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Should the Government Try to ‘Fix’ Retransmission Consent?

Robert M. McDowell

Like an adolescent awkwardly transitioning to the next stage in life, the traditional media industry is facing unprecedented competitive pressures and an uncertain future. Emotions are flaring and voices are cracking as the marketplace sorts out who will succeed and fail. Almost every market trend, however, points to consumers winning big – if Washington plays it smart, that is.

August’s contract dispute between CBS and Time-Warner Cable over contract terms for the rights to carry the broadcaster’s TV signals and resell them to cable customers, something known in the biz as “retransmission consent” or “retrans,” was but one small symptom of the market’s transition.

After a high profile one-month impasse with posturing and red-faced finger pointing characteristic of only a tiny minority of retrans negotiations, the parties finally reached a deal – just as cable and satellite TV companies and broadcasters always have since they’ve been doing business together. Every year. Hundreds of times a year.

In fact, nearly all retrans negotiations are resolved quietly and invisibly. Why? Because both sides have to give in to consumer demand for the video content they value.

TV stations make more money as more people see their shows, thus creating an incentive to distribute their product as widely as possible. These same market forces also create a disincentive for broadcasters to withhold their signals from distributors like cable and satellite companies.

Retrans codifies the concept that distributors (cable and satellite companies) of a wholesale product (broadcast content) enter into private negotiations with the makers of the product (broadcasters) to determine compensation levels and distribution rights.

Just like many other industries that use sales territories to make distribution of their product more efficient, broadcast networks grant exclusive rights to local TV stations using something akin to McDonald’s-style franchises market-by-market. For decades, these arrangements have operated under time-tested contract law.

Enter Congress. To rectify a by-product of a market-altering congressional creature called a “compulsory license” that stood in the way of direct negotiations between broadcasters and pay TV providers, Congress enacted retrans a generation ago. Cable was a young industry then, and Congress didn’t know whether cable would end up paying broadcasters or whether broadcasters would pay cable – or satellite, as happened in the U.K. The law was written to allow both possibilities. Then a surprising thing happened.

Nothing. Nothing but quietly forged contracts, that is.

For years, broadcasters and cable companies didn’t exchange a dime. They chose to swap air time for ads and new channels instead. During that time, no one ever heard anything about “retransmission consent.” It wasn’t until many years later that broadcasters were able to generate a new stream of cash for their content, which is watched by far more people than most cable-only channels. “Cable and satellite companies pay money for other cable channels and then resell them to consumers for a profit,” broadcasters reasoned. “Why give away a wholesale product for which others are getting paid handsomely?” they concluded.

As soon as cash started to flow from cable and satellite companies to broadcasters, tempers began to flare. While this debate rages and some propose government “fixes,” however, something revolutionary is happening: The marketplace is rapidly evolving to its next level. Both broadcasters and pay TV companies – such as cable and satellite – are nervously looking over their collective shoulders at the meteoric rise of “over-the-top” content – entertainment, sports and news programming delivered through the Internet and mobile devices. Traditional media executives are split on how to respond to alternative programming channels such as those provided by Amazon and Netflix.

In the meantime, some in this battle could end up looking like old generals fighting the last war while the current of history moves past them. The complex economic forces that determine cable costs (retrans fees are a small percentage of overall cable costs) may soon be upended by over-the-top choices that could exert downward pressure on consumers’ bills. Add to the mix that mobile devices are quickly becoming the “first screen” for consumers thus providing a competitive threat to pay TV and broadcasting alike, and the end result could be more choices at lower prices for consumers.

If Washington tries to “outsmart” the marketplace, however, unintended consequences are sure to ensue – as they always do. Attempted government arbitration of retrans disputes is likely to result in more blackouts, not fewer. I witnessed this phenomenon several times during my seven years at the FCC. Evidence reveals that the parties suspend talks with one another when they get “helpful” phone calls from the Federal Communications Commission. When regulators intervene, negotiations stop and the companies have to pivot to accommodate the new third party to their talks: Uncle Sam. Furthermore, the FCC simply lacks the resources to arbitrate even a handful of retrans disputes. Also, possible FCC “standstill” mandates abrogating contracts and forcing the delivery of content not only would set a perilous precedent (if they survive court review and scrutiny under Constitutional law) they would also needlessly delay inevitable decisions regarding whether to ink deals.

More importantly, although changing current law is certainly Congress’s prerogative, doing so could not happen without opening an even hotter debate over how we value intellectual property. Content creators and technological innovators of all stripes, not to mention consumers, could lament the day that happens. America is the world leader in content creation and technological innovation precisely because we prudently defend sensible intellectual property rights. In sum, efforts to change one area of the law, video distribution deals, could end up taking an unintended detour into an intellectual property policy quagmire where everyone, especially consumers, end up losers. Equally as counterproductive would be conflating retrans with the thorny but completely unrelated net neutrality debate, as some have tried.

A better path to pursue is to be patient, observe the dynamism of the marketplace and take our lead from consumer behavior. They know what they’re doing and they are finding new ways to access the best content at the right price. Policy makers who try to predict where consumers are headed may end up guessing wrong and causing harmful unintended consequences. A fast-changing market that may appear to be an ugly adolescent duckling today could likely grow into a beautiful swan before long thanks to the powerful and disruptive market trends of the Digital Age.

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