The FCC Must Concurrently Consider the Impact of Greater Television Station Consolidation on Retransmission Consent Negotiations

On February 18, FCC Chairman Brendan Carr told reporters that he supports the proposed acquisition of TEGNA Inc. by Nexstar Media Inc. – and, specifically, that the Commission is "going to be moving forward." Because the combined entity would own stations reaching approximately 80 percent of U.S. households (according to the applicants, 54.5 percent after the UHF discount is applied), approval of this $3.54 billion transaction would require a waiver of, or substantial revisions to, the current 39 percent national television ownership cap (the cap).

However, as Free State Foundation President Randolph May and I argued in comments filed last August regarding potential changes to the cap, it would be inappropriately shortsighted to assess the primary justification asserted by the broadcast industry for regulatory relief – that is, the need for greater scale and scope in order to compete for advertising dollars with national online distribution platforms – in a vacuum.

The reason: it is inevitable that any regulatory relief provided regarding the cap (whether in general or specifically in the context of the instant transaction) intended to level the playing field between broadcasters and Big Tech (Amazon, Alphabet, Apple, and so on) will further skew the already lopsided retransmission consent negotiating positions of broadcasters and facilities-based multichannel video programming distributors (MVPDs): cable operators and direct broadcast satellite (DBS) operators.

As DIRECTV, LLC described in great detail in its petition to deny, "[a]mple evidence corroborates Applicants' own statements that the local consolidation proposed here will lead to higher retransmission consent rates." In addition – and echoing the fear recently expressed by Emily Barr, the former CEO of Graham Media Group, which owns multiple television stations in four states, that relief from the cap "is more about driving up stock prices for the few companies that survive consolidation" than it is about greater localism – DIRECTV warned that the transaction "would (notwithstanding Applicants' claims) almost certainly decrease the amount and quality of local news."

Accordingly, when assessing the claimed benefits of the proposed combination of Nexstar and TEGNA, the Commission should simultaneously evaluate – and take steps to mitigate – the impact that substantially larger station groups would have on the already asymmetric, heavily regulated relationships between local television stations and traditional MVPDs. As Mr. May and I wrote:

[I]f the FCC concludes that it should – and can, in a post-Chevron appellate environment – modify the national television ownership cap, at the same time it should (1) urge Congress to modernize the Communications Act, and, in the interim, (2) identify additional ways to eliminate unwarranted rules targeting facilities-based MVPDs.

To that list of remedial measures, at this time, I would add that greater consolidation on the broadcaster side certainly should factor heavily into the agency's consideration of pending, as well as future, transactions involving facilities-based MVPDs. As the Free State Foundation noted in its comments on the proposed combination of Charter Communications, Inc. and Cox Enterprises, Inc. currently before the Commission, "given that the FCC is considering allowing greater concentration in local broadcast television station ownership to facilitate competition vis-à-vis Big Tech platforms with global reach – a one-sided deregulatory step that inevitably would further skew retransmission consent negotiations – it would seem appropriate to afford the applicants similar relief here."

Understanding the Un-Free Market for Retrans Consent Is the First Step for Reforming It

In a truly free marketplace, private parties have the liberty to pursue commercial deals with whomever they choose. By mutual consent, private parties operating in a free market are at likewise at liberty to bind themselves to negotiated terms and conditions. The parties must abide by the terms and conditions they’ve agreed to. And an impartial authority enforces the bargained-for expectation of the parties in cases where one side fails to perform as agreed.

Unfortunately, video programming services remain stuck under a decades-old legacy regulatory apparatus that in certain critical respects marks an unfree market. The retransmission consent and must-carry regulatory regime established by Congress and enforced by the FCC is a regrettable case in point.

For over 20 years now the retrans consent/must carry regime has subjected the market for video programming to forced access mandates and to restrictions on private bargaining. Under "must-carry" rules, video broadcasters are granted special rights against multichannel video programming distributors (MVPDs), such as cable and direct broadcast satellite (DBS) operators. Those rules allow broadcasters to compel carriage of their program content by an MVPD on a basic tier channel.

On the flip side, TV broadcasters can chose to forego their must-carry rights and instead require that MVPDs negotiate directly with them for permission to retransmit their video programming. But retrans consent regulations grant protections to broadcast networks and local stations by limiting the ability of cable operators to choose what broadcasters to bargain with and what programming to bargain for. In particular, network non-duplication rules block MVPDs from importing network programming from another affiliate of the same broadcast network as a designated local TV station, even if the local TV station is not carried by the MVPD. And syndicated exclusivity rules block MVPDs from carrying syndicated programming broadcast by out-of-market TV stations when the same programs are broadcast by local TV stations.

FSF Board of Academic Advisors member Bruce Owen recounted the history of political favoritism and protectionism behind retrans consent and must carry in his Perspectives from FSF Scholars paper, "The FCC and the Unfree Market for TV Program Rights." And in a Perspectives paper titled "Broadcast Retransmission Negotiations and Free Markets," FSF President Randolph May concluded the retrans consent regime "creates artificial constraints that make the negotiations anything but a free market situation" and has "the effect of conferring certain advantages that may work to the negotiating advantage of broadcasters and against the MVPDs."   

Now in a December 12 blog post at RedState, CEI's Fred Campbell took aim at the American Television Alliance's (ATVA) 2010 petition requesting that the FCC adopt certain retrans consent negotiation and dispute resolution rules. In so doing, he likened ATVA's efforts to obtain such retrans consent regulations with the efforts of pro-regulatory advocates to impose network neutrality regulations.

Fred Campbell is a former FCC Wireless Bureau Chief, a skilled analyst, and, in general, a free marketer. We at FSF are in considerable agreement with him on many communications policy issues and respect his work. But I believe a false equivalency has been made in his blog post between rules that modify an existing regulatory regime for one type of services and rules that subject a previously free market to new regulatory controls. 

Even if the FCC never acts on ATVA's petition, video programming negotiations between TV broadcasters and MVPDs are already un-free in significant respects. This is due to the 20 year-old restrans consent regulations, discussed above, that restrict who MVPDs can negotiate with. By contrast, prior to the FCC's Open Internet Order, broadband Internet access providers were free, if they pleased, to negotiate with content or "edge" providers regarding data transmission. The FCC's net neutrality regulations now restrict – or at least disfavor – certain kinds of two-sided pricing arrangements that may be consumer welfare-enhancing.

Surely there may be costs associated with all of the various proposals contained in ATVA's petition, just as there may be benefits associated with them. I leave the merits of ATVA's various proposals to others. The real focus should be on the more fundamental task of establishing a truly free market context for retrans consent negotiations, and for video services generally. 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.

One promising vehicle for comprehensive free market reform is H.R. 3720, the Next Generation Television Marketplace Act. Just introduced again by Congressman Steve Scalise, the bill would finally eliminate outdated legacy video regulations that rest on an early 1990s snapshot picture of the video market. Among other things, the Next Generation Television Marketplace Act would repeal retrans consent regulations and allow negotiations for carriage of TV broadcast stations to take place in a deregulated and truly free market context.

Perhaps Fred Campbell may agree with me that this would be a good thing and that Rep. Scalise's "NextGenTV" bill represents the proper direction for reform.

The TWC - CBS 'Retrans' Fight: Moving from Short Term Pain to Long Term Consumer Gain

As the dispute between Time Warner Cable and CBS drags on, obviously there is some pain being experienced by TWC's consumers as they are deprived of access to CBS content.

This "pain" is exacerbated by CBS's decision to block access by all Time Warner Cable broadband customers to the video programming available on CBS's Internet site. In a novel twist, this Internet blocking even affects TWC's broadband customers who do not subscribe to TWC's cable programming.

I am not a supporter of the FCC's net neutrality rules. In any event, by their own terms these regulations don't apply to blocking actions by Internet content providers such as CBS, only to the broadband Internet providers. Do not misunderstand. I am not suggesting any regulatory remedy here for CBS's blocking action. Aside from anything else, I believe that CBS – just like the broadband providers themselves – has a First Amendment right to grant or not grant access to its content. Nevertheless, if nothing else, CBS's action does illustrate the radical transformation the communications marketplace has undergone since Congress adopted the "must carry-retransmission regime" in the Cable Television Act of 1992.

Indeed, such a radical transformation that the Internet, as we know it today, was just a gleam in Al Gore's eye in 1992, along with a few other far-sighted technologically-savvy cognoscenti. Of course, today, as the FCC itself just recognized in its Fifteenth Video Competition Report, online ("over-the-top") Internet video is becoming increasingly prevalent, and, hence, an increasingly potent source of competition across the video marketplace. For lots of facts and figures concerning competition in the video marketplace, see the blog, "FCC Report Reconfirms the Reality of Video Market's Competitiveness," by Seth Cooper, my FSF colleague.

I can actually remember much of the debate surrounding adoption of the 1992 Cable Act. As anyone else who was around then knows, or who simply researches the legislative history, the principal justification for the must carry-retransmission regime (the two were linked together) was the presumed need at the time to protect local broadcasters and the local broadcast signal. Indeed, even a cursory reading of the Supreme Court's 5-4 decision in Turner Broadcasting System v. FCC will show that, but for the Court's acceptance of the argument that Congress intended to protect the signals of local broadcast stations from what the Court then called cable's "bottleneck" power, the must carry regime would have been declared inconsistent with Turner's First Amendment rights.

With the principal justification for the must carry-retransmission regime the protection of the viability of local broadcast stations, it is somewhat odd that the current TWC-CBS "retrans" battle, along with other present-day similar ones, reportedly turns on disputes regarding the terms of carriage of non-local broadcast station programming, such as various cable TV networks, along with increasingly important digital distribution rights. I submit that the negotiations going on now could not have been imagined by the framers of the 1992 Cable Act.

My point here – and I have been consistent on this point throughout – is not to argue in favor of some regulatory "fix" or the other that tweaks the current regime to favor one party or the other. At the outset I spoke of the (hopefully) short-term "pain" being experienced by current TWC subscribers deprived of their CBS programming. But hopefully out of this experience, and similar "retrans" fights, there will be a long-term "gain" for consumers. This gain would come in the form of a realization that, in today's digital broadband Internet environment, with a competitive video marketplace, it is time to get rid of all the decades-old legacy video regulations that were put in place in an analog era when consumer choice was limited in a way not imaginable today.

Deregulation of the video marketplace, along the lines of the DeMint-Scalise "Next Generation Television Marketplace Act" introduced in the last Congress, is the ultimate solution to ensuring that consumer welfare is enhanced by negotiations between programming suppliers and program distributors in a truly free marketplace. With all the legacy regulatory backstops in place, what we're witnessing now is not what I'd call a free market negotiation.

For further reading on this point, see my July 25 blog immediately below, with still more links embedded therein for even further readings.

*   *   *

Thursday, July 25, 2013

The CBS - TWC Dispute: Don't Be Fooled by Free Market "Negotiation" Claims

Today I have been reading bits and pieces about the "retrans dispute" between CBS and Time Warner Cable. These retransmission disputes have a way of turning nasty and leaving pay TV viewers -- such as Time Warner Cable's subscribers in this instance -- in the dark. 

And by "in the dark" I mean the pay TV subscribers are threatened with the loss of programming on their local TV station, or actually lose it, and they generally are in the dark as to what's behind the dispute.

Here's a good post on the Madery Ridge website that is useful in explaining what's behind the dispute. I don't mean to endorse every assertion and interpretation contained in the post, but it does shed light on the problematic nature of CBS's claims -- and the claims that are often made by the broadcast television networks in these retransmission disputes.

Even in the face of sharply rising retransmission fees paid to broadcasters by pay TV providers, I certainly don't want to presume to judge what the right "negotiated" price should be to resolve the TWC - CBS dispute -- in other words, how much TWC must pay to continue to carry CBS's broadcast programming. But, as I have said many times in the context of discussing similar retransmission disputes, please don't assume that what is taking place in LA is a "free market" negotiation as the broadcasters often claim. The broadcasters retain many legacy regulatory privileges -- adopted decades ago in a much different video marketplace environment -- that provide an overlay to the negotiations. These legacy regulations prevent the bargaining from being characterized as truly free market. That's why "negotiated" above is placed in quotes.

And the fact that broadcasters have obtained their spectrum for free is no small matter. In fact, it's a big deal in a world in which only 10% of American households still obtain their television programming free "over-the-air."

Along with other FSF scholars, I have written several pieces explaining why the "retrans negotiations" are not truly free market negotiations. If you need a refresher on this important point as you try to figure out the current TWC - CBS brouhaha, see here, here, and here.

  

Posted by Randolph J. May at 7:45 PM, July 25, 2013

The CBS - TWC Dispute: Don't Be Fooled by Free Market "Negotiation" Claims

Today I have been reading bits and pieces about the "retrans dispute" between CBS and Time Warner Cable. These retransmission disputes have a way of turning nasty and leaving pay TV viewers -- such as Time Warner Cable's subscribers in this instance -- in the dark.

And by "in the dark" I mean the pay TV subscribers are threatened with the loss of programming on their local TV station, or actually lose it, and they generally are in the dark as to what's behind the dispute.

Here's a good post on the Madery Ridge website that is useful in explaining what's behind the dispute. I don't mean to endorse every assertion and interpretation contained in the post, but it does shed light on the problematic nature of CBS's claims -- and the claims that are often made by the broadcast television networks in these retransmission disputes.

Even in the face of sharply rising retransmission fees paid to broadcasters by pay TV providers, I certainly don't want to presume to judge what the right "negotiated" price should be to resolve the TWC - CBS dispute -- in other words, how much TWC must pay to continue to carry CBS's broadcast programming. But, as I have said many times in the context of discussing similar retransmission disputes,  please don't assume that what is taking place in LA is a "free market" negotiation as the broadcasters often claim. The broadcasters retain many legacy regulatory privileges -- adopted decades ago in a much different video marketplace environment -- that provide an overlay to the negotiations. These legacy regulations prevent the bargaining from being characterized as truly free market. That's why "negotiated" above is placed in quotes.

And the fact that broadcasters have obtained their spectrum for free is no small matter. In fact, it's a big deal in a world in which only 10% of American households still obtain their television programming free "over-the-air."

Along with other FSF scholars, I have written several pieces explaining why the "retrans negotiations" are not truly free market negotiations. If you need a refresher on this important point as you try to figure out the current TWC - CBS brouhaha, see here, here, and here.

  

Unshackle Copyrighted Video and Music Content from Compulsory Licensing

Suppose you wanted to employ your creative talents through modern media art by making a video or composing music. As a creator, how would you like it if the government compelled you to make your copyrighted work available to others at prices set by the government? For some copyright holders, such a scenario is an all-too-real experience.

The ongoing dispute in WPIX v. ivi exhibits the problematic nature of current copyright policy's compulsory licensing and royalty fee scheme for retransmitting video. On March 18, the U.S. Supreme Court declined to review a federal appeals court's ruling that ivi's Internet-based streaming service is a "cable system" under the Copyright Act. As a result, ivi cannot invoke Section 111's compulsory licensing rights to retransmit copyrighted TV broadcasting content. Instead, ivi must negotiate for retransmission rights.

Aside from the merits of the Second Circuit's interpretation of Section 111, this dispute over definitions and their regulatory consequences is a reminder of current copyright policy's problematic forced access and price controls. These provisions are applied selectively depending on the underlying transmission service. Selectively-applied compulsory licensing and royalty rate standards are also imposed on copyrighted music. Market-based reforms to copyright policies for video and music should be a component of broader reforms to communications policy that are needed to comport with the realities of the digital age.

Compulsory licensing and government rate-setting for both video and music content need to be part of the public policy conversation concerning digital age reform. Either right away or in steps, public policy for copyrighted video and music content should be realigned more closely with rule of law and free market principles. Policy reform should ultimately seek to foster a truly free market in which video and music copyright holders can freely negotiate with potential licensees for retransmission or public performance rights. And those negotiations should take place under a system of impartial laws.

From a copyright standpoint, the question of whether ivi meets the definition of a "cable system" is a big deal. Significant market and financial consequences follow, depending on the answer. A "cable system" has a statute-based right to retransmit copyrighted live TV broadcast programming according to Copyright Act § 111’s compulsory licensing provision. In exchange for retransmission rights, a cable system is then obligated to pay copyright holders royalty rates set by the Copyright Royalty Board.

The Second Circuit's ruling means ivi cannot invoke statutory compulsory licensing rights to retransmit copyrighted TV broadcasting content live via the Internet. Nor can ivi claim compulsory licensing rights as an affirmative defense to copyright infringement claims by WPIX or other copyright holders. Should ivi seek to retransmit copyrighted live TV broadcast content, it must bargain at arm's length with copyright holders for licensing rights.

It's no wonder that services like ivi prefer the benefits of Section 111's compulsory licensing and royalty fee payment scheme as opposed to negotiating directly for retransmission rights in a free market. Forced access and government price controls typically present terms more favorable to potential copyright users than copyright holders. It is equally evident why copyright holding TV broadcasters would seek to avoid losing control over their content. Internet streaming services may fragment and reduce their TV viewing audiences, undermining their bargaining position with advertisers.

As a matter of principle, compulsory licensing and government rate-making run counter to a free market. Compulsory licenses are a forced access mandate that undermine copyright holders' control over their own work. Royalty fee schedules or rate standards established by statute constitute government price controls on exchange. What's more, compulsory licensing is typically administered in arbitrary ways. Different types of media services and platforms are treated differently, depending on their respective transmission technologies or business models.

I drove these points home with respect to current copyright policy for music content in my FSF Perspectives paper "Putting Music Copyright Policy on a Free Market Footing." When it comes to copyrighted music content, copyright holders who fail to negotiate terms with such media service providers must instead accept public performance royalty fees set by statutory formulas and applied by the Copyright Royalty Board. And different royalty rate standards apply to the same copyrighted music content, depending on the type of media service or platform involved. Music content royalty rate standards for cable and satellite services are subject to the § 801(b) standard, which by its terms seeks to "minimize any disruptive impact on the structure of the industries involved and on generally prevailing industry practices." Non-interactive subscription-based webcasting is subject to a "willing buyer/willing seller" that at least attempts in theory to replicate genuine market prices. And AM/FM commercial broadcasters enjoy compulsory licensing rights but are not required to pay copyright holders any royalties for over-the-air public performances.

Continuation of current policies, over time, may well undermine the incentives of creators and other copyright holders to produce video or music content. Incentives would also likely be undermined for establishing new service and delivery models and technologies to serve consumers in better ways.

Also bearing significantly on the need for reforming copyright policy for both video and music content is the transformative impact of the Internet. Both types of content are now being distributed through what the Second Circuit described in WPIX v. ivi as "'cloud-based systems,' or virtual platforms where content resides remotely on a distant server." Internet-based alternatives for distributing video and music content to consumers render even more unjustifiable arbitrary forced access mandates accompanied by price controls.

Since compulsory licensing and government-set royalty rates or fees are deeply problematic in principle, efforts to reform copyright policy ultimately should include both video and music content. And because of the transformative impact of the Internet and other digital communications platforms, copyright policy reforms for video and music should take place within the broader context of necessary reforms to communications policy, all of which should be guided by the same set of free market principles.

In the case of video copyright policy, there is a complex but especially close connection to communications policy. Cable and DBS providers must contend with an added layer of regulatory burdens imposed by the must-carry and retransmission consent regime. Those regulations are based on the Communications Act and enforced by the FCC. "Must-carry" regulations give local TV broadcast networks – who are not necessarily the copyright holders for programming content – the ability to require cable systems or direct broadcast satellite (DBS) providers to carry their programming on a basic tier channel. Alternatively, TV broadcasters can invoke statute-based retransmission consent rights, requiring cable or DBS providers to negotiate with certain local TV broadcasters. But other FCC rules – such as network non-duplication and syndication exclusivity rules – restrict the ability of cable and DBS providers to negotiate for retransmission of signals from non-local TV broadcasters.

I have previously called into question the problematic forced access implications of must-carry in previous blog posts. FSF President Randolph May has criticized the unduly restricted context for FCC-enforced retransmission consent negotiations in respective FSF Perspectives papers and blogs. And FSF Board of Academic Advisors member Bruce Owen has likewise written about the "The FCC and the Unfree Market for TV Program Rights."

In short, Copyright Act-related restrictions on video retransmission and Communications Act-related restrictions on video transmission should be reformed in accordance with fundamental free market principles that better reflect the realities of the broadband Internet age. Efforts to unshackle music content from compulsory licensing and rate-making previsions should also be considered with the same market principles in mind.

Eliminating compulsory licenses and rate-making is critical to restoring a free market environment that fosters creative new ideas in content, business models, and technology. And fostering a vibrant free market for copyrighted video and music content should be a critical element in overall digital era communications policy reform.  

New Competition, Old Rules, and the Unfree Marketplace

The Senate Committee on Commerce, Science, and Transportation will hold a hearing July 24 titled “The Cable Act at 20.” According to the press notice, "the Committee will consider the impact of the Cable Television and Consumer Protection Act of 1992 on the television marketplace and consumers twenty years after its passage."

This is all well and good. Hearings are fine.

But if you want to know how much the video marketplace has changed since the Cable Act was enacted 20 years ago, you could just take a walk with me around my neighborhood. You would see both DirecTV and Dish satellite antennas perched on many rooftops, and, on almost any day, there is a good chance you would see either, or both, Comcast or Verizon FiOS trucks as well. Both FiOS and high-speed cable services are available, and I know neighbors that have switched back and forth. And, of course, if you were invited inside a home or two, or sat down at the neighborhood Starbucks, you might catch a glimpse of the latest TV episodes online on all the iPads or other tablets, and even on what we use to call "cell phones." Or you might see Starbucksters streaming videos from the gazillions available on YouTube and other online sites.

If you prefer not to take a stroll in my neighborhood, you can review the FCC's Fourteenth Video Competition Report, just released this past Friday. I have only had a chance to read the executive summary and introduction at this point, but this much is clear. The report documents that marketplace has changed radically since the Cable Act was adopted in 1992. Then, the focus was on preventing cable operators from abusing what was seen as their dominant market power in what we call the multi-channel video programming distribution ("MVPD") market.

Whereas in 1992, the cable operator often was the only MVPD choice a consumer had available, the FCC reports that, at the end of 2010, 65.7% of American homes had access to three MVPDs, and 32.8% had access to at least four different MVPDs. In other words, over 98% of American homes had access to at least three or more MVPDs, each offering hundreds of channels.

Simply put, this is a far cry from the marketplace environment that existed when the Cable Act was adopted 20 years ago.

I'm sure the hearing will feature much back-and-forth regarding the must carry/retransmission consent regime which was an important element of the 1992 Cable Act, probably with rhetoric from both broadcasters and MVPDs concerning who is to blame for certain recent blackouts during which consumers were denied access to certain programs.

I don't want to rehash here my own views on this subject, except to say this: I find the broadcasters' oft-repeated claim that retransmission consent negotiations take place in a "free marketplace," or that these are "free market" negotiations, highly problematic. The truth is the negotiations take place in a context with a decades-old regulatory overlay that obviously impacts the bargaining that otherwise would take place in a truly free market.

In advance of tomorrow's hearing, I am happy to refer you to a blog, "A Truly Free Market TV Marketplace," I published in March of this year which I have pasted in below. And the blog has a link to a still earlier Perspectives piece, "Broadcast Retransmission Negotiations and Free Markets," I published in October 2010.

In closing, two closely related points worth emphasizing: I am not suggesting that more FCC regulation is needed to remedy whatever problems may exist with respect to the present must carry/retransmission consent regime. Quite the contrary. What is needed, as explained below, is for Congress to adopt legislation along the lines of the  the deregulatory "Next Generation Television Marketplace Act" introduced in the Senate by Sen. Jim DeMint and in the House of Representatives by Rep. Steve Scalise.

The DeMint/Scalise bill woud get rid of all the protectionist video regulations enacted during a now bygone era. Whatever consumer protection justification these regulations may have had when adopted no longer exists. Indeed, consumers would be far better served by allowing the now demonstrably competitive video marketplace to function without government intervention.


This is the direction that ought to be the focus of the Congress. 

Friday, March 30, 2012

A Truly Free Market TV Marketplace

The American Conservative Union is perfectly free, of course, to take whatever public policy positions it wishes to take. But it should not feel free to suggest a marketplace is free when, in fact, it is heavily regulated. That is what the ACU has done in a letter opposing the deregulatory "Next Generation Television Marketplace Act" introduced in the Senate by Sen. Jim DeMint and in the House of Representatives by Rep. Steve Scalise.

As I said in a blog shortly after its introduction, the Next Generation Act would "eliminate the obsolete regulatory regime in which the government requires that multichannel video operators 'must carry' certain kinds of channels with particular kinds of program content, restricts the number and kinds of media outlets that may be commonly owned, and establishes a compulsory license regarding retransmission of certain kinds programming by cable operators, all the while offending free market and free speech principles."

Indeed, the DeMint-Scalise bill, premised on the fact that the video marketplace now is indisputably competitive, is so consistent with free market principles that the blog in which I singled it out for special mention was lovingly entitled: "Hayek, Liberty, and the Communications Policy Reform Agenda."

The ACU objects to the fact that the Next Generation Act would eliminate the "retransmission consent" regime in which cable companies and broadcasters negotiate over the right of the pay-TV providers to use the local broadcaster's signal – assuming the broadcaster has not exercised its statutory "must carry" right to elect to have the cable operator carry its signal without compensation. It is true that there is an element of a market negotiation in the current retransmission consent regime, which is why, I suppose, that the ACU calls it a "marketplace." But in light of all the various legacy laws and regulations that together overlay the video marketplace – must carry, network non-duplication and syndicated exclusivity, compulsory licensing, and others -- the retransmission regime operates in the overall context of an "unfree" market.

I explained all this back in October 2010 in a Perspectives piece entitled, "Broadcast Retransmission Negotiations and Free Markets," and the Mercatus Center's Adam Thierer also did a very nice job of doing so in his blog posted yesterday.

One statement in the ACU letter bears particular mention because it gets to the heart of the matter. The ACU says, "[b]y stripping away the right to compensation for the use of the signal the government would be tipping the scales heavily to the side of the pay-tv companies." This is not true, of course. If the Next Generation Act were to be adopted, all of the legacy – and, now, hopelessly outdated – regulations, including the compulsory license that benefits cable companies, would be eliminated. Broadcasters and pay-TV providers then would negotiate for carriage rights in a true free marketplace. Broadcasters would, of course, continue to be paid for carriage of their signals – unless they choose to withhold the carriage rights because they don't like the amount of compensation offered.

In my October 2010 Perspectives piece I said this:

"At the Free State Foundation, we aspire to play second-fiddle to no one in favoring unfettered bargaining between private parties in a true competitive, free market context. Private bargaining, in which the parties know their own interests, and can contract freely to place a market value on their interests, benefits consumers more than a regime in which government substitutes its judgment for that of the private parties and handicaps the negotiations. But, at FSF, we know a free market when we see one. And under the existing legal and regulatory regime, retransmission consent negotiations simply don't take place in a free market setting."

Because I know a free market when I see one, I commend Senator DeMint and Rep. Scalise for introducing the "Next Generation Television Marketplace Act." The bill certainly represents the direction in which policy needs to go.

A Truly Free Market TV Marketplace - Part II

On March 30, I published a blog entitled "A Truly Free Market TV Marketplace." The piece essentially made two fundamental points in response to a letter from the American Conservative Union asserting that the current retransmission regime represents a "functioning market" for bargaining over the rights for carriage of video programming.

First, I said: "[I]n light of all the various legacy laws and regulations that together overlay the video marketplace – must carry, network non-duplication and syndicated exclusivity, compulsory licensing, and others -- the retransmission regime operates in the overall context of an 'unfree' market."

And the second point I made was this: "Because I know a free market when I see one, I commend Senator DeMint and Rep. Scalise for introducing the 'Next Generation Television Marketplace Act.' The bill certainly represents the direction in which policy needs to go."

A few days ago, the Competitive Enterprise Institute's Ryan Radia published a long and thoughtful blog entitled "A Free Market Defense of Retransmission Consent." In it, Ryan responds to my piece and to a similar one by my friend, Adam Thierer. Adam's essay is entitled "Towards a True Free Market in Television."

I don't want to repeat here, on a Friday afternoon no less, all the substance of the three pieces. If you haven't read them, and if you are interested in the debate about the current retransmission consent regime and the issues surrounding the "Next Generation Television Marketplace Act" bill introduced by Sen. DeMint and Rep. Scalise, you should read the pieces as background for what follows.

Here I want to respond to Ryan's post by making just a few points. They show that, in reality, he essentially agrees with much of what I say (and Adam Thierer as well.)

Before addressing the substantive points, it would be an exhibition of false modesty if I didn't acknowledge that I appreciate Ryan calling my piece "superb" and calling me "venerable." And, best of all, a "free market policy icon." Thanks, Ryan, for the kind words.

So, on to the two essential points.

Ryan states that he wholeheartedly agrees with me "that ACU’s characterization of the current regime as a 'functioning market' is inaccurate." This is a very fundamental point to acknowledge in any discussion of the current retransmission regime.

And he agrees with me that "[i]t’s high time for Congress to liberalize the television marketplace to bring it into the 21st century. Sen. DeMint and Rep. Scalise’s bill would, if enacted, mark a major step toward a freer video market." I appreciate acknowledgement of this point as well. Recall I concluded my blog by stating the DeMint-Scalise bill "represents the direction in which policy needs to go." I didn't say the bill was perfect in every respect. Few bills are, at least as introduced.

At bottom, though, Ryan concludes that the bill "could be improved by leaving retransmission consent intact." In between his acknowledgment that the current retransmission consent regime is not a "functioning market" and his acknowledgement that the DeMint-Scalise bill constitutes a "major step" forward, he goes through a lengthy and useful exposition of the major regulatory overlays in today's video marketplace.

The sheer length of the exposition pretty much proves the point concerning the extent to which the current video marketplace is burdened with a real mish-mash of protectionist-inspired legacy regulation which is ill-suited for today's competitive video marketplace. Ryan himself seems to agree that the must carry, network non-duplication, and syndicated exclusivity regulations which confer upon broadcasters certain statutory protectionist privileges should be repealed. And I think he would say the same with respect to the protectionist compulsory license benefitting cable operators.

Out of the current regime, the only regulation that Ryan suggests possibly should remain on the books is retransmission consent, albeit in an altered form so that the FCC's role in supervision and enforcement is eliminated in favor of a judicial private right of action. He recognizes that, for the vast majority of video programming, it is not necessary to preserve retransmission consent in order to ensure program owners are compensated, by virtue of a private bargaining process, by pay-TV providers. Pay-TV providers would have to negotiate for the right to carry copyrighted programming with the rights holders, whether they are local broadcasters, national or regional networks, syndicators, or whomever.

In the end, when you cut through it all, Ryan is concerned that if the DeMint-Scalise bill were adopted as is, local broadcasters "would hold far fewer cards, losing the regulations that benefit them." He acknowledges that the "disintermediation of broadcasters might benefit consumers, especially if it translates into lower fees (and, hence, more content choices and/or lower television bills.") This is no small acknowledgement.

But Ryan worries that deregulation possibly may have a "dark side." Without a statutory retransmission consent requirement in place, pay-TV operators may be able to free ride on whatever "incremental value" local broadcasters provide through certain signal enhancements such as display tickers ("crawlers") with sports scores, school closings, election results, and the like. Ryan focuses on this possible "incremental value" of local broadcasters' signals because he acknowledges that almost all their programming is, in fact, copyrighted. Thus, the vast majority of local broadcasters' programming would be subject to private bargaining between the rights holders and pay-TV providers before it could be carried by pay-TV providers.

Ryan acknowledges that the economic value of the local broadcasters' signal enhancements beyond copyrighted programming (and whatever else is left that is not subject to "fair use") is unknown. He suggests that if the signal enhancements have any incremental economic value at all, pay-TV operators' carriage of such signals without negotiated compensation offends the long-standing common law equitable principle of unjust enrichment, which holds that a person who is unjustly enriched at the expense of another is entitled to restitution.

Now the whole notion that local broadcasters are entitled to compensation for the mere retransmission of their local signals is somewhat questionable in any event, because the signals can be picked up for free by anyone within reception range. Ryan acknowledges this was the law prior to 1992 when Congress created the current must-carry/retransmission statutory regime. I think this is an important point.

But putting this point aside for the moment, my sense is that it likely would be preferable to have in place the deregulated marketplace envisioned by the DeMint-Scalise bill than to retain, as the last standing relic of the current regime, a statutory retransmission consent requirement. If there is any justification for compensation for mere retransmission at all, which I don't concede, perhaps it would be preferable to leave the matter of compensation for a pay-TV operator's carriage of a local signal to the courts under the common law theories of unjust enrichment. I doubt if the "incremental value" derived from crawlers and such would amount to much enrichment in the real world marketplace.   

Ryan's contribution to the debate is welcome. To my mind, his acknowledgement that the current retransmission consent regime does not constitute a functioning market and his acknowledgement that the DeMint-Scalise bill represents a major step forward are both significant and important. As I head into the weekend, I am happy to emphasize those key elements of agreement, rather than exaggerate the differences that exist.

Video Competition Should Lead FCC to End Old Regulation

The FCC's preparations are underway for its forthcoming Video Competition Report. The Commission confesses its information and outlook toward the video marketplace is outdated. So for what will be its 14th report analyzing the state of video competition, the Commission has issued a notice seeking information about much of the abundant variety of content, aggregation, and delivery services that characterize today's innovative video market.

Although cable video services are primarily governed by the Cable Act of 1992, the video market landscape of 2011 is fundamentally different. That changing landscape has upended many assumptions behind the 1992 Act as well as other regulations dating back to the 1990s or earlier. Direct broadcast satellite (DBS) video services are subject to antiquated regulations as well. And the more the Commission's forthcoming report recognizes the abundance of choices in today's vibrant video market – which it already does either explicitly or implicitly – the less plausible the Commission renders any continuation of old regulation based on an increasingly arcane snapshot of yesteryear's market.

In seeking an up-to-date look at video competition the Commission should use its report as the occasion to promptly begin eliminating out-of-date regulation that now hinders further innovation and competition. And, to the extent that congressional action is required to accomplish this, the Commission should recommend such deregulatory action to Congress.

The very fact that the Commission is calling for comment and information on how new forms of video content, aggregation, and delivery are impacting and providing substitutes for (multi-channel video programming distributor) MVPD services should be revealing. Implicit in the Commission's line of inquiry is the realization that the days of perceived cable monopoly are over. Although the FCC has frequently admitted that market share alone does not equate to monopoly, the chart below showing franchised cable companies' market share of MVPD subscribers conveys some sense of where the market was in the mid-1990s.

In the years immediately following, consumers in areas once served by only one incumbent cable provider began enjoying additional choices. As the next chart shows, by 2001, the competitive potential of two national direct broadcast satellite (DBS) service providers had begun to materialize.

More recently, telco providers have entered into the MVPD business with competing services. Although at this point AT&T and Verizon claim only a small percentage of MVPD subscribers compared to cable and DBS companies, such telco providers still claim approximately 6.5 million MVPD subscribers. Meanwhile, DBS has continued to make further incursions into cable companies' market share throughout the last decade.

In large part, such dramatic changes in the video marketplace prompted the U.S. Court of Appeals for the District of Columbia Circuit to declare in Comcast v. FCC (2009) that the cable bottleneck no longer exists. These changes are reflected in the final chart below based on numbers cited in the FCC's recent notice.

This last chart does not take into account other types of video services that were factored into the prior two charts, such as satellite master antenna (SMATV). More significantly, broadband-delivered video services are not factored in this market share snapshot, even though the presence of potential competition offered by broadband is now too serious to ignore.

Broadband services now provide an additional source of delivery for video programming. Consumers today obtain video content through online services such as iTunes, Netflix's subscription service, and Amazon. Hulu and a number of individual broadcast and cable TV programmer websites offer streaming content to consumers for free by using ad-supported models.

In addition, consumers have a growing variety of choices for devices to use for receiving video programming. An increasing number of "smart TVs" being brought to market, for instance, are capable of downloading video content directly from the Internet. Roku, Boxee, and Apple TV also offer content delivery services through their respective new devices. Broadband-connected video game consoles such as Sony PlayStation 3 and Xbox 360 are also increasingly popular devices for obtaining video programming. Just last week, in fact, Xbox began offering additional video content through a new Hulu Plus application. Not to be forgotten, new broadband-enabled tablet devices and smartphones are giving video consumers mobility options.

By taking into account a broader view of this rapidly changing, dynamic market, the Commission's forthcoming video competition report should be the occasion – now long overdue – for reducing regulation of cable and DBS services premised on an old, static picture of the market. A broadened perspective on video competition and substitutes should mean that outdated regulation of cable and DBS services – such as cable must-carry/retransmission consent regulation or its CableCARD regulation for cable set-top boxes – should be prime candidates for elimination. Both types of regulation are premised on an antiquated monopolistic mindset toward cable video.

It was expressly on a monopolistic premise, in fact, that must-carry regulation barely survived First Amendment challenge in a pair of 5-4 U.S. Supreme Court rulings from 1994 and 1997. In a market where conditions are competitive, however, must-carry forced-speech mandates are untenable under the First Amendment. And in Section 629 of the Telecom Act of 1996, Congress inserted a special sunset clause regarding set-top box regulation, requiring the Commission to remove regulation when there is "effective competition." The state of today's video market should prompt the Commission to invoke that sunset provision.

Now, with respect to the FCC's recent notice seeking information concerning the video marketplace, when a regulatory agency begins asking questions about successful new products and services it naturally raises worries over whether the agency might actually be seeking new rationales for expanding its regulatory authority rather than opportunities for reducing regulation in light of more competition. Might a broadened Commission inquiry into video mark the beginning of broader new regulation of the dynamic video market? Recent Commission activities – such as its adoption of regulatory conditions regarding online video in the Comcast-NBCU merger as well as its "AllVid" proposal to expand regulation of video navigation devices to all MVPDs – give real plausibility to such worries. (I discuss these in a prior FSF Perspectives paper.) Hopefully, those worries will go unrealized this time.

And, hopefully, in re-examining its old cable and DBS regulations in light of new marketplace conditions, the Commission will act consistent with the President's Executive Order for improving regulation and regulatory review. The President's Order calls on federal agencies to review their regulations to remove barriers that are needlessly hurting businesses and our economy, and to ensure that existing regulations "promot[e] economic growth, innovation, competitiveness, and job creation … [and] use the best, most innovative, and least burdensome tools for achieving regulatory ends." In February, Chairman Julius Genachowski stated he "expect[s] the FCC to perform its responsibilities consistent with the principles in the executive order."

The Commission's report should provide us with a fresh set of numbers about competitive conditions regarding several aspects of today's dynamic video market. And the report will give the Commission the perfect opportunity to finally face up to what common sense observation of today's video market reveals: rapid innovation and competition prevails, the old cable bottleneck doesn't exist, and outdated regulation of cable and DBS service based on a legacy monopolistic outlook is ill-suited for the current competitive environment. Consistent with the principles in the President's Executive Order, the Commission should use its report to remove old regulatory barriers rather than erect new ones that could stifle further innovation and competition in the video market.