Equity Pooling and Media Ownership

I. INTRODUCTION This Article examines methods to increase the diversity of ownership of media outlets. There are several reasons why public policy might be focused in this direction. First, the media has a public goods characteristic where private pricing is not proportional to the benefits obtained by any one consumer. With high fixed costs and virtually no marginal costs, there are barriers to entry for capital-constrained entities. Second, the media disseminates education and culture, which are not homogeneous. Third, corporate ownership may target programming and content toward median and representative consumers, restricting access to a diverse audience. Technological advances in media have blunted some of these arguments. The free disposal cost and an inability to charge consumers may create niche markets that advertisers are willing to support, such as in "free" newspapers and cable television--both media have targeted minority audiences. While network television has focused on median consumers, cable television has adopted a more aggressive, "narrowcasting" format, and its growth of advertising revenue exceeds that for radio and network television. These developments do not necessarily diversify the ownership base for media properties. This Article offers a proposal for pooling equity for purchase of media properties. It is based on widespread practices for savings pooling used in inner city and immigrant communities, but with certain wrinkles that facilitate securitization, diversification, and increased access. The basis of the contract is the rotating savings and credit account used to pool savings to achieve capital accumulation. These accounts provide funds for a down payment on a house or to buy a small business. Investors combine their funds into a common pot. Each investor bids for the pot, the winner being the low bidder. For media properties, the bidding is for a package of a financial pool and a management right. A group of investors contributes to a pool of funds and is concentrated into teams. Each team has the right to bid for both the pool and the management. The low bidder receives both the pot and a management right in exchange for offering a larger lump sum to the unsuccessful bidders. The management right can be resold, allowing a separation of ownership. The base package provides a preferable alliance of equity ownership and management. Only one investor group receives the management right, which is bid for by surrendering a part of the investment return to the other investors. Investors who do not manage receive compensation from those who do. The successful management group has a minimum equity stake in the business to avoid conflicts between ownership and management. The equity pool bids consecutively on several properties, allowing diversification and access to management by several groups. Alternatively, the same management group can acquire several properties. The proposal has two principal advantages over tax credits and other policies targeted at specific media properties. First, the pooling allows investors to diversify across several properties and markets, reducing the risk of default and loss of equity. Second, markets are introduced for bidding on management and programming. Those wishing to have a management role or to select the content pay for it by compensating other equity holders. Incentives to dissipate resources are reduced by requiring a management entity to have a sizeable stake in the venture. Part II of this Article discusses the background for media outlet ownership. Part III has an analytical structure of media firms, where revenue comes from national and local advertising. The local station or property's expenses are paying for the national network feed and local costs. Media properties that depend on local advertising are particularly vulnerable to shocks in their domestic markets. Particular media properties that are vulnerable in this way are radio stations and "free" throwaway newspapers to which this proposal is targeted. …