Communications attorney John Hane: "Unless it can find a way to make all of the other players in the television industry smaller, the FCC should throw off archaic broadcast ownership regulations that skew the market against the only television service that is free to Americans who don’t want to pay."
OPEN MIKE BY JOHN HANE
Ownership Limits Shackle Local Broadcasting
TVNewsCheck recently ran a short item noting that a large broadcast group (not an O&O) and a large multichannel video distributor (MVPD) successfully concluded carriage negotiations. There was no interruption of service. Given the successful outcome, I was surprised to see that someone posted a comment suggesting, more or less, that the deal illustrates why the FCC should tighten its broadcast ownership rules.
No matter how many times I read comments of this sort, I am perplexed that people actually believe it’s a good thing for the government to mandate that broadcasters be the underdogs in all major negotiations that affect the quality and availability of their programming. If anything, government policy should encourage broadcasters to grow to a scale that is meaningful in today’s complex television marketplace. Not one of the other major distributors makes its programming available for free.
If independent (non-O&O) broadcasters aren’t permitted to achieve a scale large enough to negotiate effectively with upstream programmers and downstream distributors you won’t long see high-cost, high-quality, high-value programming available for free to those who choose to opt out of the pay TV ecosystem.
It’s much better to have two, three or four strong competitors in each market, owned by companies that can compete for rational economics in the upstream and downstream markets, than to have eight or more weak competitors, few of which can afford to invest in truly local service or negotiate at arms-length with suppliers and distributors.
For those who have not been paying attention, the television market has changed profoundly in the past 20 years. The big programmers and the big MVPDs have gotten a whole lot bigger. The largest non-O&O broadcast groups have grown too, but not nearly as much. Fox, Disney/ABC, NBCU and the other programmers are vastly bigger companies with incomparable market power vis-a-vis even the largest broadcast groups. The same is true of the large MVPDs, which together serve the great majority of television households.
There’s nothing inherently bad about big content aggregators and big MVPD distributors. And anyway, they are a fact of life. Despite their size, each is trying to deliver a competitive service and deliver good returns for shareholders. That’s what they are supposed to do, and in general (with a few exceptions) they serve the country well. But again, they are much, much larger than even the largest broadcast groups. If you believe that having a viable and competitive free television option is a good thing, that’s a problem.
BRAND CONNECTIONS
So in response to the suggestion that the FCC further limit the scale of broadcasters I ask, why does the government make it so damn hard for the only television service that is available for free to bargain and compete with vastly larger enterprises that are comparatively unregulated?
Implicit in the view that the broadcast ownership rules should be tightened, not relaxed, is the notion that larger broadcasters leverage their size to impose unreasonable fee increases on MVPDs. But that just doesn’t happen. The largest broadcast groups (with market caps in the range of $1 billion, more or less) are, roughly speaking, valued at between a tenth and a thirtieth as much as the largest programmers and distributors.
When MVPDs pay higher fees to independent broadcasters, they do so because in the past those broadcasters have been greatly undercompensated. Skillful advocates can get us all twisted up in policy arguments to the point that policymakers and the general public don’t know which way is up. But the argument that a broadcast company has too much leverage in negotiations with a cable company that has 20 times as much revenue and a larger share of total television distribution revenue in any single market is nonsense.
Groups ostensibly representing the “public interest” argue that higher retransmission fees drive up costs to consumers. Any knowledgeable and unbiased economist would say, categorically, that isn’t true. Yes, programming costs are rising fast, mostly because of competition in the downstream distribution market. Everyone downstream from the owners of the programming has to pay more for programming. Price increases flow upstream from viewers and advertisers, through MVPDs, television stations and cable networks, all the way to the NFL and other program rights holders. Everyone has to pay much more to get quality programming than they did in the past, and everyone wants to turn a profit.
Although some people are disingenuous in their policy arguments, nobody is evil. Except for the very bad effects of sports league antitrust exemptions, rising prices for programming just reflect the market at work. And the market will stabilize, eventually, at a more rational place.
Higher retransmission consent fees aren’t the cause of higher programming costs, they are a symptom of them. Broadcasters must have sufficient revenue to compete with pay channels to buy high quality programming.
When broadcasters can’t make competitive bids we all know the results, like the stampede of sports rights from broadcast (where anyone can watch for free) to RSNs and national sports networks, where everyone pays handsomely whether they watch or not. Is that really a better model for Americans?
Programming will be sold to the highest bidder, and that bidder will recoup its costs from carriage fees and, to the extent possible, ad sales (though the latter is much harder because of cross-platform competition and other factors). But programming that’s acquired by a pay service because a broadcaster can’t bid enough (because the government limits the size of broadcasters and scrutinizes their fee negotiations) isn’t available to anyone for free.
There are only three things the government could do to reduce programming costs. Congress could eliminate the antitrust exemptions enjoyed by sports leagues. Good luck with that. It could directly regulate the prices all programmers charge, or it could directly regulate the prices that can be paid by all purchasers of programming. Good luck with that too.
I suppose there is a fourth way — break up all of the program rights owners or all of the programmers into much smaller companies so that the distributors would have more power in price negotiations. Don’t hold your breath, though — the government isn’t going to cap the size of anyone in the distribution chain except broadcasters. Regulating retransmission fees wouldn’t lower cable bills at all, because it is the original cost of the programming, not any particular link in the distribution chain, that’s driving up costs.
The broadcast ownership limits, which some people seem to view almost as sacrosanct laws of nature, were written at a time when broadcasters were the only distribution channel and held all the cards in negotiations with program suppliers.
Today, competition among distributors is intense. The worst possible public policy is for the government to tell the only television service that makes its programming available for free that it can’t compete aggressively for high quality programming. That does nothing to reduce the cost of programming to consumers. It only ensures that the highest cost programming will appear on cable channels where it’s not available for free to anyone.
I grew up in small broadcast stations. I respect small broadcasters and I want to see them survive and thrive. But this is not 1970 anymore. Small broadcasters have no leverage when dealing with big programmers and distributors. Having some much larger broadcast groups closer to the top of the food chain to set the bar in relationships with programmers and MVPDs, is good for small broadcasters too. I’m involved in many retransmission rights negotiations and I can say that unequivocally. Yes, large groups do better. But smaller groups benefit indirectly when their larger peers help the market adjust.
Attempts to keep broadcasting looking just as it was in 1970 are the regulatory equivalent of a neutron bomb. You keep the infrastructure in place but destroy the life and vitality. It just doesn’t work. Instead of regulating broadcasters more, the FCC should get back to the business of doing what’s right for Americans.
Unless it can find a way to make all of the other players in the television industry smaller, the FCC should throw off archaic broadcast ownership regulations that skew the market against the only television service that is free to Americans who don’t want to pay.
John Hane is counsel in Pillsbury’s Communications practice group in Washington. He speaks and writes frequently about emerging electronic media issues, especially retransmission consent, mobile video, Internet video and spectrum reallocations. He can be reached at [email protected].
Comments (9)
c munc says:
April 16, 2013 at 8:54 am
John makes a lot of valid points which need to be discussed as the broadcast television landscape and regulatory framework is affected by the spectrum auctions. However, the example of Sinclair Broadcasting (SBGI) flys in the face of his major point. Sinclair is using a “mid-market” acquisition strategy and now has stations and deals putting their ownership well over 100 stations. And they are doing this without coming anywhere near the FCC threshold of 35%. Sinclair is doing this in two ways, first by avoiding top-10 market stations which can add up quickly in terms of national pop counts, and by using a quirk in the law which says that UHF stations are counted as 50% of pop counts in the DMA. By doing this Sinclair with its current ownership and pending deals will only have about 21% coverage. If they continue on this strategy and stay away from VHF station purchases they could easily acquire another 50-75 stations, and this could include top-20 market stations. Also with FOX threatening to shed itself of its O&O stations, which are mostly major market stations, but UHF, Sinclair could enter the major markets also. Another thing is that Sinclair has many multiple station markets and could make room for continued growth by passing some of these off to its’ well used LMA/LSA entities. The current regulatory environment can be used by any other station group, but most seem not to be interested in such hyper-growth. I think this is because they think about broadcast first, whereas Sinclair has stated they are betting on spectrum, no matter how it wil be used in the future.
Liz Sidoti and Bob Lewis says:
April 16, 2013 at 9:15 am
Excellent points, John. Great commentary. As for Sinclair and its JSA partners, even if it gains 300 stations in the middle markets, it is still dwarfed by the cable, satellite and programming companies. This is not an argument about “quality” for those who would trash Sinclair. It is about an economic rationale that would continue to limit broadcasters while allowing others to benefit from their service while paying little for that right.
Shenee Howard says:
April 16, 2013 at 9:16 am
The UHF counting as 50% is an antiquated rule that should be thrown out. Today, with digital TV, most stations are technically UHF band stations. Most are positioned equal to the big VHF stations on cable and sattelite lineups. The UHF disadvantage of the early 70s is long gone. This rule should not continue, and broadcasters like SBG who skirt the rules to promote their own agenda (and acquire lots of debt, which after the decade of the 2001-2009 should in itself be worrisome) should be stopped.
John Murray says:
April 16, 2013 at 9:34 am
FreeRights, if Sinclair manages to assume too much debt, they will be stopped — by their bankers and shareholders. And, unlike Wall St (which is co-dependent with Washington) there is no such thing as “too big to fail” in TV broadcasting. So if Sinclair bites off more than it can chew, let it “be stopped” the natural way; the rest of the broadcast industry — and, most importantly, the viewers — won’t even notice. No need to invoke government intervention; I should think the current budget debate would have made it clear that the government has enough on its plate and doesn’t need to be borrowing more money from China to impose yet more regulations and oversight requiring yet more bureaucracy.
Stephen Bernard & David K. Randall says:
April 16, 2013 at 9:47 am
You hit on the heart of the issue here. The market sets its own rules and limits and more unnecessary regs hurt all broadcasters, not just any single target. With the long slow death/transformation of the print journalism industry as our model, we should be doing everything we can to make sure the last bastion of local news (local TV) remains healthy and strong.
Teri Green says:
April 16, 2013 at 1:11 pm
The UHF discount is slated to be eliminated, but like so much else at the FCC it isn’t enforced as of yet at least
Louis Power says:
April 16, 2013 at 4:16 pm
This idea that everything must get larger-too big to fail is bad for most ordinary people. It is good for corporations.
I like the idea of the small person having their voice heard. The way some broadcasters have skirted the law by putting stations in their relatives names and LMAs have greatly reduced competition. The question about Sinclair is what are they really up to? They have been pushing other standards. I would guess their real plan could be to compete with the cellphone companies for data transmission.
Peter Grewar says:
April 16, 2013 at 9:37 pm
This is the same pig in the poke that has been claimed in support of ever greater consolidation in virtually every industry. Each time, we’re assured that the customers will benefit — and that pretty much never happens. Instead, consolidation has blessed us with inflated broadband pricing, inflated wireless pricing, bloated overpriced cable service filled with channels that serve no purpose other than exploiting some sort of arcane corporate “synergy”, and so on. The solution isn’t to let broadcasting follow the same path — instead, the solution should be to break up the other concentrations in the media in order that relatively moderate sized broadcast groups are on a more equal footing.
Brad Dann says:
April 19, 2013 at 10:19 am
let’s just look at the evolution of the ownership caps and what the actual results are. I remember when the FCC allowed a company to own only 7/7/7; 7 each of TV, AM and FM stations. It slowly raised that over time to where we do not have a numeric limit but a % of homes in the country reached limit and FOX got the exception that has UHF only counting for half a % of its coverage. HOw many OTA TV stations were on the air under 7/7/7 vs today? How many stations did newscasts under 7/7/7 vs today? HOw many hours of news was produced locally by stations under 7/7/7 vs today? The public has more programming free OTA, more stations producing newscasts and far more hours of coverage today than it did under any other ownership cap limit. Why would it change if there were no ownership caps? History tells us the change would likely be more stations, more newscast and more coverage. This conspiracy theory that there are bunch of evil people plotting to screw us all if they’re allowed to own more stations is tired, childish and uneducated.