Facing Facts About the Broadcast Business*

FACING FACTS ABOUT THE BROADCAST BUSINESS* DALLAs W. SmYtTHE TELEVISION IS A MAJOR INNOVATION which like any other puts stresses on the social organization. It gives rise to problems in many areas: educational policy, family relations, diversion of consumer expenditures from older patterns and so on. It also draws attention to the nature of the institutional organization which was worked out con- sciously for the commercial use of radio technology. The very process of innovation in the radio industry is dramatically brought to our attention by the dispute over color television standards. Industrial giants like RCA and CBS have contended openly for their respective systems of color television. And in the contest they used extensively the informational services at their disposal. The repercussions from all of these interests in TV could be expected to appear in the serious journals. One of the issues raised in the color TV controversy is the matter of multiple vs. single standards. While seeming to be, initially, a technical question, this issue is closely related to another: the roles of the market and the government in radio innovation. And in turn this opens up the question of the roles of the market and the government in the conduct of the established broadcast business, both that of television and that of aural radio. Economists have paid little attention to the unique nature of the broadcast business. It is therefore incumbent on the responsible economist or lawyer when he does discuss broadcast economics to deal carefully with the facts which make it a unique institution. It is particularly confusing to advocate revision of this institution in favor of market controls in a doc- trinaire fashion and without regard to these facts. This, spokesmen for broadcast businessmen frequently do by way of special pleading.' A Comment entitled" 'Public Interest' and the Market in Color Televi- sion Regulation" in the Summer, 1951, issue of the University of Chicago * A critique of a Comment appearing in 18 Univ. Chi. L. Rev. 802 (1951). A reply by the student author follows at p. 106 infra. t Research Professor, Institute of Communications Research, University of Illinois. I See, for example, testimony by industry leaders in Hearings before a Subcommittee of the Committee on Interstate and Foreign Commerce on a proposed Amendment of the Communi- cations Act of 1934, Sen. 1333, 80th Cong. 1st Sess. (1947). 96 THE BROADCAST BUSINESS 97 Law Review2 directs attention to an important broad issue, namely, the process of innovation in radio. It brings into discussion the roles of the market and government in relation to both radio innovation and the conduct of broadcast business. However, it also offers a graphic illustration of the hazards of applying in sweeping fashion a general body of economic theory to an industry whose facts do not conform to the premises of the theory. The public importance of the issues is too great for the matter to be dropped at this point, and a thoughtful review of the facts and the logic of the Comment seems useful. The author traces the administrative and litigation history of the most recent dispute over color TV standards. He then isolates as "the most in- teresting question" the issue "whether the FCC should have permitted both the CBS and RCA systems to operate at once, with the public acting as final judge." He attacks what he calls the FCC's "limited and unwieldy conception of 'public interest' "and proposes that a desirable goal in radio allocation would be a concept of public interest (1) "which did not involve an administrative agency in making this decision," and (2) "which was consistent with current views about the best organization of economic life." The author then proceeds to sketch the history of radio legislation. This brief survey leads him to conclude that "the most important function of radio regulation is the allocation of a scarce factor of production .... This is essentially an economic decision, not a policing decision."3 He then launches his argument for multiple standards in radio with the FCC serv- ing as auctioneer, leasing the frequencies to the bidder offering the highest dollar rental "without making any other judgment of the economic or en- gineering standards to be used by the applicant." He would have the FCC "still determine the width of channels, but on the basis of one criterion- the maximization of revenue from the leasing of this scarce natural re- 4 source." At this point, the author develops his argument that the market (as a substitute for the discretion of an administrative agency) might bring about an optimum rate of innovation in broadcasting. Relying on "the logic of the price mechanism in an economy based on free consumer choice" developed by Knight and Lerner, he envisages consumers freely choosing between broadcasting technologies and thus encouraging broad- 218 Univ. Chi. L. Rev. 802 (1951). 3 Ibid., at 809. The reference to the radio frequency as a "factor of production" views it as the electronic place of business of the broadcaster qua businessman. 4 Ibid., at 811. THE UNIVERSITY OF CHICAGO LAW REVIEW [Vol. 20 casters to outbid each other for channels. Thus, if equipment manufac- turers and broadcast stations pursue maximum profits and the FCC does the same through the leasing of channels, and if competition is substantially perfect,5 the problem of choosing standards for innovation is solved. True, not all sets may be able to receive all signals, and this may injure part of the public as well as retard production of TV equipment. He concedes that if the market decisions oscillate between single and multiple standards, "it is not easy to determine which will be greater: the losses to the public because sets will not receive all program transmissions or the gains to that part of the public which, if permitted to choose freely, would choose a more rapid rate of innovation." And he frankly admits several other pos- sible disadvantages ("the rate of obsolescence of receiving sets may be greater than individual consumers would choose for themselves," and "the quality of programs may be adversely affected by a fall in total demand for receiving sets"). Nevertheless, and apparently mainly because the market control notion "is consistent with current views about the best organization of economic life," the present allocation policy is condemned. That policy, he says, "cannot convincingly resolve issues like those in- volved in the color television controversy." He accordingly sees "a power- ful inducement for considering the alternatives." It is no part of my purpose in this article to comment on the theories of Knight or Lerner as they might apply them outside of the communications field. The application of these theories in the Comment is an intel- lectual game. And a fascinating game it can be. But, when the author leaves it with a suggested application of his conclusions to reality, he takes it out of the realm in which it is merely the fashion of economists to amuse themselves. The following comments open to examination these assump- tions and preconceptions as they relate to the real conditions in the communications sector of the economy. My initial commeit is that the author does not establish a realistic technological frame of reference for his proposal. Indeed his technical views are quite inexplicit. At times he seems to refer solely to broadcasting, but his attack is broadly levied against the FCC's concept of the public interest in all radio allocation. He seems to operate on either or both of two preconceptions in this area: (1) that the broadcast use is the most important, if not the only use of the radio spectrum, and (2) that the frequencies used by broadcasters may be regarded as isolated, technologically, both from each other and from those used for other purposes. Both of these notions are invalid. S The italicized condition is my contribution; the author of the comment does not ex- plicitly recognize it. 19521 THE BROADCAST BUSINESS Far from being a dominant user of spectrum space, commercial broadcasting is a minor claimant on it. Reference to an allocation chart would reveal that only 23,050 kilocycles are exclusively devoted to commercial broadcast, while in 72,000 kilocycles commercial broadcast shares the use of the frequencies with one or two nonbroadcast users.6 The proportion of the total useful spectrum represented by these magnitudes depends on how the total is defined. Certainly the radio spectrum up to at least 1,000,000 kc is susceptible of commercial exploitation, technologically. On this basis, the exclusive use of frequencies by broadcasters represents 2.3 per cent of the total and the shared use, 7.2 per cent. However, even these small figures may overstate the importance of broadcasting in spectrum allocation terms. The FCC has allocated the spectrum to different users as far as 30,000,000 kc. And on this basis commercial broadcasters use exclusively less than one tenth of one per cent, and, on a shared basis, two tenths of one per cent. Who are the dominant users of the radio spectrum? The FCC decisions in the General Allocations hearings of 1944-45, to which reference is made in the first paragraph of the Comment, disclose the heavy use made of radio by the military, the use made of it by law enforcement agencies, fire fighting agencies, the Weather Bureau, the Forestry Service, and the radio amateurs ("hams"), the last of which by definition could hardly be expected to pay for frequency use. 7 In addition to these noncommercial users of the spectrum there are a number of classes of commercial users other than broadcasters.

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