Vertical Integration in Broadcasting: A Cause for Concern?

Operator:  Welcome to The Federalist Society's Practice Group Podcast. The following podcast, hosted by The Federalist Society's Telecommunications & Electronic Media Practice Group, was recorded on Wednesday, October 9, 2019, during a live teleforum conference call held exclusively for Federalist Society members.  

 

Wesley Hodges:  Welcome to The Federalist Society's teleforum conference call. This afternoon's topic is on “Vertical Integration in Broadcasting: A Cause for Concern?” My name is Wesley Hodges, and I am the Associate Director of Practice Groups at The Federalist Society.

 

      As always, please note that all expressions of opinion are those of the experts on today's call.

 

      Today we are very fortunate to have with us a great panel to discuss this topic. And moderating it today is Mr. Paul Beaudry, who is the Director of Broadband Policy and Regulatory Affairs at TELUS Communications. After our speakers have their remarks, we will have time for Q&A, so please keep in mind what questions you have for this topic or for one or several of our speakers. Thank you very much for sharing with us today. Paul, the floor is yours.

 

Paul Beaudry:  Thank you, Wes. And thanks to The Federalist Society for hosting this teleforum today, which, as noted, will focus on vertical integration in the broadcasting industry. I thought the discussion would be topical considering that two of the biggest media mergers in history, AT&T’s acquisition of Time Warner and Disney’s acquisition of 21st Century Fox, closed earlier this year.

 

      The broadcasting industry used to be pretty straightforward. It functioned on a linear model that consisted in content companies, distribution channels, and audiences. But over the past decades, the model has changed, in no small part thanks to the internet. In an era where streaming platforms are flooding the markets and lots of consumers are cutting the cord, vertical integration has been hailed as a useful strategy for legacy broadcasters to survive in the new digital environment. And while regulators historically have been concerned about the potential for vertically integrated TV companies to act in the anti-competitive manner, they’ve certainly adopted a more permissive approach over the past years.

 

      This begs a question: Is vertical integration a necessary strategy that legacy players must use to fight new competitors in the modern media landscape? Or is it a dangerous trend that will stifle innovation and lead to foreclosure of competition? And also, because we have a Canadian on the panel -- actually, two Canadians when the moderator is included, are there any lessons the U.S. can learn from Canada’s experience with vertical integration, considering that Canada is one of the most highly concentrated media markets in the world?

 

      I’m delighted to have two industry experts with me today. Will Rinehart is Director of Technology and Innovation Policy at the American Action Forum and is based in Washington, D.C. And Brad Danks is CEO of OUTtv, a Canadian specialty channel and over-the-top platform that broadcasts in Canada and around the world. He’s also an Adjunct Professor of Law at the University of Victoria in British Colombia. Gentlemen, thank you for joining us today. And to start, I will cede the floor to you, Will, for your initial thoughts regarding whether vertical integration is good or bad.

 

Will Rinehart:  Thanks, Paul. Thanks for having me. And I’d like to obviously thank The Federalist Society for putting this on. Obviously, this is a big issue that’s going on right now. I want to keep these introductory comments pretty brief because I know we have a slate of different questions that we want to hit up, and I’m also interested to learn as much as possible about the Canadian market because I don’t know as much about that as I probably should.

 

      But I guess it would probably be helpful to start in my expertise area, which is in the questions of economics and in economic analysis. And I would say that vertical integration seems to be, at least to me, to be kind of a natural response to a number of different pressures that are occurring in this industry. And we were going to talk, I know, pretty extensively about AT&T and Time Warner later, but I would say first off that, really, you do see this kind of vertical integration, especially when capital becomes much more important. And when there is higher capital intensity, you really do see this propensity to integrate suppliers in the supply chain. And considering that programming in broadcasting, despite being an important industry that has it’s own sort of production, it still kind of follows along in this general production model of production aggregation and distribution.

 

      And so then the question now that we’re coming to, and really with the introduction of the internet and other digital outlets, along with effectively the rise of mobile technologies as well, the real question I think we’re facing now is whether or not these current vertical mergers and these efforts to vertically integrate both down the stack and then up the stack are really going to be good for the overall ecosystem.

 

      My personal thought on this is that it seems to be almost a natural response to a changing circumstances. And really, what I’m looking for are -- let me say it like this, that what I’m really focused on right now and what I’m interested in right now is to figure out if we’re losing something within this vertical merger effort. If there’s a certain kind of content -- and I know here in the United States, we work very extensively and talk extensively about questions of localism and questions of diversity. And really, I think that’s probably my current worry is whether or not we have good evidence of those things changing and whether or not any regulatory solutions that are out there can actually solve this changing market problem.

 

      And with that, I think I’m probably just going to cede the floor, but I would say that my big concern is that we really don’t -- I really hope that we don’t try to put and cabin in the current market into a market that existed, say, 40 or 30 years ago. And that’s really something that I worry of we’re trying to do is recapture this older era where it was -- where there wasn’t as much competition, where there weren’t as many outlets, and really, to try to understand the kind of information that people need but also the best regulatory ways to deal with this changing market. And again, with that, I think I’ll cede the floor.

 

Paul Beaudry:  Thanks, Will. Brad, why don’t you enlighten us about the situation up north?

 

Brad Danks:  Enlighten you, yeah. First of all, I’ll say that we’ve -- I’ve got a pretty strong opinion on vertical integration. I would say don’t do it. Buyer beware. Vertical integration, the way I look at it, is it means a company sits on both sides of a two-sided market. And by having the opportunity on both sides, it gives it a competitive advantage. And I’ll get into the Canadian market in a second, but just generally, the impact overall is it creates an asymmetrical and structural competitive advantage to one company, or in our case in Canada, a group of companies over every current or even potential competitor.

 

      And while I agree with what Will said, it’s a natural response, it’s a natural defensive response to it. And what I’m going to say based on the Canadian experience is the two things you lose are competition, and because of loss of competition, you lose innovation.

 

      So what happened in Canada, which I think is very instructive, is nearly a decade ago, due to a series of changes in the business, combined, I think most importantly, with pressure on major companies due to the internet, Canada consolidated its business in sort of a sanctioned regulatory consolidation where four big players, Bell, Rogers, Shaw, in English Canada and Quebecor in French Canada, were basically given control of the broadcasting system. And by control, I meant because they’re the largest single carriers, all three of the English language ones controlled roughly 20 percent of the distribution market in the country, so overall, I think about 60, 65 percent combined. And each of them had over -- well, Shaw and Bell were the major players on the media side with about 40 channels each on the dial, and Rogers was smaller with about 15, but some large ones as well.

 

      And the idea was that these big companies would be, as Paul puts it, the “champions” was the word they used, of the Canadian system and keep it afloat and going. And the belief, of course, was because they controlled both sides of the market, they couldn’t be displaced. Now, at the time, people, including myself, called it the Maginot Line solution. And those of you familiar with French military history circa World War II would know that the Maginot Line was that line the French built to keep the Germans out, and the Germans, of course, just went through Belgium on their way to Paris. Well, the same thing, of course, ended up happening in Canada because the internet went right around the system, and that’s what happened.

 

      Well, just to fast-forward, ten years after, it’s pretty clear what’s happened in the marketplace. These companies have controlled, and they have the most profitable channels on the dial. Each of them have -- I think their margins compared to indie’s is about 30 percent as opposed to independent channels like the one I operate, about 7 percent. But through this time, we’ve really just seen they haven’t done anything to innovate or grow the business in any way.

 

      Most of their business is intermediation of U.S. content. And that really is the definitive difference between the Canadian market and the American market. And that is that Canadian broadcasters have the opportunity to acquire content from abroad, and the vast majority of that content, of course, is studio content from the U.S. So what they did with their market position was Bell went out and did a deal with HBO and with Showtime and these people. Shaw did different deals with different players. So all the major American players could bring their content through these licensed deals, and that dominated the market.

 

      Now, your requirement for having that level of monopoly is that you put money back into Canadian content. And Canadian content is obviously valuable from a cultural perspective, but also from an economic perspective because Canadians produce a lot of content. And I’m not sure all of you know this, but a lot of the shows that you watch routinely on prime time in the U.S. and otherwise are produced here in Vancouver where I am or in Toronto. Vancouver is the third largest production center in the world, and Toronto is the fourth largest, courtesy, primarily, of the U.S. networks that produce shows there where mask as New York or Chicago or San Francisco or other places.

 

      In any event, innovation from our perspective as Canadians is both on the technology side, but also on the content side, and the production of content and export of it. And sadly, the record is not good. At the end of the day, these companies treat content very much as a cost of doing business as opposed to a revenue source themselves. And so we see, overall, they produce less content than smaller players on an overall basis and that their export track record is appalling. And in fact, it’s so bad it’s almost embarrassing, despite the fact that was part of the reason they were given control.

 

      I think what we ended up with was a much lazier system as a result, less innovation, less competition. We’ve lost 30 percent of our independent channels in the last four years in Canada. And it’s all because vertical integration allows those channels to control where they sit in the wholesale market within the broadcasting system. And at the end of the day, I can’t really find any good reason to support vertical integration in Canada. We’ve ended up with a more vulnerable market where now -- with less players, less employment, less innovation, less exports.

 

      But—and I’ll jump to the end in this—the other problem you face is that these are different businesses. These companies, about 90 percent of their revenue is on the internet mobile delivery side. And so content presents a much smaller part of their overall business, and there’s a real fear right now that they will want to exit the content side of the business in Canada now. Last year, Shaw sold all their assets into Corus, which is a complicated Canadian issue, but Corus is owned by the Shaw family that own both sides. So now Corus is just a content company.

 

      And we’ve seen sort of a devolution of what Rogers has been doing as well, and the reason for this is very simple. At the end of the day, they’re making more money on mobile internet and so on than they are on content. Content’s also a much more competitive business, and so their shareholders are saying, “Why are we owning these content businesses? The margins are much lower.” So there’s actually corporate pushback from the shareholders now going on in Canada in that regard. So that sort of leaves me where we are.

 

      And the last thing I would say is that, just to keep in mind as we talk, while Canada is different, what we’re all being exposed to, of course, is the -- I say it’s the horizontal nature of the new business where we’ve gone from verticals where each country had its own rules because of the technological walled gardens we lived in to a global marketplace. And I think that’s putting pressure on everybody everywhere at the same time and creating more disruption.

 

Paul Beaudry:  One question I want to ask to each of you is that TV market has become much more fragmented over the years. I was looking at data on audience ratings over the past couple of decades, and you see, for instance, an iconic show like MASH. In 1983, 106 million people tuned in for the finale. Fast-forward to 1998. Seinfeld had its finale and had 76 million people. And earlier this year, Game of Thrones, which is probably one of the most popular shows of our era, only gathered 19 million people for the finale.

 

      And you see a lot of companies that deal with this, and they say, “Well, vertical integration can be used to come up with vehicles that will try to get additional eyeballs in a market that is increasingly competitive and in a market where people are increasingly cutting the cord and refusing to deal with traditional legacy players. Can’t there be a justification for vertical integration due to the fact that legacy broadcasters need to be able to package content and distribution together in order to be adequate competitors and compete on a much more, I would say, robust fashion with the Netflixes of the world which have taken the world by storm?

 

Brad Danks:  Will, do you want to go first, or you want me to go?

 

Will Rinehart:  Yeah, sure. I’ll take this first. I mean, yes, I think that at least in the case of the United States here, especially with AT&T and Time Warner, that was exactly the argument that was made there. And I think that it’s a very understandable argument that effectively what the -- what Time Warner effectively lacked, and they’ve mentioned this -- let me preface this by saying especially if you want to understand at least some of the current tensions within the American market, the most recent AT&T-Time Warner case, and especially the decision of the circuit court is really probably very important in this, just understanding generally what’s going on here.

 

      And one of the things that’s mentioned there, and in talking with a number of people that work in the industry, I’ve learned extensively as well that there’s this kind of each side has it’s own sort of problem. When you’re talking about programmers especially, one of the problems that they continually have is, at least here in the United States, you have this kind of split between advertising money and then other related -- depending on what type of -- where you are in the business. If you’re a programmer or if you’re a broadcaster, your money is typically spent between some sort of advertising revenue and then some sort of affiliate fee. And that changing nature of those two have really undercut a lot of the programmer’s ability to effectively make content. A prime example, at least with Time Warner and some of their assets, their total amount of content was something like half of that of Netflix in any given year. So they just don’t have the same amount of, effectively, money to do the big shows that, for example, HBO and Netflix is doing currently.

 

      But more importantly, I think probably what is -- at least what seems like the reason why there was an integration there and the reason why both sides really felt that there was synergies is because at least when it came to Time Warner, especially some of the Turner assets, they really didn’t know that much about their consumers. They talked about how they were effectively blind to their consumers. They really didn’t know very much information about who was watching their programming and what times are they watching the programming.

 

      They try to get this information, obviously, from Nielsen and other indirect ways, but as they said very clearly that there is a whole bunch of problems that they have in trying to understand their own markets. That has a number of different effects. It makes their advertising less effective, and they even compared some of the -- they compared their vertically integrated products online to the products that they’re selling through affiliates and effectively, they talk extensively about the quality of the advertising and the ability to actually raise the money for content in that regard.

 

      At the same time, you have this exact problem with people that are in the downstream side of things. At least here in the United States, the distributors, the independent MVPDs that are working for this -- I’m sorry, both the MVPDs and -- the consolidated MVPDs and the non-integrated MVPDs, they face also a very similar problem when it comes to programming costs, which is that they have to negotiate with a whole bunch of different players in order to get the programming to bundle it and then package it for their consumers. And so there is this really complicated kind of dance that goes on, especially when you’re in these negotiations.

 

      And at least here in the United States, there has been this concern, “Well, hey, we have to compete with all these other major players.” A lot of people are spending a whole bunch of money. Netflix is spending something like $15 billion here in 2019 on content. And in order to be competitive with that, there has been a lot of pressure to effectively integrate so they know more about their customers. They’re able to create the kinds of shows, for example, that Netflix can create. The reason why House of Cards existed for so long and before all of the unpleasantness that occurred with some of the actors, the reason they even created that show was primarily because they knew that people wanted to watch political dramas through their own customer information, their own data through their customers.

 

      And so there is on both sides this problem of information that is kind of the problem that the information age induces. It’s a problem that really everyone is facing right now, which is how do you know what your consumers are watching? What kind of content do they want? I mean, it’s been a long problem. It’s been the old -- it’s really been a continuing issue.

 

      And trying to figure out and solve that problem, of course, can be done through a number of different ways. You can try to figure out better analytics. You can try to work through startups and buy the data in, effectively, a secondary market. But increasingly, I think there is this desire to at least vertically integrate such that you kind of have the entire stack that is able to provide the kinds of content that you want.

 

      And the one thing I’d also mention is that, at least when it comes to the MVPDs here in the States, that the other big concerns they’ve had is -- so as much as they have information about the consumers, the other side of the programming is that you can’t save programming for later. In many instances, the contracts did not allow for consumers, say, on their mobile devices or even at home to really save -- it was a long, drawn out process to get the streaming to work, period. But at least when we’re talking about some of the other cases with AT&T, and again, Time Warner, they themselves, AT&T was suffering because they couldn’t download content, have consumers save their content for mobile use.

 

      So to me, there is this problem, again, that is induced by the internet that creates other sorts of competitive pressures. I do wonder whether or not -- I think, as you’ve mentioned, at least, with the Canadian case that especially with Shaw and knowing a bit about Shaw that they specifically -- it seems, and I could be wrong, but they very much consider themselves an internet first sort of company, that they’re far more interested in getting people connected to distribution rather than getting necessarily connected to content.

 

      And I guess that’s the other part of this conversation which is at least a subtext to all of it, which is that some companies, for example, AT&T, consider themselves much more of an integrated company that is able to provide many different sorts of services, whereas, say, Verizon has largely, again, here in the U.S., has largely gone out of the wireline business and is primarily in the wireless business and really sees themselves as an internet and a wireless carrier.

 

      So that’s the other part of this problem that I find very difficult to grapple with, which is that companies themselves have this very clear perception of where they’re located within the market and where they see their competitive advantage. And that, to me, also just adds another element of difficulty in trying to understand what should be the best for consumers, considering that, again, these companies see themselves as having a special niche within the larger market.

 

Brad Danks:  Paul’s business, TELUS, for example, has stayed right out of the content business. That is an issue. The cable companies in Canada are asking these questions. Where should we go? Should we get into the content side? And that’s really the vertical integration question is should they be on both sides, and are there benefits? So there’s a fair bit to unpack there. First of all, I mean, you’ve got to credit Netflix for the job they’ve done. They’re so innovative, and it’s great they’re making all this content, but I certainly wouldn’t want all their debt. I mean, they have gone out to the market and raised all of that, and I think a lot of those bigger players look at that and go, “Wow.” When does that become a big problem for Netflix? I think maybe now, but that’s a whole issue aside.

 

Will Rinehart:  Same with AT&T.

 

Brad Danks:  But you know -- yeah, AT&T’s got a problem too. So anyway, the content issue I sort of see differently. I mean, it’s been a trend that’s gone on for a long, long time, and it really goes back to the 1950s. I Love Lucy had a 50-something percent audience share. But the real question is, is it a problem that there’s so much programming and there’s so many other channels? I mean, those of us that are looking for a competitive market, do we really care that you can’t get that audience share that you used to? Is that a negative sign? Well, I guess it is if you’re Bill Paley and you run CBS and it’s 1955, anything you put on is going to get a 20 percent audience share, even if it’s a fireplace burning because you’ve got so much distribution and so little competition.

 

      But as competition has increased, it has simply impacted content markets so that there’s many, many, many, many more choices. I’m a very small broadcaster, so when we produce our original content, which we do, the question is what’s the ROI on it? We obviously have to make it for less than it sells for. And while all of these things have created more challenges on the content side, what I hear when I hear them complaining, is I hear them saying, “Look, it used to be easier for us. We used to make shows. We used to put them up and people would watch them because it was the only thing on. And we got paid, and everything was great. But this disruption is causing us grief because it means our content investments are more speculative, and it creates more challenges.”

 

      There is zero doubt in my mind that vertical integration makes it easier for the companies that are vertically integrated to pay themselves back for their content investments. That’s the number one reason why they want it. The better question is why, as a society, do we want them to have that because there’s many cycles of this through the last 100 years. One era through the 1930s to ‘50s with massive vertical integration within the U.S. film industry started to produce a lot of really boring films that didn’t get blown up until the ‘50s and ‘60s when the independents began to emerge again.

 

      The history of vertical integration is it creates boring, predictable content. It doesn’t create things that are exciting or interesting for the audiences. It works very well for the companies that get it, but it doesn’t work well for everybody else would be the contention, and that’s really why. I understand fully why they want it. I just don’t know why the rest of us let them have it.

 

Paul Beaudry:  Thanks, Brad. Will, I have a question for you. You quickly mentioned the AT&T-Time Warner merger. And I think this is an interesting case, first time in decades where a vertical merger is challenged by the government, and essentially -- and I’m commenting on this from a Canadian perspective, somebody who reads the U.S. papers once in a while, but it appears that even as the government’s theory was taken face value, it was still a pretty flimsy case. Weren’t they claiming that this would result in higher prices for consumers that would amount to the range of something like 45 cents per month?

 

      I’m a little confused by this, and that brings me to my question, whether you support it or not and, obviously, you’ve made comments that kind of support the idea that vertical integration might make business sense here, but is the consumer welfare standard that’s been predominant in U.S. antitrust for so long, is it still the standard that they should rely on in adjudicating cases like AT&T-Time Warner because I was surprised in this case that there’s a bunch of other arguments that could have been made, maybe successfully or not, regarding the ecosystem in general. But the primary focus was on that 45 cent per month tariff hike, which I thought was unconvincing from the get-go.

 

Brad Danks:  I mean, you’re right on a more philosophical level. And I admit I didn’t follow it that closely, but on a philosophical level, I’m not keen on a lot of these consumer driven arguments. I am in favor of the consumer being a major consideration, but I oftentimes think that that’s not the big picture question that we’ve been asking ourselves properly because oftentimes, you can justify a lot of these anticompetitive measures solely on the basis that the consumer will be fine with it. But it’s oftentimes a short-term argument. It’s not a longer-term argument.

 

      I tend to look the other way and say let’s start with competition and understanding that competition is ultimately going to be better for the consumer in the long run and look at innovation which inevitably comes from the outside and comes from markets that have opportunities for new entries and opportunities for evolution. And generally, the consumer model has been used in the past to justify a lot more concentration for short-term efficiencies which, I think, at the end of the day, hurt the long-term development of competition and innovation. That’s my general comment. When I see those numbers being proposed at those levels in these things, I’m always extremely skeptical because I think they can really say virtually anything when they do that. I guess that’s as far as I can go, having not delved any further into that case.

 

Will Rinehart:  I wrote a decent amount about this case as it was going on a couple years back. To be honest, to be very blunt, the government was really in a pretty tough bind here. So one of the major government witnesses, Carl Shapiro, very well-known economist, he was on the stand, and he bluntly agreed that there would be something like $350 million in consumer savings, at least in the very near term, from this merger because it would have eliminated -- it’s the double marginalization problem. It eliminated marginalizations, so it made both of the companies, at least the argument is that it’ll make both of them more efficient and it’ll also make targeting and information collection between the different elements within the company better. And Shapiro bluntly admitted that yes, there will be actually quite a big, important savings.

 

      As you mentioned, the real big question, and I think it was 170-some pages, the judge went through this. Making a claim about a vertical integration or a vertical merger is really, really, really difficult because effectively, what you have to prove is, and especially when you’re talking about these TV/video markets, is that the merger itself is going to have an effect that because of this merger, it will be able to raise the rivals costs by enough that it will affect their ability to do business. And as you said, the amount of percentage, the percentage increase was quite low, at least, even in the most expansive models that were used by Shapiro.

 

      And effectively, a lot of this came down to this kind of argument about what do the bargaining models look like? How do we know if consumers will be harmed? And it’s a very, very difficult question, and I’m not going to say it’s a very easy question. This is something that I’m part of a much larger conversation currently about whether or not the United States really should be rethinking these, as you mentioned, the consumer welfare standard. Until we’ve really seen -- I mean, personally, there’s a lot to unpack, obviously, with some of the other comments that have been made here today. But when it really specifically came down to the AT&T-Time Warner case, I think it really was a really tough case for the government to make, but very clearly, the change in consumer prices were really, really low. You’re talking about at the most aggressive, probably 0.4 percent, I believe was the number. And you’re right, it was only 40 cents at the very, very top end.

 

      But again, the court had a very interesting back and forth on this because once the model was released, then Shapiro actually ended up going back and redoing some of his numbers, and that had to be added in later into the court. So he said at the very top end, it could be a 45 cent increase per month, or it could be at the very, very most conservative end, something like 13 cents per month. So there was a back and forth even in the impact on consumers.

 

      I guess the other bigger question that I still grapple with is how do we know that -- there is typically a tradeoff between competition and innovation, in fact, that a whole bunch of competition in a market will typically lead to less innovative markets because everyone is just trying to grab a small piece of the pie. And then, in fact, there are important economies of scale in these production industries where some people do have a pretty good sense of perhaps what programming will actually do well with certain kinds of audiences. And I’m not going to say there are certain people that I think do very, very well with this.

 

      So it’s tough for me to see what we really should be aiming for, and I think that’s also another big problem that we’re trying to face here. What should the market look like? And I just don’t -- I mean, we can say that it shouldn’t be vertically integrated, but what -- should it have more programming that it does now? We’re already kind of awash in programming. Should the prices be perhaps lower than they are now? That’s another really, really tough question and one that, again, we try to grapple with largely through antitrust and not through the FCC, though that’s a whole different, separate question as well. So to me, there’s just a whole bunch of bundled questions that we’re trying to really pull out here.

 

      And I would also say that I guess I’m just hesitant to think that integration itself does create these kind of boring, predictable content. The 1950’s weren’t a horrible -- it was considered the Golden Age, in some regards, of movies. And again, while it’s very, perhaps, boring content, a lot of people do really like predictable content. And we know that people like to go back to the same stuff over and over again. So knowing what consumers want is a difficult thing. And trying to build a market and a set of regulatory regulations and rules around a market that’s driven by taste, to me, is a very, very difficult thing to do.

 

Brad Danks:  There’s one area that’s I think interesting that was raised. I didn’t address it when I talked before, but that was the use of data. And one thing I can tell you, we have a directed consumer platform. We also are on Amazon and Apple and they gave us good information. It’s not as good as we get ourselves with direct to consumer, but there’s nothing worse for information than the term broadcasting system. Nielsen’s ratings are in one in one thousand homes, and then you have to set-top box information, which is still not great. But in Canada, we have an initiative here by our regulator to develop a way for the set-top box information to be delivered to all of the programming services so they can see what people are watching at that level and help them make choices regarding the productions of programming.

 

      Well, that’s being blocked. Who’s blocking it? Primarily, one of the four vertical integrated players that’s the one out of Quebec. But the reality is that none of the four biggest players want the data to be shared, and they made that very clear. They see that as a future business opportunity that they themselves can keep, and having other people enter that is a problem. And vertical integration has been a problem in Canada because the four of them together create such a powerful group in terms of lobbying and otherwise that the system itself is slowed by that. Who controls the data, who owns the data is a huge, huge question going forward. From a content production perspective, I can tell you it’s now critical in the decisions we make around what investments we make on the content side. There’s no way that should be blocked from producers, big or small. Going forward, there’s got to be a way to deal with that.

 

      The other side, the privacy concerns, who is this person, is it Jane Smith who lives in Washington, D.C., who’s 24 years old, whatever, that’s a whole other issue, and it’s an area that we could talk about all day another time. But just getting those basic metrics on shows released, what’s watched, what’s the viewing time, how many people watched it, is so much better than we currently have. And I think that’s something, going forward, that from a regulatory perspective we’re all going to have to contend with in every country in the world that we work in right now. The Europeans are already moving on this pretty quickly. Again, in our case, vertical integration has been an impediment to that because of the power granted to those four companies.

 

Paul Beaudry:  I want to open the floor for questions, but right before I do so, I just want to ask you what do you think the future holds in store for the broadcasting market? We’re seeing lots of new services coming out. Apple TV+ is launching on November 1st. Two weeks later, Disney will launch its own service, and we’re also expecting Warner Media and Comcast to launch their own services in 2020. How will this affect the broadcasting landscape, and how will vertical integration impact the future?

 

Brad Danks:  Do you want me to go first, Will, because I think I’ve got a pretty clear idea on this.

 

Will Rinehart:  Yeah, sure. Go ahead.

 

Brad Danks:  It goes back to something you were just talking about, which is the pricing model, but I’ll come back to that. I think that Amazon and Apple are going to disrupt dramatically the business. I think that’s what’s happening with these streaming services is that now -- I know the bundle on TV will be recreated underneath them, or within them may be a better way to put it. But I think that they’ll be hugely successful, and I think those two big tech companies are going to play a huge role in it because they have so much power and so much technical capability. I think what you see on Amazon channels now in the U.S., and they’ve come to Canada now, is a huge part of the future.

 

      Alongside that, or I guess different than that, are also all these other platforms that have emerged. We’ve seen Pluto TV which has been bought by Viacom, Tubi, XUMO, and these are sort of the free available ad-supported platforms, which, if you think about it, what they represent are two sides of what is really the problem, and the crux of the problem in the AT&T matter, and that is the current broadcasting system, the payment structure is done at two levels. At the wholesale level, the broadcaster negotiates with the carrier for a fee, and then on top of that is the retail level where the consumer goes and buys the channel from the cable provider. So it’s the wholesale and retail distinction. And of course, there’s a markup there.

 

      The problem is, is that to get a good wholesale fee, there has to be a lot of power, and it’s that market power that they’re looking for in terms of vertical integration. So in other words, they want to make sure they can get a good wholesale rate regardless of what happens from the consumer side. So there’s a disconnect between the two.

 

      What Amazon’s doing with the subscription model they’ve got is they’re blowing that up on the one side. They’re saying for your premium content, you can get a subscription price. You can charge whatever you want, and we’ll do it on a revenue share basis, assuming that’s workable within the marketplace from the channel’s perspective. You provide the content, we split the revenue, we’re partners. And you get your really discreet customer base. Maybe that’s five percent of what would be your normal customer base on television, but it also is a nine or ten times the value consumer because of what they’re paying. And then on the Pluto TV side, it’s put your shows here, really your legacy library, maybe the first episode of your new season, and get it advertised and supported. But you’re going to get full reach of the entire system. So you get the best out of subscription and you get the best out of advertising. We’re combining those two.

 

      And I think that’s going to be the future of TV. I think the current pricing model is obsolete, and I think those two companies are going to blow it up because they don’t care. And this is what’s going on. And I think what’s happened is the major studios have recognized that we’ve passed the tipping point where they can maintain control of the current structure, so they’ve all decided they need to launch the streaming services. And so when one, Disney, stepped up and said, “We’re going first,” particularly with ESPN, everybody else said, “Well, now it’s time. We’ve got to go.” And that’s where we are, and I think over the next 12 to 24 months, they’re going to rip up the whole system that way with Amazon, Apple, and perhaps Roku leading the way on the delivery side.

 

Will Rinehart:  Yeah, generally speaking, I think that’s probably what’s going to happen. I guess my one addendum to all of this is something that had been mentioned, which is ESPN. I mean, this is the big other question that we haven’t talked about as much, which is how do sports really play into this? And that, to me, really sports and live television, especially when it comes to news production, which as a Washingtonian and somebody that’s involved in this space pretty extensively, the things that I still do see surviving or potentially surviving this general bifurcation of the market and this -- well, I shouldn’t say bifurcation, but the shift of the market, is still sports and still live television when it comes to news products.

 

      So those two things, I think, will probably still be the things that traditionally we see, at least through -- perhaps what you’d see if like in a traditional MVPD bought all here in the U.S., whereas some of the other elements which don’t necessarily need -- as HBO has shown and Netflix has shown, and again, Amazon and other players like that have shown that you can consume all these other sorts of content whenever you want. However, there still is this kind of time component, obviously, to sports broadcasting which, again, still make a good amount of money.

 

      I think he’s exactly right on all these other elements about the other sort of content that is important, which is the episodes, the shows that people still watch. That, to me, also comes into a really interesting competition with all of the new elements that provide inputs into all of this, which is something that I’ve been focused on in the last probably two years to really get a better sense of. As much as we’re talking about broadcasting, one of my favorite broadcasters came up in the podcast world and has gotten much, much better known and has gotten much better deals because he’s been able to leverage his podcast, especially -- again, I’m just thinking of this new space of podcasting in particular and how that also integrates within different sorts of streams for talent as well.

 

      So exactly, as much as there is shift that’s occurring, I do also see consumers increasingly shifting the kinds of things that they’re wanting to consume. And again, this market splitting to me it going to be very, very interesting. But the biggest players still seem to be able to come on top will probably be Amazon. For obvious reasons, what Disney’s doing and what they plan to do in the next year with their television show, their Star Wars elements, all of these other things that they’ve seem to come together and package, that also is -- will be, to me, something very, very important to watch, and will probably be a market leader and will provide -- they’re the big gorilla who’s really shifting the market. So it’ll be interesting to see how consumers react to it.

 

      Again, we know that consumers aren’t getting as much into the traditional television cable bundle. There’s been a huge loss of those sorts of consumers, and so, to me, there’s just a lot that’s happening all at the same time that we really need more than just an hour to go through. We need a couple hours to go through and talk through what should be the regulatory structure on all these different elements. I mean, we haven’t even talked about local channel rules here in the United States or what are the bundling requirements for the regions that you’re located in. And all of those things really feed into the kind of market that we’re looking at and whether or not, especially when you’re talking about the FCC or the DOJ really should be intervening in those markets.

 

      So I think I’ll just leave it there that I’m both optimistic, but also there’s a lot to keep track of right now, and I don’t know if -- I think that really, honestly, at least here in the U.S., I would hope that regulators are doing a better job of actually keeping track of this. And personally, my big thing is that, in fact, I think we need to be giving them more resources in attorneys and people who are economists and also technologists just generally to understand this market. That, to me, I think, is actually probably when it comes to regulation, I think that’s probably the big lift that needs to be done here in the United States is just basically better internal knowledge of these markets.

 

Paul Beaudry:  Well, thanks, Will. And I’ll be more than happy to organize a follow-up teleforum to discuss all these issues that we haven’t discussed yet. I have another question. Will, you broached the issue of local television, and recently reading what’s happening in the newspaper world in the United States, and to a similar degree in Canada, we’ve got some of the most well known papers that are able to survive like the New York Times, but people are not really subscribing to their local newspapers anymore.

 

      So you’ve got tremendous coverage, for instance, of the federal political scene. Everybody knows what’s going on in the Trump White House. However, it’s not as good for the local stuff if you live in San Francisco or Memphis or Austin, Texas. People don’t subscribe as much to their local papers, and there’s a risk to really, really losing that local touch and that local knowledge. I would assume there’s a similar situation when it comes to television. Would you mind expanding on this?

 

Will Rinehart:  Yeah, this has been occurring. So yes, there obviously has been a pretty big and drastic change in the local newspaper market. It should be noted, at least when it comes to the United States newspapers, traditionally, and this really has been the big problem that they have been facing, is that compared to most other countries, United States newspapers were far more skewed towards advertising rates in the past. Something like around 75 percent of the revenue was coming through advertising, whereas in many other countries, and I’m particularly looking at Western and Central Europe that I know best in this space, that at least in their instance, they were typically collecting in the  high 50s, low 60s when it comes to advertising as compared to subscription rates. And so the United States has really had a pretty dramatic decrease when it comes to local newspapers, primarily because there has been this shifting alliance, or this shift within the advertising space. And because, again, they’re so exposed to advertising as a source of revenue, they’ve suffered far more than anyone else.

 

      Local television is really in a weird space as well. I shouldn’t say weird space, but they’re also in a very similar sort of space, which is competitively, they’re dealing with a shift in consumers. And again, the consumers themselves are bringing the ad dollars or taking the add dollars with them. At least here in the United States, there’s kind of been a back and forth on whether or not there should be mergers between the two, and the FCC in their most recent --so they do what’s called a quadrennial review. In their most recent quadrennial review, they relaxed these rules. And not that long ago, the courts effectively said, no, you didn’t do enough work in order show that these rules could be relaxed. If the rules were relaxed, you would see, or at least allow for newspapers to merge with, effectively, local radio stations or news stations.

 

      This has been, I think, a very controversial topic and one that, again, I just don’t know if there’s any really great solutions. In a sense, yes, you will probably have a loss of newspaper outlets, and again, a lot of these newspapers are pretty debt-laden as well, so that’s also contributing to a lot of them folding. But we’ve also just seen a large contraction in just the number of local, again, the number of local outlets because of this changing market. And you can’t allow them to merge, but in effect, it’s a short term-solution to a very long-term problem, which is that, effectively, my generation, millennials, don’t spend as much time watching local news. They’re far more online. What does that portend for the future? I don’t know how you put everything back in the box. It really seems to be out in the ether already. And trying to change the market such that there is local news, that’s just very, very difficult.

 

      There’s a lot of projects going on currently that are trying to deal with this. Google is trying to actually support local news. Facebook is trying to do this as well. You have a lot of 501(c)(3) nonprofits that are trying to do this as well. Unfortunately, I think probably in the next ten years, you’re going to see a bottoming out of these local journalists, and it does clearly impact local coverage of political events. It clearly does impact the ability of local politicians to do their job. They’re not criticized as much. We also know they probably do a little bit better in reelection because they don’t face the scrutiny from local media.

 

      So there are clear problems with this, but I just don’t know if anyone has any really good solutions to fixing this problem. And having talked to a number of colleagues in Western Europe, I know this is a bit of an issue. But again, the structure is a little bit different here in the United States as compared to other places. For me, I think there is something to be worried about this, but again, I just don’t know that there are any clean regulatory solutions to any of this.

 

Paul Beaudry:  Yeah, there’s certainly the subsidy way. In Canada recently, the federal government announced a $600 million subsidy for the major newspapers. I’m not sure that’s a route that you’d want to go. But Brad, what about local television in Canada?

 

Brad Danks:  Yeah, I agree with Will. It’s a very difficult issue. We underestimated how much some of the pieces that were there before -- I mean, newspapers are the best example. The classified ads were really keeping those businesses together. Even though it was about 8 percent of their revenue, it was what drove subscriptions. Everybody wanted to go through the ads on the weekend and figure out where the local farmers market was, or maybe the obituaries, or whatever, so they paid those subscriptions. And as soon as they lost those to the Craigslists and all those companies, all of a sudden, people said, “I don’t need that paper anymore. I get all that information somewhere else,” and local news similar.

 

      I also think that it suffers from some production value issues. Live news is expensive compared to a lot of other types of content, and that’s put a lot of pressure on a lot of the local news outlets around because with the fragmentation of media, they just can’t aggregate the audiences locally enough to sell enough advertising to fill that hole. And there’s no way to see that coming back. There just isn’t enough money in it. It’s either usually supported by something else where you report the news as an obligation. Let’s not forget, the 6 o’clock news on CBS, ABC, and NBC is a condition of license. It was like, “You’re going to do this even if you don’t make money at it.” And news has always been a little like that. And right now at the local level, I think it’s very difficult. I don’t see a workable solution yet. I don’t spend that much time on that area, but I’m like Will. I don’t know how you go backwards.

 

Will Rinehart:  Before my current job, I worked as a journalist and also worked pretty extensively with advertising later in life in doing classified ads and selling classified ads. I was a witness to this crisis as it occurred in the early 2000s. The website that they tried to end up creating -- we tried to basically transition and to move towards online spaces. That transition just was not very good, and basically, that newspaper does not exist in any meaningful sense anymore. It really has been sad to see that occur, but at the same time, the unbundling of everything, Craigslist has changed, dramatically, everything.

 

      But again, as you’ve mentioned, this unbundled everything else as well. Sports and weather and a whole bunch of other information sources that used to get bundled together with the newspaper just aren’t there anymore. And it’s really unclear in a diverse communication environment and diverse information environment how you stop that bleeding. And unfortunately, I think newspapers are going to have to suffer a little bit more before you see the bottom of it and see much more of a sustainable information ecosystem merge as well. Unfortunately, the growing pains are very real right now, and its effect on politics is worrying, but I don’t know what you do. If you have any suggestions and you’re on this teleforum call, please let me know. I would love to work with you and talk through some of these issues.

 

Wesley Hodges:  Looks like we do have one from the audience. Here’s our audience caller.

 

Caller 1:  I wanted to ask the panel what each of them think can be concluded or inferred at this point about the costs and the benefits of vertical integration looking to any data we have as of yet from the AT&T-Time Warner and the Disney-Fox deals.

 

Brad Danks:  I’ll talk first. By the way, I don’t consider the Disney-Fox deal a vertical integration per se. There’s some small elements of it, but the priority of the deal is to bulk up on content. We didn’t mention this in the look forward. It was one of Paul’s questions, but we’re going to see more mergers because of these services that are being launched. And I think Lionsgate was saying today they’re going to sell off Starz separately to somebody, and you’ll see that. You’ll see MGM maybe show up. So there’ll be the content side of the business, and I think that concentration issue is kind of a different one.

 

      But in terms of benefits, the general pattern, I believe, is that the benefits are short term for the system and for the company. It’s an ability to maintain their current business. You might even say it’s a reluctance of the obsolete to go gently into the future. And so there are short term cost benefits to them. But in the long term, I always think that we suffer because of the lack of competition and the lack of innovation that we get afterwards.

 

Will Rinehart:  Yeah, just to be very clear, since we’ve talked, obviously, a lot about integration through this call, I wouldn’t say I’m always pro-integration. I think you need to look at context by context to figure out if there’s going to be a benefit to each of the different sorts of integrations. And in fact, I think there are a number of ways that one could see pro-consumer benefits for integration in many different spaces.

 

      The question about AT&T and Time Warner is, I think, very, very difficult, but Joker had the biggest box office record ever for an October showing. And it seems to be, at least people suggest, that one of the reasons why this occurred was because there was better integration. People knew what people wanted. There was also a better sense of consumer preferences. But again, who knows if those things could have been discovered through surveys and direct consumer relationships that weren’t necessarily aided through the AT&T-Time Warner merger?

 

      I think to see really whether or not these things are going to be pro-competitive, unfortunately, is going to take some more time, and it’s also probably going to take a little bit more work. This is something I’ve been actively working on with -- I’m hopefully in the next year going to be coming up with some studies on this. I do think that really what needs to be done, at least in the context here in the U.S., is that the FTC needs to do more of these retrospective merger analyses. There has been a bigger emphasis on vertical integration and questions about vertical integration typically deal with horizontal integration, and now it seems to be shifting towards these vertical integration questions. I’m still very excited about that sort of research to be able to tell us more about what’s going on in the future. And that’s where I’m looking for and really hoping to get into in the next couple of years is doing more quantitative and empirical work on what we know.

 

      That isn’t to say that is the end all, be all. That’s not to say that prices should always be determinate, but there’s a lot to be said in these kind of information environments when consumers don’t consume the content and they have access to it. If they don’t consume the content and they have access to it, that does actually tell us something about whether of not these sorts of mergers actually were very effective. I think it still is that the jury’s a little bit out when it comes to AT&T-Time Warner, but I think the early suggestions do point to there being positivity. But again, I think only time will tell on that one.

 

      And really to understand if these things have been positive, you do really need to take, unfortunately, a 5 year look back. But again, that does take time. It does take effort. And I do hope that the FTC and the DOJ look back and actually do that type of retrospective analysis. And I really hope that there’s more of this sort of work being done. And again, as I said before, the one major thing I’d actually suggest for the FCC and the FTC is just more people to do this sort of work because I think it’s actually very helpful to understand the market, but it’s also very helpful for people like me to understand whether or not they’re actually doing a good job and whether or not the market could be doing better than it currently should be doing.

 

Paul Beaudry:  Thank you, Will. It’s over 4:00 p.m. Eastern Time, so this marks, unfortunately, the end of our teleforum. Thank you to Brad Danks, CEO of OUTtv and Will Rinehart, Director of Technology and Innovation Policy at the American Action Forum. We really enjoyed the discussion and hope to discuss more of some of the things we’ve discussed today maybe in the future edition of another teleforum. Thank you so much.

 

Will Rinehart:  Thank you.

 

Wesley Hodges:  On behalf of The Federalist Society, I would like to thank everyone for the benefit of their valuable time and expertise. We welcome all listener feedback by email at [email protected]. Thank you all for joining us. We are now adjourned.

 

Operator:  Thank you for listening. We hope you enjoyed this practice group podcast. For materials related to this podcast and other Federalist Society multimedia, please visit The Federalist Society's website at www.fedsoc.org/multimedia.