TEL 510
p. 1
TEL 510
04/17
Cable networking (cont'd) and Vertical integration
 Final paper due on April 26
Cable Networking (Cont'd)
The importance of cable carriage:
 Factors in successful launch of new
networks:
-
Competition for "shelf space"
Concept and marketability
Ratings
Other considerations by cable operators:
-New network's long-term viability (Strong
management? Deep pocket? etc.)
-License fee
-Marketing support from new network?
-Local ad avails?
-Impact on existing channels (why not two
comedy channels? Why more than two news
channels?)
- Anti-competitive behaviors of cable
operators:
- Horizontal concentration --> Bargaining power
- Vertical integration --> Market closure or
refusal to deal
TEL 510
p. 2
Vertical Integration
Several sequential stages of production that
could be separately owned are instead directed
by a single firm (i.e., from production to
distribution)
Examples?
Vertical integration in cable television:
- Extensive (but with notable exceptions)
- Most common: Minority ownership in
networks and sharing of network equity
- Larger MSOs accounted for the majority of
affiliations
- Extent of VI in cable increased from the
mid-1980s
A central issue in cable television. Why?
Current regulations:
- Vertical integration limit: A vertically
integrated cable system can occupy up to
40% of its channels with programming in
which the system's operator has an
attributable interest (5%)
- Program access rules: Prohibiting unfair
and discriminatory practices in the sale of
satellite cable and satellite broadcast
programming by vertical integrated firms
TEL 510
p. 3
Why vertical integration in cable?
- Efficiency advantages:
- Transaction efficiencies
- Reducing risk of opportunistic
behaviors
- Reducing risk of changing
conditions
- Reduce double marginalization
- Enhanced availability of capital and
creative resources
- Risk reduction by means of signaling
commitment
Strategic advantages:
- Market foreclosure (against rival
program suppliers)
How can this happen?
- Presence of monopsony power of
cable systems
- Presence of economics of scale in
cable networking
Counter-arguments:
- Excessive monosopny power -->
negative externality or impact on
the whole industry
- Creating entry barriers (against
alternative MVPD)
- Counter-example: ER