Bullshit Analysis #2: Broadcast TV is efficient.

Bullshit Claim

Broadcast TV is efficient.

Bullshit Quote(s)

“Broadcasters generate tremendous efficiencies through their ability to serve ‘one-to-many’ in small bandwidth segments–efficiencies that cannot otherwise be achieved.  Indeed, with each additional viewer, a broadcaster’s use of spectrum becomes more efficient, because increasing the number of viewers places no additional incremental burden on the spectrum.”

–Gordon H. Smith, President of the National Association of Broadcasters and former U.S. Senator, Testimony before the U.S. House of Representatives, Subcommittee on Communications, Technology and the Internet, December 15, 2009.

Bullshit Analysis

Broadcasters endlessly praise their own efficient use of spectrum.  They make this efficiency claim as though it was backed with weighty economic analyses, and I think many broadcast lobbyists have repeated this assertion so many times with so much confidence that they actually believe it.  During the late 1990s and early 2000s, I read through dozens of FCC broadcast filings that claimed free TV was an efficient use of spectrum.  The only two academic citations for this claim were from Stanford Professor Roger Noll and Michigan State Professor Stephen Wildman.  Both are respected economists.  But the citations were more than a decade old and the arguments made in a very different context.  I told Noll,  the co-author of the highly respected Economic Aspects of Television Regulation (Brookings Institution, 1973), how the broadcasters were citing that work in regulatory filings.  He replied with a hearty laugh, as though it was hilarious that the broadcasters would do such a thing.   I then asked if the broadcasters were properly citing his work, and he replied, absolutely not.

At a recent U.S. Commerce Committee hearing on spectrum policy, NAB President and former U.S. Senator Gordon Smith argued that broadcasting was a very efficient use of spectrum because the marginal cost of each additional TV viewer was zero whereas for each additional mobile phone user, there was an additional cost.   Representative Walden then echoed Smith’s statement, denouncing anyone who would dare to suggest that broadcasters might be inefficient spectrum users.  Perhaps not surprisingly, nobody at the hearing contradicted their efficiency arguments.

But it is hard to imagine that Smith or Walden could have passed Economics 101 using such simplistic and flawed economic reasoning.    Ignoring the relative social welfare benefits of broadcasting vs. mobile broadband, let’s just focus on the costs.  Costs can be divided into two components: fixed and variable costs.  Smith and Walden only focused on marginal costs.  But consider this scenario.  Let’s say a business uses a $150 billion asset to serve 10 million  consumers at zero marginal cost.  Another business uses zero fixed assets but provides the same  service to 10 million consumers at $100 marginal cost/consumer.   Clearly, the second business is more cost efficient because the proper metric of cost efficiency is total cost, not marginal cost.

There is also the question of consumer choice.  American consumers increasingly want control over what information they consume.  That control includes what they watch and when they watch it.   American consumers have switched in droves from ad-supported over-the-air broadcast TV to subscription-based cable and satellite TV because they value the additional program choice offered by those distribution outlets.  Now they are switching to the Internet, which gives them even more choice and control over when they consume desired information.  Broadcast TV is based on the premise that a few individuals should be able to decide what the public should watch and when they should watch it.  Unfortunately for broadcasters, consumers increasingly recognize that’s a deal they don’t want.

Even the broadcasters’ marginal cost argument has flaws.  Broadcast TV does have a marginal cost, including electricity, repeaters, and consumer equipment.

Electricity. Broadcasters can pay $100,000/year or more for electricity.  The greater the electric bill, the more viewers can potentially receive broadcast programming.  In theory, the FCC mandates that broadcasters operate at full power level.  But that doesn’t mean the FCC actually enforces the rules or that the broadcasters follow them.    During the early years of the so-called Digital TV transition, broadcasters were mandated to gradually increase their digital TV channel power levels to full power in order to speed consumer adoption of over-the-air digital TV equipment.  Unfortunately, for many broadcasters, the incremental advertising revenue from increasing their power levels was less than the increased energy costs (the type of folks who bought early digital TV sets relied on cable and satellite TV for their HDTV viewing, not over-the-air broadcast TV).  Thus, based on marginal cost analysis, broadcasters had a strong incentive not to provide full power signals, especially because the FCC was not enforcing the law.

Translators. During the mid-2000s, broadcasters successfully petitioned the FCC  to switch from site-based licensing (a broadcast transmitter on a single tall tower) to geographic based licensing (short towers wherever they want, like mobile phone licenses), to cover the many households not able to receive over-the-air TV from a single transmitter.  In cities with tall buildings such as New York City or mountains such as the communities surrounding Denver, Colorado, single transmitters leave many dark spots.   With the advent of mobile digital TV and return links via a cell phone, broadcasters are moving even closer to a marginal cost business model.

Consumer equipment. Consumer equipment to receive an over-the-air broadcast signal is, of course, not free.  Moreover, to speed the digital TV transition, Congress mandated that every TV sold include a digital TV tuner, so for every person actually receiving the benefit of such a tuner many others were paying for the tuner and not getting the benefit.

Interestingly, broadcasters didn’t mention satellite TV, which has a much lower maginal cost of blanketing the U.S. with localized TV signals than does terrestrial TV.  Indeed, the two leading satellite TV companies each already blanket the U.S. with local broadcast TV channels, so some Americans, such as me, can now receive local TV channels through six distribution outlets: 1) terrestrially over-the-air 2) and 3) through satellite providers Direct TV and Dish TV, 4) through cable TV, 5) through a telco such as Verizon’s FIOS service, and 6) through the internet.   One can easily argue that once the fixed costs of these competing networks are already in place, the marginal cost of adding an over-the-air viewer is actually greater.

The classic argument that broadcast TV is inefficient is that the same spectrum used for mobile broadband service is worth many, many times more than when used for broadcast TV service.  Broadcasters claim that spectrum auction values don’t tell the whole story because broadcast TV is a public good.   I have some sympathy for this argument, but the taxpayer subsidies they have received are wholly out of proportion to any public service they have been providing.  One’s eyebrows should certainly be raised when one learns that a service that receives massive public subsidies and claims to be a public good (see bullshit analysis #1: Free TV is not free) has consistently had 40% gross margins, arguably more than any other legal business in the U.S.   The famous observation that a “broadcast license is a license to print money” has more truth to it than the broadcasters’ assertion that they are efficiently providing a public good–and thus deserving of taxpayer subsidies.

Moreover, broadcasters are doing everything they can to get the government to grant them mobile broadband rights without their actually having to pay for them.   That is the most efficient use of their low frequency, beachfront spectrum; they know it as well as everyone else who studies spectrum use; and that’s why they’ve been acting as if they’d prefer to provide mobile broadband service than fixed high definition TV, which can be more efficiently provided by cable TV, satellite TV, and increasingly internet TV services.   If broadcasters genuinely believed that broadcast TV was the most efficient use of their spectrum, they wouldn’t be rushing to exit that business.

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