New FCC media ownership rules; ‘gains’ must offset ‘collusion,’ expert says

The Federal Communications Commission (FCC) voted June 2 on the most significant overhaul of media ownership rules in decades, including a change that allows television networks to own more local stations. The new rule loosens the national television network ownership cap — raising the number of viewers the networks can reach to 45 percent from 35 percent of the nation’s viewers. Patrick Moreton, Ph.D., a professor of organization and strategy at the Olin School of Business at Washington University in St. Louis, says that the changes are in a very real sense, a “catch-up exercise,” forced on it by changes in the technology used to produce and deliver entertainment and news. He says media firms large and small have successfully made this argument in the federal courts to force the FCC to update its restrictions on media ownership.

Patrick Moreton
Patrick Moreton

“The heart of the issue is a familiar one to any business historian,” Moreton says. “There are tremendous advantages to being big in many, but not all industries, and these advantages place substantial pressure on regulations that seek to limit firms from exploiting them.”

Moreton says that the cost of producing and distributing media content has dropped dramatically in the last 30 years because of investments in satellite technology and the wired backbone of the nation’s communications infrastructure. In particular, the expansion of the cable television systems, now serving 85 percent of American homes, have made it economical to put together national, yet highly specialized, networks and network-like systems for distributing programming.

“The result has been more competition, with existing media producers such as Fox and Warner Brothers and large cable operators using the cable systems to put together new networks and network-like syndicates composed of the remaining independent VHF channels and the historically neglected UHF channels,” says Moreton. “The UHF channels are weaker in broadcast power and hence, have been largely irrelevant until the advent of cable TV. This competition has come at the expense of localized programming as independent channels have become affiliated with these new national networks. As FCC commissioner Kathleen Q. Abernathy recently observed, 90% of the top 50 cable programs are now owned by either the TV networks or the cable companies themselves.”

Moreton says that in most industries, suppliers are paid in cash for the inputs they supply to the production process. Steel manufacturers, for example, are paid by the automakers for steel that is used to make cars. In the TV industry, by contrast, viewers are paid in kind—they receive programming that they find enjoyable enough to tolerate the commercials that the stations intercalate between scenes or events in a program. The attention of these viewers is then delivered to advertisers, who are the real customers of any TV station.

“The value of advertising inserted into a program is a function of the number of viewers watching that program,” Moreton says. “Ideally, we have networks competing amongst themselves for the scarce input, the viewer’s attention, which then leads to programming that is the best that is economically feasible to deliver to consumers. That competition, however, is muted when a firm owns more than one station in a market because stations owned by the same firm do not compete against each other. Rather, they are legally allowed to collude, generally by providing programming that does not unnecessarily steal viewers from their sister stations owned by the same parent. The same phenomenon occurs, to a lesser degree perhaps, when a single entity owns other types of media, radio and print, for example, in the same market.”

For this reason, Moreton says that the FCC needs to look at whether the gains from increasing the size of the media companies, including higher production-quality and more focused programming, exceed the loss created by collusion.

“The answer,” he says, “unfortunately, does not lend itself to hard factual analysis because we have no real way of measuring the welfare loss that occurs when stations no longer have that added incentive to steal viewers from a sister station.”

Moreton is the author of “What’s in the Air: Interlicense Synergies in the FCC’s Broadband PCS Spectrum Auctions,” (Journal of Law and Economics, 1998) and “Pioneering Advantage in New Technology: The United States Cellular Telephone Service Industry.” He holds a Ph.D. from the University of California, Berkeley and an M.B.A. from Harvard University and previously served as a research fellow at the Harvard Graduate School of Business Administration. He has written numerous Harvard Business School case studies in finance, business ethics, and business-government regulation.

He is available to comment.