Evolution of the Multiple System Operator (MSO)

Overview

The evolution of the multiple system operator (MSO) is a story about the development of the organizational structure and fiduciary relationships within the cable television industry. "Multiple system operator" is a term used to characterize a company that owns and operates two or more cable television systems in different regions of the U.S. Most own and operate substantially more than two. Like most media-related industries, the structure of the cable industry tends toward horizontal integration and oligopolization—in other words a small number of companies own or control the large majority of cable systems in the U.S., and because they are horizontally integrated they have reduced competition and achieved economies of scale that increase profitability. At present the largest MSOs in the United States are Charter Communications (previously TimeWarner, now Spectrum), Comcast (Xfinity), Altice (formerly Optimum), and Cox Communications.

Few people are aware that the cable industry itself is a regional/community-based industry (Sterling & Kittross, 2002). Cable service providers enter into franchise deals with local municipalities for the exclusive right to provide cable service to a particular city and/or metropolitan area for a particular amount of time. Included in the franchise deals are access fees to the ducts and infrastructure through which the provider runs its coaxial or fiber optic cable, as well as the promises that the cable provider makes to the municipality in exchange for the exclusive franchise (Blumenthal & Goodenough, 2006). Among these additional promises can be reserved public access channels to be programmed by the local municipality, upgraded wiring and communications systems, and fiber optic wiring and updated Internet access for both government and subscriber use. Fiber is a substantially better and more robust wiring system than the traditional co-axial and can carry an exponentially larger amount of information both to and from the homes of subscribers.

Cable television, originally called community antenna television (CATV) began in small communities not well-served by broadcast television signals. Beginning in the early 1950s, mom-and-pop cable entrepreneurs invested in the initial cost to construct a large powerful antenna capable of receiving distant television broadcast signals that were too weak to be reliably or well-received by rabbit ears on individual televisions (Parsons, 2008). These entrepreneurs then ran coaxial cable through existing municipal ducts to underground hubs in neighborhoods and from there ran the cable into the homes of individual subscribers.

Beginning in the 1960s, as the subscriber bases of these small systems began to grow, certain investors began to purchase them and thus gain regional control over cable provision. According to Parsons (2003) many of these pioneers (such as Jerrold Electronics/Schapp and Times Wire and Cable) also built their own equipment and then struck (or did not strike) deals with other companies to provide equipment. Therefore, in the earliest stages of its creation the cable industry was an insular affair of a few players all of whom knew each other and cooperated with each other to maintain control over the nascent industry and prevent outsiders from entering the field.

In 1957 the formation of MSOs was somewhat stalled by U.S. Justice Department action against Jerrold Electronics (Parsons, 2008). Jerrold had accumulated about ten community antenna television systems across the U.S. and, because it also provided proprietary equipment, had essentially cornered the market for CATV service in those areas. The government case forced Jerrold to stop acquiring CATV systems and to stop using equipment that was incompatible with other CATV providers.

Other MSO pioneers in this earliest stage of acquisition were Los Angeles-based H&B American Corp.; Henry Griffing's Video Independent Theaters (VIT) in Texas, Oklahoma, and New Mexico; and Bruce Merrill's Antennavision, which began in Arizona and then branched out to cover New Mexico, Southern California, and eventually the eastern seaboard from New York to Connecticut (Parsons, 2008). In this stage cable was solely a retransmission system—it amplified broadcast signals and provided them to subscribers; it provided no original programming and it did not compensate broadcasters for the signals that it retransmitted. Although there were "extra" cable channels available on these systems, they were either unused or perhaps used to display a static community billboard slide or clock.

According to Parsons (2008), Bill Daniels of Daniels and Associates could accurately be described as the father of cable MSOs, because the major cable leaders of the mature MSO period began their careers with Daniels and Associates in the late 1960s and early 1970s. Key among these figures was Bob Magness, the founder of Tele-Communications, Inc. (TCI), which, by the end of the 1990s, owned or controlled cable companies with a subscriber base of over 14 million. The late 1960s and early 1970s saw the expansion of cable systems into metropolitan areas and the offering of additional channels and services, such as Ted Turner's "superstation" WTBS (a locally licensed Atlanta broadcast station that Turner took nationwide through satellite distribution) and the pay-TV channel HBO. The FCC responded with "must carry" laws that required cable providers to retransmit all local television broadcast signals in their designated market area, which simultaneously protected the interests of broadcasters while providing them with more competition as the playing field leveled among VHF and UHF broadcasters in the same designated market area.

Throughout the 1970s cable MSOs continued to increase their market holdings. H&B and TelePrompTer emerged as industry leaders after their proposed merger in 1969 was blessed by the FCC following a promise to acquire original programming to provide its customers with alternative viewing options than those offered by the long-standing monopoly of the three national broadcast networks. This was part of a larger regulatory push to increase television offerings and decrease the power wielded by the three networks—ABC, NBC, and CBS. Broadcast networks were prevented from cross-owning cable systems. Prime time access and financial and syndication rules went into effect to shorten the prime-time evening schedule and give local affiliates an extra hour of evening viewing to program and also to prevent networks from owning the majority of shows that aired on their network. This forced the networks to allow more diverse independent producer voices to be heard on the air.

As more mature MSOs began to form they also began to engage in "clustering," which enhanced their power and provided a more geographically logical structure to their holdings. Since the first community antenna television systems were themselves so localized and spread out—most of them were in rural areas or outside metropolitan centers on the edges of broadcast signal footprints—the first MSOs holdings formed an odd patchwork of companies spread across the country. As cable began to emerge as a legitimate and lucrative industry and a second wave of investors entered the industry, MSOs began to buy up adjacent cable systems or make deals with each other that resulted in the primacy of particular MSOs in particular regions. This has continued to the present day through a series of deals that divide a company into areas of exclusive service, which ensures that most Americans have only one choice of cable service provider.

In the early 1980s cable-only networks began to enhance cable systems nationwide by offering programming that was not available on broadcast. Cable News Network (CNN) and MTV premiered, which made an television owners' investment in cable one that promised not only better reception of existing broadcast stations and a few superstations (such as Atlanta's WTBS), but also a brand new type of 24-hour programming. This resulted in a substantial growth of subscribers in urban areas and a resulting increase in the number of cable-only networks and systems capable of carrying a vast number of channels. The value of the additional viewing offerings these cable networks provided also reorganized the economic structure of the cable industry.

Further Insights

Fiduciary relationships in the mature cable industry became organized in much the same way as traditional retail industries are—there are wholesalers and retailers. The owners of cable-only networks (e.g., CNN, MTV, AMC, ESPN, Bravo, Discovery, and Lifetime) make carriage agreements with cable providers in which the producers agree to "wholesale" their channel's signal to the cable provider for a particular amount of money per subscriber per month. This initially placed broadcasters at a disadvantage since their signals were legally required to be carried by cable systems by the FCC's "must carry" proviso. The 1992 Cable Television Consumer Protection and Competition Act revised the original must carry laws to give broadcast networks and local broadcasters the option to negotiate retransmission fees with MSOs.

Broadcast networks that own and operate local stations or station groups that own local broadcast network affiliates or independent broadcast stations also "wholesale" their signals to cable providers, but do so in return for "retransmission fees" also based on a per subscriber per month tally. Cable providers assemble their channel inventories (the channels they have paid wholesale costs for up front) into "tiers" of service that they then mark up and sell to subscribers for prices that cover the cost of all carriage and retransmission fees plus a profit margin. The creation of original programming by these cable-only networks drove a substantial growth in cable subscriptions during the 1990s which resulted in a considerable increase in the value of MSOs (Liu, 2007). The larger the reach of an MSO (meaning the more systems it operates) the better positioned it is to strike deals about carriage and retransmission with the cable and broadcast networks and their affiliates.

The 1996 Telecommunications Act allowed cable systems to provide phone service and phone providers to provide television services resulting in the "triple play" and "bundled" packages that became so popular. The cost of these bundled deals include the television carriage and retransmission fees for the local stations and, because cable and broadcast have now gone digital, channel inventories can stretch into the hundreds even for basic cable tiers. This has made competition for market primacy in particular regions more intense and also inaugurated a new period of acquisitions and mergers that are aimed at vertically integrating the already highly horizontally integrated cable market (Chan-Olmstead & Guo, 2011). It should be acknowledged that this complicates the regulatory identity of both MSOs and telephone companies since the bundling practices of these firms create converged telecommunications platforms that, while accurate representations of the new digital technologies and economies, may not yet be accommodated or addressed by the FCC.

Issues

The ongoing debates about media ownership and concentration challenge the growth and continued evolution of the MSOs. The four largest MSOs now control cable access for about 90 percent of the U.S. market, and deals and attempts at deal-making have moved these debates up the food chain as media conglomerates seek to vertically integrate the industry. While horizontal integration results in the bringing together of firms that all provide the same service or product under one particular corporate structure, vertical integration is when companies that provide different services or address different stages in the supply chain are owned by the same conglomerate.

Vertical integration in the cable industry may be best represented by the purchase of NBC-Universal by Comcast, which was finalized in 2011 (Crawford, 2014). This brought the producing companies and networks of NBC-Universal into the corporate family of Comcast. Cross-ownership of a television producing conglomerate by an entity that pays television producing conglomerates for the carriage of their content was approved by the FCC after substantial lobbying by the companies involved and assurances that Comcast would not engage in price-fixing or otherwise disadvantage competitors' attempts to carry properties Comcast now owned. Opponents of these megamergers argue that these deals (such as AT&T's bid to acquire Time Warner) threaten consumer choice and market competition by centralizing television distribution to the home, Internet service providers, phone service, and television content production and copyright ownership under the same corporate umbrella. Thus, the same corporate parent will receive revenues from phone, television, and Internet service provision while also paying itself carriage and retransmission fees for the cable networks it owns and licensing the shows it produces for those networks to other MSOs and streaming services. Net neutrality advocates further argue that without net neutrality these huge corporations will also be able to throttle or demand paid prioritization from streaming-only services such as Netflix, Amazon Prime Video, and Hulu, and thus further control the video viewing choices of U.S. cable subscribers/television viewers.

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