Watching local and a la carte is a recipe for STAVRAtion

Geoffrey Manne —  10 September 2014

The free market position on telecom reform has become rather confused of late. Erstwhile conservative Senator Thune is now cosponsoring a version of Senator Rockefeller’s previously proposed video reform bill, bundled into satellite legislation (the Satellite Television Access and Viewer Rights Act or “STAVRA”) that would also include a provision dubbed “Local Choice.” Some free marketeers have defended the bill as a step in the right direction.

Although it looks as if the proposal may be losing steam this Congress, the legislation has been described as a “big and bold idea,” and it’s by no means off the menu. But it should be.

It has been said that politics makes for strange bedfellows. Indeed, people who disagree on just about everything can sometimes unite around a common perceived enemy. Take carriage disputes, for instance. Perhaps because, for some people, a day without The Bachelor is simply a day lost, an unlikely alliance of pro-regulation activists like Public Knowledge and industry stalwarts like Dish has emerged to oppose the ability of copyright holders to withhold content as part of carriage negotiations.

Senator Rockefeller’s Online Video Bill was the catalyst for the Local Choice amendments to STAVRA. Rockefeller’s bill did, well, a lot of terrible things, from imposing certain net neutrality requirements, to overturning the Supreme Court’s Aereo decision, to adding even more complications to the already Byzantine morass of video programming regulations.

But putting Senator Thune’s lipstick on Rockefeller’s pig can’t save the bill, and some of the worst problems from Senator Rockefeller’s original proposal remain.

Among other things, the new bill is designed to weaken the ability of copyright owners to negotiate with distributors, most notably by taking away their ability to withhold content during carriage disputes and by forcing TV stations to sell content on an a la carte basis.

Video distribution issues are complicated — at least under current law. But at root these are just commercial contracts and, like any contracts, they rely on a couple of fundamental principles.

First is the basic property right. The Supreme Court (at least somewhat) settled this for now (in Aereo), by protecting the right of copyright holders to be compensated for carriage of their content. With this baseline, distributors must engage in negotiations to obtain content, rather than employing technological workarounds and exploiting legal loopholes.

Second is the related ability of contracts to govern the terms of trade. A property right isn’t worth much if its owner can’t control how it is used, governed or exchanged.

Finally, and derived from these, is the issue of bargaining power. Good-faith negotiations require both sides not to act strategically by intentionally causing negotiations to break down. But if negotiations do break down, parties need to be able to protect their rights. When content owners are not able to withhold content in carriage disputes, they are put in an untenable bargaining position. This invites bad faith negotiations by distributors.

The STAVRA/Local Choice proposal would undermine the property rights and freedom of contract that bring The Bachelor to your TV, and the proposed bill does real damage by curtailing the scope of the property right in TV programming and restricting the range of contracts available for networks to license their content.

The bill would require that essentially all broadcast stations that elect retrans make their content available a la carte — thus unbundling some of the proverbial sticks that make up the traditional property right. It would also establish MVPD pass-through of each local affiliate. Subscribers would pay a fee determined by the affiliate, and the station must be offered on an unbundled basis, without any minimum tier required – meaning an MVPD has to offer local stations to its customers with no markup, on an a la carte basis, if the station doesn’t elect must-carry. It would also direct the FCC to open a rulemaking to determine whether broadcasters should be prohibited from withholding their content online during a dispute with an MPVD.

“Free market” supporters of the bill assert something like “if we don’t do this to stop blackouts, we won’t be able to stem the tide of regulation of broadcasters.” Presumably this would end blackouts of broadcast programming: If you’re an MVPD subscriber, and you pay the $1.40 (or whatever) for CBS, you get it, period. The broadcaster sets an annual per-subscriber rate; MVPDs pass it on and retransmit only to subscribers who opt in.

But none of this is good for consumers.

When transaction costs are positive, negotiations sometimes break down. If the original right is placed in the wrong hands, then contracting may not assure the most efficient outcome. I think it was Coase who said that.

But taking away the ability of content owners to restrict access to their content during a bargaining dispute effectively places the right to content in the hands of distributors. Obviously, this change in bargaining position will depress the value of content. Placing the rights in the hands of distributors reduces the incentive to create content in the first place; this is why the law protects copyright to begin with. But it also reduces the ability of content owners and distributors to reach innovative agreements and contractual arrangements (like certain promotional deals) that benefit consumers, distributors and content owners alike.

The mandating of a la carte licensing doesn’t benefit consumers, either. Bundling is generally pro-competitive and actually gives consumers more content than they would otherwise have. The bill’s proposal to force programmers to sell content to consumers a la carte may actually lead to higher overall prices for less content. Not much of a bargain.

There are plenty of other ways this is bad for consumers, even if it narrowly “protects” them from blackouts. For example, the bill would prohibit a network from making a deal with an MVPD that provides a discount on a bundle including carriage of both its owned broadcast stations as well as the network’s affiliated cable programming. This is not a worthwhile — or free market — trade-off; it is an ill-advised and economically indefensible attack on vertical distribution arrangements — exactly the same thing that animates many net neutrality defenders.

Just as net neutrality’s meddling in commercial arrangements between ISPs and edge providers will ensure a host of unintended consequences, so will the Rockefeller/Thune bill foreclose a host of welfare-increasing deals. In the end, in exchange for never having to go three days without CBS content, the bill will make that content more expensive, limit the range of programming offered, and lock video distribution into a prescribed business model.

Former FCC Commissioner Rob McDowell sees the same hypocritical connection between net neutrality and broadcast regulation like the Local Choice bill:

According to comments filed with the FCC by Time Warner Cable and the National Cable and Telecommunications Association, broadcasters should not be allowed to take down or withhold the content they produce and own from online distribution even if subscribers have not paid for it—as a matter of federal law. In other words, edge providers should be forced to stream their online content no matter what. Such an overreach, of course, would lay waste to the economics of the Internet. It would also violate the First Amendment’s prohibition against state-mandated, or forced, speech—the flip side of censorship.

It is possible that the cable companies figure that subjecting powerful broadcasters to anti-free speech rules will shift the political momentum in the FCC and among the public away from net neutrality. But cable’s anti-free speech arguments play right into the hands of the net-neutrality crowd. They want to place the entire Internet ecosystem, physical networks, content and apps, in the hands of federal bureaucrats.

While cable providers have generally opposed net neutrality regulation, there is, apparently, some support among them for regulations that would apply to the edge. The Rockefeller/Thune proposal is just a replay of this constraint — this time by forcing programmers to allow retransmission of broadcast content under terms set by Congress. While “what’s good for the goose is good for the gander” sounds appealing in theory, here it is simply doubling down on a terrible idea.

What it reveals most of all is that true neutrality advocates don’t want government control to be limited to ISPs — rather, progressives like Rockefeller (and apparently some conservatives, like Thune) want to subject the whole apparatus — distribution and content alike — to intrusive government oversight in order to “protect” consumers (a point Fred Campbell deftly expands upon here and here).

You can be sure that, if the GOP supports broadcast a la carte, it will pave the way for Democrats (and moderates like McCain who back a la carte) to expand anti-consumer unbundling requirements to cable next. Nearly every economic analysis has concluded that mandated a la carte pricing of cable programming would be harmful to consumers. There is no reason to think that applying it to broadcast channels would be any different.

What’s more, the logical extension of the bill is to apply unbundling to all MVPD channels and to saddle them with contract restraints, as well — and while we’re at it, why not unbundle House of Cards from Orange is the New Black? The Rockefeller bill may have started in part as an effort to “protect” OVDs, but there’ll be no limiting this camel once its nose is under the tent. Like it or not, channel unbundling is arbitrary — why not unbundle by program, episode, studio, production company, etc.?

There is simply no principled basis for the restraints in this bill, and thus there will be no limit to its reach. Indeed, “free market” defenders of the Rockefeller/Thune approach may well be supporting a bill that ultimately leads to something like compulsory, a la carte licensing of all video programming. As I noted in my testimony last year before the House Commerce Committee on the satellite video bill:

Unless we are prepared to bear the consumer harm from reduced variety, weakened competition and possibly even higher prices (and absolutely higher prices for some content), there is no economic justification for interfering in these business decisions.

So much for property rights — and so much for vibrant video programming.

That there is something wrong with the current system is evident to anyone who looks at it. As Gus Hurwitz noted in recent testimony on Rockefeller’s original bill,

The problems with the existing regulatory regime cannot be understated. It involves multiple statutes implemented by multiple agencies to govern technologies developed in the 60s, 70s, and 80s, according to policy goals from the 50s, 60s, and 70s. We are no longer living in a world where the Rube Goldberg of compulsory licenses, must carry and retransmission consent, financial interest and syndication exclusivity rules, and the panoply of Federal, state, and local regulations makes sense – yet these are the rules that govern the video industry.

While video regulation is in need of reform, this bill is not an improvement. In the short run it may ameliorate some carriage disputes, but it will do so at the expense of continued programming vibrancy and distribution innovations. The better way to effect change would be to abolish the Byzantine regulations that simultaneously attempt to place thumbs of both sides of the scale, and to rely on free market negotiations with a copyright baseline and antitrust review for actual abuses.

But STAVRA/Local Choice is about as far from that as you can get.

Geoffrey Manne

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One response to Watching local and a la carte is a recipe for STAVRAtion

  1. 

    Mr. Manne, you wave your hands that “bundling is pro-competitive and gives consumers more content than they would otherwise have.” This is, in essence, a paraphrase of your colleague Thom Lambert’s assertions in prior posts. But it seems to be nothing more than hand-waving, that doesn’t stand up to even slight scrutiny.

    If the market for cable channels is so competitive, why is it that the established major players have succeeded in launching hundreds of new channels over the last few decades, while independents have only rarely succeeded at launching channels? If the market is so beneficial to consumers, why is it that the market has generated multiple decades of sustained hyper-inflationary price increases for consumers? How many other examples can you cite of (what you would allege to be) well-functioning markets, beneficial to consumers, that have demonstrated such sustained hyper-inflationary price increases?

    If having access to “more content than they would otherwise have” is so valuable to consumers, why do we hear almost unanimous complaints from consumers about being forced to take so many channels that don’t interest them at all? And if those consumers are just cranky, not acknowledging the actual value they are getting, why do we see record numbers of consumers abandoning the market entirely, for lack of unbundled/smaller bundled options within the market?

    Your colleague, Mr. Lambert, declined to respond at all to any of these questions (or others), in my comment on his post. Will you?

    You decry the proposal to effectively require broadcasters to negotiate directly with consumers as some affront to the “free market,” and also as having “no principled basis” — presumably because of the differential in treatment of broadcast content vs. non-broadcast content.

    I’ll agree on this much: I don’t think the Rockefeller-Thune proposal is an optimal solution (though it is certainly much better for consumers than the current, failed system), and any ultimate solution does need to address non-broadcast pay channels, also.

    But let’s consider your assertions. Are not broadcast networks fundamentally different from non-broadcast networks? Did they not obtain a broadcast bandwidth monopoly in an explicit exchange for serving the public interest and providing free (ad-supported) content to consumers? (And, btw, wasn’t the policy that enables them to collect retransmission fees, at all, adopted on the theory of supporting local programming — assertedly not the network-based national programming that has actually ended up driving all retransmission consent activity for the last two decades — and enabling local broadcasters to protect themselves from anticipated (but never materialized) unfair competition from cable operators, themselves?)

    So isn’t it perfectly natural, and quite principled, that, by virtue of the huge benefit of a public resource monopoly broadcasters have been afforded, they might be subject to a different set of regulatory constraints than non-broadcast networks?

    And how is it so antithetical to free markets to say that broadcasters can sell their product to any consumers they want, at any price they want, but only those consumers who choose to buy that product, at that price, will actually purchase it — instead of the current regime whereby all consumers are forced to purchase all broadcast networks, in order to be able to obtain any, or to be able to obtain any non-broadcast networks?

    Are you seriously arguing that the latter market is more “free” than the former?

    Regardless of the (theoretical) issue of which is more “free,” there can be no serious debate as to which is more broken.

    Why should broadcasters be allowed to leverage the state-granted monopoly they have for broadcast into forcing consumers to also purchase their non-broadcast channels (via anti-competitive tying arrangements, btw). And why should all broadcast channels be tied together?

    The empirical evidence of the last few decades demonstrates quite amply that the current system is broken and does not serve consumers well. Bundling certainly can be beneficial to consumers, but bundling at the wholesale level, in this market, has proven highly detrimental to consumers, probably because of its coupling with extremely strong and unbalanced monopoly power in the market by broadcasters/programmers, and the complete failure of all branches of government to address rampant anti-competitive behaviors.

    While I would certainly do things differently from the Rockefeller-Thune proposal, their basic approach is within the realm of the reasonable (for the subset of problems it address), and is certainly a very market-friendly approach, that predominantly relies on the market, itself, to address the issues. They are simply removing a middle-market that is, currently, extremely unbalanced in terms of leverage, and so has systematically distorted the consumer market for broadcast channels for more than two decades now.

    The Rockefeller-Thune “local choice” proposal represents a fairly light-touch regulation to address an obviously broken market. It seems to me that the only philosophical argument against such is an argument that government should never play any role in regulating, whatsoever — that markets are always better (i.e., more “free”) absent any and all regulation, even if those markets are functioning very badly!

    Is that actually your position?

    As for your alternative suggestion of abolishing all regulations, and letting the parties duke it out on the free market — that’s pretty clearly a non-solution. You can’t create a dysfunctional market with a huge leverage imbalance, and then expect that simply deregulating the market is going to cure its ills, while that leverage imbalance remains intact.