A small deregulatory victory at the FCC

Federal Communications Commission (FCC) Chairman Tom Wheeler has a well-earned reputation for regulatory intervention. Given such proclivities, it came as pleasant surprise when Wheeler recently announced that he plans to eliminate two ancient rules of broadcast regulation: the network non-duplication and syndicated exclusivity rules. While this deregulatory approach is a mere drop in the bucket compared to his otherwise aggressive regulatory agenda, Wheeler deserves some kudos for trying to sync some of the commission's outdated broadcast regulations with the market realities of the 21st century.

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By way of background, the network non-duplication and syndicated exclusivity rules are a subset of the broader fight between the broadcast industry and video distributors over "retransmission consent." Prior to 1992, broadcast signals could be retransmitted by cable systems without compensation. Arguably, that was unfair and, with the Cable Competition and Consumer Protection Act of 1992, Congress permitted broadcasters to charge video distributors for the retransmission of their signals. At first, little money changed hands, but in recent years these retransmission fees have been rising at staggering levels. Some analysts now expect U.S. TV station owners' retransmission fees — which equaled about $2 billion in 2012 — to reach $10.3 billion by 2021. These fees ultimately flow through to consumers (all costs eventually do) and the increasingly common blackouts are a public interest nightmare (particularly if consumers can't watch a major sports playoff game).

Because these fees are reached via arms-length "good faith" negotiations, it should come as no surprise that broadcasters and video distributors are frequently at loggerheads. For the broadcaster, if it cannot receive what it believes to be a fair price for its signal, its most powerful bargaining chip is to exercise its right to black out its signal. For the video distributor, however, a blackout is more than just an inconvenience that raises its customers' ire; in today's competitive video market, a blackout increases the risk that its customers may jump ship to another cable or satellite provider (or just cut the cord altogether), competition that did not exist when Congress enacted the retransmission regime in 1992. As a result, these changing market conditions provide the broadcasters with a powerful bargaining position in retransmission consent negotiations.

In an attempt to find some way to reduce the risk of a blackout, video distributors are increasingly contemplating obtaining alternative programming from the signal of a distant broadcaster. It's not a perfect solution — the local news and sports are gone and it's an expensive option for video distributors. Despite these shortcomings, distant signal importation can provide stop-gap programming to keep the proverbial lights on until a deal can be reached with the local broadcast affiliate. It's a plan that avoids at least part of the consumer burden of blackouts and shifts a bit of bargaining power back in the direction of the video distributors. However, the commission's current network non-duplication and syndicated exclusivity rules make distant signal importation more difficult by serving as a means of enforcing contractual exclusivity agreements entered into between broadcasters, which purchase the distribution rights to programming, and networks and syndicators, which supply the programming.

Given today's rapidly changing media landscape, policymakers have begun to question the continued need for these rules. Indeed, if exclusivity can be achieved via private contract and enforced by the judicial system, then does it make sense to have overlapping regulation that serves the same purpose? To answer this question, in March 2014, the FCC formally put out a Further Notice of Proposed Rulemaking which tentatively concluded that the answer is "no."

This August, after reviewing the record, Wheeler announced that he was convinced that his original conclusion was correct and revealed that he has circulated an order for a commission vote to eliminate these exclusivity rules. According to Wheeler, the purpose of eliminating these rules is for the FCC to "take[] its thumb off the scales and [leave] the scope of such exclusivity to be decided by the parties. ... In so doing, the Commission would take 50-year old rules off our books that have been rendered unnecessary by today's marketplace."

Reducing regulation in competitive markets to further private negotiations between stakeholders is a step in the right direction. Normally, for those with aggressive regulatory proclivities, the Pavlovian response to rising prices is to increase regulation; instead, in this particular case, Wheeler is uncharacteristically trying to keep a lid on retransmission fees by taking a deregulatory approach.

At bottom, these two rules were implemented to shield local broadcasters from competition under the market conditions of the 1960s. At the time, the broadcasters and the FCC feared that the competition from distant signals would dilute their audience and thus advertising revenues, threatening the financial well-being of the local stations. Yes, like much of broadcast regulation, these rules were nakedly protectionist, but the courts held rightfully so.

It's not 1960 anymore. Programming options and competition in video distribution have exploded. Although mounting costs for content creation and sports programming are certainly a contributing factor towards rising retransmission fees, the fact remains that broadcasters' ability to play the various video distributors off of each other has greatly enhanced their bargaining power in retransmission negotiations. The cable and satellite industry is now no threat to broadcasters. Nor is local broadcasting what it used to be. While network programming remains popular among viewers, most households do not get those programs over the air. The FCC knows this all too well. In fact, the broadcasters will have an opportunity next year to bail out of the over-the-air gig altogether by selling their airways to mobile wireless carriers in the commission's upcoming voluntary incentive auction.

Will Wheeler's deregulatory approach work? Only time will tell. However, given that the FCC over the last six years has either reversed (or threatened to reverse) the major bipartisan deregulatory efforts of the last two decades, I, for one, am grateful for small favors.

Spiwak is the president of the Phoenix Center for Advanced Legal & Economic Public Policy Studies, a nonprofit 501(c)(3) research organization that studies broad public-policy issues related to governance, social and economic conditions, with a particular emphasis on the law and economics of the digital age.