The Oscars, the NFL, and Failed Public Policy

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The game of Chicken, in which two players face off against one another in a potentially devastating confrontation, seems like an apt description for the clash on Sunday between Cablevision and ABC over transmission fees, which resulted in a black-out of part of the Oscar telecast for about 3 million viewers. The game is also an appropriate analogy for the face-off between the National Football League and its players' union over a collective bargaining agreement, which could result in a lock-out of players or a strike.

In both cases, however, the consumer sits in the middle of this game as the two sides hurtle towards each other. I suspect that many people would like to sidestep the whole mess and say, "A plague on both your houses." Yet it is public policy to a certain extent that leaves the TV viewer stuck where he is because over time government has granted the major players in these battles certain rights and exemptions to laws that have given them leverage over the rest of us.

Let's start with the NFL. The league wants a new collective bargaining agreement with players which reduces their take from revenues because owners say their expenses are rising. The players are balking and both sides are talking tough, in the process hurtling toward a confrontation that could cancel part or all of the 2011 season. From the owners' point of view, what's crucial to this face off are their TV licensing deals, worth about $3.7 billion a year. So valuable are the rights to NFL games that in their last agreement the TV networks granted the NFL a special arrangement in which the networks will pay the league even if a strike cancels games. That's a huge and unprecedented arrangement, something virtually no other industry facing a strike could count on from its own vendors.

But the NFL has enormous market power over television rights because in 1961 the federal government gave the league a very big anti-trust exemption when it passed the Sports Broadcasting Act, which allowed the owners in each of the major pro sports leagues to band together and negotiate broadcasting rights as one body. In granting these rights Congress determined that "the public interest in viewing professional sports warrants an accommodation with minimal sacrifice of antitrust principles."

It's generally a rule that when Congress determines it is pursuing "the public interest" you should grab your wallet and hold tight. Such is the case here. With its special privileges, the NFL was able to negotiate encompassing TV deals which eventually led to events like "Monday Night Football," a big leap for the league and its dedicated fans beyond the agreements that teams had been negotiating for TV rights for their games with local stations.

In the landscape that emerged as broadcast TV lost its monopoly to cable and a dial with hundreds of channels became commonplace, the NFL's contracts grew ever more desirable because its games could deliver an audience more sizeable and concentrated than most other telecasts. Even though an increasingly fragmented market meant that even most NFL games are watched by only a minor share of all TV viewers, the networks have been willing to pay a premium for this audience because it is still bigger than what one finds virtually anywhere else on TV. And everyone with a TV, including the majority of viewers who don't watch, pays something for these rich deals that Congress in its beneficence allows the NFL to negotiate.

To understand how this works it's useful to turn to our second controversy, between Cablevision and ABC over transmission rights. As I sat at my brother's house on Sunday night staring at Cablevision's message that ABC had pulled its transmission, I was fascinated that cable firm was telling viewers that one reason for the confrontation is that ESPN, which is another unit of Walt Disney along with ABC, has so richly paid for broadcasting rights (including a new NFL deal) that its own profits are being squeezed. Disney is trying to make up for the pinch by demanding higher transmission fees for ABC, Cablevision argued. Indeed, for more than two years, analysts have been warning that the rich deals ESPN negotiated for broadcasting rights, especially its NFL deal, would squeeze its bottom line (and this was before the steep downturn in advertising in the current recession).

This represents double trouble for the average viewer. ESPN is the 800 pound gorilla of cable. It requires all cable companies to carry its stations as part of a basic cable package that everyone must pay for, and ESPN extracts the highest price per subscriber for these services. The cable firms have gone along largely because they don't want to lose the small but passionate sports enthusiast. And they could afford to do so for a while because for decades local governments gave cable operators exclusive franchises which left many TV viewers with the choice only between high cable prices and the very limited options of broadcast TV, one reason why cable fees have vastly outpaced inflation.

But ESPN is not alone in the power it exercises over cable fees. Just last month, for instance, the Fox network and Time Warner Cable faced off in the same kind of dispute over transmission fees. Fox, too, is groaning in these troubled times under its heavy NFL contract, to say nothing of its Major League Baseball deal, which that league can also negotiate in the way that it does thanks to anti-trust exemption.

The situation is vastly different in Europe where there is no Sports Broadcasting Act to create anti-trust exemptions. As a result, the most watched sports events, especially weekly professional soccer matches, have migrated to pay-per-view and to premium networks in an ala carte menu where customers buy what they want to watch. Here in the U.S., the very mention of pay-per-view for sports evokes a phony populism in everyone from Congressmen to sports columnists, who abhor the notion that the entire country shouldn't have access to a certain sports event.

It's an argument you can only make, however, if you ignore the hidden costs of the current system, where the vast majority of viewers who never watch sports nonetheless pay for high carriage charges prompted by stratospheric rights deals. As the Wall Street Journal's Heard on the Street column observed a few days ago, surveys show that 75 percent of cable subscribers are only mildly interested in sports and would rather that their sports come as part of packages that they can choose to pay for, or not.

Yet the very nature of the deals enabled by Congress and negotiated by the likes of the NFL give the league and its broadcasters enormous leverage, so that if there is a football strike the losers won't be the NFL or the networks. Instead, the losses will be spread among the majority of TV viewers in the form of higher carriage charges. No wonder NFL owners are looking to play a game of Chicken with players. Both sides know who the real loser will be.

This is what generally happens when Congress decides it will look after the "public interest."


Steven Malanga is an editor for RealClearMarkets and a senior fellow at the Manhattan Institute

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