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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 6 subject to channel capacity constraint. In general, a signal will be added (or dropped) to the channel lineup if the additional carriage of the signal will bring about benefits greater (or smaller) than the opportunity cost of such carriage. This implies that there are both disincentives and incentives for a cable operator to carry local stations. However, much of the debate over the must carry rules has focused on the disincentives, neglecting the fact that cable operators have equally strong incentives to carry local stations. These include: the popularity of local broadcast stations among viewers; the low costs involved in carrying local stations; and local signal carriage can increase the competitiveness of cable television service vis-à-vis over-the-air television broadcasting and direct satellite broadcasting (DBS) services. In reality, balancing the benefits and costs often results in favorable local signal carriage decisions by cable system operators. The calculation in Table 1, based on one channel valuation model, takes into account each cable service’s rating, its contribution to rates of basic cable services, local ad avails and license fees. It shows that broadcast stations are actually the most valuable (followed by superstations such as TBS and then basic cable program services), thanks to their high viewing ratings among cable households and the lack of affiliate fees to cable operators. This does not mean, however, that an unregulated cable operator would want to carry every local station in the market. Several general factors affect cable’s local signal carriage choices. In addition to the popularity and cost of a local signal, a cable operator also considers whether the retransmission of the local signal increases the competitive position of the cable service and whether the added signal duplicates or diversifies the channel lineup. For example, a station with weak rating numbers such as an independent station, or a duplicate network station from a nearby market, may not be carried by a

Authors: Yan, Zhaoxu.
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Must carry rules
6
subject to channel capacity constraint. In general, a signal will be added (or dropped) to
the channel lineup if the additional carriage of the signal will bring about benefits greater
(or smaller) than the opportunity cost of such carriage. This implies that there are both
disincentives and incentives for a cable operator to carry local stations. However, much
of the debate over the must carry rules has focused on the disincentives, neglecting the
fact that cable operators have equally strong incentives to carry local stations. These
include: the popularity of local broadcast stations among viewers; the low costs involved
in carrying local stations; and local signal carriage can increase the competitiveness of
cable television service vis-à-vis over-the-air television broadcasting and direct satellite
broadcasting (DBS) services. In reality, balancing the benefits and costs often results in
favorable local signal carriage decisions by cable system operators. The calculation in
Table 1, based on one channel valuation model, takes into account each cable service’s
rating, its contribution to rates of basic cable services, local ad avails and license fees. It
shows that broadcast stations are actually the most valuable (followed by superstations
such as TBS and then basic cable program services), thanks to their high viewing ratings
among cable households and the lack of affiliate fees to cable operators.
This does not mean, however, that an unregulated cable operator would want to
carry every local station in the market. Several general factors affect cable’s local signal
carriage choices. In addition to the popularity and cost of a local signal, a cable operator
also considers whether the retransmission of the local signal increases the competitive
position of the cable service and whether the added signal duplicates or diversifies the
channel lineup. For example, a station with weak rating numbers such as an independent
station, or a duplicate network station from a nearby market, may not be carried by a


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