FCC regulating video marketplace with a broken compass

At the request of Sen. Jay Rockefeller (D-W.Va.), the U.S. Government Accountability Office (GAO) reviewed issues related to the use of commercial agreements between broadcast TV stations, including joint sales agreements (JSAs) in which one station sells advertising time for another station. In June 2014, the GAO’s report found that the “FCC has stated that it is unable to determine the extent to which broadcaster agreements affect its policy goals and media ownership rules.” (GAO report at 2.)

“Specifically, FCC does not collect data and has not completed a review on the prevalence of agreements, how they are used, or their effects on its policy goals and media ownership rules. . . . Without data and a fact-based analysis of how agreements are used, FCC cannot ensure that its current and future policies on broadcaster agreements serve the public interest.” (Id.)

{mosads}The GAO report made it clear that the FCC needed to obtain additional data before making changes to its rules governing the joint sale of advertising by TV stations.

Unfortunately, the GAO report was two months too late. In April 2014, the FCC had already released an order imposing stringent new limits on JSAs.

The FCC justified its decision to take action by artificially narrowing the scope of its inquiry. For example, the FCC refused to consider arguments regarding the potential benefits of JSAs or the impact of non-broadcast competition on the video advertising market, because those issues bear on whether the broadcast ownership limits are necessary at all — a question the FCC was determined to avoid. (FCC Order at paragraph 349.)

In response to FCC Commissioner Ajit Pai’s concern that prohibiting JSAs between TV stations while allowing JSAs among satellite and cable operators (MVPDs) would create a competitive distortion in the video advertising market, the FCC blatantly admitted that it hadn’t asked about JSAs in the MVPD context, and said it wasn’t going to ask about them unless somebody demands it. (FCC Order at paragraph 359, note 1107.)

Refusing to ask obvious questions or purposefully shutting one’s eyes to potential market distortions is inherently inconsistent with the FCC’s goals regarding competition and appropriate decision making. As the GAO noted in its report, “federal standards for internal control note the importance of agencies’ having information that may affect their goals.” (GAO Report at 2.) Expert regulatory agencies should be held to higher standards than ostriches.

The government’s fundamental understanding of the video advertising market is woefully outdated. In its filing at the FCC, the Department of Justice (DOJ) relied on old precedent to assert that “[a]dvertising on local broadcast stations has no close substitutes.” (DOJ Filing at 5.) A review of developments in the video advertising market demonstrates that this assertion is no longer true.

MVPDs now offer local video advertising in direct competition with broadcast TV stations, and MVPDs view it as a growth market. According to PEW Research, 37 percent of total cable revenue comes from advertising.

Though the market for online video ads is small for now, it is growing exponentially at 43.5 percent year over year, and is expected to make up 15 percent of the total digital advertising market by 2017.

Unlike TV stations, MVPDs and online video distributors have the ability to target ads to specific demographics. For example, DirecTV and Dish recently reached an agreement to jointly sell household-addressable advertising to political media buyers. This capability may give MVPDs and online video distributors an advantage in the local advertising market in comparison to TV stations.

Current data thus indicates that the DOJ filing was wrong: There are close substitutes for broadcast television ads. As the CEO of digital marketer i360 said in the New York Times: “The competition is not just other TV networks right now . . . . If TV marketers are only looking at other TV programs, they already are way too far behind.”

The GAO and i360 are right: The FCC needs to catch up with marketers. It should collect data on video marketing before it makes decisions that could have anticompetitive consequences in the video marketplace.

Campbell is executive director of the Center for Boundless Innovation in Technology.