Understanding the False Equivalency of the Free State Foundation’s Views on Retransmission Consent and the Free Market

by on December 20, 2013 · 0 comments

My response to Free State Foundation’s blog post, “Understanding the Un-Free Market for Retrans Consent Is the First Step for Reforming It

The Free State Foundation (FSF) questioned my most recent blog post at RedState, which noted that the American Television Alliance’s (ATVA) arguments supporting FCC price regulation of broadcast television content are inconsistent with the arguments its largest members make against government intervention proposed by net neutrality supporters. FSF claimed that my post created a “false equivalency” between efforts to modify an existing regulatory regime and efforts to impose new regulations in a previously free market.

FSF’s “false equivalence” theory is a red herring that is apparently intended to distract from the substantive issues I raised. The validity of the economic arguments related to two-sided markets discussed in my blog doesn’t depend on the regulatory status of the two-sided markets those arguments address. The notion that the existence of regulation in the video marketplace gives ATVA a free pass to say anything it wants without heed for intellectual consistency is absurd.

I suspect FSF knows this. Its blog post does not dispute that ATVA’s arguments at the FCC are inconsistent with the arguments its largest members make against net neutrality; in fact, FSF failed to address the ATVA petition at all. Though the FSF blog was ostensibly prompted by my post at RedState, FSF decided to “leave the merits of ATVA’s various proposals to others” (except me, apparently).

FSF’s decision to avoid the merits of ATVA’s arguments at the FCC (the subject of my blog post), begs the question: What was the FSF blog actually about? It appears FSF wrote the blog to (1) reiterate its previous (and misleading) analyses of the video programing market, and (2) argue that the Next Generation Television Marketplace Act “represents the proper direction” for reforming it.

To be clear, I haven’t previously addressed either issue. But, in the spirit of collegial dialogue initiated by FSF, I discuss them briefly in this blog.

Retransmission Consent

FSF is right that, “In a truly free marketplace, private parties have the liberty to pursue [or not pursue] commercial deals with whomever they choose.” I also agree that the market for video programming is not a “truly free marketplace,” and that the rules governing retransmission consent “restrict private bargaining.” But, FSF’s one-sided characterization of retransmission consent as granting “special rights” to broadcasters only is flatly misleading.

FSF highlights how local broadcasters benefit from (1) “must carry” rules and (2) non-duplication and syndication agreements.

The must carry rules require for-pay video distributors (e.g., cable operators) to carry the programming of broadcasters who elect mandatory program carriage while prohibiting distributors from charging such broadcasters for that carriage. Although I agree with FSF that the must carry rules are particularly intrusive, they are also irrelevant to retransmission consent negotiations. Once a broadcaster elects to engage in retransmission consent negotiations for carriage, it cannot take advantage of must carry for three years. Even if it could, the existence of must carry wouldn’t provide the broadcaster any pricing advantage in negotiations with for-pay video distributors, whose goal is to carry the programming at the lowest possible cost (which must carry sets at zero).

FSF correctly notes that non-duplication and syndication agreements limit the ability of for-pay video distributors (e.g., cable operators) to bargain with non-local broadcasters for new and syndicated broadcast programming, respectively. But FSF sidesteps the fact that these limitations are created in the free market by private contractual arrangements between broadcast stations and the providers of network or syndicated programming, not the government. The FCC’s non-duplication and syndication “rules do not create these rights but rather provide a means for the parties to exclusive contracts to enforce them through the Commission rather than the courts.”

Finally, FSF fails to mention, either in its blog post or its scholarly papers, that the retransmission consent rules limit the ability of broadcasters to choose with whom they bargain by prohibiting broadcasters from entering into exclusive program carriage agreements with for-pay video distributors – a limitation on bargaining that does not apply to programming owned by for-pay video distributors. Unlike non-duplication and syndication, this exclusivity prohibition is not grounded in private contractual arrangements.

FSF does not address whether the potential negotiating advantages conferred on broadcasters by FCC enforcement of network non-duplication and syndication agreements is more valuable in retransmission consent negotiations than the potential disadvantages imposed by the prohibition on exclusive program carriage agreements. To the extent the value of exclusive carriage agreements (the opportunity cost of the retransmission consent regime for broadcasters) outweighs the value of network non-duplication and syndication enforcement (the benefit to broadcasters), for-pay video distributors benefit more from the retransmission consent regime than broadcasters.

Next Generation TV Act

To be sure, even if for-pay video distributors benefit more from retransmission consent than broadcasters, retransmission consent negotiations do not occur in a “truly free market.” I agree with FSF that, “The ultimate goal should be to eliminate regulatory intrusion in this space – and to thereby eliminate occasions for debate over whether this or that particular modification to the old regulations will tip the scales in favor of one class of competitors over another.” Unfortunately, the modifications proposed by the Next Generation TV Act (the Bill) would not eliminate such debates.

FSF describes the Bill as a “comprehensive free market reform.” It would indeed eliminate FCC enforcement of network non-duplication and syndication agreements (and compulsory copyright licenses—an issue that merits additional discussion), but it is far from comprehensive.

First, the Bill doesn’t eliminate must carry for non-profit (e.g., religious and educational) broadcasters – the broadcasters most likely to elect mandatory carriage. Retaining such protections for religious and educational broadcasters is certainly reasonable when viewed from a political perspective; however, it falls short of being a free market approach to video regulation generally.

More importantly, the Bill wouldn’t eliminate any of the underlying reasons for which broadcasters enter into non-duplication and syndication agreements. Broadcasters negotiate exclusive distribution rights in local markets because government regulations require broadcasters to provide their programming for free. As a result of this government mandate, broadcasters rely on local advertising revenue to generate profit. If for-pay video distributors could retransmit duplicative programming (syndicated or otherwise) from non-local broadcasters (e.g., because the local broadcaster had not negotiated exclusive distribution rights), the local broadcaster would lose a substantial portion (if not all) of its advertising revenue. In a “truly free market,” the local broadcaster could respond to the potential loss of advertising revenue by charging subscription fees for its over-the-air video programming delivery or repurposing its spectrum for an alternative use. But broadcasters today don’t operate in a truly free market, and the government generally won’t allow them to pursue other business models.

Although the Bill aims toward a more vibrant free market, my primary concern is that it would leave in place the intrusive business model restrictions on broadcasters while eliminating rules that help make the government-mandated business model work. Perhaps FSF would agree that, if the goal is to “eliminate regulatory intrusions in this space,” the Bill should also eliminate government restrictions on broadcast business models and spectrum use. Anything less is better described as “picking winners and losers,” not “comprehensive free market reform.”

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