It seems Time Warner Cable (NYSE:TWC) and Comcast (NASDAQ:CMCSA) have the ability to raise cable bills even for customers who subscribe to smaller pay television providers.

The American Cable Association, a trade group which represents more than 800 small cable operators, has filed a brief with the Federal Communications Commission. In the filing the association asks the FCC to intervene in negotiations between the cable-affiliated programmers -- channels owned by large cable companies -- and the smaller providers which have to pay them for the rights to that programming.

Essentially, the brief argues that the major cable providers have too much leverage over their smaller rivals. Because the ACA-represented companies have little choice but to offer Comcast's channels, like Bravo, CNBC, and USA, or Time Warner Cable's regional sports networks to their customers, they are in an impossible negotiating position. That allows the big boys to dictate prices, which ultimately hampers the small timers' ability to compete.

The ACA wants the FCC to take action to stop this from happening.

Costs are rising 
The ACA said in the brief that programming costs have more than doubled between 2006 and 2014, but "providers have not been able to pass along to their customers all of the increases in programming fees" because of competition from other multichannel video programming distributors and online providers, including Netflix and Amazon Prime.

Broadcasters sometimes try to force cable operators to pay higher rates by taking programming off the air or even blocking online access to content, the ACA wrote. More importantly, the brief alleges that costs are increasing faster for small providers than larger ones. 

"According to data from SNL Kagan, per-subscriber programming costs across all MVPDs increased at an annual growth rate of 9.3% between 2006 and 2014. For smaller providers, the growth in programming costs has been much greater," the filing said.

If the pricing trends continues, smaller companies which offer cable, Internet, and phone service could see the television part of their businesses lose money. The ACA explained it in the brief: 
Analysis by Cartesian, a consulting firm specializing in telecommunications and retained by ACA, shows that if current trends continue traditional MVPD margins will be reduced substantially each year and that this service, which has been the foundational service for triple-play providers, may become a losing proposition for small to medium-sized providers within the next five years -- by 2020 or even sooner should conditions deteriorate more rapidly than anticipated.
The ACA lays the blame for rising costs squarely on the backs of the large cable providers because of their ability to set the prices the small companies must pay for channels they own. This is a problem the FCC should address, the trade group claims, because it "will reduce the overall amount of capital available for investment in new broadband deployment by existing and new entities." 
 
This is a problem, the ACA says, because "small and medium-sized MVPDs and new entrants are at the forefront of deploying new or more expansive high-performance broadband networks, especially in rural areas."
 
Projected Pay-TV Margin for Small and Medium-Sized Triple Play Providers (2015-2024)
 
Cable Graphic
 

Source: ACA FCC filing

What the ACA wants
The ACA filing says that the FCC has a number of ways to correct the problem of rising costs and thereby protect the ability of small and mid-size providers to continue deploying broadband in under-served areas. They include:
  • Program Access Reforms: The Commission's program access rules should be updated to preserve and protect competition in video distribution markets, including by ensuring that an MVPD buying group, like the National Cable Television Cooperative, has the right to bring a complaint against a cable-affiliated programmer which imposes discriminatory rates, terms, and conditions.
  • Protecting Buying Groups Under Rules as Congress Intended: The NCTC represents more than 900 small and medium-sized broadband and video providers across the country and negotiates the bulk of their programming agreements. Legally the NCTC does not qualify as a buying group, and the ACA believes that the definition for buying groups should be changed to include NCTC.
  • Protection from blackouts: Essentially, this means the ACA wants existing deals to stay in place even after they expire while any disputes over new contracts are adjudicated. This would take away the ability of the cable-affiliated programmer to pull programming.
The ACA also wants the FCC to create a dispute resolution system and enforce its existing "good faith negotiating" rules -- which are supposed to keep the rates paid for retransmission in check -- while making sure customers retain access to channels.
 
What will happen
Though the ACA is talking about fees for television programming, it's actually saying the FCC should intervene because of the impact on broadband Internet deployment. 
 
The FCC's Section 706 authority, granted by Congress in 1996, requires the commission to accelerate deployment of broadband to all Americans "by removing barriers to infrastructure investment and by promoting competition in the telecommunications market," reported ARS Technica. "The ACA is arguing that the high programming costs are a barrier preventing small cable companies from boosting broadband networks, because they have to offer TV programming in packages bundled with Internet access to remain financially viable," the technology news site wrote.
 
That's an issue the FCC has been very sensitive to. It's possible that the commission addresses the concerns in this brief directly and adopts the rules suggested by the ACA. It's perhaps more likely that the FCC makes at least some of what the ACA wants part of the conditions it imposes on the Comcast/TIme Warner Cable merger. 
 
Any ruling here in favor of the FCC is likely to do very little harm to Comcast or Time Warner Cable's bottom line, because the big boys win even when they lose. Yes, the ruling here could put a ceiling on the prices they charge smaller providers for retransmission, but being in a business where you make money even when a customer leaves for a rival is still a pretty good deal. 
 
 

Daniel Kline has no position in any stocks mentioned. He once owned a black and white television. The Motley Fool recommends Amazon.com and Netflix. The Motley Fool owns shares of Amazon.com and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.