Who’s Afraid of the TV Networks?

The announcement that Viacom and CBS are merging strikes this veteran of the regulatory and antitrust wars as a delicious denouement to another episode in Washington’s theater of the absurd.

Viacom was spun off from CBS in 1970 because of regulators’ concerns over the television networks’ ownership of programs and their distribution of reruns to television stations. Now, almost 30 years later, the Federal Communications Commission and the Justice Department are phasing out their regulations, tacitly acknowledging they were wrong all along. In the interim, Viacom has become a media powerhouse, acquiring Paramount, Blockbuster, Simon & Schuster and a variety of other companies; it now produces movies and programs for both broadcast and cable television and distributes a great deal of this programming through its own theaters, cable networks and broadcast stations. CBS, on the other hand, has had to satisfy itself with slower growth due to the constraints imposed by Washington.

The alleged abuses that led the FCC in 1972 to bar the networks from engaging in the “syndication” of reruns were always just short of absurd. The FCC’s action was driven largely by complaints from motion-picture companies, which produced network shows, that they were being exploited by the “monopsony” (i.e. “sole buyer”) power of the networks because the network fees rarely allowed the movie companies to recover their full production costs in just the network run.

The real problem for the big studios, however, was the ability of the networks to share in the risk of developing new series by owning a portion of the syndication interests. This allowed small production companies to bring them innovative new programming without having to bear all of the risk of a flop. The large movie companies did not like this competition, and they hoodwinked the FCC into believing that the networks were exploiting them. Remarkably, the commission never bothered to ask why the same movie companies came back year after year to compete for this business if they were being so cruelly abused. The movie companies persuaded regulators to limit competition from small production companies and to banish the three networks from the business of selling programs in the rerun market.

In 1972, the Nixon Justice Department, stung by allegations that it had approved an ITT merger for political reasons, needed to show that it was serious about enforcing the antitrust laws. As a result, it dusted off a dubious monopolization case against the three networks, which the networks later settled by agreeing to abide by the FCC rules that were already in place and to limit their own production of prime-time programming.

Also in 1972, the FCC established the Prime Time Access Rule, which limited the networks to three hours of prime-time programming during most of the week, half an hour less than they had customarily aired. This rule, devised to curtail the market power of the networks, did not have its desired effect. On the contrary, it gave the networks an incentive to raise their advertising prices and reduce their programming costs. The networks did not contest this rule for many years.

None of what the government did accomplished anything other than perhaps give the movie companies a larger share of network series production and rerun sales, increase the networks’ advertising prices modestly and reduce the quality of network programming. Indeed, the principal beneficiaries of this set of silly populist policies were highly paid lawyers and consultants.

The ultimate irony is that the FCC devised these policies less than 20 years after it had given the networks their power through a spectrum-allocation plan that ensured only three networks could survive. The subsequent collapse of the fourth network, DuMont, limited viewers to three broadcast networks until Fox entered the fray in the 1980s.

Some may claim that Viacom’s reunion with its erstwhile parent, CBS, is now possible because a more competitive media marketplace has allowed the FCC to relax the rules that forced the companies apart 27 years ago. But there never was a sound policy reason for these rules in the first place. In fact, they probably enhanced the market power of the movie companies and reduced the supply of innovative network and syndicated programming by making it difficult for smaller program suppliers to compete.

In this respect, conditions really have changed. With hundreds of cable networks, the motion-picture companies no longer can use their lobbying strength to limit competition for programming. Instead, the large Hollywood studios are either buying the networks (Disney-ABC, Viacom-Paramount-CBS) or establishing their own (Fox, Time-Warner). They can do so in the certain knowledge that the arguments they made in the distant past for government action against this vertical integration were never valid anyway.