Network Non-Duplication and Syndicated Exclusivity Rules Are Fundamental to Local Television

by on May 19, 2014 · 3 comments

The Federal Communications Commission (FCC) recently sought additional comment on whether it should eliminate its network non-duplication and syndicated exclusivity rules (known as the “broadcasting exclusivity” rules). It should just as well have asked whether it should eliminate its rules governing broadcast television. Local TV stations could not survive without broadcast exclusivity rights that are enforceable both legally and practicably.

The FCC’s broadcast exclusivity rules “do not create rights but rather provide a means for the parties to exclusive contracts to enforce them through the Commission rather than the courts.” (Broadcast Exclusivity Order, FCC 88-180 at ¶ 120 (1988)) The rights themselves are created through private contracts between TV stations and video programming vendors in the same manner that MVPDs create exclusive rights to distribute cable network programming.

Local TV stations typically negotiate contracts for the exclusive distribution of national broadcast network or syndicated programming in their respective local markets in order to preserve their ability to obtain local advertising revenue. The FCC has long recognized that, “When the same program a [local] broadcaster is showing is available via cable transmission of a duplicative [distant] signal, the [local] broadcaster will attract a smaller audience, reducing the amount of advertising revenue it can garner.” (Program Access Order, FCC 12-123 at ¶ 62 (2012)) Enforceable broadcast exclusivity agreements are thus necessary for local TV stations to generate the advertising revenue that is necessary for them to survive the government’s mandatory broadcast television business model.

The FCC determined nearly fifty years ago that it is an anticompetitive practice for multichannel video programming distributors (MVPDs) to import distant broadcast signals into local markets that duplicate network and syndicated programming to which local stations have purchased exclusive rights. (See First Exclusivity Order, 38 FCC 683, 703-704 (1965)) Though the video marketplace has changed since 1965, the government’s mandatory broadcast business model is still required by law, and MVPD violations of broadcast exclusivity rights are still anticompetitive.

The FCC adopted broadcast exclusivity procedures to ensure that broadcasters, who are legally prohibited from obtaining direct contractual relationships with viewers or economies of scale, could enjoy the same ability to enforce exclusive programming rights as larger MVPDs. The FCC’s rules are thus designed to “allow all participants in the marketplace to determine, based on their own best business judgment, what degree of programming exclusivity will best allow them to compete in the marketplace and most effectively serve their viewers.” (Broadcast Exclusivity Order at ¶ 125.)

When it adopted the current broadcast exclusivity rules, the FCC concluded that enforcement of broadcast exclusivity agreements was necessary to counteract regulatory restrictions that prevent TV stations from competing directly with MVPDs. Broadcasters suffer the diversion of viewers to duplicative programming on MVPD systems when local TV stations choose to exhibit the most popular programming, because that programming is the most likely to be duplicated. (See Broadcast Exclusivity Order at ¶ 62.) Normally firms suffer their most severe losses when they fail to meet consumer demand, but, in the absence of enforceable broadcast exclusivity agreements, this relationship is reversed for local TV stations: they suffer their most severe losses precisely when they offer the programming that consumers desire most.

The fact that only broadcasters suffer this kind of [viewership] diversion is stark evidence, not of inferior ability to be responsive to viewers’ preferences, but rather of the fact that broadcasters operate under a different set of competitive rules. All programmers face competition from alternative sources of programming. Only broadcasters face, and are powerless to prevent, competition from the programming they themselves offer to viewers. (Id. at ¶ 42.)

The FCC has thus concluded that, if TV stations were unable to enforce exclusive contracts through FCC rules, TV stations would be competitively handicapped compared to MVPDs. (See id. at ¶ 162.)

Regulatory restrictions effectively prevent local TV stations from enforcing broadcast exclusivity agreements through preventative measures and in the courts: (1) prohibitions on subscription television and the use of digital rights management (DRM) prevent broadcasters from protecting their programming from unauthorized retransmission, and (2) stringent ownership limits prevent them from obtaining economies of scale.

Preventative measures may be the most cost effective way to protect digital content rights. Most digital content is distributed with some form of DRM because, as Benjamin Franklin famously said, “an ounce of prevention is worth a pound of cure.” MVPDs, online video distributors, and innumerable Internet companies all use DRM to protect their digital content and services — e.g., cable operators use the CableCard standard to limit distribution of cable programming to their subscribers only.

TV stations are the only video distributors that are legally prohibited from using DRM to control retransmission of their primary programming. The FCC adopted a form of DRM for digital television in 2003 known as the “broadcast flag”, but the DC Circuit Court of Appeals struck it down.

The requirement that TV stations offer their programming “at no direct charge to viewers” effectively prevents them from having direct relationships with end users. TV stations cannot require those who receive their programming over-the-air to agree to any particular terms of service or retransmission limitations through private contract. As a result, TV stations have no way to avail themselves of the types of contractual protections enjoyed by MVPDs who offer services on a subscription basis.

The subscription television and DRM prohibitions have a significant adverse impact on the ability of TV stations to control the retransmission and use of their programming. The Aereo litigation provides a timely example. If TV stations offered their programming on a subscription basis using the CableCard standard, the Aereo “business” model would not exist and the courts would not be tying themselves into knots over potentially conflicting interpretations of the Copyright Act. Because they are legally prohibited from using DRM to prevent companies like Aereo from receiving and retransmitting their programming in the first instance, however, TV stations are forced to rely solely on after-the-fact enforcement to protect their programming rights — i.e., protected and uncertain litigation in multiple jurisdictions.

Localism policies make after-the-fact enforcement particularly cost for local TV stations. The stringent ownership limits that prevent TV stations from obtaining economies of scale have the effect of subjecting TV stations to higher enforcement costs relative to other digital rights holders. In the absence of FCC rules enforcing broadcast exclusivity agreements, family owned TV stations could be forced to defend their rights in court against significantly larger companies who have the incentive and ability to use litigation strategically.

In sum, the FCC’s non-duplication and syndication rules balance broadcast regulatory limitations by providing clear mechanisms for TV stations to communicate their contractual rights to MVPDs, with whom they have no direct relationship, and enforce those rights at the FCC (which is a strong deterrent to the potential for strategic litigation). There is nothing unfair or over-regulatory about FCC enforcement in these circumstances. So why is the FCC asking whether it should eliminate the rules?

  • http://www.techliberation.com Adam Thierer

    Fred…

    So, in a nutshell, you argument is essentially that two wrongs make a right. That is, you say: “Regulatory restrictions effectively prevent local TV stations from enforcing broadcast exclusivity agreements through preventative measures and in the courts,” and, therefore, “non-duplication and syndication rules balance broadcast regulatory limitations by providing clear mechanisms for TV stations to communicate their contractual rights to MVPDs.”

    Sorry, but the easier and more principled solution here is not to continue to “regulate up” but it is instead to “deregulate down,” by placing all players on more even, less-regulated footing. Brent Skorup & I recently wrote an entire paper about it. [http://mercatus.org/publication/video-marketplace-regulation-primer-history-television-regulation-and-current]

    Please tell us why we are wrong to want to get rid of all these rules and minimize the role of FCC to get this job done right once and for all. Because I think it makes a lot more sense than preserving and extending the archaic regulatory status quo of the analog era, which is what you seem to be suggesting here. We can enforce private contracts and handle program carriage issues without mountains of red tape. It happens in countless other capitalistic sectors; it can work here, too. Have a little faith in REAL free markets, my friend!

    Adam T.

  • Fred Campbell

    I’m not suggesting preservation of the analog era at all. I agree that comprehensive deregulation of the video market would be preferable to the status quo. My issue is that none of the legislative bills introduced to date can accurately be described as comprehensive. Eliminating video regulations piecemeal would merely shift the status quo from one set of market distortions to another. That is not faith in the free market; it is rent seeking.

  • Ryan Radia

    Imagine ABC decided that it would henceforth grant broadcasters only
    non-exclusive rights upon renewal of each affiliate agreement. Given that network non-duplication protects only those rights that broadcasters have secured in contract, is there any regulation that would prevent a network from deciding to stop granting exclusive geographic rights? I ask because it seems to me that whether broadcasters’ rights are protected by the FCC’s network non-duplication rule or by common law courts, no MVPD would actually import a duplicative distant network signal unless it had the explicit consent of the distant station. Yet no distant station would so consent, unless it had permission from the network to do so, lest the station would face a crippling lawsuit from the network – and the station would surely lose, if affiliate agreements are as water-tight as I assume they are.

    When the FCC started the ban on network duplication in 1965, the retransmission consent requirement did not exist. But now that we have retransmission consent, the network non-duplication rule seems like water under the bridge – because no MVPD can lawfully acquire network programming in the first place without getting it from a station or the network itself. If a network wanted to allow network duplication, it could begin doing so as soon as each affiliate agreement came up for renewal. But until that happens, why would a network stand idly while one of its affiliates resold network content to be imported by an MVPD in breach of its affiliate agreement? If the network thought it would be better off if its affiliates didn’t enjoy geographic exclusivity, risking costly litigation from its affiliates would be an odd way of bringing about that result.

    You make a good point that the ban on DRM hurts broadcasters’ ability to effectively protect their content – both original and network programming – from copyright infringement. But MVPDs, unlike Aereo, are subject to the retransmission consent requirement. Regardless of whether a broadcaster uses DRM to protect its content, therefore, an MVPD can’t retransmit its signal without its consent, right? If the network non-duplication rule were eliminated, presumably broadcasters fear that MVPDs would import distant signals with the consent of the originating station. Insofar the DRM ban hurts broadcasters, it’s because it enables Aereo and others to rip off their content. But I have trouble seeing how an MVPD could get away with importing DRM-free distant signals without the originating station’s consent, with or without the network non-duplication rule in place.

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