VDC — Video VOIP

I confess I hadn’t heard of VDC: Virtual Video Cable until they filed a program access complaint. Of course, since the vast majority of people probably hadn’t heard about that either (or even know what a “program access complaint” is), I imagine I remain in the distinct minority.

VDC bills itself as a purely broadband-based cable-like service. I compare it to “video VOIP” (or voice-over-IP for the five readers unfamiliar with the acronym). In theory, a service like VDC could provide real competition to cable by letting you get an actual cable service (as opposed to video clips like YouTube or random episodes from iTunes or from some streaming site) — just like VOIP allows a company like Vonage or Sunrocket to offer voice if you have a broadband connection so you can discontinue phone service, saving a bundle (assuming your broadband provider does not make you buy a bundled service or interere with your VOIP packets).

So it is unsurprising that when a possible competitor like VDC emerges, cable uses its market power to try to squash it like a bug. In this case, cable companies have resurected one of the old reliable tricks from their early days: deny the would-be competitor needed programming. Here, Time Warner has refused to enter into negotiations to make CNN available to VDC. (We can expect that if this doesn’t do the trick, cable cos will move to the new fangled tricks — mess with the packets.)

But VDC has a few weapons in its arsenal. It has invoked a provision of the 1992 Cable Act called the “program access rule” that Congress passed to force cable operators to make programming available to would-be competitors like Direct Broadcast Satellite (DBS) providers. VDC has only two problems:

1) The complaint is being handled by the FCC’s usual cable enforcement staff which, as I have observed previously, does not exactly move on “internet time.”

2) The program access rules stop working (“sunset”) this October. So even if staff resolve the complaint in something approaching reasonable time, it may not do much good.

So is video VOIP dead before it even starts? Not necessarily. For a full explanation of what’s going on and how you (yes, you) can help make video VOIP a reality, see below . . . .

Cable companies claim to love/fear folks like VDC the way Microsoft claimed to love/fear Linnux in 1998. “Look,” say the cable companies, whenever the subject of their market power comes up. “How can we have market power? There’s all this internet competition! We are a highly competitive industry that lives in fear that internet competitors will eat our lunch. How could we possibly raise prices or refuse to carry independent programming? Everyone would switch to internet competitors like VDC. So pity us and keep us deregulated.” Then they go back to their back rooms and laugh their patooties off while figuring out how much to raise rates this year.

Unsurprisingly, when the threat of competition from real video VOIP starts to become a reality, the cable guys do what comes naturally — use their market power to crush competition. Here, cable operators rely on the fact that the biggest cable companies control the most popular (“must have”) programming like CNN, HBO, etc. Economists call this “vertical integration” — when a company owns critical “upstream inputs” to the product. Since the primary reason people subscribe to a “multichannel video programming distributor” (“MVPD” in FCC-speak, someone who sells cable or a cable-like video service) is to get programming they like, a competitor without the most popular programming has about zero chance of success.

In addition, even where the cable companies don’t own programming outright, they can prevent “independent” programmers from selling to would-be rivals by demanding exclusive distribution as a condition of carriage. For example, would Viacom really tell Comcast, Time Warner, etc., with its millions of subscribers “Ha! We don’t care if you all refuse to carry our programming to your millions of subscribers! We’re going to sell on equal terms to VDC with it’s 11,000 subscribers, because that’s the right thing to do and we support competition! So go ahead, cut us off, trash our revenue, do your worst! We don’t care about our bottom line, we care about freedom!” Or is Viacom more likely to say “Sorry VDC, we hate the cable monopoly too, but we can’t afford to piss them off. Hey, it’s nothing personal. Just business, ya know?” Economists call this “market power.” Cable companies and the worshippers of deregulation call it a “competitive and robust free market.” Po-TAY-to, Po-TAH-to.

During the 1980s and early 1990s, cable used this strategy to prevent the mergence of any real competition — whether by cable companies trying to go head-to-head (“overbuilders”) or by new technologies (DBS, “wireless cable”). In 1992, when Congress finally moved to break up cable market power by passing the Cable Competition and Consumer Protection Act of 1992 (“1992 Cable Act”), it included a special provision designed to address this practice. Now codified at Section 628 of the Communications Act (47 USC 548)and usually referred to as the “program access” rules, this provision outlawed using programming owned or affiliated with a cable operator to crush competition or other “unfair” practices that prevent MVPDs from providing programming to subscribers. Further, since Congress knew that the FCC had a history of serving as cable’s happy little lap dog, Congress specified all manner of regulations that the FCC must include in enforcing this provision and gave it all kinds of authority to compell discovery and set remedies.

Unfortunately, Congress also fell victim to the belief that all it would take was a little jump start and competition would just naturally unfold. So they set a sunset on Section 628 for ten years after passage of the 1992 Cable Act. (Because 10 years ought to be enough time to get competition going, right?) But Congress also allowed the FCC to extend the prorgam access provisions if it found that extending them would serve the public interest.

In 2002, before the expiration, the FCC extended the rules another 5 years. Even Michael Powell, True Believer of the Church of Deregulation Brings Competition and Pizza, didn’t believe that cable had completely lost its market power over the market. But he figured another five years ought to be enough. So unless the FCC acts to extend the program access rules again, the rules expire October 2007.

But, at least for the moment, VDC can still use the program access rules to get access to the programming it needs to become a competitor. All it has to do is convince the cable enforcement folks that (a) it meets the definition of a “multichannel video programming distributor,” and (b) Time Warner is engaging in a practice that denies it programming to sell to subscribers. How hard can that be?

Well, first you have to get the enforcement staff in the cable section of the Media Bureau moving on the complaint. As the good folks at Mid-Atlantic Sports Network (MASN) found out, that can take a spell. I believe the words Commissioner McDowell used in the Adelphia proceeding were “an indolent bureaucracy’s failure to obey simple Congressional mandates” harms competition and consumers. Yep, that was it. OTOH, the enforcement folks did respond pretty quickly to the complaint by the NFL network against Time Warner, so there’s some hope they might get to this before the rules expire in October. When taken with the recent decision to deny the cable industry request for waivers on set-top boxes, there’s some hope the Bureau may actually want to enforce the law. On the other hand, given that Echostar has a pending complaint against Time Warner about discriminatory access to HBO, I’m not holding my breath. (And, need I mention, I’m STILL waiting for the NPRM on leased access Martin promised Adelstein in July?)

But then there is a legal question: is VDC an “MVPD” as defined by law? Well, whenever the FCC does its annual “Competition in the MVPD Programming Market” report (mandated by the same Section 628), the cable industry always says “You betcha! Anyone distributing programming — including anyone distrubting programming online, through video and dvd rentals like Netflix and Blockbuster, or through online services such as iTunes or streaming media sites — is an MVPD programming competitor.” When you ask “what ownership limits do we need to enhance competiton?” The cable industry replies “Broadband is a video programming distribution systems and highly competitive, so we don’t need ownership limits.”

Unsurprisingly, however, when a broadband video distributo actually wants to use a provision of the Act to promote this competition, the cable industry is all “you are sooooooo not an MVPD. Loser.”

So not only does the cable bureau need to act, it needs to resolve a legal question of first impression, involving new technologies, the right way.

I’m not exactly holding my breath here.

Needless to say, this case provides an important precedent that the industry will watch carefully to determine whether broadband video distribution has a real chance, or if “video VOIP” will die like wireless cable and open video systems did before it. We’ve been down this road before. In the mid-1990s, Comcast bought the Philly sports teams and formed a “regional sports network” (RSN) that it distributed terrestrially. When would-be competitors complained, Comcast replied that Section 628 only requires that cable operators make available programming distributed by satellite (the technology prevelent in 1992 when Congress passed the law).

The FCC sided with Comcast and found that program access did not apply to terrestrially distributed programming, and thus was born the “terrestrial loophole” and a new business model. Since then, the number of RSNs has exploded, with Comcast and Time Warner doing their best to acquire exclusive rights in every market where they operate as the dominant cable provider.

I expect something similar here. If the FCC holds that VDC can use the program access rules — and program access gets extended again — then we will see broadband-based video distributors emerge as a potential force. If the FCC makes the wrong decision on either count, then we can expect VDC to get squished and no one else will ever try to make a go of it, since what would be the point.

Mind you, even with program access, we’d still need network neutrality, since messing with the packets is the next stage after denying programming. But this service won’t even get off the ground without program access.

So what can we do about it? Why all that citizen stuff we usually do! I expect, for example, that the FCC will launch a notice considering whether or not to extend the program access rules. Whether they actually decide to do it or not, they would need to start the process relatively soon to have the option to extend before the rules die in October. That will provide a vehicle for comment.

And then there is legislation. Even Republicans can get behind program access. It showed up in the Ensign Bill and in the first version of the Stevens Bill (although Stevens subsequently dropped by Stevens at the insitence of the cable cos) and in the alternate version of the telecom bill submitted by the then-minority Senate Democrats. It does not take a genius to predict that the issue will resurface this year, which provides the opportunity to make sure that Congress fixes things like the definition of “MVPD” and “programming.”

So can we force the FCC and/or Congress to save “video VOIP” providers like VDC?

Stay tuned . . . .