March 4, 1991 | Executive Memorandum on Regulation
American TV viewers often complain about the poor quality of programs on the three major broadcast networks, ABC, CBS, and NBC. Much of the blame for this lies in part with rules imposed in 1970 by the Federal Communications Commission (FCC). The Financial Interest and Syndication Rules, widely known as "Fin-Syn," prohibit the broadcast networks from acquiring even a share of the programs that they broadcast, and from sharing in the profits generated by a program's re-runs or "syndication." Cable TV networks, by contrast, are free from the Fin-Syn restrictions. The two-decade old rules have been a bonanza for the large studios that make most of the programs, yet have penalized American TV viewers. Under these rules, the networks have little incentive to finance production of high quality programs that may make money in re-runs but are almost certain to lose money initially. The Fin-Syn rules have become an anachronism that prevents the healthy competition which would improve the quality of TV. The FCC is reviewing these rules, and will make a decision soon. In a recent letter to Congress on the Fin-Syn rules, White House Chief of Staff John Sununu reiterated the Administration's "aversion to unnecessary government interference with private markets" and its long-standing "opposition to the government's picking winners and losers." The FCC would do well to be guided by these principles. The only course of action that will benefit the television-viewing public and restore competition to the industry is the complete repeal of Fin-Syn.
Good Intentions Backfire. The development of television programming is expensive and risky. It is very difficult to predict whether a show will be a hit or a flop, and thus whether it will generate enough advertising revenue to cover production costs, much less make a profit. Even many popular TV programs show no profit until after they have gone into syndication, that is, are re-run off-network. An independent producer with an idea for a new television program usually will need to obtain outside financing, either from a network or from one of the major Hollywood studios.
Before 1970, the networks customarily received a percentage of the syndication profits in return for the funding they provided for producing a TV program. This seemed fair. After all, the networks in large part create the syndication market anyway: without first-run showings, there would be no demand for second-run showings. The FCC, however, began viewing this practice as inefficient and a lopsided arrangement which allowed the networks to exploit producers, especially the small, independent operators. Therefore, in 1970, the FCC prohibited the networks from acquiring any interest in the programs whose development they finance.
As it has turned out, Fin-Syn does not benefit the small, independent producers of television programming. By making it unattractive for the networks to finance productions at small firms, since the networks cannot earn anything from syndication, Fin-Syn restrictions force these smaller enterprises to sell the syndication rights of their programs to major studios. And because the networks are prevented from competing with the major studios, independent programming producers have fewer potential sources of finance. The result: independent producers are at a bargaining disadvantage, and hence they must give up to the studios an even larger share of future program profits to obtain studio funding.
Protecting Goliath against David. When the Fin-Syn restrictions were adopted, the networks had about 90 percent of the prime-time television market. With the emergence of competing technologies, such as cable TV, satellites, and video rentals, however, the clout of the networks has eroded. Today the networks' share of prime-time viewing is only about 60 percent or so, with no one network having more than about 20 percent. At the same time, the share of prime-time programming provided by the eight largest Hollywood studios has soared from 39 percent in 1970 to over 70 percent today. Thus, while the FCC may have thought it was protecting David against Goliath when it sided with the studios against the networks, just the opposite turned out to be the case.
Another major beneficiary of the Fin-Syn restrictions is the large independent producers. Because the rules make it hard for new producers to enter the market, existing producers face less competition and hence enjoy greater profits and power. Before the Fin-Syn restrictions were adopted, there were 52 independent production companies supplying series to the networks; in 1980 there were 26. Today there are nine. Many small producers are employed by big studios. It comes as no surprise that this handful of remaining producers support Fin-Syn, for the FCC rule keeps potential upstart competitors out of the market.
The Fin-Syn restrictions do not apply to cable TV. Thus, cable networks can purchase and own programs and movies, and afford to pay more for a new program because their ability to recoup their investment and eventually make a profit is not restricted. This means they can obtain the programs while the three broadcast networks have their hands tied.
The ultimate victim of the Fin-Syn restrictions is the viewing public. Because the networks find it unprofitable or too risky to finance high-quality programs that might not make money before they run in syndication, the supply of such programs is artificially restricted. The result: reduced quality and diversity of programs for viewers to choose from.
Restoring Networks' Freedom. The 1970 Fin-Syn rules have not served the public interest. They have reduced competition rather than expanded it, and have helped large firms rather than small. For these reasons, the Department of Justice's Antitrust Division and the Federal Trade Commission, the two federal agencies responsible for protecting competition and consumers, both strongly oppose keeping Fin-Syn restrictions in any form. As the Department of Justice stated in comments it filed with the FCC, "the major effect of the Fin-Syn rules today is to hinder the efficient operation of the free market." The Federal Trade Commission, the Justice Department and the White House are right. Consumers of TV programs would be better off if the FCC would revoke the harmful and failed Financial Interest and Syndication rules and restore the TV networks' freedom to contract for programs on any terms acceptable to them and the programs' producers.
William G. Laffer III, former McKenna Fellow in Regulatory and Business Affairs