Financial difficulties of small program networks and poor program quality have led the
Korea Communication Commission (KCC) to introduce a regulation mandating cable
operators to pay at least 25% of their subscription revenues to cable networks. With this
regulation, KCC intended to provide program networks incentives to deliver high quality
programs and develop the cable TV industry. However, this regulation was introduced
without a formal analysis of the optimality of market equilibrium or the effects of the
regulation on the industry or social welfare.
This paper sets up a simple model focusing on the two-sided market nature of CATV
industry. It is shown that the market equilibrium is generally suboptimal and program
quality is below the socially optimal level. When the market equilibrium is suboptimal, the
regulation of the licensing fee can improve program quality and social welfare, but cannot
achieve the socially optimal equilibrium.