How Government Regulations Created the Time Warner-CBS Blackout

It's time for Congress to completely deregulate the video distribution marketplace.

When negotiating to buy a new car, a frequent tactic of shoppers is to get up and walk away if the salesman's price is higher than they want to pay. Often the salesman will run after the buyer with a "final" offer that makes the buyer grin in victory. Sometimes, however, the shopper just has to walk away empty-handed. In the days that follow, the salesman might call and make a lower offer, or if the buyer just has to have the car, he might return with his tail between his legs and pay more than he wants to.

That's how negotiation is supposed to work in a free market. Unfortunately, the fact that many are calling for government intervention in the recent standoff between CBS and Time Warner Cable shows that there is nothing free about the video marketplace.

The blackout, now entering its eleventh day, is the result of an impasse in negotiations between Time Warner and CBS. At stake is how much the cable company should pay to carry CBS's broadcast stations, as well as Showtime and TMC, which CBS owns. Time Warner thinks the price CBS is demanding is way too steep, and CBS isn't budging. It let its contract with Time Warner expire and walked away, leaving more than 3 million subscribers in New York, Los Angeles, and Dallas without access to their local CBS stations.

The situation has become heated in recent days. CBS has blocked Time Warner broadband customers from accessing video of CBS shows on its website. It has also been playing its popular programs, like Big Bang Theory, in New York's Times Square next to a giant billboard that reads, "If you've got Time Warner Cable you can't watch CBS." Time Warner, for its part, has replaced the signals  of the blacked-out stations with a video message that begins, "CBS has demanded an outrageous increase for programming that CBS delivers free over the air and online, requiring us to remove their stations from your lineup[.]"

In a free market, like our car-buying scenario, the parties would remain at loggerheads until they came to terms, which might never happen. Yet when cable companies face blackouts, they always want an assist from the federal government.

Matthew Polka, CEO of the American Cable Association, said last week that Congress and the FCC had failed to heed cable operators' urging "to adopt rules that prevent consumers from losing access to programming during these disputes," and that "With the CEO of CBS openly declaring war on Time Warner Cable, Congress and the FCC need to take action to ensure that these types of disputes do not continue to erupt and victimize consumers who, in this case and in many more, seem to be at the mercy of a bellicose broadcast CEO with a Napoleon complex."

It's grandstanding in pursuit of a favor from government, but his frustration is, in a way, understandable.

Before 1992, cable companies didn't need the permission of broadcasters to retransmit TV signals. They had to pay the copyright owners of the programs they retransmitted, of course, but TV station signals were free for the taking. After all, broadcasters transmit on spectrum given to them for free by the federal government in exchange for a promise that they make their signals freely available.

Then Congress passed the Cable Act of 1992, which essentially created a new super-property-right for broadcasters in their signals.

Why super? For one thing, broadcasters were given "must-carry" power, which means that if a cable company is not interested in carrying a local TV station's signal, the station can force them to do so. Not only that, it can also choose to be assigned a coveted spot among the low-numbered channels. Additionally, if the cable company does want to carry a TV station's signal, it now must negotiate with the broadcaster for the right, which if withheld leads to a blackout.

This wouldn't be so bad if cable companies that couldn't reach an agreement with a local broadcaster could simply make a deal with an out of town affiliate of the same network. For example, if Time Warner can't reach a deal with CBS to carry L.A.'s KCBS, maybe it can make a deal to retransmit San Diego's KFMB—affiliated with, but not owned by, CBS. Viewers wouldn't get the local station's news, but at least they wouldn't miss the Masters golf championship as many did last weekend.

But again, the government has given broadcasters outsized rights. The FCC's "network non-duplication regulations" allowing local stations to block cable systems from importing network programming from another affiliate of the same broadcast network. They can't even carry Jeopardy, Divorce Court, or similar syndicated TV shows because FCC rules also allow local stations that carry syndicated programming to prevent cable systems from carrying the same programs from out-of-market broadcast stations.

So it's more than a little ironic that many are now calling for government intervention to solve a problem that was largely created by regulation. In a letter  to the FCC last week, Massachusetts Sen. Edward Markey made a "request that the Commission take action to bring the parties together so these negotiations can be concluded in an equitable and expeditious manner." Reading between the lines that means forced arbitration. And in a letter  of its own, Time Warner has suggested to the FCC that the agency has the power to force CBS to let the cable company continue to carry the blacked out channels while they negotiate.

Two wrongs don't make a right, however. There is no free market when it comes to broadcast retransmission because Congress and the FCC have tilted the scales in favor of the broadcasters. But the solution is not for government to "even things out" with more regulation and intervention. The solution is to take its thumb off the scales altogether.

When Congress and the FCC came up with the "must-carry" and "retrans consent" rules, they were afraid that local TV stations would be at the mercy of monopoly cable systems. That didn't make much sense then, but today with cable facing competition from two national satellite TV providers, video service from traditional phone companies like Verizon and AT&T, as well as Internet video, it definitely doesn't make any sense now.

Congress should completely deregulate the video distribution marketplace by repealing broadcaster's special rights. While the they're at it they should also end compulsory copyright licensing that allows video distributors like cable companies to pay regulated rates for the programs they retransmit, rather than negotiate. And they should privatize the spectrum, rather than continue to give it away to broadcasters in the name of the "public interest." At least one bill now pending before Congress would do much of that.

In the meantime, to my friends in New York, L.A., and Dallas, I say, hang in there. I hear Aereo has ambitious expansion plans.