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Vertical integration and the must carry rules in the cable television industry: An empirical analysis
Unformatted Document Text:  Must carry rules 5 without regulation, the cable industry would take unjust advantage of their market power to adopt adverse carriage actions against local broadcasters. Specifically, supporters of this theory reason that first, the cable and broadcast industries are competitors in the programming market. Therefore, those cable operators who have equity stakes in cable programs are motivated to discriminate against local stations to protect their own interests. The larger a vertically integrated cable system, the more likely it is for its operator or owner to do so (more on this in the next section). Second, they believe that since the two industries are competitors in local video program exhibition, cable systems that sell local advertising would have an incentive to deny carrying local stations in order to gain market share in the local advertising market. This is because the retransmission of local stations opens the door to a competing supply of ad minutes, occupies channel slots that the cable operator could use to sell ad minutes and diverts the audience away from viewing cable network services. Therefore, a strong local broadcast presence has the potential to both decrease consumer demand for cable television service and increase competition for the resources going into cable programming. 8 However, if cable system operators have every incentive not to carry local stations, how do we explain the fact that cable operators have always carried the vast majority of the broadcast stations on their systems, with or without the must carry regulations? If there are solid incentives for cable operators to carry local stations, what are they? In the absence of must carry regulations, a cable system operator decides the number and variety of cable program services to maximize the value of a program menu, 8 Vita named these two arguments “the programming monopoly hypothesis” and “the advertising monopoly hypothesis” respectively and tested the former hypothesis in his study (Vita, 1997).

Authors: Yan, Zhaoxu.
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Must carry rules
5
without regulation, the cable industry would take unjust advantage of their market power
to adopt adverse carriage actions against local broadcasters. Specifically, supporters of
this theory reason that first, the cable and broadcast industries are competitors in the
programming market. Therefore, those cable operators who have equity stakes in cable
programs are motivated to discriminate against local stations to protect their own
interests. The larger a vertically integrated cable system, the more likely it is for its
operator or owner to do so (more on this in the next section). Second, they believe that
since the two industries are competitors in local video program exhibition, cable systems
that sell local advertising would have an incentive to deny carrying local stations in order
to gain market share in the local advertising market. This is because the retransmission of
local stations opens the door to a competing supply of ad minutes, occupies channel slots
that the cable operator could use to sell ad minutes and diverts the audience away from
viewing cable network services. Therefore, a strong local broadcast presence has the
potential to both decrease consumer demand for cable television service and increase
competition for the resources going into cable programming.
8
However, if cable system operators have every incentive not to carry local
stations, how do we explain the fact that cable operators have always carried the vast
majority of the broadcast stations on their systems, with or without the must carry
regulations? If there are solid incentives for cable operators to carry local stations, what
are they?
In the absence of must carry regulations, a cable system operator decides the
number and variety of cable program services to maximize the value of a program menu,
8
Vita named these two arguments “the programming monopoly hypothesis” and “the advertising monopoly
hypothesis” respectively and tested the former hypothesis in his study (Vita, 1997).


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