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Is Viacom Favoring Its Own?
By Eric de Fontenay (Founder & Publisher)
(more articles from this author)
2003-07-14
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A reader feedback on my voluntary structural separation proposal for Clear Channel went straight to the crux of the problem faced with today's media conglomerates that mix content & pipe, with significant market power in one or both sectors:

"Viacom owns Famous Music Publishing, a publishing co. which owns the rights to songs by J-Lo, Eminem, Pink, Aguilera, ... - the very artists that get the most play on MTV and the best space in the record chain stores. Is this a coincidence or a smart business move? and... Is it legal that a company buys up the competition to be the only broadcast force and then decides to broadcast mainly their own artists, and "makes" them a star by broadcasting them a thousand times a year?"

This is a question that worries several of us that follow the industry. There has been a justifiable concern that conglomerates owning key assets in content and controlling distribution channels would use these in an anti-competitive manner to restrain/foreclose competition in any or all of these markets. This is because the conglomerate, if it is a rational economic decision maker, will maximize overall revenue and profitability, even at the expense of certain divisions.

Content/pipe owners may have an incentive to license key works only to their affiliated distribution channels, hampering other channels from being able to compete. AOL/TW for example could decide to make a Warner artist track available exclusively through their online properties, refusing to license it to competing portals such as MSN. The logic in this case is that the AOL/TW group can maximize its revenues through the anticipated additional subscribers & ancillary income from AOL exceed the licensing revenues lost to Warner. The reason that labels have licensed their works (though that even took time) was that none have dominant control over existing catalogues.

On the other hand, the fact that Apple has acquired the rights to a fraction of the songs available on competing label-backed initiatives could raise serious concerns if it endures. At the least, one might ask whether the labels are favoring the Windows format, in part due to MS' Windows Media dominance on the web - a collusion of monopoly and cartel for their respective market advantage over smaller competing alternatives. Personally, while I believe that Apple's unparalleled success renders the issue moot, it illustrates the potential for anti-competitive abuse.

The other scenario is where the content/pipe owner is a dominant player in its distribution sector. If Viacom can realise greater profits by focusing on works over which they hold rights, despite potential revenue loss to MTV, it would be a rational strategy. As Viacom holds a Microsoft-style control over the cable music sector, those losses to its cable channels would likely be minimal while maximizing Famous Music Publishing's earnings/depressing competing publishers business. At the least, Viacom could use its dominance to make it more expensive/difficult for works owned by non-affiliated publishers as compared to its own.

The question of whether they have a right to engage in these practices is clearly no. There is significant legislative and regulatory precedent starting with the Sherman Antitrust Act reinforcing from a public policy perspective the illegality for a party with significant market power to use that market dominance to restrain trade or monopolize the market. This was why ATT was broken up into pieces, why Microsoft nearly risked the same fate and why several major label merger proposals have been rejected by regulatory agencies in the US & Europe. This has also been the primary justification behind cross-ownership restrictions thrown out by the FCC's new media ownership rules.

While I cannot say whether MTV is favoring Famous Music Publishing songs, I do believe that Viacom's near-monopoly over the cable music sector justifies examining whether structural separation between the parent and its affiliates is necessary. Structural separation would establish a virtual Chinese Wall between the parent and its affiliates that would limit the former's control over the latter as well as its ability to coordinate actions benefitting the group's overall profitability over those of the individual affiliates.

The 'undesirable' alternatives to structural separation range from outright divestiture of some of Viacom's music cable holdings to mandatory must-carry obligations that would force its distribution channels to set-aside a certain amount of their videoplay to unaffiliated publishers' works.


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