The Trump administration has had a mixed approach to date on reforming the broadcasting rules. On one hand, broadcast-ownership reforms have been a key issue this year for Republican appointees at the Federal Communications Commission (FCC), as they seek to help struggling broadcasters keep pace with their digital rivals. On the other hand, the president has accused the major television networks of being biased against him and pushing “woke” ideology, while urging the FCC to revoke their licenses.
In an effort to balance these concerns, the FCC’s recent focus has been on affiliates’ relationships with the major networks. Independent broadcasters enter into affiliate agreements with networks that allow them to use their broadcast facilities to distribute costly network content, in addition to the local station’s own news and lifestyle programming (and, sometimes, shows purchased from the syndication market).
Because the FCC has authority to regulate these relationships, the commission has explored how to update the chain-broadcasting rules to give affiliates more leverage to pressure the networks to act in ways they (and the administration) would prefer. For example, when Jimmy Kimmel made comments about Charlie Kirk that sparked outrage, FCC Chairman Brendan Carr specifically pressured Sinclair Broadcast Group, Nexstar Media Group, and other independent broadcasters to refuse to air the program.
But as my colleagues and I at the International Center for Law & Economics noted in comments to the commission, it is fruitless to focus on the network-affiliation rules in isolation without taking into account the larger market changes that have disrupted the broadcasting industry. And rather than put its thumb on the scale of private negotiations, the FCC should look to deregulate broadcasters, allowing them to compete on equal footing with other media that are their true rivals.
Origin of the Network-Affiliate Relationship
Historically, the network-affiliate model arose through a mutually beneficial arrangement in which both parties provided value to the other. Large broadcast networks wanted to produce costly high-quality content designed to be consumed by a national audience, and to use that content to negotiate national advertising agreements. But these networks were, for various reasons, limited in their ability to reach that national audience.
First, FCC regulations prevent broadcasters from owning stations that combine to reach more than 39% of U.S. households, with additional limitations on the number of stations that can be owned in individual markets. Second, not all markets provide enough value to the major networks, as measured in advertising revenue, to make it worthwhile for networks to own and operate local stations. Third, station ownership poses various costs and risks, such as potential liability for defamation or violation of FCC rules. Finally, each local station must contend with local politics, and independent broadcasters are often better tuned to these politics, as well as to navigate the various FCC obligations.
Ultimately, the major networks found that it was only worthwhile to maintain owned-and-operated stations in the largest markets, with their much higher potential returns on investment. Local affiliates, in turn, provided value by allowing the networks to obtain last-mile connections in the majority of markets where the costs and risks of station ownership made it uneconomical to maintain owned-and-operated stations.
The affiliates, for their part, received compensation from the networks, and generated additional advertising revenue by delivering local content that consumers wanted to see. But as the networks have gradually developed alternative means to make that connection and deliver their content to consumers—first, via cable and satellite, and later, through direct-to-consumer video streaming—the affiliates’ value has fallen precipitously.
New Technologies Limit Affiliates’ Value
Today’s content producers have myriad options to reach the end user. Multichannel video programming distributors (MVPD)—originally offered by cable providers but later expanded to satellite, fiber, and over-the-top applications—provide much the same functionality as broadcast television, but with vastly more content. These MVPD services generally pay to retransmit the local broadcasters’ signals, but also typically offer channels that syndicate the network content after it has originally aired on a broadcast affiliate, as well as additional channels owned and operated by the major networks themselves.
But in recent years, even MVPD services have begun to lose market share, as more consumers “cut the cord” and turn exclusively to over-the-top applications and streaming services that provide content over a broadband connection. As a multi-purpose connectivity option, broadband allows consumers not only to access television programming, much like broadcast or cable services long have, but also offers additional functionality like on-demand viewing, gaming, or general internet browsing. Because most Americans have access to broadband connections, broadcast networks no longer need the affiliates to make that last mile-connection to consumers.
Instead, all four of the major broadcast networks now either own their own streaming services or are part of corporate families that include one or more streaming services. The studios that own the networks typically also have extensive content-licensing deals with even-larger streaming services like Netflix and Amazon Prime. This allows them to deliver network content to consumers directly.
Retransmission Helps the Networks, but Does Little for Affiliates
The primary value that local affiliates continue to provide to the major networks comes through their retransmission fees. The Cable Television Consumer Protection and Competition Act of 1992 requires cable providers to retransmit local broadcasters’ signals in their local market, either through an elected “must-carry” option or through retransmission-consent negotiations that often include substantial fees. This framework offers broadcasters significant bargaining advantages.
But the extent to which cable companies and other MVPDs are interested in the local content produced by independent broadcasters is limited. Instead, they pay large retransmission fees to local broadcasters largely to gain access to the higher-quality, high-cost content produced by the networks—particularly live sports. Networks, for their part, understand these market incentives, and now require their affiliates to pass much if not all of these retransmission fees back to them.
Changes to Network-Affiliation Rules Will Not Change the Market
The commission’s ongoing proceedings identify the power asymmetry between the networks and their affiliates, but wrongly imply that this represents a market failure to be fixed. The major television networks now compete with almost every other content producer and distributor for consumers’ attention and advertisers’ dollars. Among the sources of competition are cable channels, streaming services, theatrical movies, social media, and user-generated content of all sorts offered through websites like Youtube and TikTok. In this fiercely competitive market, networks must constantly find new ways to reach consumers and deliver the content they want to receive.
While there remains some value in delivering content over-the-air to consumers, it has inarguably diminished. Most consumers no longer even have the equipment necessary to tune into local broadcasts, and those that do often do not realize that there is a difference between broadcast and cable. Broadcast networks also still obtain some value from their local affiliates’ reach, but as that value continues to shrink, the incentives to continue their affiliate relationships likewise grow less significant.
If the commission does ultimately change its rules in effort to give affiliates more power in negotiations with networks, one can foresee two potential outcomes.
One is that the networks will agree to pay their affiliates more, either directly or by demanding a smaller percentage of retransmission fees. This would serve to allocate more of the networks’ resources to an inefficient distribution channel and harm their ability to compete with other content producers and distributors.
The other possibility is that the networks will increasingly forgo affiliations with local broadcasters altogether, limiting the content available to consumers who still wish to receive over-the-air signals to their homes.
Rather than expand their regulatory meddling in the broadcast industry, the FCC should reverse course.
First, it should eliminate its broadcast-ownership rules to give independent broadcasters more flexibility in their business strategy. If independent networks could grow larger and reach more consumers, they would present a more valuable partner to the major networks and thus have more bargaining power when negotiating affiliation agreements. This would also allow independent broadcasters to cut costs and operate more efficiently, potentially freeing them to invest in the local content that differentiates broadcasting from other mediums.
But just as importantly, the FCC should reform the existing retransmission-consent rules, which artificially raise the price of network content. If broadcasters could compete as any other content producer, the value of retransmission agreements would be set by the market, rather than being the product of regulatory distortions.
