouTube.
327
The Economics of Television and Online Video Markets
Comcast
22.29%
Comcast
14.27%
Time Warner
12.38%
Time Warner
16.21%
Ca.Vi.
3.24%
Ca.Vi.
2.78%
Walt Disney
19.90%
21st Century Fox
13.69%
Viacom/CBS
18.22%
Liberty
5.22%
Cox
4.60%
Charter
4.21%
Other cable
8.60%
Telcos
10.06%
DBS
34.60%
Other netw.
9.70%
Multichannel
subscriber
shares
Shares of total
revenue
(weighted by
ownership)
Comcast Timewarner Cablevision Walt Disney 21st Century Fox
Viacom/CBS Liberty Global Inc. Cox. Communications Charter Communications Other Cable MSO
Telcos DBS Other Networks
Big mediaVertically integrated
Non-cable
Cable
Figure 7.19 Vertical integration between channels and distributors, 2012. Notes: Depicted is the nature of vertical links between owners of
programming networks and owners of pay-television distribution platforms. Revenue and ownership shares for the programming market
are as described in the notes to
Table 7.5. Shares in the distribution market are subscriber shares drawn from SNL Kagan (2014a). DBS
stands for Direct Broadcast Satellite and is the sum of the subscriber shares for DirecTV and Dish Network. Ownership data was collected by
hand from company stock filings and industry sources for the research conducted in
Crawford et al. (2015).
7.6.1 Online Video Facts
With the rise of broadband Internet access to households and Internet-ready devices has
come an increase in households’ desire to watch video distributed through the Internet.
92
In the US, an estimated 85.7% of US households will purchase a high-speed data (HSD)
connection in 2014, making the consumption of online video feasible for the majority of
US households.
Figure 7.20 shows that over-the-top Internet television (OTT) is esti-
mated to be a significant and growing part of the television and online video industry. As
discussed in
Chapter 5 of this volume, by 2013 smartphone and tablet penetration in the
US reached 74% and 52% respectively.
93
While relationships governing the distribution of video content are well established in
the free and pay segments of the television industry, they are still being formed in
the online video segment. While owners of programming content like movie studios
2008
$0
$50
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
$100
Pay TV revenues (USD, billions)
$150
$200
$250
Global pay TV revenues (USD, billions)
and OTT share (%) (2008−2017)
2009
OTT + subscription revenues OTT share of OTT + TV subscriptions
(
%
)
OTT share of pa
y
TV revenues
(
%
)
2010 2011 2012 2013 2014 2015 2016 2017
Figure 7.20 OTT share of global pay-TV revenues, 2008–2017. Notes: Depicted is estimated worldwide
pay-television plus over-the-top Internet television (OTT) revenue and the share of this revenue
accruing to OTT services. Source:
PriceWaterhouseCoopers (2013) .
92
Broadband is defined in different ways by different organizations. FCC (2013b, p. 125), citing Bernstein
Research and SNL Kagan, estimates standard definition video requires an Internet connection of 2 mega-
bits per second (Mbps) and high-definition video requires one of 4–8 Mbps. The National Broadband
Plan, when discussing broadband availability in the US, reports on the availability of service by distributors
providing actual download speeds of 4 Mbps (
FCC (2010a, p. 20)).
93
That being said, Wilbur notes that, despite their proliferation, most consumers are not choosing to watch
online video on these devices, (presumably) preferring either a computer or an Internet-connected
television.
329
The Economics of Television and Online Video Markets
generally license the distribution of that content through well-established distribution
windows (premium channels like HBO, cable channels like A&E, broadcast channels like
ABC), different owners of content have taken different strategies for making that content
available online. All are sensitive about disrupting existing distribution relationships with
conventional distributors, but are eager for the incremental revenue online access can
provide. For example, at the time of publication, Sony Pictures Entertainment licenses
many of the television programs and films in its television and movie library for distri-
bution on conventional linear television channels as well as on an on-demand basis on
the advertising-supported online video service, Crackle. Crackle is itself available online
at crackle.com, as an app for smartphones and tablets for both iOS and Android operating
systems, on game consoles PS3 and Xbox 360, on Sony Blu-ray players, on Roku boxes
and Apple TVs, and integrated with Bravia TVs. By contrast, some of the content already
licensed to the premium channel HBO may be accessed via HBO Go (formerly HBO on
Broadband) from a similarly wide variety of devices and platforms.
Distributors of online video content in the US can be divided into four (not neces-
sarily mutually exclusive) types
94
:
1. Over-the-top aggregators (OTT aggregators) of original and licensed content.
95
2. Conventional pay-television distributors that provide access to live linear and
on-demand content on multiple screens, typically but not exclusively within the
home (e.g., TV Everywhere).
3. Individual content owners, especially sports leagues (MLB, NBA).
4. Device manufacturers that either license content directly or partner with providers
in one of the previous three groups.
96
A survey by SNL Kagan of online video services across 35 countries reported 710 OTT
aggregators, TV everywhere providers, and device manufacturers, an average of 20.3 ser-
vices per country (
SNL Kagan, 2012).
At the end of 2012, North American Internet usage on fixed networks had grown by
120% (
Haider, 2012). Much of this was driven by the growth in online video consump-
tion, particularly Netflix. “Audio and video streaming account for 65% of all downstream
traffic [on North America fixed networks] from 9 p.m. to 12 a.m. and half of that [33.0%]
94
While they could reasonably be included, for reasons of data availability I exclude from this short survey
“catch-up” TV services that allow for temporary, “sync and go,” downloading of content for later
(perhaps offline) viewing like Tivo in the US and the BBC iPlayer in the UK. These are usually free
to households that subscribe to another type of broadcast or pay television service.
95
Examples of providers in this group include fee- and ad-supported subscription services (Netflix, Hulu,
and Amazon Prime) and rental and electronic sell-through (EST) (transactional) service providers (iTunes,
Amazon Instant Video, and Vudu).
96
Examples of providers in this group include manufacturers of stand-alone OTT devices (Roku, Apple
TV), tablet and smartphone manufacturers (iPad, Kindle Fire, iPhone, and Samsung Galaxy), game con-
sole manufacturers (Sony PlayStation 3, Microsoft Xbox 360), and manufacturers of “connected TVs”
(Sony, Samsung, Sharp, and Vizio).
330
Handbook of Media Economics
is Netflix traffic.” Amazon, Hulu, and HBO Go accounted for 1.8%, 1.4%, and 0.5% of
peak traffic. Real-time entertainment, dominated by streaming audio and video,
accounted for 67.4% of peak download traffic, with Netflix accounting for 46.9% of that
amount. Peak traffic in Europe is less dominated by audio and video (47.4%), but this is
no doubt due to lesser availability of OTT providers.
97
OVDs differ in both their sources and amounts of revenue. According to SNL Kagan,
paid subscription services (Netflix, Hulu Plus) earned $2.6 billion in revenue, or 40.0% of
the online video industry’s estimated total of $6.4 billion (
SNL Kagan, 2014a). Video
advertising, including both ad-supported subscription services (Hulu) and non-
professional video (YouTube), earned an estimated $2.5 billion, or 38.7%.
98
Transac-
tional services (EST and rentals) earned the remaining 21.3%.
99
OVDs also differ in
whether or not viewers can access live linear television, from where they access it
(inside/outside their home), the number of titles in their film and television libraries,
whether they include advertising or not, and their price. All of these relationships are
in a state of flux.
7.6.2 Net Neutrality and Foreclosure in Online Video Markets
Two policy issues have arisen with the growth of online video: net neutrality and
foreclosure.
100
7.6.2.1 Net Neutrality and Online Video
Proponents of net neutrality articulate it as a principle of openness such that all Internet
traffic is treated equally by distributors. In practice, this principle has been interpreted as
preventing both (1) charging content (edge) providers from accessing users (i.e., requir-
ing “zero-pricing”) and (2) price discriminating across content providers for access (
Lee
and Wu, 2009
).
In the US, the FCC has argued that an open Internet promotes innovation, invest-
ment, competition, free expression, and other important policy goals (
FCC, 2010b). In
2005, the FCC articulated a Broadband (Internet) Policy Statement articulating four
principles of an open Internet and followed this in 2010 with an Open Internet Order
adopting three basic rules: transparency, no blocking, and no unreasonable discrimina-
tion (
FCC, 2010b). In January 2014, the US Court of Appeals for the District of
97
Similarly, file sharing’s share of peak download traffic on European fixed-line networks is just over dou-
ble that in North America, although it has been declining over time.
98
This is mostly due to non-professional video. Hulu’s estimated 2012 revenues were $441 million, or
17.7% of this total.
99
TV everywhere services in the US are uniformly offered as an add-on service to a conventional pay-
television bundle and so earn no subscription revenue, although they do earn some advertising revenue.
100
Some of this section draws on similar material from Crawford (2013). Chapter 10 of this volume discusses
net neutrality in further detail.
331The Economics of Television and Online Video Markets
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