A Free Market Defense of Retransmission Consent

Unshackling a market from obsolete, protectionist regulations can be a very challenging undertaking, especially when the lifeblood of a regulated industry is at stake. The latest push for regulatory reform to encounter the murky waters of modernization is the “Next Generation Television Marketplace Act.” The ambitious and comprehensive bill, introduced by Rep. Steve Scalise and Sen. Jim DeMint in their respective chambers of Congress, aims to free up the broadcast television market. The federal government’s hands have been all over this market since its inception, overseen primarily by the FCC, pursuant to the Communications Act.

The Next Generation Television Marketplace Act (“DeMint/Scalise”) is a bold and laudable bill that would, on the whole, substantially free up America’s television marketplace. But one aspect of the bill—its abolition of the retransmission consent regime—has sparked a vigorous debate among free marketers. This essay will explain what this debate is all about and why policymakers should think twice before getting rid of retransmission consent.

Toward a Free Market in Television

The DeMint/Scalise bill takes an axe to many of the myriad rules that stand in the way of a free market in television programming. As Co-Liberator Adam Thierer recently explained on these pages, the bill’s many provisions would among other things get rid of the compulsory licensing provisions in the Copyright Act that empower government to set the rates cable and satellite (“pay-TV”) providers must pay to retransmit distant broadcast signals. It would eliminate the “network non-duplication” rule, which generally bars pay-TV providers from carrying out-of-market signals that offer the same programs as local broadcasters. The bill would also end the “must-carry” rule that forces pay-TV providers to retransmit certain local broadcast signals without receiving any compensation.

These are just a few of the many provisions of the DeMint/Scalise bill that would substantially reform the Communications and Copyright Acts to foster a free video marketplace and bring television regulation into the 21st century. (For a more in-depth assessment of the positive aspects of the DeMint/Scalise proposal, see Adam’s informative Forbes.com essay, Toward a True Free Market in Television Programming; Randy May’s superb Free State Foundation Perspectives essay, Broadcast Retransmission Negotiations and Free Markets;” and Bruce Owen’s FSF essay, The FCC and the Unfree Market for TV Program Rights.)

What DeMint/Scalise Means For Retransmission Consent

While most of the DeMint/Scalise bill’s provisions are unequivocally pro-market and pro-consumer, some free marketers have criticized the bill because it would repeal the current statute that provides for “retransmission consent.” Retransmission consent, which Congress enacted by overriding President George H.W. Bush’s veto of the 1992 Cable Act, affords broadcasters an attenuated property right that entitles them to bar local pay-TV providers from retransmitting their signals without broadcasters’ permission—thus forcing negotiation over whether broadcasters should be paid for their content. Some broadcasters don’t elect to exercise this right, and instead demand that local pay-TV operators carry their signals pursuant to the “must-carry” rule. (Many unaffiliated broadcasters that transmit low-value programming elect to exercise must-carry because they recognize pay-TV operators are unlikely to pay retransmission fees.)

The current retransmission consent regime, which Congress created in 1992, is plagued with complex regulations that undermine free market negotiations. As Adam and Randy have explained, many of these regulations—including network non-duplication, syndication exclusivity, and must-carry—tilt the playing field in broadcasters’ favor, enabling them to earn hefty retransmission fees from cable and satellite providers that almost certainly exceed the fees they’d earn in a free market. This wealth transfer translates into higher monthly bills for pay-TV subscribers, and may enable some broadcasters to reap profits (economic rents) they would not otherwise enjoy.

The DeMint/Scalise bill would eliminate many of the existing rules that distort retransmission negotiations between broadcasters and pay-TV operators. In doing so, however, the bill would also eliminate the retransmission consent regime in its entirety. This has invoked the ire of some conservatives, such as the American Conservative Union (ACU), which recently sent a letter to Congress opposing the bill’s retransmission consent provisions.

But two venerable free market tech policy icons disagree with the ACU: Adam Thierer, writing on these pages, and Randy May, writing on The Free State Foundation blog. Adam argues that “ACU has mistakenly equated the retransmission consent regulatory process with an actual free market contracting process.” Randy argues that if the DeMint/Scalise bill were adopted, “[b]roadcasters would . . . continue to be paid for carriage of their signals – unless they choose to withhold the carriage rights because they don’t like the amount of compensation offered.”

I wholeheartedly agree with Adam and Randy that ACU’s characterization of the current regime as a “functioning market” is inaccurate. Nonetheless, ACU is right to worry that the retransmission consent provisions of the Next Generation Television Marketplace Act may undermine private bargaining. In particular, the bill appears to strip broadcasters of the authority to withhold carriage rights from pay-TV providers. Page 2 of the bill (PDF of bill text) states that:

Section 325 of the Communications Act of 1934 (47 U.S.C. 325) is amended . . . by striking subsections (b) and (e)

In striking these two subsections, the bill would restore 47 U.S.C. § 325 to its state prior to the enactment of the 1992 Cable Act—the law which established retransmission consent as it exists today.

On one hand, this would eliminate many onerous provisions, including the must-carry rule and the “good faith” negotiation requirement. But striking these subsections would also eliminate the legal authority that underlies broadcasters’ ability to withhold carriage rights from pay-TV operators. Under pre-1992 law, as the Senate Commerce Committee’s report on the Cable Act explained, “cable systems need not obtain consent from broadcast stations for retransmission of their signals, based on the reference in section 325 of retransmission by broadcasting stations.” S. Rep. No. 102–92, at 35 (1991). In other words, if 325(b) goes away, so does retransmission consent as we know it.

Retransmission consent is not without its critics. Some argue that broadcasters don’t deserve the right to exclude local pay-TV operators from retransmitting their signals, as subscribers can already freely watch over-the-air broadcast signals by simply putting up an antenna. Pay-TV providers simply retransmit broadcast signals without alteration and with advertisements intact, the argument goes, so why should broadcasters be able to demand compensation from pay-TV providers?

While this argument has rhetorical appeal, it ignores the economic realities of the modern television market. Today, unlike in the 1970s, a tiny percentage of viewers watch broadcast television over-the-air. The tiny minority of households with antennas pay no subscription fees, unlike the majority of viewers who pay a fee for a cable or satellite subscription. Broadcasters that demand retransmission fees from pay-TV operators are simply charging viewers who are willing to pay more than viewers who aren’t. This practice, known as price discrimination, ultimately benefits low-income families who rely on over-the-air signals by allowing them to view programming subsidized by pay-TV subscribers.

Copyright Versus Retransmission Consent

So what about content owners? Their legal rights, unlike those of broadcasters and pay-TV providers, arise primarily out of the Copyright Act, not the Communications Act.

While the DeMint/Scalise bill would eliminate the Communications Act’s retransmission consent provisions, it makes only minor changes to the Copyright Act—which, of course, prohibits most unauthorized public performances of copyrighted works, including television broadcasts. So copyright owners would retain the right to bar pay-TV providers from retransmitting their television shows without permission. (Indeed, in one sense, content owners would enjoy greater copyright protection under the bill, as it eliminates several limitations on copyright liability currently provided to secondary transmissions by cable and satellite providers.)

If the bill is enacted, therefore, pay-TV operators wishing to retransmit broadcast signals may no longer need to get permission from the broadcaster—but they’d still need permission from program owners to retransmit signals that contain copyrighted content. While broadcasters themselves own the rights to some of the programs they typically air—including local news shows and, in some cases, exclusive syndication rights for their area—the vast majority of broadcast television content is owned by third parties such as broadcast networks, production companies, syndicators, sports leagues, and the like. (Although the Copyright Act confers protection on compilations of copyrighted works in certain cases, whether broadcasters’ programming choices enjoy copyright protection is unclear. See 2 Patry on Copyright § 3:64.)

Before 1976, cable providers were free under federal law to retransmit local and distant broadcast signals without permission from the broadcaster or the rights holder. In 1976, Congress overhauled the Copyright Act to define public retransmissions of broadcast signals as “public performances” (which if containing copyrighted material generally require permission from the rights holder).

At the same time, however, Congress also created a compulsory license permitting cable providers to retransmit certain distant broadcast signals so long as they paid royalties to the Copyright Office (which in turn doles out payments to rights holders as it sees fit). The law also permitted cable providers to retransmit broadcast signals locally without paying any royalties to rights holders.

The DeMint/Scalise bill would leave intact the 1976 Copyright Act’s definition of “public performance,” while repealing not only the compulsory licensing system that currently governs retransmissions of distant signals but also the provision exempting pay-TV providers’ retransmissions of local signals from copyright liability. If the bill were enacted, owners of broadcast programs would gain the ability to freely negotiate rates with pay-TV providers, instead of relying on the rates set by the Copyright Office.

Consensual Retransmission—Or Unjust Enrichment?

How would the dynamics of the video marketplace shift if DeMint/Scalise were the law? For one thing, broadcasters would hold far fewer cards, losing the regulations that benefit them, such as syndication exclusivity, network non-duplication, and most importantly, retransmission consent. Pay-TV operators, many of which currently pay substantial retransmission fees to broadcasters, might seek out less costly sources of popular network television shows—perhaps by dealing directly with major networks. But would the networks play ball? Or would they rather leave today’s market structure intact and continue dealing exclusively with broadcasters? It’s hard to say.

Imagine that some large pay-TV providers succeed in inking deals with networks and other rights holders to publicly perform the same programs that broadcasters carry. On one hand, this disintermediation of broadcasters might benefit consumers, especially if it translates into lower fees (and, hence, more content choices and/or lower television bills). Indeed, a major selling point of the DeMint/Scalise bill is that it would enable an array of creative economic arrangements between pay-TV providers and content owners that are verboten under current law.

But disintermediating broadcasters in this manner may have a dark side.

Imagine cable provider CableCo reaches a licensing deal with commercial network NetworkCo to display the network’s primetime content to CableCo’s subscribers nationwide. CableCo, recognizing that its subscribers are accustomed to watching primetime network content originally transmitted by their local broadcaster, decides to continue retransmitting the local signals that independent NetworkCo affiliate stations broadcast in each market.

Although CableCo’s paid subscribers derive some value from these local signals, CableCo doesn’t compensate the local broadcasters whose signal it retransmits, since the Communications Act no longer enables broadcasters to demand retransmission fees. (To avoid copyright infringement liability, CableCo might replace all timeslots that contain local news shows—which are created and owned by each affiliate station—with syndicated programming.)

Is this scenario—which could conceivably occur if DeMint/Scalise were the law—an acceptable free market outcome? Absolutely, argues Professor Bruce Owen, a veteran telecommunications policy guru, who wrote the following in a recent Free State Foundation Perspectives essay:

Unlike program producers and networks, TV stations do nothing to “earn” this right, and the benefits to them are not rewards for innovation or production of valuable services. The economic value of a retransmission right comes solely from the ability of its owner to extract cash (or carriage) from cable systems and other multi-channel video program distributors (MVPDs). In fact, now that nearly everyone gets all TV signals by cable or satellite or Internet, broadcast stations are largely useless relics of a bygone technology, and the spectrum that is still reserved for their use has far better and more valuable uses.

But if Professor Owen is correct in arguing that broadcasters “do nothing to ‘earn’” the right to exclude others from retransmitting their signal, why is abolishing retransmission consent necessary? If broadcasters do nothing to enhance the value of the content they carry, the proper public policy response is to repeal the regulations (e.g., network non-duplication, syndication exclusivity, must-carry) that empower broadcasters to take a cut of exchanges that would otherwise occur directly between pay-TV providers and content owners. Without such rules in place, retransmission consent would be a dead letter (albeit technically intact) because pay-TV providers would simply obtain programming directly from the source.

What if Professor Owen is mistaken? Consider that many broadcasters work to differentiate their broadcasts from those carried by distant stations affiliated with the same network. For instance, some broadcasters overlay localized messages warning of impending perilous weather during primetime programming. Broadcasters sometimes display tickers (or “crawlers”) underneath network and syndicated shows, displaying such information as local sports scores, school closings, and election results. Some broadcasters select and display local ads during commercial breaks (in addition to national ads selected by networks). Although these alterations may in some cases enjoy copyright protection, facts cannot be copyrighted, nor can works that lack “originality” or “creativity.”

Unfortunately, we don’t know how much economic value (if any) these “signal enhancements” add to the underlying programming. Fortunately, the market can answer that question—assuming, of course, well-defined property rights exist and regulations do not mandate exclusive dealing or otherwise obstruct voluntary marketplace negotiations.

If retransmission consent is abolished, however, broadcasters’ ability to exclude others from free riding on their efforts will be severely diminished. Is this a problem? To the extent that broadcast signals possess some incremental value beyond that embodied in the programming they carry, the DeMint/Scalise bill tilts the scales in favor of pay-TV providers, and may enable them to reap economic rewards that would otherwise accrue to broadcasters.

This form of free riding offends the longstanding common law equitable principle of unjust enrichment, which holds that “[a] person who is unjustly enriched at the expense of another is subject to liability in restitution.” If pay-TV providers are free to monetize the efforts of broadcasters without permission or compensation, broadcasters may under-invest in signal enhancements. (For more on this issue, see Shyamkrishna Balganesh, The Social Costs of Property Rights in Broadcast (and Cable) Signals, 22 Berkeley Tech. L.J. 1303 (2007)).

If, as Randy May argues, consumers are best served by “[p]rivate bargaining, in which the parties know their own interests, and can contract freely,” then Sen. DeMint and Rep. Scalise should consider reforming the retransmission consent law, instead of gutting it in its entirety.

To do so, instead of repealing 47 U.S.C. § 325(b), DeMint and Scalise could rewrite the subsection to get rid of the must-carry and the good faith negotiation requirements while leaving retransmission consent intact. They could also strip the FCC of its existing authority to meddle with retransmission negotiations and instead create a private right of action for broadcasters to obtain recourse in federal court for unauthorized retransmissions. That way, if a pay-TV provider were to retransmit a broadcaster’s signal without permission, the aggrieved broadcaster could recover any profits the pay-TV provider earned as a result of the unauthorized retransmission.

The Long Run: Spectrum Liberalization

As policymakers work to liberalize the airwaves to ensure market participants put spectrum to its most highly valued uses, there may come a day when television broadcasting as we know it ceases to exist. Meanwhile, however, policymakers would be loath to lose sight of the basic principles that underlie free markets—voluntary exchange, property rights, and regulatory neutrality—in governing the television marketplace. Whatever one thinks about broadcasters’ public policy advocacy in general, two wrongs don’t make a right; the merits of protecting attenuated property rights in broadcast signals should stand on their own.

Broadcasters have long argued their efforts serve consumers and generate value for society. If they’re right, they deserve to reap the rewards of the value they create. Retransmission consent provides the means by which they may do so.

It’s high time for Congress to liberalize the television marketplace to bring it into the 21st century. Sen. DeMint and Rep. Scalise’s bill would, if enacted, mark a major step toward a freer video market. However, their bill could be improved by leaving retransmission consent intact.