The Economics of Television Regulation: A Survey with Application to Australia*

THE ECONOMIC RECORD, Vol. 68, No. 202, December 1992,377-394

The Economics of Television Regulation: A Survey with Application to Australia*

ALLAN BROWN MARTIN CAVE Department of Economics,

Griflth University, Brunel University, Uxbridge,

United Kingdom

Faculty of Commerce and Administration,

Nathan, Queensland 41 I I

The analysis of the regulation of television poses a number of chalknges to economists Because the structure and organization of television broadcasting are rarely the same between any two countries, there are difticulties in applying the economic analysis of television regulution in one country to that of another. Further, the major social and cultural role of t ehkwn causes government broadcasting policy to include many non-economic objectives This paper outlines the main issues concerning the economic regulation of television and relates the prominent literature in the area to the Australian broadcasting environment.

1 Introduction Almost everywhere broadcasting is a highly

regulated industry. Despite the growth of international, satellite-based broadcasting companies, in most countries the bulk of decisions determining the system of television and radio broadcasting are made by government. Control over the structure of broadcasting is usually exercised by the national government, although the implementation of regulatory functions, such as allocation of broadcasting licences, is often undertaken by an independent regulatory agency. Either the public sector provides broadcasting services directly, or it regulates the number, type and conduct of private companies in the industry. There is, however, no universal model for the structure, regulation and operation of broadcasting. The degree to which television and radio

We arc grateful to Glenn Withers and an anonymous referee for their most valuable comments and criticisms on an earlier draft.

broadcasting is centralized/decentralized, commercial/non-commercial and regulated/unregulated differs among countries, the outcomes being a product of the historical, ideological and political forces in each national setting.

Until recently, the broadcasting industry has not widely been viewed as a fit subject for economic analysis, except in the US. But recent developments in broadcasting technology have promoted a liberalization of the industry in almost all countries, and it is becoming increasingly the practice to apply the tools of industrial economics and the economics of regulation to it. Economic analysis based on one system is usually not able to be transposed without modification to the broadcasting environment of another country. Nonetheless, there has developed a body of literature on the economics of television regulation which has general application and which, together with the increasing number of Australian studies, provides a framework for the economic analysis of broadcasting in this country.

* 1992. The Economic Society of Australia. ISSN 0013-0249. 377

378 DECEMBER ECONOMIC RECORD

TABLE 1

&ages of Tekvkion Progmm Production and Distribution in Aurtmlia

stage ABClSBS Commercial Networks Pay TV* Video Cassettes

1 Program Production Domestic or imported 2 Networking ABC/SBS

3 Local program ABCISBS selection

4 Program delivery (a) National AUSSAT (b) Local Department of

Transport and Communications

5 Revenue Parliamentary appropriation from taxation

* ** See Section IV.

Based on proposals of Beazley ( I 99 1 ).

Domestic or imported Domestic or imported Film studios By dominant None Video (Sydney /Melbourne distributors based) licensees Before equalization:** By monopoly Local video by local licensee: licensee stores After equalization: by networks

AUSSAT/Telecom None Wholesalers By local licensee AUSSAT Households

Advertising revenues Subscription fees Rental charges

This survey sets out the basic issues relating to the economics of television regulation in an Australian context. For analytical convenience we distinguish five stages of production and distribution of television programs, namely: ( I ) program production and acquisition; (2) networking-the wholesaling of programs to local broadcasters; (3) local channel management-the selection of material for transmission by local stations; (4) program delivery; and ( 5 ) revenue collection. There is some arbitrariness in the classification. but it does make clear the wide variety of ways in which television programs and other video material can be made and distributed.

Table 1 shows how the five functions identified are discharged in a number of broadcasting (or video distribution) organizations. It can be seen that there exists a considerable degree of vertical integration within television broadcasting in Aus- tralia. The commercial networks, the Australian Broadcasting Corporation (ABC) and the Special Broadcasting Service (SBS) each undertakes some of its own production, but most of the programs they broadcast are purchased from independent local and overseas television producers. The stages of networking, program selection and program delivery, however, are all carried out in Australia

by the broadcasting organizations. This arrange- ment differs from that in the UK, for example, where the program selection and transmission functions are sometimes performed by separate organizations.

Most of the‘ discussion in this survey deals with stages (2) to (5). There is overwhelming evidence that many of the structural features described in the table are an intended or unintended product of regulation, in particular: (a) the existence of public sector broadcasters; (b) the control of entry into various stages of the industry; (c) restrictions on ownership which place limitations on the number of stations any one company can own, and on cross-media and foreign ownership; (d) restrictions on sources of finance, for example, the prohibition until recently of the operation of Pay TV, and of advertising by the ABC; and (e) control over the composition of output, as evident, for instance in the rules governing the ‘Australian content’ of programs. These restrictions operate as well as those which apply to all branches of the economy, such as taxation, and those common to all media, such as obscenity laws.

The paper is organized as follows: Section I1 outlines the economic rationale for the regulation of broadcast television; Section 111 considers

1992 ECONOMICS OF TELEVISION REGULATION 379

economic aspects of the delivery of television signals; Section IV focuses upon advertiser- supported television; Section V examines subscriber-supported television (Pay TV); the role of government-funded television is explored in Section VI; and Section VII drawssome conclusions from the survey.

II Economic JusRj%atiom for Broadcast Reguhtion Although the broadcasting industry exhibits

certain peculiar features arising from the ‘public good‘ nature of broadcast programs (discussed below), in other respects its regulation has much in common with that of other industries. Thus in broadcasting as elsewhere it is useful to distinguish between positive and normative theories of regulation (see, for example, Peltzman, 1989). The former seek to explain how the differing interests of the participants in the industry-producers and consumers-interact to produce a set of regulations which benefits the parties in different ways. The government is seen here as an actor which uses its regulatory capacity to pursue its own interests- usually the acquisition of votes or money, and which is influenced by other agents through a political and economic process.

In contrast, normative theories of regulation start from the proposition that the government is pursuing certain ‘benign’ objectives and intervening in the broadcasting system in order to pursue such goals as economic efficiency or equity. Normative motives for regulation can themselves be usefully divided into two groups. In the first, the nature of the regulation is ‘economic’; the government intervenes to avert the market failures or departures from efficiency to which an unregulated system would otherwise be prey. This can be distinguished from ‘social’ regulation, through which the government pursues certain social objectives in the ‘public interest’ such as the protection of the population from unsuitable broadcasting material, or the development of national culture. For some forms of regulation the distinction is not hard and fast. The Australian program content rules, for example, have both the economic function of protecting domestic industry, and the social functions of promoting national pride and cultural values. Beneficial externalities are thus deliberately prescribed by this form of broadcast regulation. The provision of certain types of programs considered to be ‘merit goods’ is a further motivation for government intervention in broadcasting (see Section VI).

This survey concentrates mainly upon normative approaches to regulation of the economic kind, but other approaches are considered at various stages. It is therefore useful to indicate at the outset what are the special features of broadcasting which can be seen as justifying regulation. (For a fuller account of television economics see No11 et al., 1973; Owen e z d , 1974; and Levin, 1980.)

Most economic arguments for regulation arise from the public good aspect of broadcast programs. The expense involved in producing or purchasing a television program is a fixed cost. Once the outlays have been incurred and the program produced it can be recorded on video tape or on film, and its cost to the original producer is then independent of the number of stations which acquire the rights for its rebroadcast. That is, once made, a program can be broadcast by additional stations at virtually zero marginal cost. Equally, once transmitted, a program can be seen by an additional viewer in a reception area at the low marginal cost, normally borne by the viewer, of operating his or her reception equipment. The existence of high ‘first copy’ costs is characteristic of many media, but is particularly acute in the case of television broadcasting. The implications are profound efficient consumption of programs requires, in the absence of price discrimination. a charge to the viewer of zero. How can the financing of the industry ensure efficiency in these circumstances?

There are three conventional sources of finance for television broadcasters. They can be financed out of general taxation; they can be financed by advertisers; or they can be financed by direct charges to broadcasting audiences. It is widely appreciated that there are problems in terms of economic efficiency with each of these approaches.

In the case of the first option, finance by taxation or licence fee (where it is assumed that penetration of television is such that a licence fee is equivalent to a poll tax) the difficulty arises not in the price of viewing-which is set optimally at zero at the margin-but in the incentives which face the broadcasting firms. Since viewers cannot convey their preferences in a detailed way or directly control the programming made available by broadcasting organizations, the latter may be tempted to substitute their own preferences for those of their viewers. This is a classic agency problem in which the principals (viewers) cannot convey information to, or control the agent (the broadcasting organization). As career advance- ment in public sector broadcasting organizations

380 ECONOMIC RECORD DECEMBER

may depend more on the judgement of peers than on audience size or appreciation, the welfare loss associated with the agency problem has the potential to be considerable.

The case of advertiser-support in broadcasting seems at first sight to provide an efficient solution to the problem (see Section IV). Programs are made available ‘free’ to audiences, while those audiences are then sold on a wholesale basis to advertisers, from whom stations derive revenue. The difficulty is that this process involves advertisers standing in an intermediate relationship between consumers and broadcasters which introduces a special system of incentives (Spence and Owen, 1977). The problem arises that the broadcaster receives revenue from the advertiser which is broadly proportional to the audience size, but largely independent of the audience’s preferences or willingness to pay for the program. As a consequence, in the absence of close substitutes the profit-maximizing advertiser-financed broadcaster, rather than providing programs which are greatly appreciated by smaller audiences, will always have an incentive to provide programs which are watched with scant enjoyment by larger audiences. Rothenberg (1962) describes such program types as ‘lowest common denominator’ programming.

A related problem with advertiser-supported television arises from the risk that popular program types will be excessively duplicated. The argument here is a straightforward application by Steiner (1952, 1961) of Hotelling’s principle of minimum product differentiation: a limited number of competitive channels will broadcast similar programs designed to appeal to the same mass audience, and neglect minority tastes. When the number of channels is larger, the problem of program types being excluded diminishes, but that of duplication of costs remains. The only way to remove the problem of duplication is to assign all channels to the same firm to broadcast complementary programs. In a system of broadcasting financed by advertising, therefore, the problems of inappropriate incentives and program duplication introduce a bias in the program selection process, and this militates particularly against programs appealing to minority audiences which have, but cannot express, a high willingness to pay.

The obvious way to capture willingness to pay is to charge for programs (see Section V). In a framework of multi-channel broadcasting, a useful way to visualize the industry’s structure is one of

monopolistic competition (Spence and Owen, 1977). But if broadcasters are constrained to charging a uniform price, the effect of pay broadcasting is to drive a gap between the price and marginal cost of viewing an additional program and hence to restrict consumption, because a positive price for programs will exclude some potential viewers.

Thus both advertiser-financed broadcasting and pay broadcasting generate inefficiencies. In the former case the major problem is the bias in program selection. In the latter case restricted consumption is the principal difficulty, although pay broadcasting too discriminates particularly harshly against programs highly appreciated by a small minority (&id). As with all second-best problems, it is impossible to say a priori which of the two inefficiencies is the more severe. It is likely, however, that if the number of channels is low, the harmful effects of bias will be limited too, as minority programs would not gain access to the airwaves in any case because of channel scarcity. When the number of channels is greater, the harmful effects of bias in program selection arising from advertiser-finance will be more considerable, as highly appreciated minority programs, which might be broadcast profitably under charging, may fail under advertiser-finance to generate the audience necessary to break even. It has been shown that if competitive broadcasters have the option of either advertiser-finance or pay broadcasting, they will find it more profitable to choose charges as against advertiser-support, the more viewers dislike advertisements and the lower their value to advertisers. On certain assumptions- notably, that dollars paid by advertisers for audiences are equivalent in welfare terms to dollars paid directly by audiences to view programs-the more profitable source of finance is also better in welfare terms (Wildman and Owen, 1985). This result provides support for permitting competition between various forms of finance.

The normative ‘economic’ theory of broadcasting regulation thus identifies market failures arising from the public good nature of the industry. These failures can be eliminated by public production (but which is subject to the difficult agency relation mentioned above), or by subsidiza- tion of particular program types. Accordingly, the UK Peacock Report (Committee on Financing the BBC, 1986, p.148) recommended the provision of subsidies on the ground that they would secure availability of ‘those programs which the public recognize as being in their own interest to have


produced but which cannot be delivered by the market’ (see also Section VI). However, subsidizing the production of any program which costs less than the consumer surplus it generates, given the other programs available, would require the collection of information which is not at present available. It would also be difficult to acquire such information, as asking households what value they place on viewing a hypothetical program may elicit ill-informed or opportunistic answers. (However, the results of an experiment of willingness to pay for television programs by Bohm [ 19721 suggests that the generally considered risk for misrepresen- tation of preferences for public goods may be exaggerated.)

111 Economic Aspects of Delivery The type of transmission system used to deliver

a program from the television station to the viewer will determine: the cost of signal distribution; the distance the signal can be transmitted, and hence the geographic size of the television area or market; the technical quality of the signal received by the viewer, and the maximum number of operators transmitting signals, that is, the maximum number of stations in each television area. For the operator of a commercial television station the potential profitability of the market depends upon the size, income and other attributes of the population in a reception area, and the number of competing commercial and other stations. The total advertising revenue will be divided into a number of shares according to the number of competing commercial television stations.

The three main distribution systems for television broadcasting are terrestrial, satellite and cable. With terrestrial and satellite delivery, the television broadcaster directly meets the cost of transmitting the signal to the viewer’s premises, while in a cable system that cost may be shared through a connection charge. The viewer is always responsible for the cost of displaying the signal on the television receiver.

Traditionally, television signals have been distributed by terrestrial means involving the dissemination of the signal from a station’s transmitter to all viewers in its broadcast area. The quality of the signal will be determined by the technical standard prescribed for transmissions, the strength of the signal transmitted from the station, the distance between the transmitter and the receiver, and the physical characteristics of the broadcasting area (buildings and mountains can

cause distortions to signal quality). In geographically large broadcasting areas and those in which there are buildings or hills the use of translators maintains the quality of the television signal to the viewer. Stations’ transmission costs depend on the institutional arrangements for the ownership and operation of the television transmitters. They may be owned by the stations themselves or leased, usually from a government agency.

Satellites are essentially powerful transmitters situated in geo-stationary orbit at a very high location above the earth’s surface distributing television (and other) signals from their transponders. The power and height of satellites give them the capacity to distribute television signals over a very wide area, and consequentially to a much greater number of viewers than a single conventional, terrestrial television station. Signals are transmitted from the television station to the satellite (the ‘uplink‘) and then transmitted to the viewers from the satellite (the ‘downlink’). Signals can also be distributed by satellite to television stations and retransmitted to viewers via the terrestrial system. A powerful satellite requires a relatively small, and therefore less expensive, antenna, or dish, to receive the television signal on the ground; conversely, a weaker satellite requires a larger and more expensive dish at the viewer’s premises.

Typically, satellite transponders are leased by satellite owner-operators to satellite users, the lease charges for transponders varying in accordance with their size and other technical characteristics. The distinguishing feature of television transmission by satellite is that the cost of delivery is insensitive to the location of the viewer from the broadcasting station. Distance ceases to impose a financial obstacle in the distribution of television signals. For this reason satellites are suited to distributing television signals to viewers living in small and isolated population areas, such as outback Australia. (Economic aspects of satellites are analyzed further in Brown, 199 1 .)

As well as by terrestrial and satellite delivery systems, television signals can be transmitted to home receivers along cables. Cable television can utilize the existing telephone network, or a new physical distribution system can be established. Cable television is capable of performing the same functions as terrestrial and satellite delivered television: programs can be produced and transmitted by stations; pre-recorded programs can be transmitted; programs can be received via microwave or satellite relay by cable television

ECONOMIC RECORD DECEMBER 382

stations for retransmission; and cable can provide a Pay TV service (see Section V). With cable the quality of the signal is unaffected by geography, although it is affected in some cases by distance from the ‘head end’ (cable television station). In addition it is technically possible for cable television systems to incorporate a two-way capacity which allows the transmission of information in the return (‘upstream’) direction from home receivers to cable stations.

An important feature of cable is that it does not utilize the radio spectrum for the final delivery of television signals to the home. Cable systems, therefore, are not subject to restrictions which limit the number of terrestrial and satellite television channels. In fact, there is virtually no technical limit to their channel capacity. Moreover, once a cable system of a certain capacity has been established the marginal cost of bringing additional channels into operation, up to that capacity, is very low. It is also possible, at a cost, to upgrade existing cable systems so as to expand their channel capacity. Cable thus has the potential not only to increase substantially the number of television channels, but also to supply a variety of nonbroadcasting functions, such as home shopping, burglar alarms and telephony.

The technology employed for the distribution of television signals does not itself determine the economic relationship between the signal provider and the viewer. Advertiser-supported, subscriber- supported and government-funded television can each be provided by means of terrestrial, satellite or cable distribution, and there can be competition among the three technologies for television distribution. Except in geographically isolated and very sparsely populated areas terrestrial distribution is usually the most economical means for the distribution of a smull number of television channels. Nevertheless, technological advances, including increased power of broadcasting satellites, and the development of fibre optics and digital transmission techniques, has added dynamism and uncertainty to the competition among distribution systems. In particular, fibre optic cable significantly reduces the distribution costs of television (and other) signals thus improving the economics of cable relative to terrestrial and satellite delivery for many transmission applications (Henry. 1985).

Apart from deciding whether or not a particular television distribution technology should be adopted, a major policy decision for broadcasting authorities in each country concerns the issue of

common camage. This arises from certain natural monopoly characteristics of cable television which, it is argued, make it unsuitable for establishment and operation on an entirely bez- fuire basis (see Rosse er d, 1970; Owen, 1970; Besen and Johnson, 1982). In particular, it has been argued that there are substantial economies of scale involved in the laying of cable, such that the lowest per subscriber cost in any locality is obtained by a monopoly. On this basis, it would be unlikely for two or more cable systems to compete indefinitely in the same streets. and it would be inefficient for them to do so. This provides support for establishing cable monopolies. Although the empirical basis for this claim has been contested (Noam, 198% in many countries cable franchises are established as monopolies.

To avoid the potential risk to the public interest from the exercise of market power resulting from the granting of monopoly cable rights, it is further suggested that cable television systems be organized on a common carrier basis. By this means, cable operators would not themselves provide programs for transmission by cable, but would lease out channels to others. Lessees would supply the programs and pay the cabte utility for the use of the cable reticulation system. Cable operators would determine their own method and level of charges to viewers for reception of television programs. Owen (1 970, p.546) explains that:

What is proposed here is in effect the vertical dis-integration of message sources from message carriers, allowing the carrier to take advantage of economies of scale in the transmission process, and at the same time providing an opportunity for considerable competition among message sources . . . The medium would thus be divorced from the message. In practice, factors related to economic ideology

and political traditions play a significant role in the approach of governments to the common carrier issue, and countries differ in their regulatory arrangements. In the US, for example, terrestrial delivery systems are owned by the broadcaster, while cable companies are obliged to provide some access on a common carrier basis to those wishing it. In Australia terrestrial delivery systems are owned and operated by commercial television licensees whereas, as mentioned earlier, transponders are leased to satellite users by the satellite system operator on a common carrier basis. Currently in Australia the only use made of cable

1992 ECONOMICS OF -ON REGULATION 383

for television is for the retransmission of local television broadcasts in areas of poor terrestrial reception. However, in 1989 a House of Representatives standing committee recommended that Telecom should be made the common camer for any Pay TV services in Australia delivered by cable (Saunderson Pay TV Report, 1989, pp.39- 40).

IV Advertiser-Supported Televiswn It is implicit in the introductory discussion that

there is no uniform structure for the establishment and operation of broadcasting organizations. Essentially, there are two general models for broadcasting-the US model comprised predominantly of commercial broadcasters, and the European model based mainly on centralized national broadcasters established and organized by the state. In practice, most countries have a dual system with both commercial and government broadcasters, but there are wide differences among countries in the relative size, organizational structure and financial strength of the two sectors. Australia has a dual system of broadcasting, but one more closely related to the US model than the European. In Australia the commercial sector of both television and radio broadcasting predominates in terms of numbers of stations, revenues and the size of viewing and listening audiences.

(i, Allocation Procedures A fundamental policy issue with commercial

television concerns the mechanism to be adopted by government in the granting of rights to provide television broadcasting services. The procedure is usually by the allocation of television licences which, in turn, involves the concept of economic rent. The value of rents is related to the number of competing broadcasters allowed to operate. Generally, the greater the number of competing television broadcasters in a market the smaller the value of economic rent so generated. Procedures adopted for the allocation of commercial television licences thus affect both the value of economic rent and the distribution of rent between licensees and the government.

There are essentially three options available for issuing commercial television licences, namely, by licence inquiry, lottery or auction (see Kwerel and Felker, 1985). The granting of television licences on the basis of an inquiry typically involves the broadcasting authority inviting interested potential

licensees to make competitive applications for a licence to operate a television station or service. Applicants are then assessed according to a range of criteria usuaily related to their perceived technical, financial and managerial capabilities and the attractiveness of their programming proposals. The applicant considered most suitable to provide the service is selected and issued with a licence. This competitive bid procedure, sometimes called a ‘beauty contest’, is intended to allow open access to the licence allocation process. In practice however it tends to favour individuals and corporations with broadcasting experience. It also (unavoidably) involves a degree of subjectivity in the selection process.

One way to remove the discretionary aspect from licence allocation is to select broadcast licensees simply by lottery among applicants. To ensure the suitability of a chosen applicant to provide an adequate service this option could be modified by conducting the lottery only among applicants deemed to have satisfied certain minimum criteria, relating again, to technical, financial and managerial capabilities and programming proposals. In practice, lotteries have been used only sparingly, mainly in the US to allocate licences with little commercial value.

The third method of allocating commercial television licences involves one main criterion, namely, the willingness to pay for the right to broadcast. An auction system allocates a television broadcasting licence to the highest bidder. As with lotteries, an auction could be conducted only among those interests satisfying certain minimum criteria pertaining to their suitability as broadcasters.

If an auction system is adopted for the allocation of a limited number of licences, entry into the industry will be restricted. However, an auction system could be implemented to facilitate unrestricted entry into television broadcasting. Such a proposal was first advanced by De Vany ef al. (1969) and involves the establishment of tradeable access rights for that part of the spectrum allocated to radio and television broadcasting. (More radically, access rights could be established for the entire electromagnetic spectrum.) For broadcasting, the holder of each spectrum right would have the exclusive right to transmit, within a defined area, a signal with a prescribed band- width and maximum field strength. Spectrum rights would initially be auctioned, and they could then be bought and sold as items of private property. A feature of the tradeable access rights concept

384 ECONOMlC RECORD DECEMBER

is that it has the potential to allow the number of competitors in each broadcasting area to be determined by market forces-subject only to spectrum availability. It has been argued, however, that then a n shortcomings to the market allocation of spectrum, namely, that the system would tend to undervalue externalities associated with spectrum use, and that the market may be dominated by concentrated interests which may involve monopoly losses (Hall and Schou, 1982).

With the three methods of licence allocation- inquiry, lottery and auction-there is a further set of options involving economic rent. The dilemma for government is to devise a method of determination and payment for the right to broadcast so that it closely approximates the true value of the rent pertaining to each licence. If the charge is set too low a portion of the rent will be lost by the government, whereas setting it too high may deter potential applicants or result in the ‘successful’ applicant incurring operating losses.

Both the inquiry and lottery methods can involve the payment of a resource rent tax to the government by way of a ‘licence fee’. The fee can be payable in one lump sum upon the issue of the licence, or accrue annually and be assessed in accordance with the financial results of the licensee. Alternatively, a fee could be payable on the grant of the licence, and a recurrent annual charge also payable by the licensee. The payment of an annual fee based upon financial performance allocates to the government a share of the rent after it has been gained by the licensee and its magnitude thus determined. Theoretically, therefore, this form of resource rent tax is able to capture the exact proportion of economic rent determined by the government. In practice, however, this method can have the disadvantage of establishing an incentive for potential excess profits to be whittled away by ‘x-inefficiency’, excessive costs deliberately incurred by the management of the licensee company. An dtemative approach is to base the calculation of the annual licence fee on another economic variable such as the revenue earned by the television station (as in Australia, see below).

The auction system (for part only or all of the broadcasting spectrum) involves the appropriation of economic rent by the government when the licence is issued, and the determination of the value of the rent by the auction process itself. As mentioned, however, a potential problem with the auction system for allocating licences is that if

applicants over-estimate the profitability of the licence, or if profitability is subsequently adversely affected, for example, by changes to broadcasting regulations, there will be over-bidding for the licence which will over-value the rent and may prevent the ‘successful’ applicant from earning profits-the ‘winner’s curse’. Three conditions therefore need to be met for the benefits of economic efficiency inherent in the auction system to be achieved first, the bidders need to have sufficient information regarding the potential profitability of the television service; second, government regulations affecting the profitability of the television services should not be altered, at least within a certain minimum period of time; and third, there should be no collusion among bidders (DOTAC Pay TV Report, 1989, vol. 2, pp.139- 44; Cave, 1989; Cave and Williamson, I99 I ).

Until recent years, all commercial television and radio licences in Australia have been issued on the basis of a licensing inquiry by the broadcasting regulatory authority-since 1977, the Australian Broadcasting Tribunal (ABT). Economic rent payable to the government has taken the form of a nominal charge payable on the issue of the licence, as well as an annual licence fee, currently amounting to around 6 to 8 per cent of licensees’ gross earnings.

Since the number of commercial television and radio licences issued in Australia has been far fewer than the potential number of spectrum allocations, entry into the broadcasting industries has been greatly restricted (see Brown, 1986, pp.94- 100). The official justification for this policy approach has been that licensees are obliged to comply with certain programming requirements which reduce their profits below levels they could otherwise earn. The major programming regulations for commercial television have been the ‘holy trinity’ of minimum Australian content, minimum hours of children’s programming and maximum advertising content. To the extent that regulations do reduce the profits of television licensees they are thus a form of ‘taxation by regulation’ (Posner, 1971).

Because of the restricted number of commercial television licences and the relatively low resource rent tax extracted by government high profits have been earned by licensees and, consequently, large economic rents have attached to licences. However, when television licences are sold by the original licensee, in addition to the value of the net tangible assets the selling price includes the discounted value of the economic rents. Depending on the level


of station profits the value of the rent can constitute a very high proportion of the total sale price. There have been numerous examples of this practice in the history of Australian commercial television, most notably the sale in 1987 of the Sydney and Melbourne Channel Nine television stations by Kerry Packer for $1.05 billion, and the sale of the third television station in Perth by Kerry Stokes in 1987 for $12 million-less than twelve months after the initial award of the licence.

In such cases the original licensee makes a capital profit on the sale of the licence, but the successor licensee tends to earn only a normal profit-a phenomenon Tullock (1980) has termed the ‘transitional gains trap’. Moreover, once the value of the economic rent has been capitalized on sale of the licence it is ‘lost’ from the industry and no part accrues to the government (except by way of any capital gains tax payable by the original licensee). With the sale of the Australian network television stations in the late 1980s. immediately following the liberalization of the ownership restrictions, each of the three network buyers paid in excess of the real value of the television licences and suffered the ‘winner’s curse’ by subsequently incuning substantial operating losses. The Channel Nine network was repurchased by Keny Packer for less than half the price he sold it for, and the Seven and Ten networks were both forced into receivership.

Partly in response to these events, and consistent with its general economic ideology, the government has since moved towards more market based policies for the allocation of broadcasting licences. In particular, it has announced its intention to adopt a tradeable spectrum access rights system for both commercial television and radio. The government’s decision follows the recommendation of the Bureau of Transport and Communications Economics (BTCE, 1990, 1991). The BTCE claims that, combined with unrestricted entry into broadcasting, tradeable spectrum access rights will ‘increase the flexibility and responsiveness of broadcasting to changing consumer demands and to technological innovations and should facilitate early introduction of new services and technologies’ (BTCE, 1991, p. 15 1). The Broadcasting Services Bill presented to parliament in November 1991 provides for the auction of all unallocated spectrum for television and radio broadcasting. The tradeable spectrum access rights system is planned to take effect for radio immediately it becomes legislation, and for television from July 1997.

(ii) The Changing Structure of Australian

Advertiser-supported television stations were first established in the 1950s in the capital cities in rivalry with the publicly owned ABC. A second and then a third station was added in the mainland State capital cities in the following decades. Non- metropolitan markets have until recently been confined to a single commercial station. In addition approximately 2 per cent of the population receives commercial television programming directly by satellite.

The predominant size of the Sydney and Melbourne markets gives stations in those cities a crucial role in commercial television. As well as comprising 43 per cent of the total Australian television audience, Sydney and Melbourne are the production and distribution sources of practically all television programs (except local news) produced in Australia. Historically this dominance has been expressed through contractual relationships between companies holding the Sydney and Melbourne licences and other licence holders. Recent changes in ownership regulations however have enabled these relationships to be internalized to a large extent through takeover of many of the regional stations (see below).

As already explained, the structure of commercial television, especially limitations on entry, has resulted until recently in a highly profitable industry. Data compiled by the ABT on profits as a percentage of turnover show that by this measure regional stations have consistently been even more profitable than those in the capital cities (Brown, 1986, pp.143-44). The main reason for the high profit level of the regional stations has been that they produce very little of the programming material that they broadcast, but simply purchase it from the network stations in Sydney and Melbourne. Because the regional stations have been monopolies in their own markets, they have been able to exert monopsony power over the networks in the purchase of program material. The one station in each regional market was able to choose (‘cherry pick’) from three metropolitan networks for the supply of programming, and so obtain the material at relatively low cost. Typically, regional stations purchased programs from each of the three commercial networks.

This situation is now changing as a result of the policy of ‘equalization’ which involves the aggregation of contiguous one-station regional markets into a smaller number of larger three-

Commercial Tehiswn


station markets. There are now three commercial television channels throughout regional areas in Queensland and southern New South Wales, and three services are planned to become available to regional areas of northern New South Wales and Victoria during 1992. In total 24 regional markets in New South Wales, Victoria and Queensland will have been combined into four ‘aggregated’ markets, with different arrangements applying in the other States.

Equalization brings a fundamental change to the relationship between regional stations and the networks. Each regional station will have a strong economic incentive to receive practically all of its programs from one of the three network firms based in Sydney and Melbourne. Increasingly. programs will be broadcast by satellite and will contain national advertising sold and inserted into the programming ‘feed’ received from the networks. Regional stations will thus largely lose their editorial function and their role will be restricted to that of maintaining technical equipment for receiving and transmitting network programming and selling local advertising for insertion alongside network advertisements. They will however continue to provide local news programs.

The reversal in the balance of power between networks and regional stations is likely to require regulatory protection for the latter, possibly on the lines which have become familiar in the US. These may involve the prohibition of such practices as exclusive purchasing contracts, long-term contracts which lock in the affiliate, refusals to supply, and tie-in or take-and-pay agreements which require customers to buy a number or a whole range of programs (Brown. 1989a; Cave, 1990).

(iii) Television Advertiring Markets Changes in broadcasting policy-in particular,

the equalization program discussed above-have focused considerable attention on the revenue potential of television advertising markets. However, there has been little econometric work undertaken on television advertising markets in Australia (Cave and Tavakoli, 1989 is one of the very few such studies). This is in contrast to other countries, notably the UK, where debates about funding the BBC through advertisements and the necessity to tender competitively for television licences have led to an outpouring of projections of television advertising revenue.

Most econometric work of this kind has modelled

the television advertising market as one in which the supply side depends upon the amount of time devoted to advertisements by commercial channels and the audiences they attract. The demand for advertising is assumed to originate with firms, and to be determined by such variables as current and expected consumers’ expenditure and aggregate profitability. The key results sought from the analysis are estimates of the price elasticity of demand for television advertising, and the expenditure elasticity of demand which indicates how a change in consumers’ expenditure affects the demand for advertising. The UK data suggest relatively low values of price elasticity of demand (between 0.5 and 1) and relatively high values of the expenditure elasticity of demand (well in excess of 1) (Cave and Swann, 1985; Hendry, 1988).

Unfortunately, Australian data on the price and quantity of television advertising exposures are not of the quality needed to replicate the estimates made in the UK. There is, however, evidence from several countries suggesting that television advertising has no close substitutes, so that it is plausible to suppose that the price elasticity of demand is relatively low. Equally, rates of growth of television advertising expenditure are found to grow faster than consumers’ expenditure in most countries, so that an expenditure elasticity of demand in excess of 1 is plausible for Australia.

From a regulatory point of view, one of the crucial issues is how to control exploitation of a broadcaster’s monopoly power in the advertising market. As mentioned above, before equalization, Australian data showed that higher profit margins were made by stations operating in regional monopoly markets than stations in capital cities. The introduction of greater competition through equalization is likely to diminish monopoly rents.

(iv) ownership Due to their potential to influence attitudes,

beliefs and values, commercial television services in most countries are subject to provisions concerning ownership. Ownership restrictions normally take the form of the government imposing limitations upon (a) the size or number of television operations that can be owned by any one person or group-‘group ownership’; (b) the ownership of television operations by owners of newspapers, and radio stations-‘cross-media ownership’; and/or (c) the ownership of domestic television operations by non-nationals-‘foreign ownership’.

The economic effects of group ownership of broadcasting stations have been subject to

1992 ECONOMICS OF TELEvIslON REGULATION 387

relatively little empirical analysis. A study of Canadian broadcasting stations by the Canadian Ownership Study Group (1978) reported that there existed ‘significant’ economies of scale in group ownership of both radio and television stations. A more recent study of group ownership of television stations in the US also found evidence of economies of scale, but concluded that they ‘ . . . did not seem to be large’(Besen and Johnson, 1985, p.375). Both the Canadian and US studies examined the advertising rates charged by television groups and found them to be no lower than rates charged by independently owned television stations. The Canadian Study Group (but not Besen and Johnson) also tested for programming costs and found that television groups did not pass on the benefits of scale economies to audiences by way of better quality programming (as measured by cost). In summarizing its conclusions the Study Group reported (p.40) that:

Although group ownership of radio and television results in higher levels of financial health and profitability for the corporate entities involved, the studies revealed no evidence that groups generally provide commensurate quantifiable benefits to the public in terms of relatively higher expenditure on program production or lower advertising rates.

The findings of the Canadian Study Group and Besen and Johnson provide general support for government policies designed to limit the level of ownership concentration within advertiser- supported television.

The economic effects of cross-media ownership have been investigated in the US for over two decades. The results of a study by Owen (1969) supported his hypothesis that newspaper-television combinations afforded media proprietors a degree of market power sufficient to allow them to charge higher rates for advertising than newspaper and television stations which were separately owned. Subsequent studies, however, have produced results which are in conflict with those of Owen. Peterman (1971), Busterna (1976) and Wirth and Wollert (1984) have all concluded that cross-media ownership does not affect the advertising rates of newspaper-owned television stations, while the Canadian Ownership Study Group (1978) has found that cross-ownership of a television station with either a newspaper or a radio station in the same market does not influence advertising rates. The weight of evidence now suggests therefore that cross-media ownership does not influence the price

of advertising. The effects of foreign ownership of domestic

commercial television is difficult to subject to empirical economic analysis, and involves the unquantifiable issues of national culture and identity, and foreign influence upon social, economic and political life. As is the case with cross-media ownership, the rationale for restrictions on foreign ownership of television operations would seem to rest on non-economic criteria.

In 1987 the previous television ownership limitation in Australia of two stations (in any two markets) was liberalized to one based on the proportion of population in television markets, the maximum audience reach for any one owner being set at 60 per cent of the national viewing audience. The Broadcasting Services Bill 1992 provides for this limitation to be raised to 70 per cent. Cross- media rules were also introduced in 1987 which prohibited the common ownership in the same service area of either a television station and a commercial radio station, or a television station and a newspaper. Foreign ownership in Australian commercial television has been limited since 1956 to 20 per cent of the voting equity in a company holding a licence.

V Pay 7’V Pay TV is the supply of television signals on

a commercial basis different from that of conventional advertiser-supported or government- funded television. Pay TV programs are available to viewers only when payment is made to Pay TV system operators, usually a monthly fee. The Pay TV viewer is also charged a connection fee to the system, and certain pay channels may be accessible only by payment of an additional ‘premium’ fee. In addition, special programs-for example, prize fights and live concerts-may be made available to viewers on a ‘pay-per-view’ basis.

The number of channels in a Pay TV system depends upon the decisions of the broadcasting authorities and upon the technology employed for the delivery, usually in encrypted form, of Pay TV signals. Terrestrial and satellite delivery commonly provide for the distribution of one to six pay channels, while cable can allow a much greater number, in some systems in excess of 100.

(i) &mami for Pay TV The economic relationships within a Pay TV

industry are substantially different from those


prevailing within traditional advertiser-supported television broadcasting. When television is financed by advertising revenues television stations are the suppliers; advertisers are the buyers; and the products are the audiences which are ‘sold‘ by the stations to the advertisers. The programs transmitted simply serve the purpose of attracting the attention of audiences to the advertising messages. In contrast, with Pay TV, where viewers pay directly for programs, the ‘stations’ (Pay TV operators) are still the suppliers; however, the viewers become the buyers, and the products are the programs which are sold to viewers. (When advertising is presented on Pay TV the economic relationships combine elements of both advertiser- suppotted and subscriber-supported television, and financing is similar to that of newspapers and magazines which derive revenue both from advertising and cover sales.)

As shown above in Section 11, with limited channel advertiser-supported television the programming preferences of minority audiences tend to be neglected. This can be alleviated by the direct payment by audiences for programs. Subscriber-supported television is able to take into account the intensity of audiences’ preferences for programs, expressed in money terms. It has the potential, therefore, to generate the production and transmission of additional programs that cater to the tastes of audience groups whose size is sufficiently small that such programs would be unprofitable (or less profitable than other programs) under advertiser-support. In practice Pay T V operators attempt to seek revenues by offering viewers a differentiated product in terms of programs not available on advertiser-supported or government-funded television-especially early release movies and programs with less advertising content.

It was indicated in Section I1 that there is a prima fu& case for the introduction by government of Pay TV, but not for the replacement by Pay TV of advertiser-supported television. If an all-Pay TV system provided any of the same kinds of programs previously available under advertiser-support, viewers would be charged for programs which previously they received without payment. An all- Pay TV system would, therefore, be likely to bring about a ’ considerable income transfer from consumers to the television industry. According to Noll et aL, (1973, p.135) ‘viewers would watch the same kinds of programs, but they would be poorer by several billion dollars’. This income transfer would be offset however to the extent that

any consequent reduction in advertising rates for advertiser-supported television was reflected in reduced prices for consumer products.

Most studies of the demand for Pay TV are those carried out in the US where Pay TV operates in competition with conventional advertiser- supported television and is available mainly on cable. Demand for Pay TV in the US is determined by a range of factors including the number of channels available from existing advertiser- supported and public television broadcasters, the prices charged for Pay TV, and the quality of pay programming material. Demographic characteristics are also significant with upper income households having a disproportionately higher demand for Pay TV (Bloch and Wirth, 1984; Pacey, 1985).

(ii) Regulatory Issues The primary regulatory issue with Pay TV

involves the decision whether or not to allow the operation of pay services. A government might be reluctant to introduce Pay TV if it considers its operation might jeopardize the financial viability of existing commercial television operations, or might result in a diminution in the quality of commercial television programs. Similarly, it might consider that Pay TV will reduce the audience numbers for government-funded television programs. The weight of these considerations will depend upon the government’s philosophical attitude to protecting the audience numbers and financial viability of existing television operators.

The second consideration for government concerns the technology or technologies to be adopted for Pay TV. There are three main technologies which can be employed for the transmission of Pay TV signals: terrestrial means; direct broadcast satellite (DBS); and cable. (Pay TV can also be transmitted by MDS-multipoint distribution system-which is a terrestrial system utilizing microwave frequencies and sometimes known as ‘wireless cable’. It does, however, require the use of satellite or cable as an originating technology.) The government has four options concerning the technology for Pay TV. It can (a) choose either of the three main Pay- TV technologies; (b) allow more than one technology to be used for Pay TV concurrently; (c) decide that one technology will be employed for Pay TV initially, and be replaced by an alternative means of distribution at some future time; or (d) allow the technology to be determined solely by the Pay Tv operators.

1992 ECONOMICS OF TELEVISlON REGULATION 3 89

The delivery of Pay TV via terrestrial means requires the encryption (‘scrambling’) of the signal to prevent it being received by households without payment. A decoder is rented by subscribers and attached to the set to allow reception of the signal. The reception of Pay TV via DBS also requires a decoder. In addition, the subscriber must have an earth receive station (dish) to capture the signal from the satellite. Recent technological advances have greatly reduced the size and cost of satellite receive dishes.

Technically, cable is easily the superior means of Pay TV delivery. As explained in Section 111 optical fibre cable has the capacity for a larger number of channels than terrestrial or satellite, provides a better quality signal, makes no demand on the radio spectrum, does not require decoders for the transmission of its signal, and has the capability for interactive (two-way) services. Cable also has the capacity to sustain ‘video ondemand‘- a system whereby subscribers can dial up an individual feature film on the cable network. The disadvantage of cable, however, is its high cost of installation, especially in small and isolated population areas. This can necessitate a long timeframe for its widespread availability.

Since 1982 the Australian domestic telecommunications operator has been engaged on an extensive and ambitious project to upgrade its network by replacing its existing copper cables with optical fibre. (In early 1992 the domestic carrier, Telecom Australia, was merged with the overseas carrier, Overseas Telecommunications Corpora- tion, to form the Australian and Overseas Telecommunications Corporation-AOTC). The primary purpose of the fibre optic upgrade program is to create additional capacity on the network to enable AOTC to meet the continually increasing demands for voice, data and video communications services. AOTC estimates that a fibre optic Pay TV distribution capability will be established to within, on average, 2 kms of 60 per cent of Australian homes by 1994 (Saunderson Pay TV Report, 1989, p.39).

In addition to ownership (which raises the same issues as those outlined above in relation to advertiser-supported television) the major regulatory matters concerning Pay TV are advertising, local content and program ‘siphoning’. Countries have adopted different approaches to the issue of advertising on Pay TV. Canada and the Scandinavian countries prohibit it altogether, UK and most Western European countries allow it with restrictions, and US allows it without restrictions.

Because there is an inherent incentive for Pay TV operators to minimize the ‘intrusiveness’ of non- programming material to attract and retain subscribers, advertising on Pay TV tends to take the form of sponsorship, name association and strip messages (except in the case of advertiser- supported channels rebroadcast on cable).

Advertiser-supported television stations in a number of countries, including Australia, are subject to minimum requirements regarding the transmission of domestically produced programs. As indicated earlier, the purpose of this regulation is to preserve and enhance the nation’s cultural heritage by the presentation of domestically produced programs on television, and to protect the local television production industry. However, because of the relatively high cost of locally produced material, especially of feature films which play a dominant role in pay programming, a Pay TV industry is likely to find it particularly onerous to comply with local content requirements at similar levels to those which apply to advertiser- supported television.

Program siphoning occurs when programs traditionally provided on advertiser-supported or government-funded television become available only on Pay TV. Siphoning thus reduces the welfare benefits of Pay TV. Programs most likely to be siphoned are those for which there is a relatively inelastic demand by mass audiences-for example, major sporting events such as the Olympic Games, and international variety concerts and special events-and which are more profitable to Pay TV operators than conventional commercial broadcasters. The government may decide to regulate against this practice, for example, by directing the broadcasting authority to prepare a schedule of programs and/or major events for which no exclusive Pay TV rights could be granted or obtained (see Brown, 1990).

In October I99 1 the Minister for Transport and Communications announced the government’s decision to allow the introduction of Pay TV in Australia from October 1992: four to six pay channels are to be transmitted by the AUSSAT satellite; there is to be no advertising on Pay TV for the first five years of operation; ‘strict’ siphoning rules are to be imposed; and the broadcasting regulatory authority has been directed to consider ‘appropriate’ Australian content requirements for Pay TV services (Beazley, 1991). As already indicated, AOTC’s optical fibre network will in a few years provide the option of switching the Pay TV distribution system from satellite to cable

390 ECONOMIC RECORD ' DECEMBER

and therefore for greatly increasing the number of Pay TV channels,

Vl CovenUnent-Fwrded Television Government-funded television operates in a

greater number of countries than does commercial television. In many of these countries the television channels may serve as a communications (propaganda) arm of the central government. Government funding need not necessarily involve direct control of program output by the state, however. In most Western countries there have developed principles to protect the operating autonomy of the government-funded broadcasting authority, and procedures to prevent government interference in its day-to-day operations (Etzioni- Halevy, 1988). Nevertheless, considerable indirect supervision is retained by the government in its control of financial allocations to the state broadcasting authority and in its appointments to its board of management.

The existence of government-funded broadcasters is closely associated with, but not identical with, the notion of public service broadcasting. Although public service broadcasting is an elastic concept, the general sense underlying it is that broadcasting should have objectives other than the entertainment of viewers and the profitability of private broadcasting firms. For example, Withers (1982, pp.227-28) has argued from a welfare economics perspective that the functions of the ABC should be to increase the diversity of programs available and to promote desirable social and political objectives particularly concerning Australian content, children's television, the provision of impartial news coverage and the fostering of public discussion of public issues.

The concept of public service broadcasting was further analyzed in Britain by the Broadcasting Research Unit (1985). which argued that public service broadcasting embodies the following eight principles: (1) geographic universality; (2) the broadcasting system to be directly funded by the viewing and listening audience; (3) independence from government and vested interests; (4) concern for national identity and community; (5 ) catering for all interests and tastes; (6) catering for minorities; (7) quality of programming; and (8) creative freedom for program makers. It can be seen that the principles fall into two broad groups: the first group (1 to 3) concerns the relationship between the government, the public and

broadcasters; while the second group (4 to 8) refers to the philosophy of program production and presentation. This list of principles has been criticized (Peacock Report, 1986, p.53) as inviting the suspicion that it simply offers ct p s f justification for whatever programs government- funded broadcasters present.

It is clear that public service broadcasting objectives are independent of the form of ownership of the broadcasting system. The attainment of many of the objectives listed above-those related to redistributive and political or cultural objectives- is achieved through 'social' regulation of commercial broadcasters. However, we have noted in Section II a possible case grounded in economic theory for the existence and operation of government-funded television. This derives from the tendency towards duplication of profitable program types and neglect of minorities by profit- maximizing competitive commercial broadcasters. The argument is based upon a number of key assumptions, notably the existence of identifiable program types, the lack of beneficial rivalry between suppliers of programs of the same type, restrictions on entry, and skewed audience tastes (Beebe, 1977). Nonetheless the Hotelling argument does provide a possible economic ground for the existence of public sector broadcasting to satisfy minority tastes.

Levin (1971, 1980) has investigated, in the case of US broadcasting markets, the effect of introducing a 'public' (non-commercial) station to a market previously served only by commercial stations. He finds inter ulia that program diversity is enhanced in a market by the addition of a non- commercial channel far more than it is by the addition of another commercial station. He also finds that the existing commercial stations suffer no apparent economic losses due to competition from the establishment and operation of a public television station. He concludes (1980, p.271):

One implication of my findings . . . is that bringing a new public TV station into a market without one may be a highly cost-efficient way to promote . . . diversity, compared, at least, to the number of commercial stations needed to generate an equivalent amount of diversity.

He acknowledges however that greater programming diversity may be achieved only by the presentation of programs that a small minority of the public will view:

. . . [it is a] known fact that public TV adds

1992 ECONOMICS OF TELEVISION REGULATION 39 1

a lot to market diversity by showing programs with limited audience appeal . . . mainly through programs that the majority of viewers do not wish to watch, since most people prefer mystery, adventure, sex, violence

[Levin, 1980, pp.2672701.

The concept of television programming diversity is seen by Levin to be a form of merit good to which he applies the term ‘merit programming’. He provides three rationale for the public financing of merit programming on television. The first is a ‘cultural elitist view’ by which it is deemed that the welfare of viewers is enhanced by the provision of certain programs which would not be supplied in response to market demand

The cultural elitist view is that even if people want comedylvariety shows, we should give them Shakespeare, which they may never come to like or watch in the face of alternatives, but which will make them ‘better people’ when they do (gratifying our elitists in the process).

Levin’s second rationale for merit programming is a variation of the infant industry argument, namely, that merit programs may eventually become economically viable in their own right after viewers have been exposed to them for some time. The third rationale is essentially the minority interest argument already outlined and concerns programming ‘directed to limited ethnic, intellectual, social, or cultural groups’ (Levin, 1980,

Australia is most unusual in having not one, but two, government-funded public service broadcasting organizations-the ABC and SBS. The ABC was set up (originally as the Australian Broadcasting Commission) in 1932 along the lines of the BBC which was established six years earlier. The ABC has always been prohibited from selling advertising air time on its stations and was originally funded by licence fees payable by the owners of radio and (from 1956) television receivers. In 1974 the government abolished listener and viewer licence fees and financed the ABC entirely by parliamentary appropriations. The SBS was set up in 1977 to take over responsibility for ethnic radio stations in Sydney and Melbourne. and in 1980 its charter was extended to include television. The SBS is also financed by the Federal government, although in 1991 it was granted the right to supplement its income by a limited amount of advertising and corporate sponsorship. The ABC provides both general interest and public service

pp.44-46).

programs while the SBS specializes in non-English programming.

The funding of non-commercial broadcasting in Australia has been under constant government review since the mid 1970s. and the level of budgetary appropriations to the ABC has fallen significantly in real terms from that time. The debate on the future of the ABC has brought forth one proposal that the broadcasting function of the organization be abandoned and its activities be confined to the production of public service type programs-particularly in the areas of current affairs. educational and children’s programming- to be made available at an attractive (subsidized) price to commercial broadcasters thus enabling ‘improved’ programming to reach a greater proportion of the population (Withers, 1980). Less radically, a government report on national broadcasting policy (Department of Transport and Communications, 1988) has suggested that ABC programs be categorized into two types-those which are of a public service broadcasting nature, and thoseof a more popular.genera1 interest kind- and that only the former category be guaranteed government funding. To date neither of these proposals has been acted upon, however. The amalgamation of the ABC and SBS has also been considered but not yet implemented by the government (see Brown, 1989b).

There is some evidence that viewers place a high value on programming provided by government- funded broadcasters, at least in the UK. A survey conducted by Ehrenberg and Mills (1 990) found that almost all households with colour sets (98 per cent) were willing to subscribe voluntarily to the BBC at the then current (compulsory) licence fee level of E66 rather thah be denied BBC programs, even though without subscribing they would still have free access to the two existing commercial channels. Ehrenberg and Mills also found that viewers’ willingness to pay for BBC television was ‘remarkably insensitive’ to higher proposed prices up to f 200, three times the licence fee.

Withers (1985) has investigated the determinants of ABC viewing levels and of diversity in programming, within the context of a more general model of television set ownership and use. He discovered a higher than proportional relationship between ABC viewers and households using television, suggesting that as more persons switched on their television sets they were more likely to watch ABC than were previous viewers. His results also suggested that ABC viewing levels were best enhanced by complementary rather than


competitive programming. This may be because ‘attempting to attract (habitual) viewers by competitive programming may well lose some of the more regular ABC viewers who are alienated by such programming’ (p.109). He also found, like Levin. that adding additional commercial stations in an Australian metropolitan television market did not significantly increase program diversity. This suggests that at the levels of commercial provision of television services currently found in Australia, either public provision or explicit regulatory policy is needed to enhance diversity. Withers’s work is an example of econometric analysis of the broadcasting industry which unfortunately is still scarce in Australia.

VII Conclusion Television broadcasting in Australia, as

elsewhere, is in the process of structural and technological transformation which is radically altering the approach to its regulation. The essential ingredient in this transformation is the proliferation of channels. It was indicated in Section I1 that a major justification for the regulation of broadcasting has traditionally been the limited number of stations in each market. In Australia ’4s limitation for terrestrial broadcasting has ;ently partly been lifted by more liberal licensing

procedures, and is planned to be removed altogether with the introduction of tradeable spectrum access rights.

A still greater proliferation of channels, however, will come with the distribution of television signals by fibre optic cable. Picard (1989, pp.37-39) suggests that there may be diminishing marginal utility with increased numbers of television channels. Nevertheless, the significance of cable distribution of television signals is that the number of channels can be determined by consumer demand rather than limitations imposed by spectrum availability. The adoption of a tradeable spectrum access rights system for television will increase the number of terrestrial channels available, but only marginally and mainly in metropolitan areas. Fibre optic cable, however, can provide unlimited channels as well as a range of other interactive video services.

Although Pay TV in Australia will initially be broadcast by satellite, in the next century it is likely that there will be competition between terkstrially distributed advertiser-supported television and Pay TV distributed by cable. Both types of commercial television are likely to coexist but the US experience

suggests that Pay TV may be responsible for a significant reduction in the size of audiences and advertising revenues of the traditional television networks. This could create pressures to reduce the regulatory burden on advertiser-supported television broadcasters-especially in relation to the ‘holy trinity’ of Australian content, children’s programs and advertising content-which would have important implications for national culture and the quality and diversity of Australian television programming.

It is not yet possible to foresee clearly the extent of acceptance of Pay TV. If, however, multi- channel Pay TV delivered by cable eventually becomes a major force within the Australian video programming market further policy issues will arise. In the examination of the common camage concept for cable in Section 111 it was indicated that it would be undesirable for a Pay TV industry to be organized on the basis of national or local monopoly. It is important for both social and economic reasons to have intra-industry competition within Pay TV as well as inter-industry competition between Pay TV and advertiser- supported television.

A related issue concerns access to Pay TV delivered by cable. Charging for television programs and other video services will exclude some people. The US evidence cited in Section V suggests that non-subscribers to cable will be mainly from lower income groups. The equity issue with Pay TV therefore is its potential to widen differences between the ‘haves’ and ‘have-nots’. These differences may not be considered socially harmful if Pay TV simply provides more of the same kinds of entertainment programs available on advertiser-supported television (movies and sport). but are of greater concern should Pay TV become an important source of information and education.

The future proliferation of television channels, therefore, brings potential problems as well as benefits. It will be necessary for the government to institute appropriate regulatory responses to these problems, and economic analysis can be a forceful guide to sound and considered decision making. In dealing with these issues the focus of economic analysis will need to be broadened to address the integration of broadcasting and telecommunications represented by the distribution of television signals by cable. In the Australian context particular regard will need to paid to the implications for television policy of the recent moves to increase competition in telecom-

1992 ECONOMICS OF TELEVISION REGUMTION 393

munications and to the proposal to privatize the national telecommunications network.

Reference was made in Section VI to the financial exigencies experienced by the ABC and SBS. Similar pressures are being imposed upon public service broadcasting organizations around the world which are being forced to justify their existence and public funding in an environment of increased viewer choice of both advertiser- financed and pay television channels. Economics has 3n important role to play in identifying and analyzing these issues concerning non-commercial television.

One general conclusion is the deficiency of evidence or analysis on the demand side of the television industry. This applies both to studies of demand for television advertising, which are necessary to project the revenues of advertiser- supported television under the new more competitive regime and, even more so. to the scarcity of analysis of Australians' willingness to pay for television programs. The emergence of Pay TV will generate data on actual demand behaviour, but one critical lacuna is survey evidence relating to the value of public service broadcasting.

This survey has outlined the economics of the regulation of television and has related the important literature in the area to the Australian environment. A major difficulty but also a major challenge in the economic analysis of television broadcasting is that, more than in most other industries, many of the issues of concern are not primarily economic in nature. Throughout this paper a number of the regulatory issues have related to the potential of the television medium to influence attitudes, beliefs and values, and to the perceived need to cater for the programming preferences of minority groups. It is one of the strengths ofour discipline that economics can make a significant contribution to the analysis of these concerns as well to matters involving economic efficiency in television broadcasting. It is also clear that many of the current and future policy issues concerning the economic regulation of television are made more difficult to solve by the absence of the necessary empirical analysis. We hope that this survey may provoke other researchers into undertaking more work of this kind.

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The Economics of Television Regulation: A Survey with Application to Australia*

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