SPEECH BY REED HUNDT CHAIRMAN FEDERAL COMMUNICATIONS COMMISSION AMERICAN BAR ASSOCIATION WASHINGTON, D.C. (AS PREPARED FOR DELIVERY) MARCH 28, 1996 NEWS FLASH! FCC WINS OSCAR FOR BRAVE-HEARTED APPLICATION OF ANTITRUST THEORY OF VERTICAL INTEGRATION IN BROADCASTING Antitrust lawyers! I am one of you! Thank you for inviting me. As you know, earlier this year Congress passed the landmark Telecommunications Act of 1996. The role of the broadcast media in these emerging and converging telecommunications markets received considerable attention in the legislative debate. In general, the new law loosens the Commission's limits on the number of television stations one firm may own nationally, requires the Commission to re- examine its policy prohibiting ownership of more than one television station in a local market, allows existing broadcast networks to begin "sister" networks, and allows broadcast networks to own cable systems. The political compromise that emerged recognizes that although competitive policy is important, when it comes to broadcast television, other considerations such as diversity of ownership and diversity of content are important, as well. The reasons, I think, are clear: Broadcast television plays a major role in the everyday lives of Americans and is the primary source of news and entertainment for most households. So when we talk about fostering "competition" in broadcast television, we have to keep in mind that other serious social considerations are at work. The Commission says it has an interest in fostering broadcast "diversity." However, the Commission has not always been very clear about what "diversity" means. The Commission seems to be interested in at least four different notions: outlet diversity, source diversity, voice diversity, and program diversity. "Outlet diversity" is relatively straightforward -- the Commission would like to maximize the number of separately-owned media outlets. "Source diversity" was invoked to promote the development of a number of upstream programming producers and was the justification for the Fin/Syn and Prime Time Access Rules, also known as PTAR. "Voice" diversity -- or viewpoint diversity --describes, in my opinion, editorial perspective. The key to success in novel writing, says Anthony Powell, is point of view. Whether that's true for network TV is debatable, but the recent dipping of networks into the turbulent sea of advertising on their own behalf in support of free spectrum underscores the importance of trying to preserve diverse points of view in the mass media. "Program diversity" is more complicated, but perhaps most important. Program diversity means that it is a good thing if lots of different types of programming are shown on television. When it comes to entertainment programs, the Commission lets the free market decide the optimum level of programming diversity. If the market decides that Laugh-In reruns or oldies music stations are no longer profitable, I might feel a personal loss, but the Commission is indifferent. However, there are certain types of programs that are underprovided in a free market but are nonetheless important and need to be encouraged. And it is in the public interest to provide them. Two examples are children's educational and informational programming, and programming related to political participation and civic discourse. The Children's Television Act and the political advertising rules exemplify the Congressional determination to promote both examples of programming. Rules implementing the Children's TV Act are a way to achieve program diversity. By contrast, rules such as the now repealed fairness doctrine were designed to promote voice diversity. Structural rules promoting outlet and source diversity, however, do not necessarily give us either voice or program diversity. For example, it may well be that if a network could own two stations in a given market, it would be more inclined to program children's TV on one of them, since counterprogramming seems to work well for cable channels. Yet outlet and source diversity were said to be key parts of the Commission's policies of separating broadcast networks from program producers. Soon after I arrived at the Commission two-and-half-years ago, I concluded that these policies were at best not working, and at worst were actually counterproductive. Tremendous efficiencies can result from vertical integration between networks and program producers. In this context, vertical integration can spread the risk of program development and reduces transaction costs. As a result, there is greater up-front investment in programming production and, as a result, better programming. Until last year, the Commission's Fin/Syn and PTAR rules forced the disintegration of program producers and broadcast networks. I cannot help but think what would have happened if the Fin/Syn rules had been in place when ABC made the investment to help Disney build Disneyland in exchange for some exclusive programming. I expect the Commission would have received a complaint that the arrangement violated the financial interest rules, as ABC's interest in the theme park might be viewed as a sort of interest in the eventual success of the Disney programming it received. PTAR is a classic example of the school of thought that believed that national broadcast networks were too big and that the networks wielded extraordinary bargaining power over their affiliates and programming producers. The Commission decreed that for one hour of prime-time each weekday, the networks would be forbidden from providing programming to their affiliates. The affiliates would then be "free" to produce their own programming or buy programming directly from independent programming producers. Another part of PTAR was the "off-network" rule. This prohibited network affiliates from showing syndicated programming that originated on their network. According to the Commission, from this policy, a million flowers were to bloom. And they did -- most of them in Merv Griffin's backyard. Outside of local news, Hard Copy, Wheel of Fortune, and Jeopardy are the fare that was generally seen during the access period. Now, I like Merv Griffin, and I think Wheel of Fortune is a wonderful show, but I don't really think that he needs the FCC's help in getting that program on the air. PTAR was the type of rule that fuels discontent about bureaucrats -- the Commission took it upon itself to redistribute slices of the pie among market participants, while at the same time changing the taste of the pie. Wheel of Fortune, as I said, may be a fine show, but it ain't children's educational TV. If you want that sort of programming, rules directly requiring or incentivizing it will be necessary. If PTAR did anything, it certainly didn't promote program diversity in any way that justified government intervention in the marketplace. Our repeal of Fin/Syn and PTAR in 1995 made the Disney/ABC merger possible. I was not surprised that once those rules were repealed, a major movie studio would buy a national broadcast network. Creating this possibility was our specific goal. I believed then, and I believe now, that this vertical integration enhances the competitiveness of broadcast TV, which is jeopardized by cable, satellite, and telephony competition. And since broadcast TV is freighted, properly, with public interest obligations, and as a free, over-the-air product is a public good, we have sound reasons to promote its competitiveness other than purely for efficiency goals. The Commission should continue to modify or change its remaining rules dealing with the vertical relationship between the networks and their affiliate stations. Last year, the Commission repealed the "dual affiliation" rule, which prohibited stations in smaller markets from having affiliations with more than one network when an independent station was available in the market. The Commission also repealed a rule that prohibited the networks from purchasing stations in the smallest television markets. The Commission is reviewing most of its remaining rules that regulate particular clauses in network affiliation contracts. To the extent networks have bargaining power, these rules appear to do little more than push the networks to exercise that bargaining power successfully in connection with other provisions of the affiliate agreements. For the Commission the game is not worth the candle. There is scant constituency for repealing the network-affiliate rules, even though the call for deregulation is often voiced in this town. At least antitrust lawyers will appreciate the wisdom of dispensing with such rules, or at least not allowing them to be replanted in the digital world as broadcasting explores its new dimensions. With respect to the affiliate rules and other vertical integration issues, I suspect that if there is sufficient capacity available in the market to offer competing services, the Commission need not concern itself much with vertical integration. This is a big "if" -- but the point is that the prime role for antitrust and regulation is addressing horizontal competition among providers, not in regulating the internal structure of that provider. Horizontal competition is enhanced to the degree that the Commission can create more conduits or pathways or channels to the consumer. This is the great advantage the Commission has over antitrust authorities. We can pursue policies that promote dynamic -- or "leap-frog" -- competition between and among different media and facilities. Crucial here is the Commission's authority over spectrum. One current proceeding has to do with an innovative service called "Local Multipoint Distribution Service", or LMDS. LMDS is a technology that permits two-way broadband delivery of voice, video, or data. It can substitute for wire or cable-based local exchange-type services or cable services. That is, at any rate, its promise. An issue the Commission is facing is whether it should allow cable systems and local exchange companies to participate in the auctions for LMDS licenses. This horizontal issue is vastly more important than any pending vertical issue relating to broadcasting. Another recent example is Direct Broadcast Satellite -- DBS. DBS is a digital service that has the potential to compete with cable for a large number of viewers. In fact, DBS is one of the fastest-growing video distribution technologies. There are predictions that the industry will serve 3 million subscribers by the end of 1996. The essential inputs to DBS service -- spectrum and orbital locations -- are highly scarce resources that the Commission controls. There are very few orbital locations from which one DBS satellite can serve the continental United States, and only three of those have been allocated to this country. These three orbital locations are unique inputs to a DBS system. It is much more difficult to offer a cost-effective national DBS service without access to one of these three locations. Until earlier this year, DBS was only operational on one of those three locations -- the services offered by DirecTV and USSB. A few months ago, the Commission had to decide how to license the channels at one of the two remaining locations. Our concern was that one firm would control too much of this scarce and essential resource that could be used by potential competitors. The Commission implemented a simple auction rule that has a powerful principle behind it: Anyone could bid for the channels, but the winner could not have any channels on any of the other two DBS orbital locations. We are on a path that potentially leads to at least three separate national DBS providers. Is the market large enough to support three separate national DBS providers? I don't know, but as long as the Commission keeps sound antitrust principles in mind, at least we will be able to find out. Virtually all Commission regulations of the television networks' commercial practices were driven by fear of the consequences of excessive concentration at the horizontal level. Namely, the historic three networks were thought to be too powerful in terms of their bargaining power as to program suppliers, their influence over the programs, and their significance to national politics. The most effective response to this concern has always been the creation of alternative methods of reaching the audience and alternative outlets for programming. Cable, DBS, and LMDS are examples of this response. We have to admit, however, that the new competition has threatened the status of the broadcast networks as providers of the public good of free TV. So our national commitment to free TV is to a degree undermined by our procompetitive policies that multiply conduits or channels to the audience. The solution will lie in simultaneously promoting competition among means of delivery, while defining specific public interest goals that over time may have to be sought in innovative new ways. That takes us into a wholly different speech. So for now let me say only that given specific public interest obligations, ample alternative capacity, and adequate horizontal checks, we should then be comfortable that the economic aspect of how Disney organizes its programming production and distribution ought not be of great concern to the Commission. The next great test for this approach is digital TV. Digital TV is the ability to use currently unusable spectrum to broadcast digitally as many as 50 channels in Washington, D.C., 70 in New York, a similar number in Los Angeles, and so forth. Is there any reason to burden digital broadcasters with the affiliate rules that clutter deals in the analog world? Is there any reason for the Commission to restrict ownership of digital licenses, beyond placing limits on capacity owned by one firm? Wouldn't clear, simple, specific, and tradeable public interest obligations, as conditions of the digital leases, be an economically efficient way to make meaningful the public interest requirements applicable to users of the public's spectrum? And shouldn't we be very, very reluctant to tell broadcasters that their digital TV has to be completely free (i.e., nonsubscription) or even devoted exclusively to video as opposed to voice or data? Constraining digital TV before it is deployed is hardly a good way to develop the competitive potential of this new service. With simple antitrust rules in place, digital TV can reduce still further our concern about the market dominance of broadcast networks. It 's a thrill to talk about the dawn of a new TV policy in the digital age. It would be even better if our new TV policy paid close attention to sound antitrust policies. To this end, we need your advice and guidance as we make the key decisions over the next months, and I welcome your involvement. -FCC-