Free TV Doesn't Mean Free Lunch

John K. Hane

Posted April 16, 2013

By John Hane

Recently, ran a short item noting that a large broadcast group (not a network owned and operated group) 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 regarding the piece saying 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 impact the quality and availability of broadcasters' 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 have to wait 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 program 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.

So in response to the suggestion that the FCC further limit the scale of broadcasters, I reply: 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?

Some people argue that the broadcast ownership rules should be tightened (I think they should be all but eliminated) because larger broadcasters leverage their size to impose unreasonable fee increases on MVPDs. But in the real world, 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 twenty times or more 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. For the most part, 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 are not 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. That's why I say free television doesn't mean free lunch. Free TV still needs subscription revenue support to provide the highest quality programming. But it is still available for free, with no footnotes, caveats, or limits.

There are three things the government could do to reduce programming costs. First, Congress could eliminate the antitrust exemptions enjoyed by sports leagues. Good luck with that. Second, Congress could directly regulate the prices all programmers charge. No chance. Third, Congress 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 arbitrarily cap the size of anyone in the distribution chain except for 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. That kept programming costs lower, of course, with the side effect of limiting output. But those days are long gone. 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 to the viewing public 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 on behalf of both large and small broadcasters and I can say that unequivocally. Yes, large groups obviously do better. But smaller groups benefit indirectly when their larger peers help the market adjust.

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 can't or don't want to pay.