What market failure? The weak transaction cost argument for TV compulsory licenses.

by on July 31, 2015 · 0 comments

At the same time FilmOn, an Aereo look-alike, is seeking a compulsory license to broadcast TV content, free market advocates in Congress and officials at the Copyright Office are trying to remove this compulsory license. A compulsory license to copyrighted content gives parties like FilmOn the use of copyrighted material at a regulated rate without the consent of the copyright holder. There may be sensible objections to repealing the TV compulsory license, but transaction costs–the ostensible inability to acquire the numerous permissions to retransmit TV content–should not be one of them.

Economists can devise situations where transaction costs are immense and compulsory licenses are needed for a well-functioning market. Today, as when the compulsory license was created, the conventional wisdom is that TV compulsory licenses are still needed to prevent market failure.

In the 1970s, cable companies were capturing broadcast channels and retransmitting it to their subscribers for free because, per the Supreme Court, cable was a passive transmitter and didn’t need copyright permission. In 1976, to correct this perceived unfairness, Congress amended the Copyright Act and said this cable retransmission did necessitate copyright authorization. To make it easier on cable systems (most of which were small, local operations), the law created a compulsory license to broadcast TV content like NBC, ABC, and CBS programming.

The compulsory license primarily does two things: it provides cable operators local TV content royalty-free and provides non-local (“distant”) content (imagine a DC cable company importing a WGN broadcast from Chicago) at regulated rates.

As the House report says:

The Committee recognizes…that it would be impractical and unduly burdensome to require every cable system to negotiate with every copyright owner whose work was retransmitted by a cable system.

The Copyright Office, early on, opposed the compulsory license and has called for the repeal of the compulsory license to broadcast TV content since 1981. As the Register of Copyrights said at a 2000 congressional hearing,

A compulsory license is not only a derogation of a copyright owner’s exclusive rights, but it also prevents the marketplace from deciding the fair value of copyrighted works through government-set price controls.

But when the issue of repeal comes up, many parties cite “significant transaction costs” as a problem with conventional, direct licensing. GAO echoed these objections in an April 2015 report,

we have previously found that obtaining the copyright holders’ permission for all this content would be challenging. Each television program may have multiple copyright holders, and rebroadcasting an entire day of content may require obtaining permission from hundreds of copyright holders. The transaction costs of doing so make this impractical for cable operators.

That sounds sensible but we have powerful contradictory evidence: for decades, hundreds of TV channels requiring the bundling of thousands of copyright licenses are distributed seamlessly and completely outside of the compulsory license regime.

So it’s a mystery to me why analysts still talk about the difficulty in acquiring copyright permission from hundreds or thousands of rights holders. TV distributors outside of the compulsory license scheme do these complex content acquisition deals routinely. Hundreds of non-broadcast channels–like ESPN, CNN, Bravo, HGTV, MTV, and Fox News–are distributed to tens of millions of households via private contractual agreements and without regulated compulsory licenses. TBS, uniquely, in the late 1990s went from a broadcast channel, subject to a compulsory license, to a cable channel distributed via direct licensing with no apparent ill effects. Analysts raising the transactions costs for keeping compulsory licenses, to my knowledge, never explain why the market failure they predict is absent for these hundreds of cable and satellite channels.

Further, while cable and satellite companies don’t need to negotiate broadcast TV copyrights because of the compulsory license, the FCC’s retransmission consent process, part of the 1992 Cable Act, requires these companies to negotiate payment to retransmit broadcast signals–signals that contain the underlying copyrighted content. This process, though bizarre and artificial, is essentially the same negotiation cable and satellite companies would need to enter into in a world without compulsory license.

Finally, online programming from distributors like Hulu, Netflix, and (potentially) Apple TV operate entirely outside of the retrans-compulsory copyright system and undermine the transaction costs objection. Netflix, for instance, doesn’t negotiate with every individual right holder like GAO and Congress imply is necessary in a non-compulsory license regime. Content aggregators and intermediaries, not regulation, streamline the rights acquisition process without the need for a compulsory license. The ostensibly burdensome transaction costs don’t stop Netflix from licensing over 10,000 titles worth around $9 billion.

Certainly, converting from compulsory licensing to direct licensing has issues. Changing legal regimes can be costly and there is a need to prevent anticompetitive withholding of content. Understandably, many cable and satellite distributors oppose repeal of compulsory licenses if the complex FCC system of retransmission consent and must carry are maintained. I tend to agree. Nevertheless, it’s time to strike the transaction cost argument from the policy discussion. The predicted market failure is overcome by market forces.

For more background on TV regulation, see Adam Thierer and Brent Skorup, Video Marketplace Regulation: A Primer on the History of Television Regulation and Current Legislative Proposals (Mercatus working paper).

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