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How FCC Tennis Channel Decision Relates to Economics of Video Business

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July 30, 2012

How FCC Tennis Channel Decision Relates to Economics of Video Business

By Gary Kim
Contributing Editor

A Federal Communications Commission decision regarding the Tennis Channel, and where it is carried on Comcast (News - Alert) video subscription services, illustrates the many ways the consumer cost of buying a video service, distributor cost structures and programming revenue opportunities are related to "technical" decisions such as placement on a tier of service.

The decision arises from a July 5, 2010 complaint by the Tennis Channel against Comcast Cable Communications.

Basically, the Tennis Channel alleged that Comcast was discriminating against the Tennis Channel by carrying the network on a lesser-viewed "sports tier," rather than the "expanded basic" tier that virtually all ad-supported networks prefer.

The Comcast sports tier gets fewer subscribers because an additional fee must be paid to view the Tennis Channel argued, and the FCC (News - Alert) agreed, that because the Golf Channel and NBC Sports Network were carried on the expanded basic tiers, which have a significantly higher subscriber take rate, that Comcast was discriminating against the Tennis Channel.

The FCC agreed with the charge.

It’s just one decision, but the decision shows the stakes when ad-supported networks are packaged. Basically, every ad-supported network wants to be carried on the most widely viewed tier, the expanded basic tier, to bolster network ad sales efforts.

Distributors sometimes may prefer to carry lesser-viewed channels on discretionary tiers that appeal to consumers with high interests in a content area. The rationale for doing so is to hold down overall prices for the expanded basic tiers, since subscription costs can be matched better to demand.

Consumers, on the other hand, might prefer that scores of channels were broken off from the expanded basic tier into groups, such as children’s programming, news, sports, foreign language or movie tiers. That, in principle, might enable consumers to buy only the tiers they prefer.

But distributors often argue that such tiers could lead to higher prices for many consumers, rather than lower costs. Essentially, the argument is that, by bundling a broad selection of networks on the expanded basic tier, consumers benefit from the economies of scale and scope such bundling provides.

The problem is that if content acquisition costs continue to climb much faster than the overall rate of inflation, consumer resistance to pricing is bound to increase. By putting lesser-viewed channels on separate tiers, distributors might be able to keep expanded basic prices a bit lower, since consumers can opt not to buy the specialty tiers.

The FCC decision puts the Tennis Channel into the network provider preferred expanded basic tier. At least in principle, that will allow the Tennis Channel to sell more advertising, but also could lead to higher content prices for Tennis Channel, over time.

That, in turn, means potentially higher prices for consumers, since programming costs simply are passed on to end users.

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Edited by Brooke Neuman

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