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January 21, 2016
Clear TV Key: Watch broadcast

During the last Satellite Television Extension and Localism Act (STELA) reauthorization, the process was derailed by debates about other cable industry (Pay TV) issues. Congress missed the reauthorization deadline, which threatened to disrupt satellite television services for rural consumers.

Many have urged Congress to avoid a similar fate this time through a “clean" STELA bill. Excluding side issues would enable timely action on STELA and ensure other proposed changes receive more comprehensive consideration.

Pay TV is nevertheless pushing Congress to transform STELA into a debate about “retransmission consent” — the right of TV stations (Free TV) to control redistribution of their programming. Pay TV claims they are raising consumer prices because Free TV is charging too much for retransmission rights. Spinning it as a consumer issue has prompted Congress to ask whether it should adopt reforms to retransmission consent in the STELA process.

The answer is “No.” Changes sought by Pay TV could have significant consequences for video consumers and market participants that cannot be adequately explored in the truncated STELA process.

When the signal is separated from the noise, Pay TV claims about programming prices don’t resonate. Retransmission prices are lower than the rates Pay TV distributors willingly pay their affiliates for similar cable programming, and traditional market analysis shows that Pay TV has more pricing power than Free TV.

The absence of credible evidence that retransmission prices are too high begs the question Congress should be asking: Why has Pay TV made this their highest legislative priority? Evidence suggests their ultimate goal is to kill Free TV and take its advertising revenue.

Both Pay and Free TV distributors derive revenue from the sale of local advertising. Available advertising time is typically split between TV distributors and programming networks in both market segments.

The difference is the degree to which different TV distributors rely on advertising revenue. Most Pay TV revenue is from subscription fees whereas Free TV distributors get most of their revenue from advertising.

The revenue sources of cable (Pay TV) and broadcast (Free TV) programming networks reflect their corresponding distributors. Cable networks derive more revenue from license fees paid by distributors for programming distribution rights than from advertising sales whereas broadcast networks derive nearly all of their revenue from TV advertisements.

These revenue models are starting to change.

As TV viewership has gradually shifted to Internet media platforms, Free TV is facing increased competition for advertising revenue. Free TV has responded by diversifying its revenue stream through the sale of retransmission rights and online advertising.

In the Pay TV segment, cable operators are facing increased competition for subscribers. From 2002 to 2012, cable’s video subscriber share decreased by 20%. Cable has responded to subscriber losses by focusing more effort on local advertising, which is now growing annually at double digit rates.

This growth opportunity for Pay TV distributors is constrained by their inability to sell advertising for broadcast network programming. When they buy programming from cable networks, they split the available advertising time. But when Pay TV distributors buy broadcast programming through retransmission consent, there is no advertising available to split — it’s already been split between TV stations and broadcast networks.

This advertising revenue is significant. Free TV advertising time generated at least $35.8 billion in 2011. TV stations sold $10.3 billion in local advertising alone, which is more than double the $4.2 billion in local advertising revenue earned by cable operators that year.

This fundamental inability to share in Free TV advertising revenue is driving Pay TV dissatisfaction with retransmission consent rights. Pay TV distributors see TV stations as a middleman in the programming supply chain who blocks them from making money on advertising during broadcast network programming. If they could obtain programming from broadcast networks directly, Pay TV distributors would realize the revenue generated by the advertising split, not TV stations. Satisfying the Pay TV desire to buy programming from broadcast networks and share the advertising split directly, however, would mean the end of Free TV, which relies on advertising and retransmission consent revenue to survive.

Absent regulatory intervention there would be no TV broadcast industry today, and cable operators and other [Pay TV distributors] would pay nothing to broadcasters. The [Pay TV distributors] would acquire program rights directly from the program content owners. Without broadcasters to tax [Pay TV distributors] and viewers there would be more programming and lower program prices.

In short, Pay TV’s fixation on retransmission rights isn’t about programming prices — it’s about eliminating the Free TV model and increasing advertising revenues for Pay TV distributors. This explains the cognitive dissonance of some free market advocates who, while clamoring for repeal of retransmission consent and other provisions that are essential to the Free TV model, are not advocating for repeal of provisions mandating that TV stations broadcast their signals for free. It’s a nifty way of killing Free TV without expressly acknowledging it.

Irrespective of the Free TV model’s merits, a policy change of this magnitude should be debated transparently and comprehensively, not rushed through STELA wearing a false “market failure” masque. If Congress intends to eliminate Free TV, it should at least recognize the legitimate consumer and investment-backed expectations created by the current statutory framework and consider appropriate transition mechanisms. The Communications Act update would provide an appropriate legislative vehicle for that consideration. STELA reauthorization does not.

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