CBS and Time Warner Cable have been embroiled in a heated contractual battle over the past week that has resulted in viewers in some major markets losing access to CBS programming. When disputes like these go nuclear and signal blackouts occur, it is inevitable that some folks will call for policy interventions since nobody likes it when the content they love goes dark.

While some policy responses are warranted in this matter, policymakers should proceed with caution. Heated contractual negotiations are a normal part of any capitalist marketplace. We shouldn’t expect lawmakers to intervene to speed up negotiations or set content prices because that would disrupt the normal allocation of programming by placing a regulatory thumb too heavily on one side of the scale. This is why I am somewhat sympathetic to CBS in this fight. In an age when content creators struggle to protect their copyrighted content and get compensation for it, the last thing we need is government intervention that undermines the few distribution schemes that actually work well.

On the other hand, Time Warner Cable deserves sympathy here, too, since CBS currently enjoys some preexisting regulatory benefits. As I noted in this 2012 Forbes oped, “Toward a True Free Market in Television Programming,” many layers of red tape still encumber America’s video marketplace and prevent a truly free market in video programming from developing. The battle here revolves around the “retransmission consent” rules that were put in place as part of the Cable Act of 1992 and govern how video distributors carry signals from TV broadcasters, which includes CBS.

But those “retrans” rules are not the only part of the regulatory mess here. There are many related federal rules that tip the scales toward broadcasters and content creators, such as the requirement that video distributors carry broadcast signals even if they don’t want to (“must carry”); rules that prohibit distributors from striking deals with broadcasters outside their local communities (“network non-duplication” and “syndicated exclusivity” rules); regs specifying where broadcast channels appear on the cable channel lineup; and prohibitions against carrying sporting events on cable when the local stadium doesn’t sell all its seats on game day (“sports blackout rule”).

As they say on TV.. ” But Wait, There’s More!” Working in the favor of video distributors are the compulsory licensing requirements of the Copyright Act of 1976, which essentially forced a “duty to deal” upon broadcasters. Broadcasters have to let cable operators and other video distributors retransmit local stations, though the system at least ensures they get compensated for it. As I noted in my old Forbes essay, along with must carry rules, “Compulsory licensing is the original sin of video marketplace regulation. We could have avoided most of the regulatory mess of the past quarter century if Congress had simply left these rights and contractual negotiations alone. Once Congress forced broadcasters to share their programming, however, marketplace manipulation was off and rolling.”

Of course, the more primal and problematic intervention came decades before in the 1920s and ’30s when the government decided to nationalize spectrum management. Once mandates instead of markets where chosen as the primary allocation agent, America was off and running with a grand experiment in spectrum central planning. We’re still living with the results today. The very fact that spectrum is licensed and can only be used and sold for very narrow purposes as detailed in meticulous FCC regulations is a sign of just how far-removed we are from a pure free market here.

The question now is, what are we going to do about this fine mess? And is there any chance we can get it done?

The problem in this debate is that there are multiple layers of interventions that have built up over the years and created constituencies that are wedded to their preservation. Broadcasters, networks, independent content creators, big cable companies, small cable companies, satellite companies, sports leagues, and viewing consumers themselves — they all have conflicting interests and a stake in how this debate turns out. In his 2012 Mercatus Center working paper, “Consumer Welfare and TV Program Regulation,” media economist Bruce M. Owen noted that “What distinguishes TV programs from other mass media content, including both traditional print and new online media, is the extreme eagerness of Washington to engage in efforts to prevent markets from working freely, often in response to interest group pressures and opportunities for political advantage and with almost complete indifference to the welfare of consumers.”

As a result, if you talk to almost anyone involved in this debate, they will all insist that only their very specific reforms are the ones that can or should be implemented. Consequently, comprehensive reform will be challenging precisely because of all the conflicting interests and layers of law and regulation that must be eradicated.

But at least there is a blueprint for how to get the job done right. Many times here before I have written about “The Next Generation Television Marketplace Act,” which was floated last session by Rep. Steve Scalise (R-LA) and then-Senator Jim DeMint (R-SC). It proposed wiping off the books all the archaic rules outlined above. Alas, the bill never went anywhere in the last Congress and now that Sen. DeMint has left to lead the Heritage Foundation, there is no supporter in the Senate this session. Instead, we have some lawmakers floating bad ideas like S.912, the “Television Consumer Freedom Act of 2013,” which just proposes more regulatory gaming of an already over-gamed system.

We instead need policy reforms like the old DeMint-Scalise bill that clean up the regulatory mess of the past. But there just isn’t much appetite for such a house-cleaning. Most parties affected by these rules want very specific outcomes and deregulation won’t give them any such guarantees. After all, there will still be blackouts after deregulation. And the cost of some content may continue to go up in response to demand. And there will still be fights over sports programming. And there’s no certainty that all local broadcasters or small video distributors will survive. And so on, and so on.

But it is also true that a deregulatory environment is more likely to lead to even more experimentation and innovation with new business models, technologies, and methods of content creation and delivery. We already see much innovation in this marketplace despite all the red tape that exists. Just look at what’s been going on recent years with alternative video delivery platforms, including: Netflix, Hulu, XBox Live, Vudu, Roku, Redbox, Boxee, Amazon, Apple TV, Aereo, Google Chromecast, and so on. And don’t forget the strides that the old broadcast and cable giants have made here, too. CBS is actually a pretty good model for how content can be re-purposed online in creative ways on a firm’s own digital platform. Likewise, cable companies like Time Warner Cable are slowly but surely adapting to consumers’ demand for video to be delivered to multiple devices.

Of course, there there will always be hiccups along the road to video nirvana. Some regulatory activists seemingly expect that all content can be delivered effortless and cheaply to consumers without giving a thought in the world to just how complicated it is to get that content financed and distributed in the first place. Great content and great delivery platforms don’t just happen by magic or the good intentions of activists or policymakers. Those platforms happen because new markets and monetization mechanisms develop to facilitate them. If we cut back the regulatory deadwood in our modern information marketplace, we’d likely get even more experimentation and innovation that would likely produce all new ways of financing, creating, and delivering content to consumers. But we’ll never know unless we are willing to embrace change and kill all those old regulatory weeds that continue to grow in our information garden.

Alas, if Congress can’t muster the courage to do that, then lawmakers ought to at least consider asking the broadcasters to return all that juicy spectrum they are sitting on. After all, the current retrans racket gives the broadcasters an increasingly lucrative revenue stream when they deliver content on cable and satellite systems (in addition to the advertising revenues they already receive). No good reason exists to give them preferential treatment relative to any other cable channel out there today. Don’t forget, there are all sorts of garden-variety cable carriage disputes that happen outside the regulated retrans system today. (Remember last year’s big spats between AMC vs. Dish and Viacom vs. DirecTV?) There are no special rules that either side can rely on in those instances. So why should special rules be applied to other content companies simply because some of their properties are broadcast channels? Answer: they shouldn’t.

But if no other reforms occur and if companies like CBS still want to be more like a cable mega-channel — albeit, a very handsomely compensated cable channel — then by all means go for it. In the meantime, however, they can return all that spectrum for re-auction for some better purpose. In fact, back early 2009, CBS Corp. President and CEO Les Moonves told an investor conference that moving all CBS network programming to cable and satellite platforms would be “a very interesting proposition.” I agree! But, absent other reforms, it might be time to make that “interesting proposition” a mandatory one.

I’ve just released a new PFF white paper looking at the hysteria that has often accompanied major media mergers and then taking a look at the marketplace reality years after the fact.  Here‘s the PDF, but I have also pasted the entire thing down below.

_____________________________

A Brief History of Media Merger Hysteria: From AOL-Time Warner to Comcast-NBC

by Adam Thierer

Although the pending union of Comcast and NBC Universal has not yet made it to the altar, Chicken Little-esque wails about the marriage have already begun in earnest. For example, the pro-regulatory media organization Free Press has already set up a website to complain about the deal.[1] And Jeff Chester, executive director of the Center for Digital Democracy, has called it “an unholy marriage.”[2] The fever only promises to spread once the deal is formally announced, and a lengthy fight over the deal is expected at the Federal Communications Commission (FCC) and whichever antitrust agency reviews the deal.[3]

But reality tends to play out somewhat less dramatically than the script penned by the media worrywarts. It’s worth looking back at some of the more prominent examples of media merger hysteria in recent years to understand why such panic is unwarranted, and why a deal between Comcast and NBC Universal is unlikely to lead to the sort of problems that the pessimists suggest.[4]

AOL-Time Warner: From the “New Totalitarianism” to Digital Divorce Court in Less Than a Decade

When the mega-merger between media giant Time Warner and Internet superstar AOL was announced in early 2000, the marriage was greeted with a cacophony of righteous indignation and apocalyptic predictions.  When referring to the dangers of the deal, syndicated columnist Norman Solomon, a longtime associate of the media watch group Fairness & Accuracy In Reporting, summoned the ghost of Aldous Huxley when he and referred to the transaction in terms of “servitude,” “ministries of propaganda,” and “new totalitarianisms.”[5] Similarly, USC Professor of Communications Robert Scheer wondered if the merger represented “Big Brother” and claimed, “Diversity is out, niches are gone, it’s Skippy peanut butter time. AOL is the Levitown of the Internet, mom and apple pie, ‘50s boredom, conformity and dullness as a virtue: A Net nanny reigning in potentially restless souls.”[6]

Such pessimistic predictions proved wildly overblown. To say that the merger failed to create the sort of synergies (and profits) that were originally hoped for would be an epic understatement.[7] The titles of two popular books about the deal summed up the firm’s troubles: One was entitled Fools Rush In (by Nina Munk) and the other, There Must Be a Pony in Here Somewhere (by Kara Swisher and Lisa Dickey).[8]

The numbers were mind-boggling. By April 2002, just two years after the deal was struck, AOL-Time Warner had already reported a staggering $54 billion loss.^[9] By January 2003, losses had grown to $99 billion.^[10] By September 2003, Time Warner decided to drop AOL from its name altogether and the deal continued to slowly unravel from there.^[11] In a 2006 interview with the Wall Street Journal, Time Warner President Jeffrey Bewkes famously declared the death of “synergy” and went so far as to call synergy “bullsh*t”!^[12] In early 2008, Time Warner decided to shed AOL’s dial-up service^[13] and now is set to spin off AOL entirely.[14] Looking back at the deal, Fortune magazine senior editor at large Allan Sloan called it the “turkey of the decade”:

The day the deal was announced, Jan. 10, 2000, Time Warner closed at the equivalent of $184.50 a share. After almost 10 years of travail, the $184.50 has shrunk to about $42.25, consisting of one Time Warner share and a quarter of a Time Warner Cable share. The 77 percent decline is triple the decline in the Standard & Poor’s 500-stock index over the same period.[15]

And the Time Warner-AOL split wasn’t the end of this messy divorce process. In 2008, Time Warner Cable and Time Warner Entertainment decided to split.^[16] Time Warner has even spun off some of its oldest properties. In 2006, it announced that it was putting 18 of the 50 magazines in its Time magazine division up for sale.^[17]

As is always the case, these divestitures and down-sizing efforts garnered little attention compared with the hullaballoo and hysteria that accompanied the announcement of the deal back in 2000.^[18]

News Corp/DirecTV: Murdoch’s “Digital Death Star” Blows Up

No media industry personality attracts more attention (or angst) than News Corp. Chairman and CEO Rupert Murdoch. The popular leftist blog The Daily Kos has likened him to “a fascist Hitler antichrist.”[19] And CNN founder Ted Turner once compared the popularity of the News Corp.’s Fox News Channel to the rise of Adolf Hitler prior to World War II.^[20] Alternatively, Murdoch has been accused of being a Marxist.[21] Meanwhile, Karl Frisch, a Senior Fellow at Media Matters for America, speaks of Murdoch’s “evil empire”^[22] and a recent MSNBC poll has asked people to vote on the question: “Is Rupert Murdoch evil?”[23] In 2003, when asked by talk show host Chris Matthews, “Would you break up [News Corp.-owned] Fox?” then Democratic presidential candidate Howard Dean answered, “On ideological grounds, absolutely yes.”^[24] And in their book Our Media, Not Theirs, John Nichols and Robert McChesney took the Murdoch-as-evil-overlord storyline to its logical extreme when they suggested Hollywood was on to something by scripting a media tycoon like Murdoch as the bad guy in a James Bond movie: “No wonder conspiracy theories are so popular in America; no wonder, when the makers of James Bond movies look for believable villains these days, they eschew Eurotrash bad guys for more credibly threatening villains such as the Rupert Murdoch-like media baron of 1997’s Tomorrow Never Dies.”^[25]

These Murdochian fears came to a head in 2003 when News Corp. announced it was pursuing a takeover of satellite television operator DirecTV.  Paranoid predictions of a pending media apocalypse followed.  A group of regulatory activists filed joint comments to the FCC claiming that if News Corp. and DirecTV were allowed to merge, “the result will be unprecedented concentration within all aspects of the television marketplace, as well as increased prices for consumers of cable and satellite television.”[26] Similarly, then-FCC Commissioner Jonathan Adelstein worried that the deal would “result in unprecedented control over local and national media properties in one global media empire. Its shockwaves will undoubtedly recast our entire media landscape.” He continued; “With this unprecedented combination, News Corp. could be in a position to raise programming prices for consumers, harm competition in video programming and distribution markets nationwide, and decrease the diversity of media voices.”[27]

Not to be outdone, full-time media fussbudget Jeff Chester predicted that Murdoch would use this “Digital Death Star” as the base of a nefarious scheme to conquer the media universe:

Murdoch will use DirecTV as a ‘death star’ to force his programming on cable companies by threatening a price war unless they give Fox favorable access. Since News Corp will control cable TV’s principal multichannel competitor, it will easily create new channels—unlike anyone else in the TV business.  Rather than engage in open combat and competition, cable powerbrokers such as Comcast and AOL-Time Warner will likely accommodate Murdoch and add his new channels to their own services. Imagine Fox News on steroids. Worse, with DirecTV’s capacity to ‘spotbeam’ channels to serve distinct communities, localized versions of Fox programs could be available in major cities across the nation.[28]

Imagine the horror of new, “spotbeamed” local media competition!  However, unlike the destruction of the planet Alderaan by the Death Star in Star Wars,[29] no one was harmed in the making of the News Corp-DirecTV marriage.  Indeed, the rebels would get the best of Darth Murdoch since his “Digital Death Star” was abandoned just three years after construction.  In December 2006, News Corp. decided to divest the company to Liberty Media Corporation in an effort to win back more controlling News Corp. stock.^[30]

Ironically, many of the same groups that had vociferously protested the original News Corp-DirecTV deal again found reason to complain when the deal was being undone! The FCC’s failure to implement various restrictions as part of the license transfer, they claimed, would “result in continuing control by News Corp. over content distribution, harming competition in both the programming and distribution markets, reducing consumer choice and raising cable prices.”^[31] Unsurprisingly, little mention was made of the previous round of pessimistic predictions or whether there had ever been any merit to the lugubrious lamentations of the media critics.

Sirius-XM: “Merger to Monopoly” or Prelude to Bankruptcy?

Some of the most entertaining and wrong-headed predictions about the future of the media marketplace often come from media moguls themselves. For example, back in 2003, when he was still President and Chief Operating Officer of Viacom, Mel Karmazin said in reference to Microsoft, AOL Time Warner, and Comcast: “I can’t imagine being a competitor with any of these guys.”[32] Just six years later, however, plenty of others are competing with those companies. Microsoft finds itself in a heated war with Google on all fronts, AOL-Time Warner has fallen apart, and Comcast is squaring off against telco (e.g., Verizon’s FiOS and AT&T U-Verse) and online video competitors (e.g., YouTube, Hulu) that were unfathomable in 2003—not to mention the traditional satellite TV competitors they still face. Meanwhile, Karmazin abandoned Viacom and is now struggling to find a way to make subscription-based satellite radio survive the ongoing digital music bloodbath caused by the rise of online music services and a little thing called the iPod.

Of course, hysteria ran rampant when Sirius and XM were merging, too.  Critics called it a “merger to monopoly” and predicted a variety of coming calamities.[33] National Association of Broadcasters Vice President Dennis Wharton described the merger as a “monopoly platform for offensive programming” that would be “anti-consumer.”^[34] Mr. Wharton later remarked that the merged firms “will raise prices, won’t improve their technology and will limit their offerings.”^[35] A coalition of six non-profits claimed that the merger was “perhaps the worst offense against the basic principle that competition is the consumer’s best friend” and, if approved, “a tsunami of mergers could ripple through the digital space at the worst possible moment.”^[36] They predicted that “once the competition is eliminated, prices will rise over time,” “innovation will slow to the pace preferred by the monopolist and consumers will be much worse off in the long run.”^[37] Another coalition argued that the new company would “abuse consumers, artists and other input suppliers in the satellite radio market.”[38]

In the end, the merger took an astonishing 500-plus days for the FCC to finally approve[39] and was conditioned with a lengthy set of “voluntary concessions” to supposedly rectify these potential harms—including pricing constraints that could limit the firm’s ability to cover costs and pay down debt over time.

Unsurprisingly, things haven’t turned out so well for Sirius XM. When the merger was finally approved by the FCC in August 2008, Commissioner Copps dissented vigorously on various grounds but specifically insisted that, “We must assume that the marketplace can support two financially viable competitors.”[40] Unfortunately for Commissioner Copps—as well as Sirius XM—it’s not even clear that the market can sustain one satellite radio provider. The company’s stock went into freefall following completion of the deal and, at one point, its stock fell below 10 cents per share. The company flirted with bankruptcy in February of this year as “satellite radio failed to win over many younger listeners, and competition from other sources slowed subscriber growth.”[41] In March 2009, Karmazin orchestrated a cash-for-stock swap with Liberty Media to get a $530 million lifeline and avoid bankruptcy.[42] But even with the cash infusion Sirius XM faces an uncertain future with stiff competition.[43] “Sirius is girding for slower growth than in the past,” notes Olga Kharif of Business Week, “and analysts remain concerned about the company’s ability to control costs.”[44] Former stockbroker and RealMoney.com contributor Tim Melvin predicts the overleveraged company “will disappear from the landscape. The subscribers will go to another tech or entertainment company in bankruptcy proceedings. Subscription radio just does not have that much appeal to most people.”[45]

Whether Melvin’s dour forecast for satellite radio proves accurate remains to be seen. What’s clear, however, is that the fears bandied about by critics when the Sirius-XM deal was pending have not come to pass.

Murdoch’s Wall Street Journal Quest

In 2007, Rupert Murdoch announced his desire to purchase The Wall Street Journal.  Once again, a great deal of hand-wringing ensued. “This takeover is bad news for anyone who cares about quality journalism and a healthy democracy,” argued Robert McChesney. “Giving any single company—let alone one controlled by Rupert Murdoch—this much media power is unconscionable.”[46] And FCC Commissioner Copps warned that “It will create a single company with enormous influence over politics, art and culture across the nation and especially in the New York metropolitan area.”[47]

Today, however, the Journal keeps humming along and continues to produce some of the finest journalism on the planet. Meanwhile, “politics, art and culture” seem largely unaffected by the deal—either in New York or the nation.

And the deal certainly hasn’t made Murdoch or News Corp. any richer. “His purchase of The Wall Street Journal is widely seen as one of the worst moves of his career,” notes Michael Wolff of Vanity Fair.[48] News Corp. has already taken a whopping $3 billion write-down on the deal.  Considering the $5 billion price tag Murdoch paid two years ago, one wonders if he’ll hold on to this property any longer than he did DirecTV.

Comcast-NBC Universal: Debunking the Fears Preemptively

No doubt we’ll soon be hearing many of these same apocalyptic predictions about the Comcast-NBC deal. Free Press has said the new entity “will have an incentive to prioritize NBC shows over other local and independent voices and programs, making it even harder to find alternatives on the cable dial.”[49] And Free Press Executive Director Josh Silver has called for the Obama Administration to block the deal saying “it would further starve Americans of [media] diversity.”[50] Even competitors are complaining. Liberty Media Corp. Chairman John Malone, which owns DirecTV, has suggested that they might push the government to reject the deal.[51] Many other rivals will likely join that bandwagon.

These critics will likely raise vertical integration fears and claim that Comcast will act as a “gatekeeper” by limiting the ability of independent voices to get a slot on cable distribution systems, or by withholding NBC-Universal content from other platforms and providers. But there’s little historical evidence that suggests this will be a problem. As the adjoining exhibit illustrates, the overall number of video programming channels available in America has skyrocketed, from just 70 channels in 1990 to 565 channels in 2006, the last year for which the FCC has made data available.

More importantly—and despite claims to the contrary—vertical integration in the video marketplace has plummeted over the past two decades. While many more cable and satellite networks are available today than ever before, the greatest share of the growth in the multichannel video marketplace has come from independently owned video networks. Since 1990, the number of cable-owned or affiliated channels has increased slightly, but it pales in comparison with the growth of independently owned and operated video networks. In real terms, therefore, the percentage of the overall video marketplace controlled (i.e., owned and operated) by cable companies has plummeted—from 50% in 1990 to just 14.9% in 2006. Moreover, in the wake of the Time Warner Cable and Time Warner Entertainment divorce, vertical integration in the cable sector has probably fallen into the single digits. Even if the merger of Comcast and NBC-Universal results in slight increase in industry vertical integration, it almost certainly will not surpass 20 percent.  Consequently, as far as vertically integrated industries go, it is impossible to conclude that this market could be characterized as being controlled by “gatekeepers.”

It is difficult to imagine that Comcast would buck these trends and begin restricting independent options on its systems or withhold its content from others.  Video distributors don’t make money by restricting choice. Consumers would flock to alternative video providers and media services if Comcast played such games. The great thing about the modern media marketplace is that there is always another place for consumers to turn to find something they want.[52] Sports programming could be an exception to the rule, and is the one issue that Comcast may need to bargain over with FCC regulators or antitrust officials since they own regional sports networks that other video distributors want access to.^[53] But traditional concerns about access to over-the-air broadcast signals (namely, the NBC local broadcast television properties) shouldn’t be as much of an issue today as it was the past.  Frankly, local broadcasters need all the eyeballs they can get these days. Thus, it’s unlikely that Comcast would try to withhold those stations from other video distributors, especially since a great deal of NBC programming is already available through other means. And intense competition exists for some of the most important news and informational services that NBC offers, such as local news, weather, and traffic.

Overall, therefore, it’s hard to see the case for the FCC rejecting the deal. Regulators need to be forward-looking about what is driving this deal.  This deal isn’t about protecting old markets but instead about building new ones. “The real motivation behind this deal,” argues Mike Berkley, former CEO of SplashCast Media, “is survival.”

Comcast understands that the price point for distributing TV into homes is going to fall dramatically in the coming years. Comcast’s 3 distribution products, Voice – TV – Internet, are collapsing into just one, single product: Internet. This poses a huge threat to Comcast’s top line. As such, Comcast is hedging through diversification into content, moving up the media value chain. Comcast will be looking to replace lost revenue in distribution with revenue from content (advertising, subscriptions, etc).[54]

Similarly, Wall Street Journal business columnist Holman Jenkins points out that Comcast is scrambling to find a way to rework their business model as the era of set-top box-delivered video slowly gives way to a world of ubiquitously available online video:

This would be a merger, after all, of two businesses that seem headed toward some combination of the fates of newspapers, music CDs and the old wireline telephone business. Customers want the product for free. Comcast’s lifeblood, the $100-a-month cable bill and the $50-a-month broadband bill, increasingly look like duplicative expenses. And so on. True, the number of households that have actually dropped their cable subscriptions in favor of subsisting on TV streamed or downloaded from the Internet is not yet large. But for the Roberts family and its Comcast property, their worst fears lurk just around the corner—being reduced to a “dumb pipe,” subject to commodity pricing while somebody else (Google) makes all the money. Yet an escape route is vexingly hard to envision. Time Warner and Comcast have been talking up plans to make their respective cable lineups available by computer—as long as you keep paying your cable bill. This is a stopgap, especially appealing to anyone who owns two homes but wants to pay only one cable bill. Never mind, too, that hundreds of shows are already available online for free, via Web sites operated by none other than Comcast and the TV networks themselves.[55]

In light of such technological upheaval and marketplace uncertainty, it’s important that regulators proceed cautiously when reviewing this deal or future deals.

Conclusion: Let Markets Evolve

The point here is not that media mergers are inherently good or always make sense. Indeed, as the examples discussed above illustrate, mergers sometimes prove to be huge blunders.[56] But the hysteria sometimes heard before media mergers are consummated rarely bears any relationship to reality once the deals move forward. Media markets are extremely dynamic and prone to disruptive change and technological leap-frogging. Mergers are often one response to that turbulence.

But mergers are no panacea, and they often fail to produce the “synergies” hoped for. A 2004 survey by McKinsey & Co. found that “Nearly 70 percent of the mergers in our database failed to achieve the revenue synergies estimated by the acquirer’s management.”[57] Perhaps, therefore, the best argument for blocking media mergers is not their potentially pernicious effect on markets or consumers, but rather to save the merging firms (and their stockholders) from a miserable marriage!

On the other hand, experimenting with alternative business models and ownership structures is an important part of any dynamic market, because markets are not static but represent and ongoing processes of entrepreneurial “discovery.”[58] Thus, policymakers would be wise to avoid micro-managing mergers and instead let things run their course.  Sometimes collaboration makes a great deal of sense, especially when the significant costs of providing a media service becomes impossible absent a partnership. Indeed, federal officials and agencies are currently exploring how (or whether) journalism can survive an era of seeming perpetual media upheaval.[59] Healthy media companies certainly must be part of the answer and new ownership arrangements might be part of the solution.

Given how difficult it is to predict the future course of events in this chaotic sector, humility—not hubris—is the sensible disposition when it comes to media merger policy. At a minimum, policymakers should insist that ongoing debates are governed by facts instead of fanaticism, because, if the past decade is any guide, discussions about media mergers have been more often rooted in hyperbolic rhetoric and unsubstantiated hysteria.

[1] www.freepress.net/comcast

[2] Quoted in Cecilia Kang, Public Interest Groups Rail against a Comcast and NBC Merger, Washington Post, Post Tech Blog, Nov. 9, 2009, http://voices.washingtonpost.com/posttech/2009/11/for_example_were_advancing_tv.html

[3] “For regulators, a deal like this is a gift; an occasion to impose their will upon needy companies that would otherwise be outside their regulatory reach.” Craig Moffett, Bernstein Research, Comcast: Snatching Defeat from the Jaws of Victory? Oct. 23, 2009, at 14.

[4] Cecilia Kang, A New Kind of Company, A New Kind of Challenge for Feds, Washington Post, Nov. 26, 2009, at 1, www.washingtonpost.com/wp-dyn/content/article/2009/11/26/AR2009112602500.html

[5] Norman Soloman, AOL Time Warner: Calling The Faithful To Their Knees, Jan. 2000, www.fair.org/media-beat/000113.html

[6] Robert Scheer, Confessions of an E-Columnist, Jan. 14, 2000, Online Journalism Review, www.ojr.org/ojr/workplace/1017966109.php

[7] Looking back at the deal almost ten years later, AOL co-founder Steve Case said, “The synergy we hoped to have, the combination of two members of digital media, didn’t happen as we had planned.” Quoted in Thomas Heath, The Rising Titans of ’98: Where Are They Now?, Washington Post, Nov. 30, 2009, www.washingtonpost.com/wp-dyn/content/article/2009/11/29/AR2009112902385.html?sub=AR

[8] Nina Munk, Fools Rush In: Steve Case, Jerry Levin, and the Unmaking of AOL Time Warner (New York: Harper Business, 2004); Kara Swisher and Lisa Dickey, There Must Be a Pony in Here Somewhere: The AOL Time Warner Debacle and the Quest for a Digital Future (New York: Crown Business, 2003).

[9] Frank Pellegrini, What AOL Time Warner’s $54 Billion Loss Means, April 25, 2002, Time Online, www.time.com/time/business/article/0,8599,233436,00.html

[10] Jim Hu, AOL Loses Ted Turner and $99 billion, CNet News.com, Jan. 30, 2004, http://news.cnet.com/AOL-loses-Ted-Turner-and-99-billion/2100-1023_3-982648.html

[11] Jim Hu, AOL Time Warner Drops AOL from Name, CNet News.com, Sept. 18, 2003, http://news.cnet.com/AOL-Time-Warner-drops-AOL-from-name/2100-1025_3-5078688.html

[12] Matthew Karnitschnig, After Years of Pushing Synergy, Time Warner Inc. Says Enough, Wall Street Journal, June 2, 2006, http://online.wsj.com/article/SB114921801650969574.html

[13] Geraldine Fabrikant, Time Warner Plans to Split Off AOL’s Dial-Up Service, New York Times, Feb. 7, 2008, www.nytimes.com/2008/02/07/business/07warner.html?_r=1&adxnnl=1&oref=slogin&adxnnlx=1209654030-ZpEGB/n3jS5TGHX63DONHg

[14] John Letzing, AOL, On The Verge Of Independence, Weighs On Parent, Wall Street Journal, Nov. 4, 2009, http://online.wsj.com/article/BT-CO-20091104-718782.html

[15] Allan Sloan, ‘Cash for . . .’ and the Year’s Other Clunkers, Washington Post, Nov. 17, 2009, www.washingtonpost.com/wp-dyn/content/article/2009/11/16/AR2009111603775.html

[16] Tim Arango, Time Warner Spinning Off Cable Unit, New York Times, April 30, 2008, www.nytimes.com/2008/04/30/business/30warner-web.html?ref=technology

[17] Carolyn Pritchard, Time Inc. to Sell 18 Magazine Titles, MarketWatch, Sept. 12, 2006,  www.marketwatch.com/News/Story/Story.aspx?guid=%7B94967C37%2D9B4A%2D4C1A%2D8AC0%2D64904C1267A1%7D&dist=rss&siteid=mktw&rss=1

[18] “Break-ups and divestitures do not generally get front-page treatment,” notes Ben Compaine, author of Who Owns the Media?  See Ben Compaine, Domination Fantasies, Reason, Jan. 2004, p. 28, www.reason.com/news/show/29001.html

[19] www.dailykos.com/story/2009/9/7/778254/-Rupert-Murdoch-is-a-Fascist-Hitler-Antichrist

[20] Jim Finkle, Turner Compares Fox’s Popularity to Hitler, Broadcasting & Cable, Jan. 25, 2005, www.broadcastingcable.com/CA499014.html

[21] Ian Douglas, Rupert Murdoch is a Marxist, Telegraph.Co.UK, Nov. 9, 2009,  http://blogs.telegraph.co.uk/technology/iandouglas/100004169/rupert-murdoch-is-a-marxist

[22] Karl Frisch, Fox Nation: The Seedy Underbelly of Rupert Murdoch’s Evil Empire? MediaMatters.org, June 2, 2009, http://mediamatters.org/columns/200906020036

[23] www.msnbc.msn.com/id/19817142/

[24] Dean Vows to ‘Break Up Giant Media Enterprises,’ The Drudge Report, Dec. 2, 2003, www.drudgereport.com/dean1.htm; Bill McConnell, Dean Threatens to Break Up Media Giants, Broadcasting & Cable, Dec. 3, 2003, www.broadcastingcable.com/index.asp?layout=articlePrint&articleID=CA339546.

[25] John Nichols and Robert W. McChesney, Our Media, Not Theirs: The Democratic Struggle against Corporate Media (New York: Seven Stories Press, 2002) at 31.

[26] Consumers Union, Consumer Federation of America, Center for Digital Democracy, and Media Access Project, Comments In the Matter of News Corporation/Fox Entertainment Group Merger with Hughes Electronics Corporation/DirecTV, MB Docket No. 03-124, July 1, 2003, www.consumersunion.org/pdf/0701-DirecTV.pdf

[27] Dissenting Statement of Commissioner Jonathan S. Adelstein, Re:  General Motors Corporation and Hughes Electronics Corporation, Transferors, and The News Corporation Limited, Transferee, MB Docket No. 03-124, Jan. 14, 2004, http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-03-330A6.doc

[28] Jeff Chester, Rupert Murdoch’s Digital Death Star, AlterNet, May 20, 2003, www.alternet.org/story/15949

[29] Destruction of Alderaan, Wookieepedia: The Star Wars Wiki, http://starwars.wikia.com/wiki/Destruction_of_Alderaan

[30] News Corporation and Liberty Media Corporation Sign Share Exchange Agreement, News Corp Press Release, Dec. 22, 2006, www.newscorp.com/news/news_322.html.  A frustrated Murdoch referred to DirecTV as a “turd bird” just before he sold it off. See Jill Goldsmith, Murdoch Looks to Release Bird, Variety, Sept. 14, 2006, www.variety.com/article/VR1117950090.html?categoryid=1236&cs=1

[31] Consumers Union, Consumer Federation of America, Free Press, and Media Access Project, Comments In the Matter of Authority to Transfer Control of DirecTV, MB Docket No. 07-18, March 23, 2007, www.mediaaccess.org/file_download/177

[32] Richard Linnett, Media Rivals Backslap at Cable Conference, AdAge.com, June 10, 2003.

[33] Dissenting Statement of Commissioner Michael J. Copps, Applications for Consent to the Transfer of Control of Licenses, XM Satellite Radio Holdings Inc., Transferor, to Sirius Satellite Radio Inc., Transferee, MB Docket No. 07-57, Aug. 5, 2008, http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-08-178A3.pdf

[34] Dennis Wharton, National Association of Broadcasters, NAB Statement in Response to Sirius/XM Proposed Merger, Feb. 19, 2007, www.nab.org/AM/Template.cfm?Section=Search&template=/CM/HTMLDisplay.cfm&ContentID=8258.

[35] Peter Whoriskey and Kim Hart, Justice Dept. Approves XM-Sirius Radio Merger, The Washington Post, Mar. 25, 2008, www.washingtonpost.com/wp-dyn/content/article/2008/03/24/AR2008032401645.html.

[36] The XM-Sirius Merger: Monopoly or Competition from New Technologies: Hearing Before the Senate Committee on the Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights, 3 & 6 (March 20, 2007) (statement of Common Cause et. al), www.hearusnow.org/fileadmin/sitecontent/2007_-_0320_Public_Interest_GroupsStatement-_Senate_Judiciary.pdf

[37] Id. at 6.

[38] Common Cause, Consumer Federation of America, Consumers Union, Free Press, Comments in the Matter of Consolidated Application for Authority To Transfer Control of XM Radio Inc. and Sirius Satellite Radio Inc., MB Docket No. 07-57July 9, 2007, at 1, www.hearusnow.org/fileadmin/sitecontent/xm-sirius_comments.pdf

[39] James Gattuso, Day 505: The XM-Sirius Circus Is Finally Over, Technology Liberation Front Blog, Aug. 7, 2008, http://techliberation.com/2008/08/07/day-505-the-xm-sirius-circus-is-finally-over

[40] Dissenting Statement of Commissioner Michael J. Copps, Applications for Consent to the Transfer of Control of Licenses, XM Satellite Radio Holdings Inc., Transferor, to Sirius Satellite Radio Inc., Transferee, MB Docket No. 07-57, Aug. 5, 2008, http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-08-178A3.pdf

[41] Andrew Ross Sorkin & Zachery Kouwe, Sirius XM Prepares for Possible Bankruptcy, New York Times, Feb. 10, 2009,  www.nytimes.com/2009/02/11/technology/companies/11radio.html

[42] Jon Birger, Mel Karmazin Fights to Rescue Sirius, Fortune.com, March 16, 2009, http://money.cnn.com/2009/03/13/technology/birger_sirius.fortune/index.htm

[43] Former stockbroker and RealMoney.com contributor Tim Melvin worries about the “significant competition for the company going forward” He notes:

Most of the younger people I know have iPod docks in their vehicles for listening to music. Smartphones are bringing music and podcasts to mobile consumers. E-reading machines have wireless connections that can eventually deliver content on a subscription or pay-per-use basis. I really do not need the sports channels from Sirius if I can watch and listen to the games I want on my phone. As time goes by, satellite radio will be viewed as a stepping-stone technology that was replaced by smartphones and other portable media devices.

Tim Melvin, Sirius’ Hopes Keep Slipping Away, The Street.com, Nov. 10, 2009, www.thestreet.com/story/10624757/1/sirius-hopes-keep-slipping-away.html?cm_ven=GOOGLEFI

[44] Olga Kharif, Sirius XM: The Good and Bad Earnings News, Business Week, Nov. 5, 2009, www.businessweek.com/technology/content/nov2009/tc2009115_002716.htm

[45] Melvin, supra 39.

[46] Robert McChesney, Murdoch’s Deal for the Journal: Yet Another Blow for Journalism, Free Press Press Release, July 30, 2007, www.freepress.net/release/260

[47] Michael Copps, Letter to FCC Chairman Kevin Martin, Oct. 25, 2007, http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-277576A1.pdf

[48] Michael Wolff, Rupert to Internet: It’s War! Vanity Fair, Nov. 2009, at 112.

[49] www.freepress.net/comcast

[50] Josh Silver, Too Big to Block? Why Obama Must Stop the Comcast-NBC Merger, Huffington Post, Nov. 13, 2009, www.huffingtonpost.com/josh-silver/too-big-to-block-why-obam_b_356826.html

[51] www.forbes.com/feeds/afx/2009/11/19/afx7143505.html

[52] Adam Thierer and Grant Eskelsen, The Progress & Freedom Foundation, Media Metrics: The True State of the Modern Media Marketplace, Summer 2008, www.pff.org/mediametrics

[53] However, experience with regulation of sports programming suggests that FCC meddling has had negative unintended consequences.  See W. Kenneth Ferree, Competition in the Sports Programming Marketplace, Testimony before the Subcommittee on Telecommunications and the Internet, House Committee on Energy and Commerce, March 5, 2008, www.pff.org/issues-pubs/testimony/2008/030508ferreetestimony.pdf; Barbara Esbin, Unable to Watch the Big Game? Testimony before the National Conference of State Legislatures Communications, Financial Services and Interstate Commerce Committee, Apr. 25, 2008, www.pff.org/issues-pubs/testimony/2008/080425esbinNCSLpresentation.pdf

[54] Mike Berkley, The Comcast-NBC Deal is a Defensive Move by Comcast. It’s about Survival, TV News Stream, Nov. 16, 2009, http://tvnewsstream.com/the-comcast-nbc-deal-is-a-defensive-move-by-c

[55] Holman Jenkins, The Economics of Jay Leno, Wall Street Journal, Nov. 18, 2009, at A17, http://online.wsj.com/article/SB10001424052748704431804574541684183772504.html

[56] Chris O’Brien, Beware the Hype Around Mergers, MercuryNews.com, Nov. 12, 2009, www.mercurynews.com/chris-obrien/ci_13756963?nclick_check=1

[57] Scott A. Christofferson, Robert S. McNish & Diane L. Sias, Where Mergers Go Wrong, McKinsey on Finance, Winter 2004, at 2, http://westportcapital.com/library/McKinsey_Where_Mergers_Go_Wrong.pdf.  The authors noted that, “acquirers face an obvious challenge in coping with an acute lack of reliable information. They typically have little actual data about the target company, limited access to its managers, suppliers, channel partners, and customers, and insufficient experience to guide synergy estimation and benchmarks.”

[58] See, e.g., Israel M. Kirzner, Competition, Regulation, and the Market Process: An “Austrian” Perspective, Cato Institute Policy Analysis No. 18, 1982, www.cato.org/pubs/pas/pa018.html

[59] For example, congressional hearings have been held on this topic and the Federal Trade Commission is holding a workshop on December 1^st and 2^nd asking, “Will Journalism Survive the Internet Age?” www.ftc.gov/opp/workshops/news/index.shtml

Continuing the “Cutting the (Video) Cord” series started by my PFF colleague Adam Thierer:  The WSJ had two great pieces yesterday about the increasing competitive relevance of television distributed by Internet—a trend that was at the heart of an amicus brief PFF recently filed in support of C omcast’s challenge of the FCC’s 30% cap on cable ownership.  The first WSJ piece declares that:

After more than a decade of disappointment, the goal of marrying television and the Internet seems finally to be picking up steam. A key factor in the push are new TV sets that have networking connections built directly into them, requiring no additional set-top boxes for getting online. Meanwhile, many consumers are finding more attractive entertainment and information choices on the Internet — and have already set up data networks for their PCs and laptops that can also help move that content to their TV sets.

The easier it is for consumers to receive traditional television programming (in addition to other kinds of video content) distributed over the Internet on their television, the less “gatekeeper” or “bottleneck” power cable distributors have over programming.  So the Netflix-capable and Yahoo-widget-capable televisions described by the WSJ piece go a long way to increasing the substitutability of what we call Internet Video Programming Distributors (IVPDs) for Multichannel Video Programming Distributors (MVPDs), such as cable, satellite television and fiber services offered by telcos such as Verizon’s FiOS.  

While such televisions are only expected to reach 14% of all TV sales by 2012, one must remember that a growing number of set-top boxes ( e.g., the Roku Digitial Video Player, game consoles like the Microsoft XBox 360 and Sony PlayStation 3, and TiVo DVRs) allow users to users to receive IVPD programming on their existing televisions.  

As we argued in our amicus brief, the immense competitive importance of IVPDs lies not in the potential for some users to “cut the cord” to cable and other MVPDs (though that will surely happen), but in the immediate impact IVPDs have as an alternative distribution channel for programmers.  In the pending D.C. Circuit case, we argue that both the FCC’s 30% cap, issued in December 2007, and the underlying portions of the 1992 Cable Act authorizing such a cap should be struck down as unconstitutional because the ready availability of IVPDs as an alternative distribution channel means that cable no longer has the “special characteristic” of gatekeeper/bottleneck power that would justify imposing such a unique burden on the audience size of cable operators.  (Of course, Direct Broadcast Satellite and Telco Fiber are also eating away at cable’s share of the MVPD marketplace.)

The second WSJ piece, an op/ed, illustrates beautifully how cable operators are already losing “market power” (or at least negotiating leverage) in a very tangible way:  they’re having to pay more for programming.  Specifically, the Journal describes how Viacom plaid chicken with Time Warner—and won.  

 The Viacom network had threatened to pull its 19 channels, including Nickelodeon with its “Dora the Explorer” and “SpongeBob SquarePants” cartoons, from the 13 million subscribers to the Time Warner Cable system…. The game of chicken included Viacom advertisements that unless Time Warner Cable agreed to pay more, it would pull the channels, encouraging viewers to call to say they wanted their MTV and other Viacom channels. One ad asked, “Why is Dora crying?” Time Warner countered that consumers would pay more if its costs rose. Bernstein Research analyst Michael Nathanson noted that neither party could afford “mutually assured destruction.” Viacom needs to find more subscription revenue as advertising revenues soften, while Time Warner Cable has to worry about satellite and telecom competitors. New media was the new factor. Many popular Viacom shows are widely available on the Web, including on its own sites. When it looked as if Comedy Central would be pulled, Wired magazine helpfully posted a guide for accessing the shows on the Web, pointing out that Jon Stewart’s “The Daily Show” can be accessed on Hulu and that “South Park” episodes are on Fancast. The best parts of “The Colbert Report” are often viewed as email attachments or as snippets on mobile phones.

So, in a nutshell, the fact that consumers could get Viacom programming available through IVPDs gave Viacom more leverage against MVPD Time Warner because it increased the credibility of Viacom’s threat to simply shut off programming to Time Warner if the cable giant didn’t cough up more cash.  While this fact seems to have carried the day for Viacom, the availability of Viacom’s content through IVPDs did have some secondary effects that also are worth noting:

During the negotiations, Time Warner Cable threatened to make it easier for its subscribers to connect laptop computers to their televisions so that Viacom shows could stream directly onto subscribers’ televisions.

This is essentially a reversal of the tactic often employed by local broadcasters in their battles with cable operators:  give your customers a set of rabbit ears so they can still get your signal if you actually take your programming off the local cable network.  While this tactic doesn’t seem to have helped Time Warner here, it does point to a long-term trend that could fundamentally change the programming marketplace:

The cable company also argued that it shouldn’t have to pay more to distribute shows that Viacom made available free in other media.

I suspect that, as IVPDs further erode the viewership of cable and other MVPDs, the MVPDs will become more desperate for content—and therefore willing to pay more for it.  But it seems likely that both of the key revenue sources for MVPDs—subscriptions and advertising—will, at some point, begin to decline as Americans spend more time watching IVPD content and become less willing to pay for expensive MVPD plans.  As this happens, cable may have less revenue to share with programmers per subscriber, even as their need for that programming grows.

So how will this all end?  I doubt anyone really knows.  But I feel reasonably comfortable making two predictions.  

First, the overall health of the video programming content market will become increasingly dependent on the profitability of advertising—for MVPDs, IVPDs as well as programmers.  This will require technological innovation to produce smarter advertising.  The better advertising is targeted to a specific consumer’s interests, the more revenue it will produce for all concerned.  But if the government short-circuits this process by hindering the evolution of targeted advertising in the name of protecting consumers’ privacy (or simply to protect them from the supposed inherent unfairness of advertising—an old Marxist shibboleth), the total amount of funding available for content could plummet.  The dynamics described so well by Chris Anderson in “Free! Why $0.00 Is the Future of Business” could drive video programmers to make their content available online for “free” (i.e., at no charge to the user) even if that content ends up producing (via advertising, etc.) significantly less revenue than it currently does on MVPDs (primarily from subscription revenue).  Plenty of smart people have explored this question and have far more intelligent things to say about it than I do.  But since the long-term trend seems to be that consumers are increasingly unwilling to pay even small sums for content, I just don’t see any alternative to increasing advertising revenues—other than public financing, which will necessarily bring with it government control and censorship.

Second, the other part of the solution to this problem will be business model innovation:  If individual consumers won’t pay for online video content, and if future ad revenues for online video content  don’t replace existing revenue streams, programmers are going to look for other sources of funding.  This dynamic seems to be on a collision course with net neutrality mandates.  The WSJ reported:

At one point, it looked as if Viacom might have escalated by trying to block Time Warner Cable broadband subscribers from accessing its Web sites to see its shows.

Whatever actually happened here, one can easily imagine a programmer like Viacom at some point in the future trying to get ISPs to start paying money per broadband subscriber for video content just as MVPDs currently pay per subscriber.  This is really the inverse of the fear generally expressed by net neutrality advocates that ISPs would try to charge programmers for the bandwidth used to transmit their content to an ISP’s subscribers.  If it’s true that programmers (the Viacoms of the world) and not distributors (Time Warner Cable the MVPD or Time Warner Cable the ISP) really have the market power, as this story suggests, then such arrangements might well be the economic salvation of content creators.  As with regulation of advertising, I only hope that government mandates against such innovation in the name of abstract “neutrality” principles don’t end up dooming us to a future where, with free market solutions (better advertising, revenue sharing with ISPs) rendered ineffective by government, government itself seems to be the only option left.

This is just a listing of the installments of my ongoing “Media Deconsolidation Series.” I needed to create a single repository of all the essays so I could point back to them in future articles and papers. For those not familiar with it, this series represents an effort to set the record straight regarding the many myths surrounding the media marketplace. These myths are usually propagated by a group of radical anti-media regulatory activists who I call the “media reformistas.” Sadly, however, many policymakers, journalists, and members of the public are buying into some of these myths, too.

In particular, I have spent much time here debunking the notion that rampant consolidation is taking place and that media operators are only growing larger and devouring more and more companies. In fact, nothing could be further from the truth. Over the past several years, traditional media operators and sectors have been coming apart at the seams in the face of unprecedented innovation and competition. The volume of divestiture activity has been quite intense, and most traditional media operators have been getting smaller, not bigger. As a result, America’s media marketplace is growing more fragmented and atomistic with each passing day.

Anyway, here’s the series so far…

• Media Deconsolidation (Part 24): I Read the News Today, Oh Boy
• Media Deconsolidation (Part 23): Cox Selling Most of its Newspapers
• Media Deconsolidation (Part 22): TW spin-off of cable unit
• Media Deconsolidation (Part 21): TW spin-off of AOL
• Media Deconsolidation (Part 20): News Corp spins off 8 TV stations
• Media Deconsolidation (Part 19): IAC/Interactive Corp. divides by 5
• Media Deconsolidation (Part 18): Scripps Splits
• Media Deconsolidation (Part 17): Clear Channel Station Sell-off
• Media Deconsolidation (Part 16): Clear Channel Crackup
• Media Deconsolidation (Part 15): AOL-TW Divorce Near?
• Media Deconsolidation, Part 14: Time Warner Without Time?
• Media Deconsolidation, Part 13: Tribune Considering Major Downsizing
• Media Deconsolidation, Part 12: Time Warner President Calls Synergy “Bull—t”
• Media Deconsolidation, Part 11: Knight Ridder’s Coming Crackup
• Media Deconsolidation, Part 10: Viacom’s Breakup Official
• Media Deconsolidation, Part 9: Viacom’s Split
• Media Deconsolidation, Part 8: Time Warner Spin Off of AOL Likely
• Media Deconsolidation, Parts 6 & 7: Emmis & Disney Divestitures
• Media Deconsolidation, Part 5: “Clear Channel to Dismantle Media Empire”
• Media Deconsolidation, Part 4: Is News Corp. Next to Downsize?
• Still More on Media Deconsolidation
• More on Media (De)Consolidation
• Stop This Insane Media De-Consolidation!

Related reading:

• What the Media Reformistas Really Want
• Your Soapbox is My Soapbox! Thoughts on the Media Access Movement
• BOOK: Media Myths: Making Sense of the Debate over Media Ownership (2005)
• SPECIAL REPORT: Media Metrics: The True State of the Modern Media Marketplace (2008)
• BOOK:  A Manifesto for Media Freedom (with Brian Anderson, 2008).

I reviewed the Veoh case for DRMWatch recently:

The user-generated video site Veoh achieved a victory in court on August 27th when California District Judge Howard Lloyd ruled that it was entitled to the protection of the DMCA’s safe harbor provisions. Veoh was accused of copyright infringement by IO Group, a maker of adult films…

Like eBay v. Tiffany, another case in which one might trumpet a tech-side win… the tech gets at least some protection from liability. But only in a context in which the tech is already taking substantial steps to help the plaintiff trademark/copyright owner with their enforcement problem, steps that would have been hard to conceive of a decade ago, and that many would have grandly declared to be too ambitious and too invasive for online services to attempt. Prediction: the case law is now much more mature, but the business side is just getting started. More and fancier filtering to come.

It’s funny and scary how many of our grand ideas about justice, rights, freedom, fairness and property come down to what we can become accustomed too.  Bad, in the sense that one can easily lose the customary baselines against which freedom is measured in a generation or so. Good, in the sense that one is not limited to identify freedom with just one historic mythical Golden Age; a free society has somewhat more leeway.

I’m fond of paradoxes these days. Tedious things. Almost as annoying to other people, I am sure, as those characters (you know who you are) who make puns all the time.

Faithful readers will recall that, several months ago, I penned a 7-part “Media Metrics” series that took a hard look at the health of the media marketplace. Today, the Progress & Freedom Foundation is releasing a greatly expanded version of these essays that I have put together with my PFF colleague Grant Eskelsen. In this 100-page special report, “Media Metrics: The True State of the Modern Media Marketplace,” we begin by noting that heated debates about the state of the media marketplace continue to rage in Washington, and opinions seem to range from grim to outright apocalyptic. As we note on pg. 1:

Many people—including a large number of legislators and regulators—argue that America’s media marketplace is in a miserable state. Some claim that citizens lack choice in media outlets and that options are just as scarce as ever. Others believe that media “localism” is dead or that many groups or niches go underserved because of a lack of true “diversity” in media. Others argue that the market is hopelessly over-concentrated in the hands of a few evil media barons who are hell-bent on force-feeding us corporate propaganda. And still others say that the quality of news and entertainment in our society has deteriorated because of a combination of all of the above. It all sounds quite troubling, but is any of it true?

After taking an objective look at the true state of America’s media marketplace, we conclude that such pessimism is unwarranted. Indeed, a careful review of the facts reveals that—contrary to what those media critics suggest—we have more media choice, more media competition, and more media diversity than ever before. Indeed, to the extent there was ever a “golden age” of media in America, we are living in it today. The media sky has never been brighter and it is getting brighter with each passing year. We come to this conclusion by looking beyond the rhetoric that has for too long governed debates about media in American and providing a comprehensive look at a variety of media sectors such as audio, video, print and online media. Our survey contains over 70 charts and exhibits illustrating facts and figures on such diverse topics as advertising revenue, company market share, audience trends, and areas of growth in the sector. We will also aim to periodically updated the report to reflect the rapidly evolving media industry.

We encourage readers to provider input about how to improve and expand the report going forward in an attempt to refine and improve the metrics. And we look forward to future debates on this subject–debates that we hope will be guided by facts instead of fanaticism and by evidence instead of emotion. The hyperbolic rhetoric, shameless fear-mongering, and unsubstantiated claims that have driven policy debates in recent years have no foundation in reality and should be rejected as the debate over media policy continues.

This and future installments of “Media Metrics: The True State of the Modern Media Marketplace” will be available on the PFF website at www.pff.org/mediametrics. I have also embedded the entire document below as a Scribd file so that those interested in the topic can peruse the report immediately.

Google has found itself stuck between a rock and a hard place in its legal battle with Viacom over the question of whether IP addresses constitute “personally identifiable information,” as Jim pointed out yesterday . It’s worth noting, however, that EU regulators have left Google little choice but to stake out uncharted territory in order to defend its data collection practices.

Under the European Union’s strict privacy directive , websites are prohibited from retaining “personal data” for more than six months. What exactly constitutes personal data is up for debate. Google, which retains IP addresses for 18 months , has taken the position that IP addresses don’t constitute personal data and therefore are not subject to EU data retention limits.

That argument has placed Google in a double-bind in its legal proceedings with Viacom. In his recent ruling, Judge Stanton specifically referenced Google’s recent blog post which argued that IP addresses should not be considered personally identifiable information. If IP addresses aren’t private, Stanton reasoned, then what’s the harm in Google handing them over to Viacom?

Whether an IP address can identify an individual is a matter of context. Google stated recently, “Based on our own analysis, we believe that whether or not an IP address is personal data depends on how the data is being used.” That makes sense; an IP address alone is generally not enough information to identify an individual, absent a court order.

Yet while IP addresses are not capable of overtly identifying individuals in the same way as phone numbers and addresses, IP addresses combined with other details often make it possible to positively identify individuals with a high degree of accuracy. Anybody can run a reverse DNS lookup on an IP address, which usually reveals the city and state in which the user of that IP address is located, along with the service provider. The YouTube logs that Google has been ordered to produce include not just IP addresses but also usernames and specific viewing times, so it’s all but guaranteed that quite a few individuals could be personally identified given enough man-hours of data mining .

Surprisingly, Google is not arguing that usernames are personally identifiable. Sure, they’re self-selected and often completely pseudonymous, as Berin noted . But it’s fairly common for people to use the same username across online forums and instant messaging services. The same LobsterBoy1922 who spends his evenings watching Rick Astley clips on YouTube is probably the same LobsterBoy1922 who often posts using his real name on the AVS Forum.

Some people even use their real name as their username, but that still doesn’t mean that they’ve sacrificed their expectation of privacy. While I believe that users have no inherent of expectation of privacy online , Google has a robust privacy policy governing user data. Website privacy policies can go a long way towards establishing an expectation of privacy for users. Google admits its privacy policy is legally binding , so it seems reasonable for people to watch YouTube under the assumption that their viewing habits won’t be exposed to third parties.

I don’t see why Judge Stanton felt it necessary to grant such a broad discovery order in the first place. Why does Viacom need usernames or IP addresses of YouTube viewers to accomplish its objective of determining whether YouTube is “ capable of substantial non-infringing uses ?” Google’s (unanswered) request to hand over partially redacted viewing logs would protect user privacy without impeding Viacom’s ability to compare viewing statistics between infringing and non-infringing videos.

Some have even argued that Google should simply refuse to comply with the court order. Such a bold move would invariably trigger contempt penalties, but would also give Google a lot of favorable press and positive blogosphere credo. And Google might even overturn the court order on appeal, although any appeal wouldn’t be heard until after the discovery deadline passes.

While Judge Stanton’s ruling is a blow to the privacy of YouTube users, many in the media are vastly exaggerating the privacy implications of the court order. Viacom won’t have free reign to do as it pleases with the YouTube logs, despite what some bloggers have suggested. Remarkably, journalists continue to omit any discussion of the protective order that places narrow conditions on Viacom’s access to the YouTube logs.

As Berin explained last week , worries about the YouTube records being used to file lawsuits against viewers are similarly overblown. Suing viewers would likely run afoul of the protective order —possibly resulting in legal penalties—plus there’s no legal precedent for taking people to court merely because they viewed infringing video files . And due to the strict confidentiality provisions in the protective order, a data breach or accidental leak would expose Viacom (or its outside experts) to serious civil liability. Still, information is volatile, as Jim warns , and Viacom’s analysis will only endanger the secrecy of YouTube’s logs.

In case you’ve been in a pre-holiday daze this week, the blogosphere has been atwitter (not to mention a-twittering) with the news that the Hon. Louis L. Stanton, the Federal district judge presiding over Viacom’s massive copyright infringement suit against YouTube has ordered Google, which owns YouTube, to turn over its viewership records (12 terabytes).  Most notably, TechCrunch’s Michael Arrington has called Judge Stanton a “moron” for failing to appreciate that “handing over user names and a list of videos they’ve watched to a highly litigious copyright holder is extremely likely to result in lawsuits against those users that have watched copyrighted content on YouTube.”  Whatever one thinks of the Viacom v. YouTube/Google case, Arrington’s concern is misplaced (if not hysterical) and his logic betrays his ignorance of how litigation actually works. 

Judge Stanton’s July 2 order (PDF) explains:

[YouTube and Google’s] “Logging” database contains, for each instance a video is watched, the unique “login ID” of the user who watched it, the time when the user started to watch the video, the internet protocol address other devices connected to the internet use to identify the user’s computer (“IP address”), and the identifier for  the video.  That database (which is stored on live computer hard drives) is the only existing record of how often each video has been viewed during various time periods. Its data can “recreate the number of views for any particular day of a video.” Plaintiffs [primarily Viacom] seek all data from the Logging database concerning each time a YouTube video has been viewed on the YouTube website or through embedding on a third-party website. They need the data to compare the attractiveness of allegedly infringing videos with that of non-infringing videos. A markedly higher proportion of infringing-video watching may bear on plaintiffs’ vicarious liability claim, and defendants’ substantial non-infringing use defense.

While Stanton denied other requests made by Viacom for the search code that powers YouTube and Google Video on the grounds that Viacom had not made a sufficient showing of need for such records, he rejected Google’s arguments that turning over the large amount of viewer data would be unduly burdensome (given today’s cheap and convenient storage).  Also rejecting Google’s “speculative privacy concerns,” the judge agreed with Viacom that, the “’login ID is an anonymous pseudonym that users create for themselves when they sign up with YouTube’ which without more ‘cannot identify specific individuals.'”  The judge noted that Google–hoisted on its own petard–had elsewhere taken the position that IP addresses alone are not personally identifying:

We . . . are strong supporters of the idea that data protection laws should apply to any data that could identify you. The reality is though that in most cases, an IP address without additional information cannot.

The Electronic Frontier Foundation raises the valid question of whether the release of viewer data would violate the Video Privacy Protection Act (VPPA), passed in 1988 after a newspaper disclosed Supreme Court nominee Robert Bork’s video rental records during his controversial and abortive nomination.  While Judge Stanton’s order dismisses this law as inapplicable in a footnote, EFF argues that the law does in fact apply because (i) the law covers “prerecorded video cassette tapes or similar audio visual materials,” which should include YouTube and (ii) some user names do identify users (e.g., “berinszoka”).  If EFF is correct, the VPPA would preclude the kind of comprehensive data production ordered by Judge Stanton.

Whether EFF is correct as a legal matter, this is certainly the kind of question privacy advocates should ask.  Those of us who argue that government should generally address concerns about user privacy by enforcing privacy policies (rather than dictating to companies how they should treat data through regulation) must be especially vigilant whenever the government forces companies to turn over potentially identifying user data, either to other companies in lawsuits such as this one or to law enforcement, lest the threat of the real “Big Brother” (government) completely obscure the fact that companies like Google live and die by their reputation, and thus have strong incentives to protect user privacy.

But Arrington is not engaging in such thoughtful analysis, merely name-calling:

I can understand why Judge Stanton, who graduated from law school in 1955, may be completely and utterly clueless when it comes to online video services. But perhaps one of his bright young clerks or interns could have told him that (1) handing over user names and a list of videos they’ve watched to a highly litigious copyright holder is extremely likely to result in lawsuits against those users that have watched copyrighted content on YouTube, and (2) YouTube’s source code is about as valuable as the hard drive it would be delivered on, since the core Flash technology is owned by Adobe and there are countless YouTube clones out there, most of which offer higher quality video. … Judge Stanton doesn’t seem to care much about [the the Video Privacy Protection Act] for now. And he clearly doesn’t understand that far more data is being transferred than is necessary to comply with Viacom’s core stated concern, which is to understand the popularity of copyright infringing v. non-infringing material. Viacom has asked for far more data than that, and there’s only one use for that data: to sue individual users (or shake them down via the threat of lawsuit, which has been perfected by the RIAA) who have watched a few music videos or television shows on YouTube. I say this with the utmost respect, but Judge Stanton is a moron. And Google simply cannot hand this data over without facing a class action lawsuit of staggering proportions.

Is Arrington unfamiliar with the concept of a protective order?  A standard feature of any major lawsuit, protective orders allow parties to limit use of sensitive information they may be required to provide in the “discovery” process during litigation.  In this case, the protective order grants access to the viewership data Google is required to provide to a very limited number of individuals on plaintiffs’ litigation team, requires that they “maintain that information … in confidence and use it only for the purposes of this litigation.”  Thus, as noted by CNET, the viewership records could not be used in copyright infringement lawsuits against users, such as those pursued by the Recording Industry Association.

For those interested, here is the most recent protective order in the case (see paragraphs 3 and 10):

Of course, there is always the possibility that such records, once released, might be accidentally disclosed–though the fact that the plaintiffs in this case are subject to criminal sanctions for violation of the protective order does create a rather strong incentive for them to avoid such disclosures.  (EFF provides the example of 2006 “AOL search data scandal.”)  Accidental disclosure–or hacking–certainly is a valid concern.  Indeed, this exactly the kind of concern that always weighs in the balance when courts make decisions about whether to order the production of documents.  In this particular case, Stanton noted, in rejecting Viacom’s demands for the YouTube and Google Video search code, that “the protections set forth in the stipulated confidentiality order are careful and extensive, but nevertheless not as safe as nondisclosure.”  That is, Viacom had not shown sufficient need for the search code to overcome the risk of accidental disclosure–while he reached the opposite conclusion on viewership records.

The real question here is a difficult one of balancing the plaintiff’s need for certain data to make its case against concerns about sensitivity of the data at issue.  Such questions are highly fact-dependent and it is always difficult for those outside the case to evaluate the claims, since we lack all the key details, many of which has been redacted from court filings.

Setting aside (but not trivializing) EFF’s arguments about the VPPA, the most one can say here is that Google’s response–to request that Viacom “respect users’ privacy and allow us to anonymize the logs before producing them under the court’s order”–seems eminently reasonable, at least from the outside.  Certainly such a solution would set a valuable precedent for future disclosures that would allow plaintiffs like Viacom access to data where necessary while minimizing the risks to users’ privacy.  Such a solution would be akin to the March 2006 court order that required Google to disclose only a sample of Google’s search index, rather than individual user search terms, in response to the Justice Department’s broader demands for data it said it needed to test software intended to block access to child pornography.