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INSIGHT: Clock Ticks on Congress and STELAR Reauthorization

Nov. 21, 2019, 9:01 AM

In a market economy, millions of negotiations for products and services occur every day. While we normally think of market transactions as involving buying and selling, the fact is that “no deal” is the most frequent outcome. Generally, we do not fret over foregone purchases and failed negotiations. That’s the way the market works; price is exclusionary. In some cases, however, we do worry.

Consider the case of broadcast television programming.

Ever since the 1992 Cable Act allowed broadcasters to charge multichannel video distribution providers (MVPDs) for retransmission rights of their signals, broadcasters have demanded (and received) increasingly high retransmission fees. Between 2006 and 2019, retransmission fees rose from $215 million to $11.7 billion. Today, MVPDs pay about $11 per subscriber/month for over-the-air broadcast signals, raising consumers’ bills. The fee was $0 before the 1992 Cable Act.

MVPDs are increasingly balking at broadcaster demands. Increased competition in video distribution, including over-the-top technologies, have shifted bargaining power toward content sellers.

In fact, rising content costs, especially for broadcast signals, have led some MVPDs, especially smaller providers, to abandon altogether the provision of video packages. Other MVPDs now provide their customers with free antennas for over-the-air signals to avoid high retransmission fees, though such technology is not always seamless to the consumer and the free signals are not always available.

This fight is reaching fever pitch as Congress currently debates whether to renew (or let expire) the Satellite Television Extension and Localism Act, commonly referred to as STELAR, past Dec. 31. At the center of the dispute is STELAR’s compulsory license, which permits satellite providers to retransmit some broadcast signals at regulated prices without consent.

The broadcasters’ position is plain: Let STELAR expire to eliminate the “significantly discounted compulsory copyright license” so that broadcasters can charge “carriage fees for these stations negotiated in the market.”

The position of the satellite providers is also clear. At a recent congressional hearing on STELAR, Robert Thun, senior vice president of content and programming at AT&T, encouraged the extension of STELAR, stating that its expiration will “raise prices and create further blackouts.”

A Simple Question at Heart of Dispute

At the center of the dispute is a simple question: Should broadcasters get to charge whatever retransmission fee the market will bear?

The answer may be no.

If broadcasters were just another programming network, then rising prices reflecting high viewership would simply reflect the high-demand for their programming. A strong case may be made, however, that broadcasters are not TBS or Comedy Central.

A lack of access to broadcast signals, in the words of Sen. Edward Markey (D-MA) at the recent hearing, is “a threat to the informed citizenry a healthy democracy requires.” Congress, it appears, sees broadcast signals not as mere entertainment but as essential to democracy. Broadcast signals should, therefore, be retransmitted as widely as possible.

But the retransmission fee is an exclusionary device. If broadcasters are permitted to charge whatever fee they choose, then some MVPDs will not retransmit the signal (a blackout). It is not an obligation of the MVPD to pay whatever a broadcaster demands. Or, if the higher fees are paid, then some consumers will cancel the higher-priced video packages and become part of the “[un]informed citizenry.”

This problem with market-based pricing for broadcast signals is detailed in a paper I co-authored in 2013. While the setting of profit-maximizing fees by the broadcast and non-broadcast networks is identical in form, the economic implications of the pricing decisions are not the same.

This difference arises from the presence of a social contract between the government and broadcasters to serve the “public interest” (e.g., provide “local” programming and a “diversity of voices” to as many Americans as possible)—a contract that has provided broadcasters with favorable legislative and regulatory treatment over the years. U.S. communications law embeds a preference for the widespread “consumption” of broadcast programming due to its socially-valuable nature.

In economics lingo, this social contract embeds a positive information externality in the local broadcast signal, driving a wedge between socially- and privately-optimal prices. Our paper demonstrated that the “right” (or welfare maximizing) price for broadcast signals is the market price less the value of their social obligation. That is, the broadcasters’ desire for “carriage fees for these stations negotiated in the market” leads to prices that are too high.

There is a disharmony between Congress’ desire to ensure the widespread availability of socially-valuable broadcast programming and leaving the determination of price to private negotiations. Congress must decide—does it embrace market pricing for broadcast signals, or does it value an informed citizenry and democracy? Congress cannot eat its cake and have it too.

If broadcasters are just another cable signal, then they should be free to pursue whatever price they can obtain. But, in doing so, all protectionist rules that apply uniquely to and favor broadcasters should be eliminated. For instance, MVPDs should have the ability to offer broadcast signals on an a-la carte basis, so consumers can decide which and how many broadcast signals they are willing to pay for.

Today, they are prohibited from doing so. Also, in a purely market setting, broadcasters should pay rent on the spectrum they use or return it to inventory for auction. And, Congress must learn to ignore blackouts. A blackout is a market outcome and no cause for concern.

With limited days left in the legislative calendar before STELAR expires, there is insufficient time for a sensible solution to this complex issue. Senate Commerce Committee Chairman Roger Wicker (R-Miss.) has offered a “clean” STELAR reauthorization bill to maintain the status quo, which would provide Congress with some much-needed breathing room to begin tackling the gnarly issue of how broadcast signals can be both widely retransmitted and compensated.

Congress and the Trump administration should welcome this opportunity.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Dr. George S. Ford is the chief economist of the Phoenix Center for Advanced Legal & Economic Public Policy Studies, a non-profit 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.