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FCC Finds the Case for Broadcast Ownership Deregulation Compelling

After much public debate, the FCC voted 3-2 today to reconsider and reverse the prior decision of the Wheeler FCC to leave the broadcast ownership rules largely unchanged in the 2010/2014 Quadrennial Regulatory Review.  As detailed in an FCC Fact Sheet released after the FCC’s action this morning, the FCC’s ultimate order will hew closely to the draft released several weeks ago which we discussed briefly here.  As a result, the FCC will be eliminating the Newspaper/Broadcast Cross-Ownership Rule and the Radio-Television Cross-Ownership Rule, eliminating the Eight-Voices Test for owning a local TV Duopoly, eliminating the attribution of joint sales agreements as a regulated ownership interest, and will consider allowing broadcasters to own two Top-4 rated TV stations in a market on a case-by-case basis.

The FCC is also launching a Diversity/Incubator program to facilitate entry by new players into the broadcast industry, adopting a Notice of Proposed Rulemaking today to gather comments on how that program should be structured and implemented.

Given the extended and very public debate over modernizing the FCC’s broadcast ownership rules, including a forum on Capitol Hill yesterday debating the merits, today’s vote was not a surprise.  Indeed, regardless of the outcome, the Commission is to be congratulated for finally grappling with tough issues that past Commissions have found easier to ignore while continuing to maintain the status quo.  Unfortunately, much of the public debate outside the FCC has been beset with jingoism and shallow analysis that, among other things, presumes broadcasters operate in a walled garden (to borrow a phrase from the tech industry, another player with which broadcasters must now compete).

In an effort to bring greater depth to the discussion, Pillsbury’s John Hane agreed to give his personal views on broadcast ownership regulation at yesterday’s Capitol Hill forum, but unfortunately was unable to participate due to illness.  Before the event, however, John had asked me to look at his opening statement, and it brought home to me how wonderful it would be if jingoism could be replaced with real-world analysis, and politics be sidelined by informed debate.  With John’s gracious permission, reprinted below is his opening statement for yesterday’s forum debate.  You may not agree with him, but he makes a compelling argument with which — based on this morning’s vote — a majority of the current FCC commissioners may well agree.

From the pen of Mr. Hane:

To be clear, I’m here representing my own views.  I don’t speak for any broadcaster or anyone else.  I speak only for myself.  The question we agreed to debate is whether we need FCC rules limiting broadcast ownership in the age of ubiquitous high resolution Internet streaming, new OTT services, and more competition than ever in MVPD distribution.  We don’t.  

In today’s hypercompetitive media marketplace, antitrust principles are more than adequate to govern consolidation in television broadcasting.  We don’t need separate rules administered by an independent agency imposing artificial and arbitrary definitions of “competition and diversity” all of which were chosen decades ago as political compromises rather than in response to rigorous thought about how television distribution works.

Two basic premises guide my views.   First, I believe free over the air broadcasting is a vital national asset — a treasure even.  I don’t take it for granted.  It evolved as happenstance of technology and markets in the last century.  Whatever you say about programming markets or retransmission consent or advertising markets or the highest and best use of spectrum, I urge you to consider this:   If free over the air broadcasting didn’t exist, and the FCC allocated spectrum for it today, would investors provide capital, and would the new broadcasters be able to outbid Internet and multichannel pay platforms to acquire the very highest cost and most popular programming, and produce hours and hours of live news in every market, day in and day out, and make it available for free?  Electronic access to people is no longer a barrier to entry.  But nobody else does these things today.

I suspect many of the advocates of rigorous broadcast ownership rules disagree.  If they can’t greatly limit broadcast ownership, they’d rather do without broadcasting at all.  I prefer that we have a basic system of television distribution that is inherently egalitarian, and broadcasting is the only one we have.

Second, I understand that with television distribution, as with every other human endeavor with the possible exceptions of art and love, there is no free lunch.  We’ve chosen to finance over-the-air television broadcasting by allowing broadcasters to compete for revenue in the marketplace.  There are other models.  Some countries levy a direct tax on every household to pay for TV.  In other countries the government directly controls all broadcasting.  Each of these models has tradeoffs.  

The decision to finance free over the air broadcasting with profits earned in the marketplace means broadcasters can’t take anything for granted.  They have to earn their supply of programming by paying for it — nobody requires CBS stations to broadcast NFL games, and nobody requires the NFL to distribute its programming on a platform that is available for free, or to sell games to CBS for which ESPN or Fox Sports will pay more.  When the broadcast ownership rules were adopted, broadcast TV was the NFL’s only practical option.  No longer. 

So when I hear the typical arguments against broadcast consolidation, I hardly know where to start.  Because I’ve never heard a single opponent of broadcast consolidation truly accept the simple premise that broadcasters have to compete against unregulated competitors for every minute of programming and every dollar of revenue.  Sure, they’ll pay lip service, and I expect that some of the panelists here today will say they accept that broadcasters have to compete.  But, they’ll say, broadcasters also have special public interest obligations. And they got their spectrum for free.

The problem with “public interest obligations” is that everybody believes their own private interest is a proxy for the public interest.  It’s not.   Even today, much of the most popular programming — including many of the unimaginably expensive NFL games — are available to most Americans for free, if they want to get them that way.  So is the largest regularly-scheduled widely available local video news in most markets.  Free.  So take your pot shots all day.  If you want to have a serious debate, you have to convince me you understand how the very complicated television distribution marketplace works in 2017 and are willing to be intellectually honest about it. 

Some of the panelists here have argued that broadcasters got their spectrum for free, and that justifies regulations that thwart their competitiveness.  This makes the hair on the back of my neck stand up.  Very few stations are in the hands of original licensees who got the licenses for free.  The original cellular and DBS licenses were issued for free too.  Most all of the licenses — DBS, cellular and broadcast — originally issued for free have changed hands to buyers who paid a market price.  Having public interest obligations doesn’t mean licensees can sustain regulations that harm their competitiveness.  There’s no ongoing subsidy.  Pretending otherwise leads to a pretty thin debate.  Because it ignores economic reality.

The FCC’s politically divined ownership rules have innumerable perverse and very harmful effects in the market.  Preston Padden relates in yesterday’s Wall Street Journal the story of how the FCC’s ownership rules for decades prevented Dumont from building a fourth broadcast network.  I could recount many other perverse effects.  Does anybody remember profitable local newspapers?  

We don’t need national ownership rules because those particular rules prevent new competition to existing national distribution platforms.  With a few exceptions, the market for television programming is national.  Limiting the only distributors that make their content available for free to sub-national distribution only further entrenches the national incumbents — the large programmers.  

We don’t need local ownership rules because we need to allow those who are willing to invest in local markets to organize in a way that allows them to be as profitable as competing platforms.  Local broadcasters have regained profitability in the last decade but they have a long way to go to close the gap.  In the system we’ve chosen to finance broadcasting, profits – commensurate with the profits of competing platforms — are not just good, they’re essential.  

Even if you believe broadcast ownership should be regulated beyond antitrust, the next question is, what ownership rules are right in 2018 and beyond?  I reject as preposterous the argument that the rule framework on the books before Facebook, Google, Amazon, Netflix, or even DIRECTV or DISH, existed, and when AT&T was still just a long distance provider, is the best framework for the 21st century.  Many of those rules weren’t even based on the market when they were adopted.  

The U.S. chose to finance broadcasting through marketplace profits.  That was easy when broadcasters had no competition except each other.  Restrictive ownership limits had bad consequences, but they were not existential threats to free television.  If you want the marketplace to find a way to bring local news, NFL games, and high cost scripted programming to everyone for free, you have to let the marketplace figure out how to do it.  Because programmers are going to sell to the highest bidder every single time.  And the government isn’t going to subsidize any of it.