Archaic retransmission rules jeopardize spectrum transfer

Failure to get more spectrum to wireless broadband consumers soon could result in nearly one-half trillion dollars in consumer welfare losses, according to a newly released study by the American Consumer Institute. 

As background, wireless spectrum is in short supply, according to FCC estimates that by 2014 consumers will face a shortfall of 275 megahertz.  To help alleviate the shortfall, senior policy makers have called for swift action to encourage the transfer of wireless spectrum to consumers and to first responders for their public safety operations, and Congress has authorized “incentive” auctions to repurpose underused TV spectrum for use as wireless spectrum.  Under the plan, the Federal Communications Commission (FCC) could auction up to 120 megahertz in 2014 for those purposes.  

This spectrum is of high value to consumers.  The spectrum is estimated to earn over $40 billion at auction, but when placed in service as the most popular wireless applications it would be worth 10 to 20 times more to consumers – conservatively one-half trillion dollars.

Spectrum for this auction will come from relinquishing underused channels or relocating UHF channels in a way that frees up spectrum.  Channels in the 700 MHz range had once been given without charge, to “over the air” TV stations.   Of the estimated $40 billion total in auction proceeds, $2 billion would help TV stations relocate a channel, $13 billion would be the TV station “incentive” to relinquish spectrum, and $7 billion would go to first responders to help build out their new communications systems.  About $18 billion would go to the U.S. Treasury, according to some estimates. 

As if it was that simple. 

The FCC has a policy called retransmission consent that allows TV stations to negotiate fees for allowing cable TV networks to carry TV station signals.  When viewership was mostly through analog antennas, retransmission consent fees were a minor supplement to TV station advertising revenues.  Today, over the air viewership has sunk to 7 percent of households.  Despite over the air viewership approaching the level of a technicality, in 2012, TV stations used 91 blackouts to shake $3 billion in RTC fees from cable. The retransmission consent shakedowns produce high yields and CBS reported a 2012 annual growth of 62 percent in these fees.  That gusher of fees comes out of cable consumer pockets.

In addition, retransmission consent rules prevent cable TV and video service providers from substituting their advertisements into TV station programming.  In effect, TV stations can earn handsomely from advertising, despite its plummeting over-the-air market share.  Effectively by generous retransmission consent fees and secured advertising, retransmission consent regulations are propping up a business model that Professor Hazlett has referred to as subsidizing the killer app of 1952.  

As a result, the “incentives” for the spectrum auctions are grossly misaligned.  Why take a one-time $13 billion auction payment when your over-the-air presence gifts you an income stream of fees and advertising already at $22 billion per year and growing?

Current retransmission rules will encourage broadcasters to keep their broadcast spectrum and enjoy the fees bonanza.  Conversely, the incentive auction demands they give up spectrum and lose this income stream, if they want the “incentive” payment.   

There are opportunities to end these archaic regulations and the harm they cause cable and wireless consumers.  Two legislative proposals, one by Reps. Anna Eshoo (D-Calif.) and Zoe Lofgren (D-Calif.) and another by Rep. Steve Scalise (R-La.) and former Sen. Jim DeMint (R-S.C.), work to reform these regulations and reduce TV blackouts. 

Cable TV and video service consumers are losing from higher programming fees, and wireless consumers will be soon be facing bandwidth shortages.  If Congress does not reform these retransmission consent regulations soon, having the FCC pull its auction trigger may shoot consumers right in the foot.

Daley and Pociask write for The American Consumer Institute Center for Citizen Research.  For more information, visit www.theamericanconsumer.org.