The Internet revolution is changing our lives in terms of how we shop, where we work, how we bank, how we communicate and get local news, and where we receive music and video content. However, while there has been an explosion of local news and content sources online, the regulations that govern related markets have been very slow to change. As I will explain, this regulatory inertia has a real impact on consumers.
Many decades ago, the average community might only have local news coverage coming from a handful of radio broadcasters, TV broadcasters and maybe a city newspaper or even two. Back then, cross-ownership of broadcasters and newspapers raised some concerns with regulators and policymakers, who saw the potential for anticompetitive risks stemming from increased market concentration in the distribution of local news, music and TV programming.
As a result, the Federal Communications Commission (FCC), the chief regulator for the TV and radio broadcast stations, kept a watchful eye on market structure and concentration. Their decades old concern was that having only a few broadcasters per market would lead to too few “voices” in the community from which consumers could get their news and content.
While the FCC began imposing cross-ownership rules as far back as the early 1940s, various market ownership rules remain today. For one example, a single TV or radio station cannot own a newspaper in the same market. Additionally, regardless of the number of stations in the market or their specific market shares, a major top-4 TV station is barred from merging with another top-4 station. Similarly, any cross-ownership between stations is prohibited unless there are more than 8 local TV stations in the market (the so-called 8-voice test). The idea was that these cross-ownership regulatory prohibitions would “preserve localism” and give consumers alternative “voices” – essentially, the rules were designed to give consumers access to many sources for news and information. That was fine for the 1940s.
The problem, however, is that these rules are comically stuck in time, ignore basic economic principals, leave consumers worse off and work to undermine the preservation of localism – the very thing that these rules were set out to preserve.
The FCC’s 8-voice test is completely arbitrary and a stellar example about how poor these rules are; it is not supported by any well-accepted economic theory or by any empirical evidence. The fact is that the FCC does not know what the correct number of broadcasters should be in any given market (a concept sometimes referred to as the minimal efficient scale). That determination is the role of competitive markets.
What we do know is that less populated and concentrated markets require fewer stations in order to attract enough ears and eyes to justify advertiser support. The current cross-ownership rules make it much harder for broadcasters to achieve the economies of scale that would allow them to operate profitably and most efficiently. Because these rules may require more broadcasters than a local market can support, it paradoxically puts more broadcasters out of business, which means consumers are made worse off and localism is undermined.
In addition, the FCC is responsible for regulating more than TV and radio broadcast stations. Their jurisdiction includes Internet services, as well as wired and wireless telecommunications, satellite, cable and other services – all of which compete for the same eyes and ears of consumers. At the same time, the Internet doesn’t count as a single voice under the 8-voices test. Yet, the FCC cross-ownership regulations have seemed to have missed this obvious fact.
The reality is that consumers have many choices among music and video content providers, who complete alongside each other for the same advertising dollars, which makes for a very intense rivalry. Specifically, local broadcasters compete with Cable TV, Satellite and a host of well-established online streaming sites for video and music – think Netflix, Sling, Apple TV, Google’s YouTube, HBO Now, Amazon Prime, Hulu, Sirius, Pandora, Spotify and others – yet none of these rivals face similar restrictions on media cross-ownership.
Like broadcasters, most of these news and streaming websites operate, at least in part, on advertising revenues. In a time when newspapers are literally on deathwatch, we should be doing everything we can to support and cultivate local news and reporting. However, if these cross-ownership rules prevent efficient operations, then they are speeding the demise of many broadcasters, which will ultimately reduce their reach to consumers. Simply put, while regulations were established to preserve localism, they are having the effect of ending localism, not protecting it.
With the lightening pace of change as to how consumers access, consume and share media, it is surprising that these old regulations remain in place, and it is nonsensical that these regulations can still be justified based on a notion of preserving localism. It is time for the new FCC to rethink these decades-old regulations so that they reflect the new competitive landscape, at least if consumers and localism are still important.