TV’s Unnatural Monopolies; The rationale for government regulation is collapsing in the face of technological change

August 18, 2013, 5:25 p.m. ET

Crovitz: TV’s Unnatural Monopolies

The rationale for government regulation is collapsing in the face of technological change.

L. GORDON CROVITZ

The big loser in the battle between Time Warner Cable TWC -0.24% and CBSCBS -0.56% is not the cable company, the network or the viewers who lost access to their favorite shows. The big loser is Washington, whose efforts to regulate what used to be called television grow more futile with every new video technology.

Lawmakers and regulators still treat broadcasters and cable operators as “natural” monopolies. That gives them a rationale to layer on bureaucratic rules setting out how the industry should be run.The notion of natural monopolies began a century ago—the last time rapid technological change led to fundamental shifts. By the time of the New Deal, industries from real estate to coal and milk all claimed to be public utilities in hope of being granted monopolies and thereby beat back competition. Radio and then TV stations got monopoly rights over their broadcast frequencies. Later still, cable companies were considered natural monopolies because of their large infrastructure investment.

The idea of a natural monopoly ignores new technology. In “The Myth of Natural Monopoly,” a 1996 scholarly essay, economist Thomas DiLorenzo described how in the Industrial Age economists “understood that competition was an ongoing process and that market dominance was always necessarily temporary in the absence of monopoly-creating government regulation.”

The Federal Communications Commission might reflect on that wisdom now that technology has undermined its decades-old regulations. In exchange for grants of spectrum, broadcasters agreed to air their programming free, supported by advertising. Today only 10% of American households still use old-fashioned rabbit ears to get their programming. The other 90% have satellite dishes or cable.

In 2012, disputes between distributors and broadcasters led to more than 90 blackouts of networks on cable and satellite TV systems. This month, viewers in more than 50 markets can’t access all their channels. The Time Warner Cable-CBS dispute affects three million viewers in markets including New York and Los Angeles.

The FCC could intervene but wisely decided to let the players fight it out. Broadcasters hope to reduce their reliance on the uncertain revenue stream of advertising by raising the price of retransmission—fees that cable and satellite companies are required by the Cable Act of 1992 to pay to carry what are otherwise free-to-air broadcasts. CBS wants $2 a subscriber.

Cable companies would have to pass these costs on to customers, who might defect to alternatives like Netflix and Hulu. More than 100 million U.S. households have cable or satellite, but 2013 is expected to mark the first-ever decline in the number of pay-TV subscribers.

Regulation makes this kind of dispute inevitable. By imposing the fees, Congress thought it was protecting local broadcasters from monopolistic cable systems. But cable has many competitors, including satellite, phone companies like Verizon, and an increasing number of Internet video providers like Roku, Amazon Prime and Google Chromecast.

These cable-broadcaster disputes illustrate how new technologies trump old regulations. Time Warner Cable even urged its customers to watch CBS via a free-trial offer by a competitor called Aereo. This $8-a-month online service provides access to broadcast television stations using a system that courts have held is exempt from retransmission fees.

Wall Street analysts are focused on how regulations created unsustainable monopoly rights. Craig Moffett recently wrote that disputes like the one between Time Warner Cable and CBS “pit what [is] essentially a government-sanctioned monopoly content provider against a distributor for which there are readily identifiable substitutes.”

Richard Greenfield posted a long essay titled “The Disequilibrium of Power: How Retransmission Consent Went So Wrong & How to Fix It.” He makes the point that if broadcasters are able to increase their retransmission fees to the $2 CBS seeks, this would amount to $12 billion in fees. “This $12 billion would essentially be an annual tax on consumers to receive television signals that are broadcast over the air for free, using spectrum that was given to local TV broadcasters for free and who are supposed to operate in the public interest.”

The absurdity of the current laws is clear: A regulatory system designed to keep local broadcasts available to viewers is causing disputes between cable companies and broadcasters, leading to the very blackouts the regulations were supposed to prevent. It’s past time to deregulate video distribution.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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