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J.H. Snider

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The Broadcast Industry's Free TV Scam Redux

Posted: 10/24/11 02:07 PM ET

Fool me once, shame on you; Fool me twice, shame on me.

On October 20, 2011, the Free TV and Broadband Coalition held a press conference at the National Press Club announcing its proposed alternative to the incentive spectrum auctions endorsed by President Obama and key members of Congress, including those serving on the deficit reduction super committee.

The Free TV Coalition, led by executives from Sinclair Broadcast Group, claims that its aim is to preserve Free TV and enhance it to include both fixed (to your living room) and mobile (to your cell phone) distribution. By Free TV is meant ad-supported programming, even if 90% of the audience for the programming indirectly pays subscription fees for it via their cable TV, satellite TV, and mobile phone service providers. No mention was made of the fact that there is now far more "free" news content on the Internet than on broadcaster provided "Free TV."

At the press conference, the Coalition argued that its plan is "American" whereas the incentive auction one is "unAmerican"; that its plan will preserve Free TV whereas the opposing one will kill it; and that its plan compared to the opposing one will provide more than ten times the revenue to the U.S. Treasury, albeit with zero spectrum auction receipts.

Listening to the plan I was reminded of Milton Maltz, the billionaire TV broadcaster who led the broadcasters' brass knuckles Free TV campaign in the early 1990s. In the early 1990s, TV broadcasters concluded that cable TV was growing too powerful and that they would need must-carry, retransmission consent, and preferred channel position rights in order to thrive. Must-carry rights allowed broadcasters to demand free carriage on local cable TV; retransmission consent rights allowed them to negotiate the highest possible fee for carriage; and preferred channel position rights allowed them to force cable companies to give them a low and therefore desirable channel number.

Maltz had a half-dozen barely profitable UHF TV stations that had to make do with providing low value programming such as the Home Shopping Network. He knew that if his stations could win free, guaranteed, and low channel carriage on cable TV, they would vastly increase in value. With hundreds of millions of dollars worth of rights to gain, he was a natural to lead the free TV campaign. Of course, the public emphasis was on Free TV, not a windfall for Maltz and other broadcasters. Here is the type of language Maltz cynically used to launch the campaign:

Free TV lightens the burdens of millions of our citizens with the best in entertainment. Free TV enlightens the minds of Americans with information and news.... Broadcasters must make the American public aware of the danger facing our institution of Free TV. It is time for the greatest marketers in the world--TV broadcasters... to start telling this story.

A decade later Maltz would sell his UHF stations, practically worthless in the late 1980s, for close to a billion dollars. Today Maltz may be best known as the founder of Washington, DC's International Spy Museum--a symbolically telling denoument.

Now Sinclair Broadcasting, as the lead player in the Coalition, has taken up the mantle where Maltz left off. Sinclair, with 65 local TV stations, has potentially billions of dollars to gain if it can transition its spectrum licenses, at public expense, from low value fixed broadcast to high value mobile broadband service. From a company whose executives, most visibly Mark Hyman, are known for their fierce belief in deregulation and free markets, the chutzpah of advocating for this corporate welfare in the name of Free TV is breathtaking.

The key feature of the Coalition's plan is that it seeks to abandon any effort to auction broadcast spectrum while allowing broadcasters to provide the type of high valued mobile broadband services the auction winners would provide. The Coalition argues that the highest valued use of spectrum for mobile broadband is not one-to-one (telephone-like) but one-to-many (broadcast-like) service, with each cell tower a broadcast transmitter.

Specifically, the Coalition argues broadcasters can provide mobile broadband video service 80% more efficiently than conventional mobile broadband services. Thus, the Coalition forecasts they will capture the lion's share of this market. This, in turn, will generate huge revenue for the U.S. Treasury via the 5% tax on ancillary revenue earned by broadcasters. Indeed, the amount of this revenue, ranging from $62 billion to $215 billion, is at least an order of magnitude greater than the forecast receipts via an auction, which the Coalition says is $6 billion. As a public bonus, all the new revenue broadcasters receive from mobile broadband TV will help them preserve Free TV.

The Coalition's cost-benefit analysis is breathtakingly amateurish, making numerous dubious assumptions. The analysis:

  1. Assumes that revenue from mobile phone providers on the spectrum the broadcasters would give up is zero.
  2. Doesn't explain how U.S. Treasury revenue would be expanded when cellular providers pay approximately 18% of their revenue in taxes whereas broadcasters only pay 5% on their auxiliary service revenue.
  3. Assumes no loss in consumer welfare from the loss of higher valued on-demand ("one-to-one") services if consumers are forced to watch one-to-many ("broadcast") services.
  4. Ignores whether using low-frequency spectrum is the best way to deliver mobile broadband services (as opposed to, say, the higher frequency spectrum used by mobile satellite radio services).
  5. Doesn't justify the $6 billion incentive active score from the Congressional Budget Office, when even that implausibly optimistic figure is based on the assumption that the great majority of the auction proceeds will simply go into the broadcasters' pockets.

However, if the past is any guide, Congress will likely not care about such a slipshod analysis. Consider the politically successful economic analysis broadcasters used in the late 1980s to prevent the mobile telephone industry from reallocating spectrum in the underutilized UHF TV band. Broadcasters argued that there was minimal public demand for mobile telephone service (still a plausible argument in the late 1980s when only the wealthy could afford such service) and that allowing broadcasters to use that spectrum (a giveaway not actually technically necessary) to transition their licenses from a single standard definition TV channel to a single high-definition TV channel would provide much better value to consumers. They also argued that broadcast HDTV was the key to the future success of the American electronics industry and that without it the Japanese would not only take over the U.S. TV business, but the even more important semiconductor business, which would provide the HDTV chips. Not least, they argued that with their proposed state-of-the-art HDTV standard, America would conquer vast markets as the world's leading TV producer.

Of course, it didn't turn out that way. HDTV turned out to be a niche business. Satellite and cable TV, not broadcast TV, led the U.S. HDTV rollout. And Americans were saddled with the inferior U.S. HDTV system (called ATSC), which the rest of the world refused to adopt, partly because it was widely recognized to be a primitive, broadcast lobbyist driven standard. Then, after the political threat from the mobile telephone providers was eliminated, the broadcasters quickly changed their business plans, insisting they should each be given the right to provide as many as a dozen different standard definition channels in place of one, as this would allow Free TV to compete more effectively against multichannel satellite and cable TV providers. They also later won rights to provide mobile TV service (the key feature of ATSC 2.0), which allows them to provide dozens of low resolution TV channels and charge for them like a cable TV service--a repudiation of their earlier HDTV and Free TV promises.

No politician has ever paid a price for giving broadcasters huge economic windfalls at public expense for business plans that turned out to be just smoke and mirrors. No wonder, then, that the Coalition thinks it can continue to play this game successfully.

Next up for the broadcast TV industry is the refinement and adoption of the ATSC 3.0 standard, which is the spectrum technology they hope to ride into the mobile broadband world. ATSC 3.0 embodies the reality that the broadcasters previous promises didn't pan out as expected and that fraudulent techical arguments are rarely punished in Washington. In the early 1990s, the broadcast lobby saw Europe's HDTV OFDM transmission standard as a political threat and dissed it with bogus research. Now, twenty years later and exploiting Washington's historical amnesia, they're championing it.

A common saying is that if it walks like a duck and quacks like a duck it must be a duck. Accordingly, ATSC 3.0 appears set to borrow heavily from the technologies adopted by the leading mobile wireless providers. But the broadcasters protest that they're going to use the technology to broadcast free TV from cellular towers, not compete by providing one-to-one broadband service. But if there was a market, today's wireless carriers could do much of what the broadcasters propose because each cell tower already broadcasts to all the individuals within its range. Wireless carriers don't use their local towers to microbroadcast because that isn't the highest valued use of their spectrum. Spellbindingly, broadcasters currently aren't even making the pretense that ATSC 3.0 will be backward compatible.

What the broadcasters really want is to transition to mobile broadband service without paying for the privilege. The debate in the industry is over the means, not the end. The National Association of Broadcasters (NAB) believes that incentive auctions can be successfully gamed to achieve that end, whereas members of the Coalition think they have become too risky, now that they have been caught up in the high visibility, high stakes, debt reduction debate. ATSC 3.0, which has been backed by both NAB and the Coalition, signals what seems to be the broadcasters' true long-term agenda.

Mine is certainly not the preferred broadcast history championed by the broadcast industry and its allies. And no doubt the broadcasters' brilliant spinmeisters will dispute it. But the proof is in the pudding. A broadcast license has always been a license to print money, but with the exploding value of spectrum the stakes keep increasing. Already, the broadcast industry has wrung from government tens of billions of dollars of corporate welfare in the form of spectrum giveaways. In return, from public interest obligations to free TV to HDTV economic growth nirvana, there has been one broken promise after another. But with the exploding demand for wireless service, the stakes and gamesmanship have never been greater.

The American public has long proved a sucker for such games. It's been a long ride, and I don't expect it to be over until the billionaires and their media conglomerates, with their sycophantic allies in Congress, have succeeded in upgrading their licenses from broadcast to broadband for chump change to the American public who own the airwaves.

Addendum: Please consider signing a petition against spectrum giveaways on the White House's new We The People website. To sign the petition, you'll need to sign in (this includes providing your name, email address, and zipcode, then enter a captcha code), wait to receive an email with a verification link, click on the link, and then sign ithe petition. Don't forget the last step!

 
 
 

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