###  Presentation to MAB

A.G. Edwards Financial Breakfast

April 21, 1999

I.  Introduction

Thank you, Mark, for those kind words of introduction, and thank you to
A.G. Edwards for sponsoring the breakfast this morning.

The job of Wall Street investment analysts is to follow the performance
of individual stocks. If you are looking for hot tips on individual
stocks, I don't have any. Indeed, I studiously avoid in this job looking
at individual stock performance. Picking winners and losers, or
consciously influencing winners and losers is not my job.

> But I do follow markets broadly, and, as an economist, I have strong
> views that excessive regulation harms businesses. I would like to
> caution you today about their potentially harmful effects of excessive
> regulation on broadcasters. I will describe changing market structures
> and market characteristics that have little rational basis for many of
> our broadcast rule, if a rational basis ever existed.

II. Market Structure

Economists look at economic activity in terms of markets. Markets have
demand and supply characteristics, and are defined in terms of specific
products or services, and in terms of geography.

> FCC regulations span many markets. Let me describe six broad markets
> that are directly or indirectly affected by FCC regulation.
>
> [A. Creation of Intellectual Property]{.underline}. These are the
> writers, playwrights, songwriters, producers, directors, actors, and
> others who create original programming, books, and movies, and other
> forms of intellectual property. Intellectual property includes
> advertising . Broadcasters are creators of programming either through
> their own operations such as news, or through ownership interests in
> broader entertainment or information creation enterprises.
>
> The vast majority of intellectual property creation, even creation
> limited to copyright works, goes on outside of the broadcast industry.
> Broadcasters have no market power in this market. FCC rules typically
> do not apply in this market.

B.  [Wholesale distribution, and management of intellectual
    property]{.underline}

> Record labels, motion picture studios, book publishers, news agencies,
> cable MSOs, satellite broadcasters and others actively manage the
> wholesale distribution of intellectual property Including programming
> and advertising. Broadcast networks are also active in the wholesale
> distribution of intellectual property. Broadcasters have no market
> power in this market. FCC regulations typically do not apply in its
> market for wholesale intellectual property.
>
> [C. Retail distribution of intellectual property:]{.underline} Book
> stores, music stores, newspaper, daylight broadcasters, Internet
> companies, movie theatres, local cable operators, and others including
> local broadcasters, distribute intellectual property, including
> programming and advertising, directly to consumers. Terrestrial
> broadcasters are only a small portion of [this market]{.underline} and
> they have no market power. Few FCC regulations apply to the
> distribution of intellectual property.

D.  Wholesale information and communications transport anwholesale

connections communications networks. The transport of information and
communications and wholesale communications is heavily regulated by the
FCC. Whether long-distance phone services, wireless services, satellite
services, or others, the FCC regulates much of the transport
communications. Broadcast networks have some interest in the transport
of information, but they are a small part of the market, and have no
market power.

E. Retail Distribution of Communications and Information Services

The FCC also regulates the retail distribution of information and
particularly communications services. Local telephone companies, local
cable operators, wireless carriers, and others, including local
broadcasters, distribute information and communications services.
Terrestrial broadcasters typically distribute audio and video
programming, and commercial advertising both technologically, other
forms of information would equally well be distributed. Broadcasters
represent only a small portion of the market for the retail distribution
of communications and information services.

F. Government property management. A final broad market is the
management of government property, in this case, spectrum. Private and
public groups demand access to the spectrum and the FCC has
responsibilities to manage it efficiently. Broadcasters are active
participants in the FCC's spectrum management, but they represent only a
tiny share of the hundreds of thousands of FCC license holders, and have
no market power.

III. Market Characteristics

> All of these six markets have peculiar demand and supply
> characteristics. Many of these are worthy of extended discussions. But
> I will save those for another day. Today I would like to focus on
> three characteristics of these six markets that make FCC regulation
> difficult, particularly for the peculiar regulation of broadcasters.
>
> [A. Technological Change]{.underline}. All of these six broad markets
> are in the process of extraordinary technological change. Technology
> ten years ago was substantially different, and will doubtlessly be
> substantially different ten years from now. Regulations only directly
> affects supply or technology in a market. Devising sound regulations
> is difficult enough where technology is stagnant; it is truly
> problematic when technology is changing rapidly.

B.  [Fragmentation of markets.]{.underline} It is popular to speak of
    "market

> convergence." I personally believe the term is misleading. Two decades
> ago, many markets in which the FCC exerted regulation were
> characterized by atomistics firms providing one-or a small number of
> homogeneous products or services. Each of these products or services
> may have comprised a separate economic market, independent of the
> pricing behavior in other markets.
>
> The term "convergence" conjures an image of markets merging into a
> single market with a single or small number of homogeneous products or
> services.
>
> I do not believe that this form of market convergence is taking place.
> Rather, we are seeing an explosion in the number and complexity of
> goods and services available in the six markets described above. These
> markets are moving rapidly away from homogeneity. These markets are
> now characterized by a continuum of differentiated products. These
> markets consist of hundreds of smaller market segments or splinters,
> each of which has interrelated prices and service quality
> characteristics. There are many competitors in each of these market
> segments, and both consumers and suppliers can choose in which of the
> market segments they wish to participate. Consumers can substitute
> goods and services from one market to another.

The market fragmentation makes any form of regulation difficult,
particularly for an agency such as the FCC, whose regulatory authority
covers some, but not all, businesses and technologies in the market.

IV. Regulation of the broadcast industry

> The FCC regulates the broadcast industry more than most industries.
> The Commission uses two forms of legal authority to regulation: (1)
> specific statutory requirements for regulation; (2) optional
> regulatory authority at the discretion of the Commission.
>
> Of the vast number of regulations on broadcasters, it turns out that
> the substantial majority is discretionary on the part of the
> Commission. That is, it would not be a violation of the law for the
> FCC to remove these regulations.
>
> So, why do we have these regulations?
>
> Not only are these regulations discretionary, but the statutory
> authority to impose then apply with equal force to hundreds of
> thousands of FCC license holders who are not broadcasters. The burden
> is upon the FCC first to rationalize why the discretionary regulation
> should be imposed on anyone, and second, why the discretionary rule
> should apply only to broadcasters. One might expect the FCC would have
> elaborate documentation on all such rules. One would be deeply
> disappointed.
>
> Economists have a few rationales to justify some regulations. Let's
> see if the broadcast regulations meet these standards.

#  Competition. First, are there competitive concerns? As we have 

# seen, broadcasters no longer occupy any market or market segments by themselves. All of these markets segments in which broadcasters can be found are relatively competitive. Lack of competition does not provide a basis for regulation in this instance.

> [B. Externalities]{.underline}. Externalities are actions by one party
> that affect the welfare of another party and for which no compensation
> is paid. Externalities are a common economic rationale for regulation,
> but not for broadcast regulation at the FCC.

## C. Cost --Benefit Analysis. A third economic basis for regulation is a clear finding than benefits of a proposed regulation demonstrably exceed the costs. This is a common concept, but not one that has been applied to broadcast regulation at the FCC.

> [D. Intellectual Property Basis.]{.underline} Paradoxically, although
> most broadcaster activity is in the wholesale transport and retail
> distribution of information, these activities provide little of the
> basis for much of broadcast regulation. Instead, it is the activities
> related to intellectual property that provide for most of impetus of
> discretionary regulation.
>
> The uniquely FCC concepts of "voices" is not one based on competition
> in a market for the distribution of information, but on the activities
> in the market for the creation, management and distribution of
> intellectual property. Yet intellectual property markets are some of
> the most competitive in the country.

V. Picking Winners and Losers

> In every market and market segment in which broadcasters operate, they
> compete against non-broadcasters, firms that face substantially less
> regulation than broadcasters. Stated slightly
>
> differently, in the six markets described above, not all businesses
> face the same regulations. Some face more; some face less.
>
> Regulation raises the cost of doing business. If all firms in a market
> face the same regulations, there is not necessarily a competitive
> advantage or disadvantage resulting from the regulations. But where
> some firms face regulation and others do not, the competitive effect
> is predictable.

Differences in regulation are easily defended where the law requires
differences in regulation. But in the case of broadcast regulation, most
differences are not required. They are discretionary, and -- whether
intended or not -- they have the effect of substantially influencing who
will win and who will lose in the market.

VI\. Conclusion

> The only rational conclusion is for the FCC to review its
> discretionary broadcast rules and determine which make sense and have
> benefits in excess of costs in view of rapidly changing, competitive,
> fragmented markets. The Commission is required by statute to conduct
> such a review of its ownership rules, but many more rules should be
> reviewed as well.