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The Center for Individual Freedom ("CFIF") this week filed comments with the Department of Justice Antitrust Division’s “roundtable” on anticompetitive regulation. In the comments, CFIF Senior Vice President of Legal and Public Affairs Timothy Lee describes how government regulation distorts retransmission consent negotiations between television stations and pay-TV operators. They prevent the parties from negotiating efficient and innovative carriage arrangements and tend to lead to higher prices. While such regulation may be appropriate for mandatory carriage, they have no place in what should be marketplace negotiations. View the comments here (PDF) or read the comments below. May 29, 2018
On behalf of the Center for Individual Freedom (hereinafter "CFIF") and over 300,000 supporters and activists across the nation, I write to draw your attention to a series of anti-competitive regulations governing “retransmission consent” negotiations for pay-TV carriage of broadcast television stations. Eliminating these regulations and instead permitting the marketplace to govern carriage terms of these broadcast stations would encourage innovation, better enable pay-TV providers meet the needs of their subscribers and very likely lower retail prices. About the Center for Individual Freedom (CFIF) Founded in 1998, CFIF is a constitutional and free-market advocacy organization. CFIF seeks to focus public, legislative and judicial attention on the rule of law as embodied in the federal and state constitutions, and on policies that advance free markets, private investment and greater innovation. In addition, the Center seeks to foster intellectual discourse by bringing together independent thinkers to examine broad-ranging issues of individual freedom in our global society. Government Interference in Retransmission Consent Negotiations The relationship between pay-TV providers and providers of video programming except for broadcast programming has always been governed by purely market-based transactions. Broadcast stations, however, are different. They, and only they, can choose between one of two different regulatory regimes for determining their carriage arrangements with pay TV providers. Under the “must carry” regime, the relationship between pay-TV providers and broadcast stations is completely regulated and involves no market-based transactions of any sort. Pay-TV providers must carry the station in question, and the station cannot charge fees for such carriage. Under the “retransmission consent” regime, by contrast, a pay-TV provider cannot carry the station without its permission. The station can, and invariably does, negotiate a fee known as a "retransmission consent payment." Public television stations must choose must-carry, and most smaller and less-watched commercial stations do as well. Affiliates of the major networks, by contrast, almost always choose retransmission consent. They can often charge retransmission consent fees that are comparable or higher than the license fees charged by even the most popular cable networks. While broadcasters claim that retransmission consent negotiations are purely “marketplace” negotiations, that is not correct. In reality, the carriage arrangements between local TV stations and pay-TV providers must satisfy a set of stringent conditions and regulations that have nothing to do with the “marketplace.” For example:
Those regulations may make sense for must-carry stations. A local broadcast station elects must-carry when the pay-TV provider has no commercial interest in carrying the signal of the local TV station and is in a sense being “forced” to carry the signal. In such cases, it may be necessary for the government to specify a set of conditions and requirements that the carriage agreements must satisfy in order to guarantee that the local TV station does not receive “inferior” carriage terms. If a station elects retransmission consent, however, the pay-TV provider is no longer being “forced” to carry the signal. Rather, Congress intended for the two parties to determine the terms and conditions of carriage. Thus, there is no more justification for regulating the carriage conditions in agreements between pay-TV providers and local TV stations that elect retransmission consent than there is to regulate the carriage conditions of agreements between pay-TV providers and other programmers. In the absence of any government interference, we would expect the parties to negotiate efficient carriage terms that maximized their joint gain and to then negotiate a license fee that splits the gains from that efficient relationship between them. No “push” from the government is necessary to achieve this result. Effect of Government Interference in Retransmission Consent Negotiations It is not only unnecessary for the government to interfere in retransmission consent negotiations, it is affirmatively harmful to the parties and consumers alike. First, those rules inhibit innovation and restrict the ability of the parties to negotiate fully efficient relationships. That harms consumers, because it prevents parties from providing the products that consumers most want.
Second, all of the government intervention described above creates an entirely different form of harm because it favors one party to the negotiation (broadcasters) over the other party (pay TV providers) to the negotiation. Broadcasters receive those terms by law before the negotiation has even begun. They do not need to bargain for them by, for example, lowering the license fees that they charge. Thus, mandating those broadcaster-favorable terms instead of allowing them to be part of the negotiation essentially increases the bargaining power of broadcasters, and likely allows them to negotiate higher license fees than they would otherwise be able. Of course, a substantial share of those increases in license fees are ultimately passed on to consumers in the form of higher subscription fees. Recommendation We believe that, absent a demonstrated and uncorrectable market failure, the marketplace remains the best mechanism for allocating goods and services and directing economic activity. By distorting negotiations between the parties, the current retransmission consent regime limits the benefits that competitive markets can produce by artificially restricting parties to agree to regulatory conditions appropriate (if at all) only in the context of must carry. That harms consumers by limiting efficient and innovative arrangements between broadcasters and pay-TV carriers and by placing upward pressure on prices. Negotiations over the distribution of the signals of local broadcast stations electing retransmission consent should take place in the same free marketplace that today works perfectly well for all other types of programming. Some of these requirements are found in the Communications Act, and thus require Congressional intervention to remedy. Others, however, can be fixed, or at least ameliorated, by the FCC. The FCC could, for example, eliminate the network nonduplication and syndicated rules. It could also clarify that the material degradation and buy-through rules apply only to must-carry stations. The Antitrust Division should urge it to do so.
Timothy Lee |