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Misregulating television: Network dominance and the FCC
Book reviews
91
Stanley M. Besen, Thomas G. Krattenmaker, A. Richard Metzger and John R. Woodbury, Misregulating Television: Network Dominance and the FCC (University of Chicago Press, Chicago, IL, 1984). Misregulating Television tells a story which by now is quite familiar to those who follow the debates over the regulation of television in the United States. American television, the story says, is 'dominated' by three large over-the-air n e t w o r k s - A B C , CBS, and NBC. These networks purchase programs from suppliers, sell time between program parts to national advertisers, and feed the arranged program and advertising to affiliates who simultaneously broadcast this material over the air in disparate locations. Networks evolve for several reasons: (1) they are, a highly efficient response to the 'public good' nature of programming (i.e., once one has produced a program it can be shown over and over again with very low marginal costs), (2) networks develop expertise in purchasing and developing programming that will appeal to audiences that advertisers wish to reach, and (3) networks produce efficiencies in selling blocks of time to advertisers. The number of commercial networks is only three because FCC policies have prevented the evolution of a fourth network. In particular, the Federal Communications Commission's allocation of spectrum grants nearly all local markets only three television stations in the more desirable V H F band (channels 2 through 13). Moreover, the FCC allows each television station to affiliate with at most one network. These policies produce an industry structure of three networks. For the last 40 years the Federal Communications Commission has promulgated rules that attempt to control network behavior toward affiliates and program suppliers. These rules frequently regulate the terms in contracts between networks and both affiliates and suppliers. The suspect contract terms, all of which seem to give the network 'too much' power visa vis the affiliates and suppliers, have, for the most part, perfectly innocent explanations, most of which cluster into three groups: (1) Strategic behavior by both affiliates and networks may prevent them from working together so as to maximize joint profits. The suspect contractual terms often can be understood as attempts by networks and affiliates to reduce losses from strategic behavior. (2) Networks can procure programs from producers much more efficiently than affiliates can, and the suspect terms help to exploit network efficiencies. (3) Suspect contractual terms often do nothing more than allocate risk of loss (due to unpopular programming) between networks and program producers, and help to ensure that the producers supply the most profitable sort of programming. The authors find a few exceptions to these basic observations, ~ but in general they regard network conduct as more likely benign than malignant. This outlook rests on a basic argument: even if the three major networks could theoretically exercise collusive oligopoly power, they could not succeed in using it because, on most
1For example, the authors are chary of allowingnetworks to control their affiliates' advertising rates for non-network spots sold to national advertisers. Such a practice has virtually no purpose other than horizontal price fixing.
92
Book reviews
matters, coordination of cartel behavior is virtually impossible, and even if coordination problems were solved, new technologies are now waiting in the wings to challenge the traditional networks. Misregulating Television next argues that the FCC should p r o m o t e the goals of enhancing economic efficiency, maximizing the n u m b e r of viewing options available to viewers at any given time, and (perhaps) encouraging 'localism'. 2 Given these three goals, the FCC's attempts to control network behavior by regulating contract terms have been, and continue to be, completely misguided. Instead, the FCC ought to concentrate on helping new networks to evolve by creating more outlets with which new networks can affiliate and by removing regulatory obstacles to the formation of new networks (by, for example, allowing individual stations to affiliate with more than one network at a time). Misregulating Television is both impressive and mildly troubling. Given the norms of efficiency, diversity, and localism, the analysis that proceeds from t h e m is quite good and frequently convincing. In general I know of no recent work that presents this material any better. However, Misregulating Television provides no clear picture of the relationship of its norms to positive analysis. For example, when introducing the norms of economic efficiency, diversity, and localism, the book justifies its choice in the following terms: '[C]areful examination of economic principles, First A m e n d m e n t values [and] the Communications A c t . . . suggests that three widely agreed u p o n standards constitute workable criteria by which to measure television network commercial p r a c t i c e s . . . ' (p.23). However, even a casual reading of some of the cases from the District of Columbia Circuit Court of Appeal shows that the courts find other norms in the Communication Act and the First A m e n d m e n t which directly conflict with economic efficiency, diversity and localism. For example, Cosmopolitan Broadcasting 3 dealt with a New York City radio station which had wholesaled away most of its air time to 'time brokers', who resold it in portions as small as 30 minutes. The purchasers were foreign language programmers who catered to the many ethnic groups living in New York. As a consequence, Cosmopolitan broadcast programming in 17 foreign languages each week. This result looks very good in terms of the norms in Misregulating Television. Such programming is economically efficient because most of the ethnic groups were numerous enough to support only a (strongly desired) few minutes a week of programming in their native language. This programming obviously increased diversity, and also served the localism goal. Nevertheless, the FCC revoked the station's license because, among other things, the Federal Communications Act requires each broadcaster to know the content of its broadcasts and affirmatively to choose that content in the 'public interest'. 2'Localism' is defined either as an attempt to maximize individual choice of viewingoptions, or as a desire to ensure that programming reflecting the needs and interests of small, local communities is presented. 3CosmopolitanBroadcasting Corp. v. F.C.C., 581 F.2d 917 (1978), cert. denied, 454 U.S. 1143 (1982).
Book reviews
93
The owners of C o s m o p o l i t a n knew virtually nothing of its broadcast content. The District of Columbia Circuit Court of Appeals upheld the F C C ' s decision, finding that the Federal Communications Act contains a norm of owner involvement in programming. Applied in this way, such a norm obviously raises the cost of broadcasting to ethnic minorities, and thereby conflicts with economic efficiency, diversity and localism. Of course, there are jurisprudential approaches that allow a c o m m e n t a t o r to call a court decision 'wrong'. The authors may, in fact, wish to call 'wrong' the norm of owner involvement that was found in Cosmopolitan; Misregulating Television gives no hint regarding the authors' resolution of the tension b e t w e e n the case law and their choice of norms for the book. A n d this tension strains some of the b o o k ' s analysis. For example, when Misregulating Television criticizes the FCC for failing to choose the right policies toward television networks, the b o o k couches the criticism in terms that suggest that although the authors and the FCC share exactly the same norms of efficiency, diversity and localism, the FCC has b e e n consistently inept and misinformed. If only the F C C had the right information and were more effective it would choose the correct policies. H o w e v e r , in its last chapter Misregulating Television reverses its field and considers the possibility that the F C C may choose to follow norms (or objective functions) other than those of the authors. This schizoid approach to characterizing the F C C ' s behavior stems from the lack of clarity on the relationship b e t w e e n norms and positive analysis. 4 This lack of clarity need not be fatal. O n e should read this b o o k as a fairly sophisticated analysis which assumes the correctness of its norms and then produces policy prescriptions. Those who embrace the basic norms will agree with many of the p r o p o s e d policies. Those who do not may still appreciate Misregulating Television as a mapping b e t w e e n norms and policies. My final question a b o u t the b o o k is why it was written. The authors give three reasons '[N]ot since 1957 has anyone examined in a comprehensive integrated fashion the entire panoply of network relationships with advertisers, stations, and program suppliers.' (p.27). The four authors of Misregulating Television were also the chief m e m b e r s of the U.S. Federal Communications Commission's N e t w o r k Inquiry Special Staff, which p r o d u c e d a very large two volume report, ' N e w Television Networks' [see U.S. F C C (1980)]. The analysis in Misregulating Television differs only slightly from the analysis in the report. A t many places, most notably in the treatment of network and program supplier relationships, Misregulating Television is better d e v e l o p e d than New Television Networks. But in general, they strongly resemble each other. 4If the FCC can choose to follow goals other than efficiency, diversity and localism, then one must ask whether the choice of other goals is legitimate - if there really are other norms in the Federal Communications Act. If so, the FCC's behavior may not be criticized on those grounds. If not, then the FCC may be criticized as inept (or, perhaps, venial). But in order to show that the FCC may not choose norms other than efficiency, diversity and localism, the authors must make the very same arguments required to show that the norm of owner involvement in Cosmopolitan Broadcasting was wrong.
Book reviews
94
'Second, in our formal roles as investigators for the F C C , we were able to collect from a variety of industry sources large amounts of information not previously available to researchers. Consequently, we were able to test empirically a n u m b e r of assertions concerning television industry behavior and the effect of FCC rules on that behavior to an extent not previously possible.' (p.2). Misregulating Television contains no empirical testing of any proposition. In fact, w h e n e v e r an empirical question surfaces, the authors cite a previously published w o r k - most often their own F C C special staff report, New Television Networks. 'Third, and most importantly, until quite recently television netw o r k s . . , were practically the exclusive source of televised home entertainment. Today, however, ]there is a much wider, more diverse broadcasting i n d u s t r y ] . . , w h e t h e r existing or p r o p o s e d regulations of conventional networks remain sound in this wider, more diverse broadcasting industry will soon b e c o m e the central issue of television n e t w o r k economic regulation.'(p.23). In Misregulating Television the analysis of the consequences of new video technologies is virtually identical with that of the analysis in New Television Networks - with only a couple of afterthoughts p r o m p t e d by some recent changes in competing technologies. 5 In sum, because Misregulating Television reads only like a slightly better developed version of portions of New Television Networks, none of the authors' three justifications for writing this b o o k seems convincing. I suspect that the authors published this b o o k , instead, because their original w o r k did not have the impact for which they had hoped. Perhaps they are publishing essentially the same story in the hope of having more impact this time. For all of these reasons, I can r e c o m m e n d this b o o k to anyone who wishes to gain an appreciation for much of the contents of the original work. In addition, the b o o k is useful for learning of the most recent thoughts of the authors on television network policy. But anyone who is familiar with New Television Networks will need to spend little time with Misregulating Television.
References u.s. Federal Communications Commission, Network Inquiry Special Staff, 1980, New television networks: Entry, jurisdiction, ownership and regulation (U.S. Government Printing Office, Washington, DC). M a t t h e w L. Spitzer University of Southern California Los Angeles, C A 5There are two basic afterthoughts. First, it seems increasingly less likely that the networks actually possess substantial monopoly power, and hence it is now even less sensible to try to regulate their behavior. Second, the FCC must carefully tailor its actions so as to avoid skewing the growth of new networks either towards or away from technologies.
91
Stanley M. Besen, Thomas G. Krattenmaker, A. Richard Metzger and John R. Woodbury, Misregulating Television: Network Dominance and the FCC (University of Chicago Press, Chicago, IL, 1984). Misregulating Television tells a story which by now is quite familiar to those who follow the debates over the regulation of television in the United States. American television, the story says, is 'dominated' by three large over-the-air n e t w o r k s - A B C , CBS, and NBC. These networks purchase programs from suppliers, sell time between program parts to national advertisers, and feed the arranged program and advertising to affiliates who simultaneously broadcast this material over the air in disparate locations. Networks evolve for several reasons: (1) they are, a highly efficient response to the 'public good' nature of programming (i.e., once one has produced a program it can be shown over and over again with very low marginal costs), (2) networks develop expertise in purchasing and developing programming that will appeal to audiences that advertisers wish to reach, and (3) networks produce efficiencies in selling blocks of time to advertisers. The number of commercial networks is only three because FCC policies have prevented the evolution of a fourth network. In particular, the Federal Communications Commission's allocation of spectrum grants nearly all local markets only three television stations in the more desirable V H F band (channels 2 through 13). Moreover, the FCC allows each television station to affiliate with at most one network. These policies produce an industry structure of three networks. For the last 40 years the Federal Communications Commission has promulgated rules that attempt to control network behavior toward affiliates and program suppliers. These rules frequently regulate the terms in contracts between networks and both affiliates and suppliers. The suspect contract terms, all of which seem to give the network 'too much' power visa vis the affiliates and suppliers, have, for the most part, perfectly innocent explanations, most of which cluster into three groups: (1) Strategic behavior by both affiliates and networks may prevent them from working together so as to maximize joint profits. The suspect contractual terms often can be understood as attempts by networks and affiliates to reduce losses from strategic behavior. (2) Networks can procure programs from producers much more efficiently than affiliates can, and the suspect terms help to exploit network efficiencies. (3) Suspect contractual terms often do nothing more than allocate risk of loss (due to unpopular programming) between networks and program producers, and help to ensure that the producers supply the most profitable sort of programming. The authors find a few exceptions to these basic observations, ~ but in general they regard network conduct as more likely benign than malignant. This outlook rests on a basic argument: even if the three major networks could theoretically exercise collusive oligopoly power, they could not succeed in using it because, on most
1For example, the authors are chary of allowingnetworks to control their affiliates' advertising rates for non-network spots sold to national advertisers. Such a practice has virtually no purpose other than horizontal price fixing.
92
Book reviews
matters, coordination of cartel behavior is virtually impossible, and even if coordination problems were solved, new technologies are now waiting in the wings to challenge the traditional networks. Misregulating Television next argues that the FCC should p r o m o t e the goals of enhancing economic efficiency, maximizing the n u m b e r of viewing options available to viewers at any given time, and (perhaps) encouraging 'localism'. 2 Given these three goals, the FCC's attempts to control network behavior by regulating contract terms have been, and continue to be, completely misguided. Instead, the FCC ought to concentrate on helping new networks to evolve by creating more outlets with which new networks can affiliate and by removing regulatory obstacles to the formation of new networks (by, for example, allowing individual stations to affiliate with more than one network at a time). Misregulating Television is both impressive and mildly troubling. Given the norms of efficiency, diversity, and localism, the analysis that proceeds from t h e m is quite good and frequently convincing. In general I know of no recent work that presents this material any better. However, Misregulating Television provides no clear picture of the relationship of its norms to positive analysis. For example, when introducing the norms of economic efficiency, diversity, and localism, the book justifies its choice in the following terms: '[C]areful examination of economic principles, First A m e n d m e n t values [and] the Communications A c t . . . suggests that three widely agreed u p o n standards constitute workable criteria by which to measure television network commercial p r a c t i c e s . . . ' (p.23). However, even a casual reading of some of the cases from the District of Columbia Circuit Court of Appeal shows that the courts find other norms in the Communication Act and the First A m e n d m e n t which directly conflict with economic efficiency, diversity and localism. For example, Cosmopolitan Broadcasting 3 dealt with a New York City radio station which had wholesaled away most of its air time to 'time brokers', who resold it in portions as small as 30 minutes. The purchasers were foreign language programmers who catered to the many ethnic groups living in New York. As a consequence, Cosmopolitan broadcast programming in 17 foreign languages each week. This result looks very good in terms of the norms in Misregulating Television. Such programming is economically efficient because most of the ethnic groups were numerous enough to support only a (strongly desired) few minutes a week of programming in their native language. This programming obviously increased diversity, and also served the localism goal. Nevertheless, the FCC revoked the station's license because, among other things, the Federal Communications Act requires each broadcaster to know the content of its broadcasts and affirmatively to choose that content in the 'public interest'. 2'Localism' is defined either as an attempt to maximize individual choice of viewingoptions, or as a desire to ensure that programming reflecting the needs and interests of small, local communities is presented. 3CosmopolitanBroadcasting Corp. v. F.C.C., 581 F.2d 917 (1978), cert. denied, 454 U.S. 1143 (1982).
Book reviews
93
The owners of C o s m o p o l i t a n knew virtually nothing of its broadcast content. The District of Columbia Circuit Court of Appeals upheld the F C C ' s decision, finding that the Federal Communications Act contains a norm of owner involvement in programming. Applied in this way, such a norm obviously raises the cost of broadcasting to ethnic minorities, and thereby conflicts with economic efficiency, diversity and localism. Of course, there are jurisprudential approaches that allow a c o m m e n t a t o r to call a court decision 'wrong'. The authors may, in fact, wish to call 'wrong' the norm of owner involvement that was found in Cosmopolitan; Misregulating Television gives no hint regarding the authors' resolution of the tension b e t w e e n the case law and their choice of norms for the book. A n d this tension strains some of the b o o k ' s analysis. For example, when Misregulating Television criticizes the FCC for failing to choose the right policies toward television networks, the b o o k couches the criticism in terms that suggest that although the authors and the FCC share exactly the same norms of efficiency, diversity and localism, the FCC has b e e n consistently inept and misinformed. If only the F C C had the right information and were more effective it would choose the correct policies. H o w e v e r , in its last chapter Misregulating Television reverses its field and considers the possibility that the F C C may choose to follow norms (or objective functions) other than those of the authors. This schizoid approach to characterizing the F C C ' s behavior stems from the lack of clarity on the relationship b e t w e e n norms and positive analysis. 4 This lack of clarity need not be fatal. O n e should read this b o o k as a fairly sophisticated analysis which assumes the correctness of its norms and then produces policy prescriptions. Those who embrace the basic norms will agree with many of the p r o p o s e d policies. Those who do not may still appreciate Misregulating Television as a mapping b e t w e e n norms and policies. My final question a b o u t the b o o k is why it was written. The authors give three reasons '[N]ot since 1957 has anyone examined in a comprehensive integrated fashion the entire panoply of network relationships with advertisers, stations, and program suppliers.' (p.27). The four authors of Misregulating Television were also the chief m e m b e r s of the U.S. Federal Communications Commission's N e t w o r k Inquiry Special Staff, which p r o d u c e d a very large two volume report, ' N e w Television Networks' [see U.S. F C C (1980)]. The analysis in Misregulating Television differs only slightly from the analysis in the report. A t many places, most notably in the treatment of network and program supplier relationships, Misregulating Television is better d e v e l o p e d than New Television Networks. But in general, they strongly resemble each other. 4If the FCC can choose to follow goals other than efficiency, diversity and localism, then one must ask whether the choice of other goals is legitimate - if there really are other norms in the Federal Communications Act. If so, the FCC's behavior may not be criticized on those grounds. If not, then the FCC may be criticized as inept (or, perhaps, venial). But in order to show that the FCC may not choose norms other than efficiency, diversity and localism, the authors must make the very same arguments required to show that the norm of owner involvement in Cosmopolitan Broadcasting was wrong.
Book reviews
94
'Second, in our formal roles as investigators for the F C C , we were able to collect from a variety of industry sources large amounts of information not previously available to researchers. Consequently, we were able to test empirically a n u m b e r of assertions concerning television industry behavior and the effect of FCC rules on that behavior to an extent not previously possible.' (p.2). Misregulating Television contains no empirical testing of any proposition. In fact, w h e n e v e r an empirical question surfaces, the authors cite a previously published w o r k - most often their own F C C special staff report, New Television Networks. 'Third, and most importantly, until quite recently television netw o r k s . . , were practically the exclusive source of televised home entertainment. Today, however, ]there is a much wider, more diverse broadcasting i n d u s t r y ] . . , w h e t h e r existing or p r o p o s e d regulations of conventional networks remain sound in this wider, more diverse broadcasting industry will soon b e c o m e the central issue of television n e t w o r k economic regulation.'(p.23). In Misregulating Television the analysis of the consequences of new video technologies is virtually identical with that of the analysis in New Television Networks - with only a couple of afterthoughts p r o m p t e d by some recent changes in competing technologies. 5 In sum, because Misregulating Television reads only like a slightly better developed version of portions of New Television Networks, none of the authors' three justifications for writing this b o o k seems convincing. I suspect that the authors published this b o o k , instead, because their original w o r k did not have the impact for which they had hoped. Perhaps they are publishing essentially the same story in the hope of having more impact this time. For all of these reasons, I can r e c o m m e n d this b o o k to anyone who wishes to gain an appreciation for much of the contents of the original work. In addition, the b o o k is useful for learning of the most recent thoughts of the authors on television network policy. But anyone who is familiar with New Television Networks will need to spend little time with Misregulating Television.
References u.s. Federal Communications Commission, Network Inquiry Special Staff, 1980, New television networks: Entry, jurisdiction, ownership and regulation (U.S. Government Printing Office, Washington, DC). M a t t h e w L. Spitzer University of Southern California Los Angeles, C A 5There are two basic afterthoughts. First, it seems increasingly less likely that the networks actually possess substantial monopoly power, and hence it is now even less sensible to try to regulate their behavior. Second, the FCC must carefully tailor its actions so as to avoid skewing the growth of new networks either towards or away from technologies.