Killing TV Stations Is the Intended Consequence of Video Regulation Reform

Posted by | May 07, 2014 | Video | No Comments

Tomorrow is a big day in Congress for the cable and satellite (MVPDs) war on broadcast television stations. The House Judiciary Committee is holding a hearing on the compulsory licenses for broadcast television programming in the Copyright Act, and the House Energy and Commerce Committee is voting on a bill to reauthorize “STELA” (the compulsory copyright license for the retransmission of distant broadcast signals by satellite operators). The STELA license is set to expire at the end of the year unless Congress reauthorizes it, and MVPDs see the potential for Congressional action as an opportunity for broadcast television to meet its Waterloo. They desire a decisive end to the compulsory copyright licenses, the retransmission consent provision in the Communications Act, and the FCC’s broadcast exclusivity rules — which would also be the end of local television stations.

The MVPD industry’s ostensible motivations for going to war are retransmission consent fees and television “blackouts”, but the real motive is advertising revenue.

The compulsory copyright licenses prevent MVPDs from inserting their own ads into broadcast programming streams, and the retransmission consent provision and broadcast exclusivity agreements prevent them from negotiating directly with the broadcast networks for a portion of their available advertising time. If these provisions were eliminated, MVPDs could negotiate directly with broadcast networks for access to their television programming and appropriate TV station advertising revenue for themselves.

The real motivation is in the numbers. According to the FCC’s most recent media competition report, MVPDs paid a total of approximately $2.4 billion in retransmission consent fees in 2012. (See 15th Report, Table 19) In comparison, TV stations generated approximately $21.3 billion in advertising that year. Which is more believable: (1) That paying $2.4 billion in retransmission consent fees is “just not sustainable” for an MVPD industry that generated nearly $149 billion from video services in 2011 (See 15th Report, Table 9), or (2) That MVPDs want to appropriate $21.3 billion in additional advertising revenue by cutting out the “TV station middleman” and negotiating directly for television programming and advertising time with national broadcast networks? (Hint: The answer is behind door number 2.)

What do compulsory copyright licenses, retransmission consent, and broadcast exclusivity agreements have to do with video advertising revenue?

  • The compulsory copyright licenses prohibit MVPDs substituting their own advertisements for TV station ads: Retransmission of a broadcast television signal by an MVPD 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));
  • The retransmission consent provision prohibits MVPDs from negotiating directly with television broadcast networks for access to their programming or a share of their available advertising time: 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)); and
  • Broadcast exclusivity agreements (also known as non-duplication and syndicated exclusivity agreements) prevent MVPDs from circumventing the retransmission consent provision by negotiating for nationwide retransmission consent with one network-affiliated owned-and-operated TV station. (If an MVPD were able to retransmit the TV signals from only one television market nationwide, MVPDs could, in effect, negotiate with broadcast networks directly, because broadcast programming networks own and operate their own TV stations in some markets.)

The effect of the compulsory copyright licenses, retransmission consent provision, and broadcast exclusivity agreements is to prevent MVPDs from realizing any of the approximately $20 billion in advertising revenue generating by broadcast television programming every year.

Why did Congress want to prevent MVPDs from realizing any advertising revenue from broadcast television programming?

Congress protected the advertising revenue of local TV stations because TV stations are legally prohibited from realizing any subscription revenue for their primary programming signal. (See 47 U.S.C. § 336(b)) Congress chose to balance the burden of the broadcast business model mandate with the benefits of protecting their advertising revenue. The law forces TV stations to rely primarily on advertising revenue to generate profits, but the law also protects their ability to generate advertising revenue. Conversely, the law allows MVPDs to generate both subscription revenue and advertising revenue for their own programming, but prohibits them from poaching advertising revenue from broadcast programming.

MVPDs want to upset the balance by repealing the regulations that make free over-the-air television possible without repealing the regulations that require TV stations to provide free over-the-air programming. Eliminating only the regulations that benefit broadcasters while retaining their regulatory burdens is not a free market approach — it is a video marketplace firing squad aimed squarely at the heart of TV stations.

Adopting the MVPD version of video regulation reform would not kill broadcast programming networks. They always have the options of becoming cable networks and selling their programming and advertising time directly to MVPDs or distributing their content themselves directly over the Internet.

The casualty of this so-called “reform” effort would be local TV stations, who are required by law to rely on advertising and retransmission consent fees for their survival. Policymakers should recognize that killing local TV stations for their advertising revenue is the ultimate goal of current video reform efforts before adopting piecemeal changes to the law. If policymakers intend to kill TV stations, they should not attribute the resulting execution to the “friendly fire” of unintended consequences. They should recognize the legitimate consumer and investment-backed expectations created by the current statutory framework and consider appropriate transition mechanisms after a comprehensive review.

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