CBIT White Paper: The Future of Broadcast Television

Posted by | June 11, 2014 | Satellite, Video, Wireless | One Comment

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Executive Summary

The migration of consumers from over-the-air television to other video platforms has prompted a debate about the role that television (TV) stations should play in the future communications marketplace. This debate has focused on only two options, each of which is supported by a competing segment of the video marketplace:

  • Broadcasters support maintaining the regulatory status quo; and
  • Multichannel video programming distributors (MVPDs) support maintaining only the unique “public interest” obligations imposed on TV stations by the regulatory status quo while repealing the regulatory provisions that enable TV stations to meet those obligations.

Neither option would harness the power of the free market to determine the future of broadcast television. Though the first option would continue to rely on government intervention to preserve free over-the-air television, the second option would bear even less resemblance to a functioning free market. Repealing only the regulations that enable TV stations to meet their unique public interest obligations would effectively result in the forced abandonment or sale of TV stations at fire-sale prices, thus destroying the legitimate, investment-backed expectations of TV stations through government action. It would be the antithesis of a free market approach.

This paper proposes a free market alternative that could unleash the broadcast industry’s full competitive potential and usher in a new wave of innovation and investment in communications: Enabling TV stations to innovate and compete in the MVPD and wireless broadband market segments through comprehensive, market-based regulatory reform. This alternative would allow TV stations to transition their businesses to a free market approach by eliminating the following anticompetitive regulations:

  • The free television mandate,
  • The broadcast MVPD prohibition,
  • The Federal broadcast tax,
  • Broadcast ownership limits,
  • Broadcast programming restrictions, and
  • Broadcast spectrum limitations.

This pro-competitive approach would enable the elimination of regulations that are necessitated by the government-mandated broadcast business model while respecting the investment-backed expectations of TV station owners. The result would be a truly comprehensive approach to reforming broadcast regulation that would promote competition, investment, and innovation by allowing market forces to determine the future of broadcast television stations.

Introduction

In its previous paper analyzing the video reform debate, the Center for Boundless Innovation in Technology (CBIT) demonstrated that the MVPD proposal for video reform is designed to eliminate local TV stations as a distributor of video programming to the home.[1] Though it did not take a position on the merits of preserving broadcast television, the paper concluded that a “policy change of this magnitude should be debated transparently and comprehensively.”[2] If Congress were to decide that over-the-air television no longer serves the public interest, the paper recommended that it “recognize the legitimate consumer and investment-backed expectations created by the current statutory framework and consider appropriate transition mechanisms.”[3] The paper did not, however, describe an appropriate transition mechanism.

This paper fills that gap by proposing a truly comprehensive, free market alternative for video reform that would allow TV stations to transition their businesses to a free market approach while respecting their investment-backed expectations. This alternative would promote competition, investment, and innovation by allowing market forces to determine the future of broadcast television stations.

Video Reform Debate

“It has long been a basic tenet of national communications policy that the ‘widest possible dissemination of information from diverse and antagonistic sources is essential to the welfare of the public.’”[4]

Policymakers have relied primarily on broadcast television stations to fulfill this basic tenet. The FCC designed its initial broadcast policies for this purpose, and when the development of pay-TV threatened over-the-air television, Congress identified a “specific interest in ‘ensuring [the] continuation’ of ‘the local origination of [broadcast] programming’” and “‘providing a fair, efficient, and equitable distribution of broadcast services.’”[5]

Congress reaffirmed its support for the preservation of free over-the-air TV during the digital television transition (DTV). To ensure that low income consumers who could not afford a digital television set or MVPD service could continue to receive over-the-air TV using analog-only televisions, Congress subsidized the purchase of digital-to-analog converter boxes.[6] When demand for converter boxes exceeded the supply,[7] Congress delayed the DTV transition[8] and increased funding to support the distribution of more than 33.5 million converter boxes.[9]

The Federal Communication Commission (FCC) hailed the completion of the DTV transition as a “win-win for consumers and for the long-term health of the broadcast industry,”[10] but this enthusiasm did not last. Less than a year after the DTV transition ended, the FCC proposed to reallocate 120 MHz of spectrum from the broadcast television band to other wireless services,[11] and MVPDs began pushing for reform of television retransmission consent rights.[12] These actions prompted a new debate about the role that TV stations should play in the future communications marketplace.

Now that broadcasters have succeeded in developing the market for digital, high definition television (HDTV), MVPDs want to eliminate TV stations altogether. If MVPDs could obtain access to broadcast network programming directly, they would have an opportunity to negotiate a share of the available advertising time for prime-time programming. To accomplish this result, MVPDs are seeking the elimination of regulatory provisions that enable and protect affiliation agreements between local TV stations and prime-time broadcast programming networks — e.g., compulsory copyright, retransmission consent, and FCC enforcement of non-duplication and syndication agreements. Though MVPDs claim their proposal to eliminate regulatory provisions that benefit TV stations is a “comprehensive” approach to “free market” video reform, MVPDs have not proposed the elimination of regulatory policies that impede the ability of TV stations to compete in the MVPD market — e.g., free television, localism, and broadcast competition (i.e., stringent broadcast ownership limits).

Television stations rightly fear they would not survive if policymakers adopted the MVPD proposal for video reform. If MVPDs could obtain prime time broadcast programming directly from the national networks, station revenues would be based solely on the programming TV stations produce in-house (primarily local news). Though local programming has commercial value, it is unlikely that it would be adequate to sustain multiple, independent television stations subject to the unique public interest obligations of free television, localism, and broadcast competition policies. Broadcasters thus argue that policymakers should maintain the status quo.

Government-Mandated Business Model for Broadcast Television

Though it has become fashionable to attack broadcasters for a lack of innovation,[13] TV stations are not to blame — the law is. For over sixty years,[14] the law has mandated that TV stations follow a business model requiring that local TV stations compete with one another to provide programming to consumers for free.[15] The nature of the broadcast industry is directly attributable to this requirement, not the business decisions of station owners, most of whom purchased their station rights on the secondary market long after this policy was in place.

Policymakers also bear responsibility for the regulations necessitated by this policy choice (e.g., must carry). As Adam Thierer and Brent Skorup recently noted in a paper television regulation, the policy goals underlying the government-mandated broadcast business model “cannot be accomplished simultaneously without substantial ongoing regulatory interventions.”[16] In the absence of such regulatory intervention, TV stations would be unable to meet the “public interest” demands of the government’s conflicting policy goals.[17]

The primary culprits are the unique public interest policies of free television, localism,[18] and broadcast competition.[19]

The requirement that TV stations transmit at least one channel for free[20] forces stations to rely primarily on advertising revenue.[21] The success of any ad-supported service depends on its ability to attract “consumer eyeballs” through (1) broad distribution (2) of high quality services (3) at low cost.[22]

The ownership limits and localism policies applicable to TV stations are antithetical to the criteria for success of ad-supported services in a free market, especially when broadcasters are subject to competition from MVPDs and online video distributors who do not face similar constraints. These broadcast policies limit (1) the breadth of a station’s distribution, (2) the number of channels the station can offer and the quality of programming it can produce in-house, and (3) its overall economies of scale (which increase its costs relative to unconstrained competitors).[23]

Despite their adverse impact on the over-the-air television industry, localism and competition competition policies did not threaten the survival of TV stations so long as over-the-air television remained the primary option for video entertainment at home. The deployment of cable TV in the 1960s, however, did pose a fundamental threat to the ability of TV stations to generate advertising revenue solely through distribution of their signals over-the-air.[24]

The FCC responded to this market development by doubling down on its initial broadcast policy decisions. Rather than removing broadcast regulations that prevent TV stations from competing directly with MVPDs, the FCC adopted new regulations to counteract the market distortions caused by the government-mandated broadcast business model, e.g., must carry and non-duplication and syndication.[25] Congress subsequently affirmed this approach by adopting compulsory copyright, retransmission consent, and other provisions. These new policies were designed to ensure that local TV stations could continue to attract national network programming and generate advertising revenue in a video market with regional and national subscription-based competitors.

The new regulations had little impact on cable operators while they remained dominant among MVPDs.[26] Just as cable operators once changed the broadcast industry, however, new competitors are changing the MVPD market segment. Effective competition has (1) prompted MVPDs to sell advertising time in competition with TV stations in order to offset lost subscription review and (2) enabled broadcasters to demand monetary compensation for the retransmission of their programming by MVPDs.

Traditional policies intended to preserve the government-mandated broadcast business model impact both developments. The retransmission consent provision prohibits MVPDs from retransmitting commercial broadcast television signals without consent,[27] and the compulsory copyright licenses subject MVPDs to copyright liability if they insert their own ads into broadcast programming streams.[28] These provisions effectively prevent MVPDs from advertising during broadcast programming, because the available advertising time has typically already been split between the broadcasters through their affiliation agreements, and the compulsory copyright license prohibits MVPDs from inserting their own ads without the consent of the individual copyright holders.

This inability to sell advertising for broadcast programming transmitted on their systems is the primary reason MVPDs want to eliminate compulsory copyright, retransmission consent, and non-duplication and syndication provisions.[29]

Pro-Competitive, Free Market Alternative for Video Reform

Though current broadcast regulations undoubtedly create market distortions, eliminating only regulations that are designed to protect the government-mandated broadcast business model would not produce a free market for video distribution — it would “only result in more market distortions.”[30] No proposal for video reform that leaves the government-mandated broadest business model in place could legitimately be considered comprehensive or free market. Truly comprehensive video reform would require the elimination of free television, localism, and broadcast competition policies that have shackled over-the-air television since its inception.

Brief History of Broadcast Regulation

A brief history of broadcast regulation is useful in understanding the adverse effects of traditional broadcast policies on competition, investment, and innovation in the television industry.

Like most new communications services, radio broadcasting was not subject to regulatory oversight initially. In the unregulated era of radio, the business model for over-the-air broadcasting was “still very much an open question.”[31] Various methods for financing radio stations were proposed or attempted, including taxes on the sale of devices, private endowments, municipal or state financing, public donations, and subscriptions.[32] “We are today so accustomed to the dominant role of the advertiser in broadcasting that we tend to forget that, initially, the idea of advertising on the air was not even contemplated and met with widespread indignation when it was first tried.”[33]

By the time Congress adopted the Communications Act of 1934, ad-supported radio broadcasting had become commonplace. Congress nevertheless provided the FCC with broad authority to authorize either ad-supported or subscription television services over-the-air.[34] Section 303 authorizes the FCC to “classify radio stations”[35] and “prescribe the nature of the service to be rendered by each class of licensed stations an each station within any class.”[36] The U.S. Court of Appeals for the District of Columbia Circuit has held that this provision was “designed to foster diversity in the financial organization and modus operandi of broadcasting stations as well as in the content of programs,” and that “subscription television is entirely consistent with these goals.”[37]

Despite its broad statutory authority, the FCC waited sixteen years to act on a 1952 petition requesting that the agency permit subscription television (STV) service.[38] When the FCC finally did authorize STV services in 1968, it imposed extraordinarily strict limits on them: The FCC would authorize an STV station only in markets with five or more commercial broadcast stations and would authorize only one STV station per market.[39] These limitations effectively guaranteed that STV would not become widespread in the video distribution market or become a viable competitor with MVPD services.[40]

The digital television (DTV) transition required policymakers to reevaluate the analog-era’s broadcast policies.[41] The DTV standard permits a single TV station to deliver one high definition program or multiple standard definition programs using a single licensed channel, which could have enabled TV stations to provide STV services in competition with MVPDs (who primarily offered standard definition analog channels at the time).[42]

Congress responded to this possibility by adopting a new statutory provision that limits the flexible use of broadcast television spectrum[43] and preserves broadcasters’ unique public interest obligations in the digital era.[44] The FCC implemented this provision by requiring that TV stations “transmit at least one video program signal at no direct charge to viewers,” but did not require that this signal be broadcast in high definition.[45]

When broadcasters proposed competing with MVPDs by offering multiple standard definition channels on a subscription basis,[46] Congress demanded that each TV station provide a single high definition channel without charge. At a Senate Commerce Committee hearing addressing the broadcasters’ MVPD proposal,[47] FCC Chairman Reed Hundt testified that the agency had intended to allow the market to dictate “how best to use the [broadcast] spectrum”, and that this approach was “in every material aspect . . . a significant change from earlier policies.”[48] He urged Congress to “resist the impulse to micromanage the use of the DTV spectrum, and instead permit the marketplace to be the judge.”[49]

Congress did not heed this recommendation. Leading members of Congress instead “threaten[ed] retribution against broadcasters” who dared to compete with MVPDs.[50] Representative W. J. (Billy) Tauzin, who chaired the House telecommunications subcommittee, vowed, “There will be a quid pro quo” for broadcasters who choose to offer STV services with multiple channels.[51]

Broadcasters responded to Congressional pressure by abandoning their plans to compete with MVPDs and instead focusing on the unproven market for HDTV.[52]

Justification for Unique Broadcast “Public Interest” Obligations

Congress insisted on the preservation of the government-mandated broadcast business model in the digital era even though policymakers had long since abandoned its original justification.

In his seminal 1938 work, Radio Law, Senator Clarence Dill, who played key roles in the drafting of the Radio Act of 1927 and the Communications Act of 1934, described the original justification for imposing unique public interest obligations on broadcasters as follows:

The requirement of serving the ‘public interest’ has been applied to the radio largely because the grant of the privilege of using a certain frequency for a certain length of time is such a great gift to confer upon a licensee. This is especially true of broadcasters. . . . The number of broadcast frequencies is so limited in comparison to the number of those who desire to erect broadcasting stations, that the Commission is justified in applying the test most rigidly to applicants for broadcast facilities.[53]

In today’s competitive communications market, neither the fact that spectrum licenses were once issued for free nor that spectrum is a scarce resource provide a legitimate justification for treating over-the-air television stations differently from MVPDs or other spectrum licensees.

First, prior to the early 1990s, all spectrum licenses were granted for free. Both cable and satellite MVPDs received spectrum licenses for free, and mobile spectrum that can be used to provide one-to-many video services was initially granted for free as well. Yet the FCC does not impose free television, localism, and stringent ownership limits on the holders of such spectrum.

Second, continuing to impose unique public interest requirements on broadcasters would not prevent companies who were granted free TV station licenses from receiving a “windfall”. As Jeffrey A. Eisenach demonstrated in a recent paper, the vast majority of TV station licensees (92% of full power stations) have paid for their licenses on the secondary market.[54] He estimates that these broadcast licensees paid, in net present value terms, approximately $50 billion to purchase their stations.[55] The initial licensees of the sold stations have thus exited the market already.

Third, there is nothing intrinsic in the particular frequencies used by broadcasters that justifies their discriminatory treatment. Mobile services use spectrum in the 700 MHz and 2.5 GHz bands that was once allocated to broadcast television, but the FCC does not treat licensees in those bands like television broadcasters.[56]

Fourth, spectrum licenses for broadcast TV stations are subject to competitive bidding at auction[57] whereas satellite television licenses are not.[58] Indeed, it is easier to obtain a satellite television license today than it ever was to obtain a broadcast television license. Before the FCC received auction authority, broadcast licenses were subject to the “time consuming and resource intensive” comparative hearing process.[59] Satellite television licenses are granted for free on a first-come, first-served basis.[60] These facts indicate that, if either service should be subject to unique public interest obligations on the basis of spectrum policy, it should be satellite television.

Fifth, although TV stations were loaned an extra channel at no charge in order to facilitate digital simulcasting during the DTV transition, those channels were returned to the FCC and auctioned for approximately $19 billion in 2008.[61] There is no reason to hold TV stations accountable for a temporary loan — or any other outdated spectrum decision — in perpetuity.

Sixth, even if there were, the DTV spectrum loan was not free. Though TV stations did not pay monetary lease fees for the loaned spectrum, they nevertheless paid a heavy price. In exchange for the use of additional channels, TV stations were required to invest substantial sums in HDTV technology and broadcast signals in that format long before it was profitable. The FCC required “rapid construction of digital facilities by network-affiliated stations in the top markets, in order to expose a significant number of households, as early as possible, to the benefits of DTV.”[62] TV stations were thus forced to “bear the risks of introducing digital television” for the benefit of consumers, television manufacturers, MVPDs, and other digital media.[63]

It is likely not a coincidence that the FCC and MVPDs waited to start debates about the future of broadcast television until shortly after broadcasters had finished proving the consumer marketability of HDTV technology. The FCC did not impose comparable “loss leader” requirements on MVPDs, who remain free to continue providing analog services indefinitely. According to the FCC’s most recent media competition report, “At the end of 2012, the all-digital transition had reached slightly more than half of the collective footprints of the top eight cable MVPDs.”[64] The FCC noted that, although Comcast and Cablevision have moved aggressively to transition to all digital, Charter, Cox, Bright House, and Time Warner Cable “are moving more slowly.”[65] By comparison, the DTV transition was fully completed in mid-2009.

Seventh, broadcast spectrum is no more scarce than spectrum allocated for other wireless services.[66] Since the late 1990s, Congressional policy has been to reallocate TV channels to meet increasing demand for mobile spectrum:

  • TV channels 52-69 were reallocated for mobile use in the 2000s,[67] and
  • The FCC plans to hold an incentive auction next year to reallocate up to 20 more TV channels for fixed, mobile, and unlicensed services.[68]

These decisions indicate that policymakers no longer believe TV spectrum is particularly scarce.

Finally, Congressional passage of broadcast incentive auction legislation[69] confirms that the means by which a spectrum license is granted initially does not dictate its future disposition. If TV stations were somehow less deserving of market-oriented regulation than wireless licensees who purchased spectrum rights at auction, Congress would have had no reason to require the FCC to compensate TV stations for voluntarily relinquishing their licenses.

In short, there is no satisfactory rationale for using the initial grant of broadcast licenses by comparative hearing to justify the government-mandated broadcast business model. The applicability of such an intrusive policy should not turn on whether a regulated entity has made a direct monetary contribution to the U.S. Treasury — such policies should be justified on their own merits.

Anticompetitive Broadcast Regulations

TV stations nevertheless remain subject to a government-mandated business model that prevents them from competing in the MVPD and wireless broadband market segments. This government-mandated model is the aggregate result of numerous statutory provisions and FCC regulations that are intended to preserve free television, localism, and broadcast competition policies, including:

  • the free television mandate,
  • the broadcast MVPD prohibition,
  • the Federal broadcast tax,
  • broadcast ownership limits,
  • broadcast programming restrictions, and
  • broadcast spectrum limitations.

Transitioning TV stations to a free market approach would require the elimination of these regulations as well as the regulations necessitated by the government-mandated broadcast business model.

Free Television Mandate

The requirement that TV stations transmit at least one free signal is the core public interest provision in the government-mandated broadcast business model. This requirement reflects a longstanding, bi-partisan consensus that all consumers should have access to at least some high-quality video programming without charge. As a result, Section 73.624(b) of the FCC’s rules provides that each broadcast television stationmust transmit at least one over-the-air video program signal at no direct charge to viewers” irrespective of market demand.[70] The fact that this requirement bears no direct relationship to market demand for the reception of over-the-air broadcast signals is in large part why TV stations require must carry and other regulatory interventions.

Broadcast MVPD Prohibition

Provided they are in compliance with the free television mandate, DTV stations are permitted to offer additional ancillary or supplementary (AOS) services.[71] The Communications Act requires that AOS services be subject to FCC regulations applicable to analogous services, except that AOS services cannot be deemed MVPD services for the purpose of accessing affiliated cable network programming and have no must carry rights.[72] This exception prevents broadcasters from invoking the program access rules, which puts TV stations at a severe disadvantage during negotiations for cable network programming. In comparison, satellite television operators and other recent entrants in the MVPD market segment have been able to rely on the program access rules to provide competitive program offerings.

Federal Broadcast Tax

Congress imposed a federal tax on any AOS services (1) for which a subscription fee is required or (2) for which the licensee receives any compensation for transmission of material other than commercial advertisements used to support free over-the-air broadcasting.[73] This tax is designed to “recover for the public an amount that, to the extent feasible, equals but does not exceed (over the term of the license) the amount that would have been recovered” if the spectrum used for AOS services had been auctioned.[74] The FCC set the amount of the tax at five percent (5%) of gross revenues generated by AOS services, including any revenue they derive from retransmission consent fees attributable to ancillary or supplementary services.[75]

The continued application of this tax only to broadcast TV stations is anticompetitive. The tax was imposed by Section 201 of the Telecommunications Act of 1996,[76] less than a year after the FCC decided to subject satellite television licenses to competitive bidding at auction.[77] Congress exempted international satellite spectrum from competitive bidding in 2000,[78] however, and the DC Circuit Court of appeals ruled that satellite television licenses are entitled to this auction exemption.[79] In contrast, new TV station licenses are subject to the competitive bidding provisions of the Communications Act.[80]

The result is a complete reversal of the situation Congress intended to address with the Federal broadcast tax: TV stations who bid for mutually exclusive spectrum licenses at auction must nevertheless pay the 5% tax, whereas satellite television operators, who are now exempt from competitive bidding at auction, are not subject to the tax.

Broadcast Ownership Limits

The FCC adopted stringent broadcast ownership limits to foster localism and intramodal competition among TV stations when they were the dominant means of distributing video programming to the home.[81] In today’s competitive video market, however, broadcast ownership limits create severe competitive disadvantages by preventing TV stations from (1) aggregating television spectrum to enable the distribution of more programming channels,[82] and (2) realizing efficient economies of scale.

Local Ownership Limit. The local ownership limit generally prohibits a single firm from owning more than one TV station in a single designated market area (DMA) and absolutely prohibits a single firm from owning more than two TV stations in a single DMA.[83] A firm is permitted to own more than one, but not more than two, television stations with overlapping coverage in the same DMA only if:

  1. At least one of the two stations is not ranked among the “top four” stations in terms of audience share; and
  2. At least eight independently owned and operating commercial or noncommercial full-power broadcast television stations would remain in the market after the combination.[84]

In effect, the first part of this rule prevents a single firm from owning two stations that are both affiliated with the four largest broadcast programming networks (ABC, CBS, Fox, and NBC), and the second part prevents ownership of more than one station in smaller markets, which are typically served by fewer than eight stations.[85]

These local ownership limits impose severe limits on a TV station owner’s potential economies of scale in any particular DMA as compared to MVPDs, who are not subject to local ownership limits.

Joint Sales Limit. A joint sales agreement (JSA) authorizes a broker to sell some or all of the advertising time of the brokered station.[86] The FCC recently found that JSAs “involving a significant portion of the brokered station’s advertising time convey the incentive and potential for the broker to influence program selection and station operations.”[87] Based on this finding, the FCC adopted a rule counting “television stations brokered under a same-market television JSA that encompasses more than 15 percent of the weekly advertising time for the brokered station toward the brokering station’s permissible ownership totals.”[88]

This relatively recent ruling by the FCC gives MVPDs, who are not subject to any restriction on JSAs, a substantial competitive advantage over TV stations in the video advertising market. The largest MVPDs are all parties to a single, nationwide joint sales agreement, which allows them to bundle advertising time and share their marketing costs on a nationwide basis.

Dual Network Limit. This rule provides: “A television broadcast station may affiliate with a person or entity that maintains two or more networks of television broadcast stations unless such dual or multiple networks are composed of two or more persons or entities that, on February 8, 1996, were ‘networks’ as defined in Section 73.3613(a)(1) of the Commission’s regulations (that is, ABC, CBS, Fox, and NBC).”[89] The rule thus “permits common ownership of multiple broadcast networks, but prohibits a merger between or among the ‘top four’ networks.”[90]

Cable programming networks are not subject to a merger prohibition.

Newspaper/Broadcast Cross-Ownership Limit. The newspaper/broadcast cross-ownership limit prohibits common ownership of a TV station and a daily newspaper if the television station’s Grade A service contour completely encompasses the newspaper’s city of publication.[91] The FCC had provided for limited waivers of this rule, but the Third Circuit Court of Appeals vacated and remanded the modified rule for procedural reasons.[92]

MVPDs are not subject to limits on newspaper ownership.

Radio/Television Cross-Ownership Limit. The FCC limits the number of commercial radio and television stations a firm is permitted to own in the same market, with the degree of permitted common ownership varying in accordance with the size of the relevant market.

  • A single firm may own up to two television stations and four radio stations in a market, as long as at least 10 independently owned media voices would remain; and
  • A single firm may own (1) up to two television stations and six radio stations, or (2) one television station and seven radio stations, in a market as long as at least 20 independently owned media voices would remain.[93]

MVPDs are not subject to limits on radio station ownership.

National Ownership Limit. The Communications Act prohibits a firm from having a “cognizable interest” in TV stations that have an aggregate national audience reach exceeding thirty-nine percent (39%) (i.e., TV stations with signals reaching more than 39% of U.S. television households).[94]

Though Congress requires the FCC to impose a similar national ownership limit on cable operators, the FCC has not implemented this requirement for five years.

Section 613(f) of the Communications Act requires the FCC to prescribe rules establishing reasonable limits on the number of cable subscribers served by an individual cable operator through its ownership or control of local cable systems.[95] The FCC established a 30% limit on the number of households passed by a cable system in 1993, and modified it in 1999 to apply to the percentage of MVPD subscribers served by a cable operator rather than the number of households passed.[96]

The DC Circuit Court of Appeals vacated the 30% cable ownership limit in 2001, because the record did not adequately support the chosen limit.[97] The FCC re-established the 30% limit in 2008 based on more recent empirical data and additional economic analysis.[98] The DC Circuit overturned the limit again in 2009, because the FCC had not adequately demonstrated that allowing a cable operator to serve more than 30% of all MVPD subscribers would reduce programming diversity or competition among MVPDs.[99]

Since the court issued its opinion vacating the 30% limit five years ago, the FCC has not issued a notice of proposed rule making or taken any other action to establish a reasonable cable ownership limit as required by the Communications Act.

Quadrennial Review. With the exception of the national ownership limit, broadcast ownership limits are not required by statute. Due to increased competition in the video marketplace, Congress requires the FCC to review its non-statutory ownership rules every four years to determine whether they are still necessary, and has directed that the FCC repeal or modify them if they are no longer in the public interest.[100] The FCC has nevertheless failed to complete a quadrennial review of its broadcast ownership limits during the last seven years.

In sum, despite the fact that most video programming is viewed on infrastructure that is owned by MVPDs (i.e., both MVPD and online video programming), MVPDs are not subject to stringent ownership limits similar to those imposed on TV stations — a regulatory disparity that puts TV stations at a severe competitive disadvantage in the video marketplace.

Broadcast Programming Restrictions

Though broadcasters and MVPDs alike are subject to programming restrictions, the most onerous requirements are applicable only to broadcasters.

Only TV stations are required to post “political file” documents online, including the rates charged by TV stations for political advertising.[101] This regulatory disparity (1) gives political ad buyers an incentive to advertise on MVPD and online rather than on broadcast channels and (2) forces TV stations to disclose sensitive pricing information more widely than their competitors, especially online video distributors, who are not subject to any disclosure obligations at all.

TV stations are also the only video programming distributors subject to content-based restrictions on “indecent” programming.[102] The Supreme Court held that this prohibition passes First Amendment scrutiny because (1) “broadcast media have established a uniquely pervasive presence in the lives of all Americans,” and (2) “broadcasting is uniquely accessible to children, even those too young to read.”[103] If the government-mandated broadcast business model were eliminated, these justifications for applying a lower degree of constitutional scrutiny to broadcast programming would no longer apply.[104]

The Communications Act also provides that the authorization of AOS services shall not be “construed as relieving a television broadcasting station from its obligation to serve the public interest, convenience, and necessity.”[105] A TV station providing AOS services must establish that “all of its programming services” are “in the public interest,” and any violation of FCC rules “applicable to ancillary or supplementary services shall reflect upon the licensee’s qualifications for renewal of its license.”[106] This provision indicates that AOS services are subject to the same indecency obligations as free over-the-air broadcast signals, which discourages TV stations from airing STV programming in competition with MVPDs.

Broadcast Spectrum Limitations

Broadcast spectrum policies also limit the ability of TV stations to compete in the MVPD and wireless broadband markets. Though the FCC provided TV stations with some spectrum flexibility during the DTV transition, TV stations still do not have fully flexible use rights similar to those that have been granted to other wireless licensees.[107]

Unleashing the Competitive Potential of Broadcast Television

Eliminating the anticompetitive broadcast regulations discussed above could usher in a new wave of innovation and investment in the communications industry by enabling TV stations to experiment with new business models that maximize the competitive potential of their content and spectrum assets.

MVPD Competition

Deregulated TV stations would be well positioned to compete in the MVPD market segment, either alone or in combination with other service providers.

Even after the incentive auction is complete, there is likely to be sufficient spectrum in the television broadcast band for TV stations to offer a competitive subscription television service. Though the number of programming channels received by the average U.S. home has increased from 129 channels in 2008 to 189 channels 2012 — an increase of 60 channels — Nielsen reports that consumers have consistently watched an average of just 17 channels.[108] These data indicate that offering hundreds of channels may not be necessary to compete in the MVPD market segment.

TV stations would also have the option of combining their assets with other service providers who offer additional channels. For example, the wireless broadband capabilities of the broadcast television band may be complementary to the video services offered by satellite television operators, who currently lack their own terrestrial broadband facilities.

Fixed Wireless Broadband Competition

Fixed wireless broadband services could also be an attractive option for deregulated TV stations. TV stations could compete in the fixed broadband segment on their own or in combination with other service providers (e.g., Wireless Internet Service Providers (WISPs) who are currently using spectrum on an unlicensed basis). TV station licensees could also use their spectrum for fixed point-to-point services in some areas.

Mobile Wireless Broadband Competition

TV stations could also compete in the mobile market. They could provide their own services as a new entrant, provide wholesale spectrum or network access to other mobile competitors, or provide video offload services for incumbent mobile operators. The popularity of mobile services combined with recent increases in video traffic over the Internet could make the latter option particularly attractive.

Conclusion

If Congress were to decide that preserving broadcast television is no longer in the public interest, it should not destroy the legitimate, investment-backed expectations of TV station licensees by eliminating only the regulations that benefit broadcasters. It should allow TV stations to transition their businesses to a free market approach by eliminating the anti-competitive regulations associated with the government-mandated broadcast business model as well. This alternative to current video reform proposals would promote competition, investment, and innovation by allowing market forces to determine the future of broadcast television stations.

__________

1. See Fred B. Campbell, The Mission to Kill Broadcast Television Stations, Center for Boundless Innovation in Technology (May 1, 2014), available at http://techknowledge.center/blog/2014/05/cbit-white-paper-the-mission-to-kill-broadcast-television-stations/.

2. Id. at 32.

3. Id.

4. Turner Broadcasting System, Inc. v. FCC , 512 U.S. 622, 663-64 (1994) (quoting United States v. Midwest Video Corp.,  406 U.S. 649, 668, n. 27 (1972) (plurality opinion) (quoting Associated Press v. United States,  326 U.S. 1, 20 (1945))).

5. Turner Broadcasting System, Inc. v. FCC , 520 U.S. 180, 192 (1997) (quoting Cable Television Consumer Protection and Competition Act of 1992, Pub. L. No. 102-385, 106 Stat. 1460, §§ 2(a)(9), (10) (1992)).

6. See Deficit Reduction Act of 2005, Pub. L. No. 109-171, 120 Stat. 4, § 3005 (2006).

7. See John Eggerton, Government Exceeds Original Converter Box Coupon Funding Limit, BROADCASTING  & CABLE (Jul. 24, 2009), available at http://www.broadcastingcable.com/news/washington/government-exceeds-original-converter-box-coupon-funding-limit/56335?nopaging=1.

8. See DTV Delay Act, Pub. L. No.111-4, 123 Stat. 112 (2009). Congress extended the date for the completion of the nationwide DTV transition from February 17, 2009 to June 12, 2009.

9. See American Recovery and Reinvestment Act of 2009, Pub. L. No. 111-5, 123 Stat. 115, Title II (2009). The National Telecommunication and Information Administration reported that 33,578,000 coupons had been used as of July 22, 2009. See Eggerton, supra note 7.

10. See Remarks of Acting FCC Chairman Michael J. Copps in the Wake of the Digital Television Transition (Jun. 13, 2009), available at http://www.fcc.gov/document/remarks-acting-fcc-chairman-michael-j-copps-wake-digital-television-transition.

11. See Connecting America: The National Broadband Plan, Recommendation 5.8.5 (Mar. 17, 2010), available at http://www.broadband.gov/plan/.

12. See Petition for Rulemaking, MB Docket No. 10-71 (fi led Mar. 9, 2010). See also Media Bureau Action, Public Notice, DA 10-474 (Mar. 19, 2010) (seeking comment on the petition).

13. See Imees, American Television Alliance, Broadcasters Ignore Their Own Long History of ‘Stifling Innovation’ (Feb. 5, 2014), available at http://bit.ly/1kI9wTw.

14 See Sherille Ismail, Transformative Choices: A Review of 70 Years of FCC Decisions, FCC Staff  Working Paper 1 at 7-9 (Oct. 2010) (describing the early history of broadcast television regulation), available at http://www.fcc.gov/working-papers/transformative-choices-review-70-years-fcc-decisions.

15. See, e.g., Advanced Television Systems and Their Impact upon the Existing Television Broadcast Service, Fifth Report and Order, FCC 97-116 at ¶ 5 (1997) (“Fift h DTV Order”) (“First, we wish to promote and preserve free, universally available, local broadcast television in a digital world. Only if DTV achieves broad acceptance can we be assured of the preservation of broadcast television’s unique benefit: free, widely accessible programming that serves the public interest.”).

16. Adam Thierer and Brent Skorup, Mercatus Center, Video Marketplace Regulation: A Primer on the History of Television Regulation and Current Legislative Proposals at 8 (Apr. 29, 2014), available at http://mercatus.org/publication/video-marketplace-regulation-primer-history-television-regulation-and-current.

17. See Statement of Reed E. Hundt, Chairman, Federal Communications Commission, before the Committee on Commerce, Science, and Transportation, U.S. Senate (Sep. 17, 1997) (“Hundt Testimony”) (noting that, without regulatory requirements, free over-the-air television “might not exist”), available at http://transition.fcc.gov/Speeches/Hundt/spreh749.html.

18. In this paper, “localism” includes concerns regarding programming diversity and diversity of ownership.

19. Thierer and Skorup refer to intramodal competition as “universal service” and list intermodal competition as an additional, conflicting broadcast policy goal. See Thierer and Skorup, supra  note 16, at 8. This paper generally does not consider intermodal competition, because the FCC does not consider over-the-air television a viable substitute for MVPD services. See Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, Fifteenth Report, FCC 13-99 at ¶ 1 n.3 (2013) (“Fifteenth Report”).

20. See 47 C.F.R. § 73.624(b).

21. See Fifteenth Report, supra  note 19, at ¶ 178 (finding that, in 2011, broadcast TV stations earned approximately 86% of their revenue through the sale of advertising time for over-the-air programming).

22. See id. at ¶ 146 n. 541. Th is fundamental fact is why Internet companies that rely primarily on advertising revenue are such ardent supporters of polices that maximize the breadth of their distribution at the lowest possible cost — e.g., net neutrality and increased broadband penetration generally.

23. This paper generally uses the term “station” to refer to both a single TV station and an owner of multiple stations.

24. See Turner Broadcasting System, Inc. v. FCC , 520 U.S. at 192.

25. See Amendment of Subpart L, Part 11, to Adopt Rules and Regulations to Govern the Grant of Authorizations in The Business Radio Service for Microwave Stations to Relay Television Signals to Community Antenna Systems, First Report and Order, 38 FCC 683, 703-704 (1965).

26. See Joseph Farrell and Philip J. Weiser, Modularity, Vertical Integration, and Open Access Policies: Towards a Convergence of Antitrust and Regulation in the Internet Age, 17 HARV . J.L. & TECH . 85, 100-106 (2003) (noting that monopolists can extract all available profits by internalizing complementary externalities).

27. An MVPD cannot retransmit a local commercial broadcast television signal without the “express authority of the originating station.” See 47 U.S.C. § 325(b)(1)(A).

28. Retransmission of a broadcast television signal by an MVPD pursuant to a compulsory copyright license is “actionable as an act of infringement” if the content of the signal, including “any commercial advertising,” is “in any way willfully altered by the cable system through changes, deletions, or additions.” See  17 U.S.C. §§ 111(c)(3), 119(a)(5), and 122(e).

29. See Campbell, supra note 1, at i.

30. See Thierer and Skorup, supra note 16, at 9.

31. National Assoc. of Theatre Owners v. FCC, 420 F.2d 194, 200 (DC Cir. 1969), cert. den., 397 US 922.

32. See id. at 200-202.

33. See id. at 201, n. 19 (quoting C. Siepmann, RADIO, TELEVISION, AND SOCIETY  7 (1950)).

34. See generally National Assoc. of Theatre Owners, 420 F.2d 194.

35. See 47 U.S.C. § 303(a).

36. See 47 U.S.C. § 303(b).

37. National Assoc. of Theatre Owners v. FCC, 420 F.2d at 202.

38. See id. at 195-97.

39. See id. at 197-98.

40. See generally Amendment of Part 73 of the Commission’s Rules and Regulations In Regard to Section 73.642(a)(3) and Other Aspects of the Subscription Television Service, Fourth Report and Order (Proceeding Terminated), FCC 83-485 (1983) (describing history of STV service and eliminating certain regulatory requirements applicable to STV).

41. See Public Interest Obligations of TV Broadcast Licensees, Notice of Inquiry, FCC 99-390 at ¶ 3 (1999).

42. See Advanced Television Systems and Their Impact upon the Existing Television Broadcast Service, Fifth Further Notice of Proposed Rulemaking, FCC 96-207 at ¶ 7 (1996) (noting that DTV standard submitted to FCC in 1995 permits the provision of additional services and programs).

43. See 47 U.S.C. § 336, adopted in the Telecommunications Act of 1996, Pub. L. No 104, 110 Stat. 56, § 201.

44. See Fifth DTV Order, supra note 15, at ¶ 48 (1997).

45. 47 C.F.R. § 73.624(b) (emphasis added).

46. See Joel Brinkley, A Gulf Develops Among Broadcasters on Programming Pledge, N.Y. TIMES (Aug. 18, 1997), available at http://www.nytimes.com/1997/08/18/business/a-gulf-develops-among-broadcasters-on-programmingpledge.html.

47. See 143 Cong. Rec. D958-02, D960-D961 (Sep. 17, 1997), available at http://www.gpo.gov/fdsys/pkg/CREC-1997-09-17/html/CREC-1997-09-17-pt1-PgD960.htm.

48. See Hundt Testimony, supra note 17.

49. Id.

50. See Joel Brinkley, Warning to Broadcasters Th at Renege on Running HDTV, N.Y. TIMES (Sep. 15, 1997), available at http://nyti.ms/1nPqD6Y.

51. Id.

52. See Joel Brinkley, High-defi nition television: Screens refl ect back the business interests of the executive beholder, N.Y. TIMES (Oct. 6, 1997) (noting that ABC retracted its MVPD proposal after senior members of Congress accused broadcasters of betraying their pledge to offer HDTV), available at http://nyti.ms/1hpcTQd.

53. Clarence C. Dill, RADIO LAW: PRACTICE AND PROCEDURE at 88 (1938).

54. Jeffrey A. Eisenach, The Equities and Economics of Property Interests in TV Spectrum Licenses, NAVIGANT ECONOMICS at 10 (Jan. 2014), available at http://www.nab.org/documents/newsRoom/pdfs/011614_Navigant_spectrum_study.pdf.

55. Id. at 11.

56. See Service Rules for the 698-746, 747-762 and 777-792 MHz Bands, Second Report and Order, FCC 07-132 (1997) (“700 MHz Order”); Amendment of Parts 1, 21, 73, 74 and 101 of the Commission’s Rules to Facilitate the Provision of Fixed and Mobile Broadband Access, Educational and Other Advanced Services in the 2150-2162 and 2500-2690 MHz Bands, Order on Reconsideration and Fifth Memorandum Opinion and Order, FCC 06-46 (2006).

57. See Implementation of Section 309(j) of the Communications Act – Competitive Bidding for Commercial Broadcast and Instructional Television Fixed Service Licenses, First Report and Order, FCC 98-194 (1998) (“TV Auction Order”).

58. The Open-Market Reorganization for the Betterment of International Telecommunications Act (the “ORBIT Act”) prohibits FCC auctions of orbital locations or spectrum used for the provision of international or global satellite communications services. See 47 U.S. Code § 765f. In Northpoint Technology, LTD v. FCC, 412 F.3d 145 (DC Cir. 2004), the court vacated FCC rules to auction DBS orbital slots because the FCC had not limited DBS licensees to the provision of services only to the U.S. The FCC has since determined that the potential benefits of auctioning DBS slots are outweighed by the potential harms of limiting DBS services to domestic coverage only.  See Establishment of Policies and Service Rules for the Broadcasting-Satellite Service at the 17.3-17.7 GHz Frequency Band and the 17.7-17.8 GHz Frequency Band Internationally, and at the 24.75-25.25 GHz Frequency Band for Fixed Satellite Services Providing Feeder Links to the Broadcasting-Satellite Service and for the Satellite Services Operating Bi-Directionally in the 17.3-17.8 GHz Frequency Band, Report and Order and Further Notice of Proposed Rulemaking, FCC 07-76 at ¶¶ 8-10 (2007) (“BSS Order”).

59. See FCC Report to Congress on Spectrum Auctions, Report, FCC 97-353 at 6 (1997).

60. See BSS Order, supra note 58, at ¶ 8.

61. See Auction of 700 MHz Band Licenses Closes, Public Notice, DA 08-595 (2008).

62. Fifth DTV Order, supra note 15, at ¶ 7.

63. See id.

64. See Fifteenth Report, supra note 19, at ¶ 5.

65. See id. at ¶ 87.

66. The Supreme Court has relied on the “scarcity doctrine” to apply a lower level of First Amendment scrutiny to broadcast television than to other media.  See FCC v. League of Women Voters of California, 468 U.S. 364, 380-81 (1984).

67. See 700 MHz Order,  supra note 56.

68. See Expanding the Economic and Innovation Opportunities of Spectrum Through Incentive Auctions, Report and Order, FCC 14-50 (2014).

69. Middle Class Tax Relief and Job Creation Act of 2012, Pub. L. No. 112-96, 125 Stat. 156 (2012).

70. 47 C.F.R. § 73.624(b) (emphasis added).

71. See 47 U.S.C. § 336(a)(2).

72. See 47 U.S.C. § 336(b)(3).

73. See 47 U.S.C. § 336(e).  See also Fees for Ancillary or Supplemental Use of Digital Television Spectrum, Report and Order, FCC 98-303 at ¶ 7 (1998) (delineating the tax provision’s scope).

74. See 47 U.S.C. § 336(e)(2)(B).

75. See 47 C.F.R. § 73.624(g)(ii).

76. See Telecommunications Act of 1996, Pub. L. No 104, 110 Stat. 56, § 201.

77. See Revision of Rules and Policies for the Direct Broadcast Satellite Service, FCC 95-507 at ¶ 2 (1995).

78. See Open-market Reorganization for the Betterment of International Telecommunications Act (ORBIT Act), Pub. L. No. 106–180, § 647, 114 Stat. 48 (2000) (codified at 47 U.S.C. § 765f).

79. Northpoint Technology, LTD v. FCC, 412 F.3d 145 (DC Cir. 2004).

80. See TV Auction Order, supra note 57.

81. See 2006 Quadrennial Review, Report and Order and Order on Reconsideration, FCC 07-216 at ¶ 9 (2008) (“2006 Quadrennial Review”).

82. No TV station owners can hold more than 12 MHz of spectrum in a single DMA.  See 47 C.F.R. § 73.3555(b).

83. See 47 C.F.R. § 73.3555(b).

84. See id.

85. See Adam D. Rennhoff and Kenneth C. Wilbur,  Local Ownership and Media Quality at 2 (Jun. 12, 2011), available at http://www.fcc.gov/encyclopedia/2010-media-ownership-studies.

86. See 2014 Quadrennial Regulatory Review, Further Notice of Proposed Rulemaking and Report and Order, FCC 14-28 at ¶ 342 (2014).

87. See id. at ¶ 350.

88. See id. at ¶ 340.  See also 47 C.F.R. § 73.3555, Note 2(k) (codifying the rule).

89. 47 C.F.R. § 73.658(g).

90. See 2006 Quadrennial Regulatory Review, supra note 81, at ¶ 139.

91. See 47 C.F.R. § 73.3555(d)(1).

92. Prometheus Radio Project v. FCC, 652 F.3d 431 (3d Cir. 2011).

93. See 47 C.F.R. § 73.3555(c)(2).

94. See 1996 Act at § 202(c). See also  47 C.F.R. § 73.3555(e).

95. See 47 U.S.C. § 533(f)(1)(A).

96. See The Commission’s Cable Horizontal and Vertical Ownership Limits, Fourth Report & Order and Further Notice of Proposed Rulemaking, FCC 07-219 at ¶¶ 6-7 (2008) (“Cable Ownership Order”).

97. See Time Warner Entertainment Co. v. FCC , 240 F.3d 1126 (D.C. Cir. 2001).

98. See Cable Ownership Order, supra  note 96, at ¶¶ 1-2.

99. See Comcast Corp. v. FCC , 579 F.3d 1, 8 (D.C. Cir. 2009).

100. See Telecommunications Act of 1996, Pub. L. No. 104-104, § 202(h), 110 Stat. 56, 111-112 (amended by Consolidated Appropriations Act of 2004, Pub. L. No. 108-199, § 629, 118 Stat. 3 (2004) (Appropriations Act) (codified at 47 U.S.C. § 303 note (2006)). Telecommunications Act of 1996, Pub. L. No. 104-104, § 202(h), 110 Stat. 56, 111-12 (1996). The Appropriations Act amended the then-biennial review requirement to require such reviews quadrennially. See Appropriations Act, 118 Stat. at 100, § 629.

101. See Standardized and Enhanced Disclosure Requirements for Television Broadcast Licensee Public Interest Obligations, Second Report and Order, FCC 12-44 (2012).

102. Title 18 U.S.C. § 1464 provides that “[w]hoever utters any obscene, indecent, or profane language by means of radio communication shall be fined … or imprisoned not more than two years, or both.” The FCC enforces the indecency prohibition in § 1464 only with respect to over-the-air programming broadcast between the hours of 6 a.m. and 10 p.m. See  47 C.F.R. 73.3999. See also  Public Telecommunications Act of 1992, § 15(a), 106 Stat. 954 (codified in 47 U.S.C. § 303) (requiring enforcement from 6 a.m. to 10 p.m.).

103. FCC v. Pacifica Foundation, 438 U.S. 726, 748, 749 (1978).

104. Both justifications are premised on the government-mandated business model for broadcasters, which ensures that every MVPD household has access to broadcast channels, see  47 U.S.C. § 543(b)(7)(A), and effectively prohibits the use of digital rights management with free over-the-air television signals. See American Library Ass’n v. FCC, 406 F.3d 689 (2005).

105. See 47 U.S.C. § 336(d).

106. See id.

107. See 47 U.S.C. § 303(y) (authorizing the FCC to permit flexibility of use).

108. See Nielsen, Changing Channels: Americans View Just 17 Channels Despite Record Number to Choose From (May 6, 2014), available at http://www.nielsen.com/us/en/newswire/2014/changing-channels-americans-viewjust-17-channels-despite-record-number-to-choose-from.html.

 

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