29.11.07

GETTING VINCE'S FEDORA. A professional football game with meaningful playoff implications was only available on broadcast television in Dallas, Milwaukee, and Green Bay. Everybody else had to find a tavern or a friend with satellite dish service carrying the NFL Network. Brian Goff at The Sports Economist characterizes the tussle between the league, which would prefer that its Network be made available as part of the basic cable service, and the cable carriers, who have offered to carry the Network in the sports add-on bundle as a game of chicken, where he would like at least one referee to stay out.
The [Dallas Morning News] article alludes to possible intervention over the long run by the FCC and state legislators. I can only hope that doesn't happen, other than prompting them to reduce whatever barriers to competitive entry exist. There is a marketplace out there, and it is working itself out albeit not in some kind of instantaneous, nirvana kind of way. By the way, I'll be enjoying the game on my DirectTV connection.
An editorial in USA Today suggests the league is being churlish.

Cable companies are also used to having their way — not because they are liked but because, as insulated quasi-monopolies, they don't see much advantage in being liked. In this particular dispute, however, they happen to be right. They're saving millions of non-fans from an attempt by the NFL to pick their pockets.

The reason the NFL Network is not on most cable systems is the league's arrogance. It won't let the cable companies put its channel on a premium tier, where the fans who want it would pay the NFL's premium price. The network insists that it be included in a basic package, which spreads the costs to all customers, including those who don't care a whit for football.

The NFL wants an average of 80 cents per cable subscriber per month, according to media consulting firm SNL Kagan, making it the fifth most expensive cable channel among 159. Even to the NFL's fans, that price might seem high for a network that provides about 24 hours per year of live NFL football and about 8,736 hours of filler. For people whose idea of good TV is cooking shows, it must seem downright insane.

Not to mention potentially inefficient.

Take, for example, Stigler's "A Note on Block Booking." Block booking of movies was the offer of a fixed package of movies to an exhibitor; the exhibitor could not pick and choose among the movies in the package. The Supreme Court banned the practice on the grounds that the movie companies were compounding a monopoly by using the popularity of the winning movies to compel exhibitors to purchase the losers.

Stigler disagreed and presented a simple alternative argument. If Gone with the Wind is worth $10,000 to the exhibitor and Getting Gertie's Garter is worth nothing, wrote Stigler, the distributor could get the whole $10,000 by selling Gone with the Wind. Throwing in a worthless movie would not cause the exhibitor to pay any more than $10,000. Therefore, reasoned Stigler, the Supreme Court's explanation seemed wrong.

But why did block booking exist? Stigler's explanation was that if exhibitors valued films differently from one another, the distributor could collect more by "bundling" the movies. Stigler gave an example in which exhibitor A is willing to pay $8,000 for movie X and $2,500 for Y, and B is willing to pay $7,000 for X and $3,000 for Y. If the distributor charges a single price for each movie, his profit-maximizing price is $7,000 for X and $2,500 for Y. The distributor will then collect $9,500 each from A and B, for a total of $19,000. But with block booking the seller can charge $10,000 (A and B each value the two movies combined at $10,000 or more) for the bundle and make $20,000. Stigler then went on to suggest some empirical tests of his argument and actually did one, showing that customers' relative tastes for movies, as measured by box office receipts, did differ from city to city.

Put another way, perhaps the National Football League ought consider putting its Thursday night games on pay-per-view rather than engage in transaction-cost-reducing bundling complete with cross-subsidization.

The president of the Network, however, contends that the cable services exhibit undue preference and prejudice toward their own sports channels.

This is about squashing competition. NFL Network and a handful of other independent programmers such as the Hallmark Channel and the Black Television News Channel cannot get a fair deal with Big Cable for one simple reason: We are not owned by a cable company.

Companies such as Comcast, Time Warner and Cablevision control what content gets aired, but they also own many of the channels you must buy in your cable package. Comcast puts NFL Network on an expensive sports tier that viewers have to pay extra to receive. So why is The Golf Channel in Comcast's must-buy package? Because Comcast owns The Golf Channel.

He goes on to note,

A remedy is needed to fix this market failure. Our government leaders should ensure that Big Cable cannot treat its channels better than it treats independent channels such as NFL Network and hold consumers hostage in the dispute. A neutral, third-party arbitrator should be able to step in to bring about an agreement. Six states are considering legislation to do just that, and the Federal Communications Commission is looking at the issue, too. We don't fear independent arbitration and believe that in virtually every case, it would lead to a negotiated settlement

So what is Big Cable's problem? Is it worried that its discriminatory double standard will become public knowledge?

There's no market failure here, although there may be a failure to correctly define the property rights. Early in the 20th Century, the Hepburn Act forbade railroads from favoring shipping managers with free passes and the Elkins Act forbade both rate rebates and discounts from published rates. These laws effectively ended any incentive for railroads to own shippers, thus ending the Delaware and Hudson and Reading anthracite coal holdings. (The regulatory history books are at the office, and it's been some time since I had to teach the details.) There is the possibility, however, that the cable companies will be treated as common carriers rather than vertically integrated programmers and carriers as a resolution of the dispute.

The game? As I griped last week, Thursday night football is for the Mid-American championship. Packers didn't win. I had previous plans to attend the Avalon Quartet concert, which coincided with the final public performance by the Vermeer Quartet, in Rockport, Maine, near cellist Marc Johnson's retirement home. Great performance, and a few of us were having so animated a conversation in the lobby at intermission that we missed the blinking of the lobby lights ...

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