Chapter 4 is the second component of Part II of this manuscript. While Chapter 3 focussed on legal theories of intellectual property and how they apply to the related rights of broadcasters, this chapter focuses on the economic context of broadcasting markets themselves. It focuses on the various market characteristics – and market failures – which supposedly characterise the broadcasting sector, and aims at framing how intellectual property rights interface with this context.
In this regard, the underlying research question in this Chapter is “What are the key features of the markets in which the related rights of broadcasting organisations exist?”
[4]-1 INTRODUCTION
Wireless broadcasting revolutionised the way in which information was disseminated to the public in the early 20th century, and was instrumental in the development of various modern social and cultural institutions. As such, the broadcasting sector also sits in a very important position within the framework of the overall creative economy, serving an important role as a supply chain intermediary between producers of creative works and end-users.
Media markets are generally defined by complicated value chains where intermediaries are needed to facilitate the distribution of content between producers and consumers. Commercial broadcasting organisations are such supply intermediaries, which may generally either be based on (i) advertising revenues (two-sided markets), or (ii) subscription revenues; in television markets, traditional terrestrial channels and cable television channels respectively would exemplify this.173
In the case of non-terrestrial broadcasting, it is important to make a distinction between the network operator and the broadcaster. The former represents the service provider who owns transmission infrastructure (or leases infrastructure from an upstream communications firm). The broadcaster on the other hand engages in the activity of ‘bundling’ audiovisual content into a single programming schedule for transmission (i.e. a broadcasting channel), while a subscription service provider ‘bundles’ several broadcasting channels into a single service package which is offered to consumers (end-users).
In order to answer the underlying research question regarding the economic context of broadcasting markets, this chapter is divided in to three main sections.
Firstly, a discussion is presented on the various market characteristics of the broadcasting sector, and its associated market failures and public policy goals.
173 This is not to say that these two financing models are exclusive – they merely represent the typical business models employed in the commercial broadcasting sector. Alternative business models may include support through public financing, with or without supplementary revenues from commercial sources (advertising or subscription revenues). The notion of public financing is central to the concept of Public Broadcasting Service, which is discussed later in this chapter.
Secondly, a discussion is presented on the role of intellectual property as a policy tool to address public good market failures. Thirdly, a short analysis is undertaken on the types of content distributed by broadcasting transmissions, and how they interface with the incentives created by the copyright and related rights system.
[4]-2 PUBLIC POLICY GOALS AND MARKET CHARACTERISTICS
The following section focuses of the key policy and market characteristic of the broadcasting sector in general.
[4]-2.1 Broadcast Regulation and Public Policy
In order to provide context to the discussion, it is useful here to recognise the various public policy goals that the broadcasting sector is meant to achieve. In general, communications sectors have been historically subject to a higher degree of regulatory oversight than other industries.174 Generally, regulatory issues in the broadcasting sector may be divided into economic issues (competition related) and non-economic issues (public policy).175 Non-Economic issues can be further separated into issues relating to content and access.
In all spheres of economic activity, policymakers seek to facilitate market institutions that provide consumers with a wide range of high quality goods (or in this case services), at competitively efficient prices. In this regard, the obvious economic goal is to promote variety in services that align with prevailing consumer preferences. Furthermore, policymakers and regulators seek to mitigate the effects of monopolistic market power that undermines economic efficiency. However, due to various unique market characteristics, competition regulation in media markets often takes a different form than in other sectors, i.e.
such markets are often subject to sector-specific competition regulation regimes.
Furthermore, building on the distinction stressed in this manuscript between content production and distribution, it should be recalled that broadcasting markets are intrinsically linked to upstream production markets. Therefore, competition concerns in broadcasting markets are not only related to issues of horizontal market structure, but also to the effects that market structures have on upstream production activities.176 This relationship essentially provides the linkage between the economics of copyright and the economics of broadcasting markets.
174 Rowart (2007) cites that the communication sector (including its respective aspects of competition regulation) is on average more heavily regulated than other sectors in the OECD, though there is a higher variance.
175 Rowart (2007) further observes that the degree of international consensus on an appropriate normative framework is lower for non-economic policy issues in the broadcasting sector, as it is for economic policy issues in other sectors.
176 The effect of the state of competition in communications markets on upstream production markets has attracted significant attention in recent regulatory debates, such as discussions on the issue of Net Neutrality and Intermediary Liability.
Non-economic policy issues which deal with content are typically related to the notion that information goods are often associated with various externalities. In this regard, policy goals include objectives such as the promotion of cultural values, the protection of minors, and the regulation of advertising. In terms of
‘access issues’, the policy goal is to promote ubiquitous access to information services, pursuant to the notion that access to information can be seen as a fundamental right of the entire citizenry. Such access goals are usually referred to as ‘universality’ goals.
Furthermore, it is important to note that policy issues in media markets in general are linked to issues of fundamental freedoms and democratic ideals. As such, broadcasting markets should serve the role of facilitating free speech, freedom of the press, and effective democratic and civic participation; these concepts are embodied in the principle of ‘media pluralism’177.
[4]-2.2 Market Characteristics and Regulatory Tools
Based on the above distinction between economic and non-economic goals, the following section discusses key characteristics of the broadcasting sector, and briefly discusses the regulatory tools used to mitigate such problems. However, Armstrong and Weeds (2007) suggest that although there are several prevalent market failures in the broadcasting sector, the majority of these issues (with the notable exception of externalities) are mitigated by trends in digitisation and the consequent shifts in business models.
[4]-2.2.1 Public Good Problem
Broadcasters are understood to incur significant costs in (i) market research into consumer preferences, (ii) negotiating content licences with copyright holders (a form of transaction costs), (iii) actual royalty payments to copyright holders, (iv) capital investment in distribution infrastructure, and (v) operational costs of commercial activities and network maintenance. It is however duly noted that the extent to which items (iv) and (v) enter into the production function depend on whether the broadcaster is an integrated network operator, or a facilities leaser.
Furthermore, like all other information industries, broadcasting has a distinct cost function characterized by high fixed costs and zero (or negligible) marginal costs (Seabright and Weeds, 2007).
Once these costs are incurred, it is easy for a second party to free-ride off of a broadcaster’s investments by using the already transmitted signal (e.g. by retransmitting the signal with replaced ads, or by inclusion of the signal on a subscription network). Hence, in the absence of the ability to exert some control over the use of their signal, it is argued that broadcasters will not have sufficient incentives to distribute content, to the detriment of social welfare. Broadcaster’s
177 Polo (2007) makes a distinction between ‘external pluralism’ – a diversified supply of different political opinions in each media market, and ‘internal pluralism’ – fair, balanced and complete representation of the political spectrum within each media outlet itself.
rights are hence argued as necessary to recoup costs and incentivise content distribution.
As such, the essential market failure that characterises the broadcasting sector is a public good problem in content distribution. This is the principle market failure that relates to the analysis of broadcasters’ rights, and hence the most important in the context of this manuscript.
Before analysing the public good problem in more detail in the next section, the following sub-sections briefly discuss other relevant market characteristics.
[4]-2.2.2 Information Good Externalities
Distribution of information goods is often associated with various externalities, which may either be positive or negative. Positive externalities may be present when the information under consideration is of an educational nature and hence promotes the social goals of investing in human capital. Similarly, content which is journalistic in nature may facilitate the social goal of strengthening civic participation and democratic ideals.
Armstrong and Weeds (2007) identify that positive externalities of broadcast content include (i) educational benefits, (ii) network externalities, and (iii) social or ‘citizenship’ benefits. However, the authors note that network externalities are generally internalised by coordination between consumers, and the incentives of broadcasters, and any remaining externalised effects are unlikely to be significant.
Another interesting example of content that may have strong positive externalities is information relating to emergency situations (for example during natural disasters). For this reason, a common feature of many broadcast regulation regimes is the ability of the government to commandeer broadcasting airtime for public service in times of national emergencies.
Content on broadcasting networks may also exhibit negative externalities. This is the case that is often argued as the basis for codes of practice in broadcasting regulation. The purpose of such codes and regulations is to mitigate the effects of content that is alleged to have negative social externalities, such as programmes that are perceived to be violent, pornographic, or profane in nature. However, it is noted that such regulation necessarily sets against each other, the competing policy goals of protection of minors and the promotion of free speech. Certainly, attitudes toward this conflict depend on the socio-cultural context of a particular jurisdiction.
Additionally, some forms of advertising may be deemed also have negative externalities, particularly in the context of influencing minors. As such, broadcasting codes may also have particular restrictions on advertising during children’s programming, or during time periods where children are likely to be part of the general audience. Advertising restrictions are often also employed for goods deemed as ‘demerit goods’ – although such restrictions are not necessarily unique to the broadcasting sector as an advertising platform (e.g. limitations on
the advertising of alcohol and tobacco products). Broadcast content regulations may also make provisions on ‘truth in advertising’ requirements, which prevent the negative externalities of misleading information; however such requirements are also not necessarily unique to the broadcast media, and more generally belong to the domain of consumer protection law.178
Conceptually, broadcast content may also have externalities that affect community solidarity and social cohesion. On one hand, the network externalities associated with content may suggest that such externalities are positive. On the other hand however, there are popular perceptions that consumption of media services such as television results in reduced social activity, and hence these externalities are negative. However, these debates appear to be more appropriate for sociological study rather than economic analysis.179
[4]-2.2.3 Local Content and Cultural Diversity
Another aspect of information externalities – particularly in terms of locally produced programming - is the importance of broadcasting for cultural diversity.
Broadcasting markets are a subset of the media industry, which is in itself a subset of the wider creative economy. However, as a primary distribution platform for creative works, broadcasters are institutions which play an important role in defining trends in the consumption of creative works – particularly for audiovisual and musical works. In the case of music works in particular, broadcasting markets generate significant revenues in the form of performance royalties for copyright holders, which are then remitted back to rightsholders whose works were broadcast. The composition of programming on broadcasting networks therefore plays a major role in the functioning of the overall creative economy. In this regard180 As such, local content requirements for broadcasting networks are often utilised as a form of industrial policy to promote economic growth in the wider creative economy.
Furthermore, creative works are often viewed as more than economic goods – they can be seen as vectors of value systems and ideals. As such, some policymakers see promotion of local production of creative works as a critical element of building institutions of national identity and preservation of cultural heritage.181 This is particularly true in jurisdictions where natural market forces lead to net importation of creative works, which can be detrimental to the goal of
178 These comments on advertising externalities (distinct from the disutility of advertising) are particularly relevant when noting the possibility of a market equilibrium characterized by over-advertising (briefly discussed in a sub-section below).
179 See Armstrong and Weeds (2007) for a brief discussion on this issue.
180 For example, some collective copyright management organisations base royalty distributions for non-broadcasting revenue streams using data on the use of works in broadcasting.
High levels of local content in broadcasting can therefore increase remittances to copyright owners and artists in all revenue streams. Local content on broadcast media therefore create a sort of
‘information externality’ which drives income in other sectors of the creative economy.
181 For a general overview of local content regulation policies in the broadcasting sector, see (Mendel, 2001).
preserving cultural diversity in the media. Pursuant to these goals, local content requirements can sometimes be seen as complimentary to media ownership regulation, where limits are placed on ownership of media assets by non-nationals.
[4]-2.2.4 Media Market Power
Like all economic sectors, media sectors are characterised by some prevailing level of competition both vertically and horizontally. Given the large capital costs needed for rollout of infrastructure, communications markets in general are characterised by significant economies of scale. This can lead to possible monopolistic structures in communication markets, both vertically (integrated operators) and horizontally (media ownership consolidation).
While market power is a market failure in all industries, it takes on additional dimensions in media markets due to the existence of the externalities of information distribution.
As noted above, the media sectors are considered to have public policy goals beyond economic efficiency, and hence are generally subject to some form of sector-specific regulation. Hope (2007) discusses the conflict between competition policy and sector-specific economic media regulation, and notes that this conflict arises due to two factors: (i) general media regulation goals (freedom of expression, diversity, independence, cultural identity, language, and technical issues such and spectrum), and (ii) sector-specific economic issues such as technological convergence and the nuances of two-sided markets.
Buigues and Rabassa (2007) note that the media industries may have characteristics that make vertical foreclosure issues more likely. Such issues may arise from leveraging market power from traditional markets onto new media markets, or situations where a dominant firm (i) denies access to premium content or to scarce distribution network needed by a potential entrant or current competitor, or (ii) grants long-term exclusive licences for premium content to a single operator. The interdependencies of the players in the value chain are exemplified by the fact that while premium contents are by definition scarce inputs for media businesses, access to scarce downstream technical platforms is also of high importance to upstream media operators.182
In addition to exclusive licencing agreements, joint-selling of media content (a form of potentially anti-competitive bundling183) may also raise competition concerns. Furthermore, competition concerns may arise due to joint-selling or joint-purchasing of content, even when such rights are non-exclusive. In the case
182 Generally, vertical concentration in communications markets is limited through regulation of platform and network infrastructure access provisions (such as those provided for in the EU Access and Framework Directives). However, Seabright and Weeds (2007), argue that diminishing scarcity of transmission platforms combined with competition between platforms reduces the need for regulation over platform access.
183 In this context, ‘content licensing bundling’ should not be confused with content distribution bundling, which is discussed in a sub-section below.
of joint-buying, the practice may legitimately be based on economies of scale, but may result in exclusionary behaviour and restrictions of competition.
On the horizontal level, media ownership regulation may exist in two tiers: (i) regulation within a particular market, and (ii) regulation between media markets (i.e. cross-ownership). In terms of economic policy goals however, it is noted that these two tiers are inter-related and there may be both substitutability and complementarity between various media platforms. For purpose of competition law, it is notably difficult to analyse issues of potential dominance in the media sector, particularly due to the nature of two-sided markets.184
Building on insights from industrial organisation literature, Polo (2007) suggests that although market mechanisms may promote differentiation in programming contents, this heterogeneity does not necessarily extend to political views.
Furthermore, competition for content can inflate fixed costs and preserve concentrated structures, hence reducing the likelihood that the market will naturally facilitate external pluralism. As such, general competition regulation in media markets can also indirectly promote the non-economic goal of pluralism in addition to the primary economic goal of competitive market structures.185 As a consequence of these non-economic goals, media markets are generally subject to a stronger degree of ownership regulation, as concentration of ownership (both within and across markets) may have negative implications for external plurality, cultural diversity, and fairness in political representation.
Hence, many jurisdictions place explicit restrictions on media ownership within markets (e.g. caps on the number of stations a single corporate entity can own), and between horizontal markets (e.g. limits on cross-ownership of television, radio and newspapers).
[4]-2.2.5 Spectrum Scarcity
Another important characteristic of broadcasting markets is spectrum scarcity.
This is a market failure of market power in the sense than an essential upstream input can be monopolised creating restrictions in downstream service provision.
Traditional terrestrial broadcasting is based on transmissions via the technical platform of dedicated electromagnetic frequencies. However, the laws of physics limit the quantity of these frequencies that is available for use in communication applications; i.e. electromagnetic spectrum is a scarce resource.
As such, traditional terrestrial broadcasting markets exhibit a unique barrier to entry – there is a maximum number of competing firms which can be facilitated by the technological platform itself. Once the number of firms operating in the
184 See Argentesi and Ivaldi (2007)
185 Intuitively, competition in media markets would generally lead to specialized programming formats, specialized targeted demographics (depending on the extent of heterogeneity of consumer preferences) and specific media outlets will hence general have little private incentives for internal plurality. Hence, external plurality can be seen as the policy goal more complimentary to economic policy goals.
market reaches this limit, there is therefore an absolute barrier to entry that can undermine effective competition.
Furthermore, traditional views on broadcast regulation frame the electromagnetic spectrum as a public resource, and suggest that as a consequence,
Furthermore, traditional views on broadcast regulation frame the electromagnetic spectrum as a public resource, and suggest that as a consequence,