The Effects of Regulation on an Industry
MAY 01, 1979 by SHARI GIFFORD
Shari Gifford is a student of economics at the University of Florida.
What a situation! A person, who has decided to go into business for himself, discovers that he must first obtain a license from the government. To get the license he must prove to the authorities that he is a citizen of moral character with financial, technical and other qualifications. He must describe in detail all equipment, buildings, location and any other apparatus necessary for operation. He must describe his proposed production techniques, including times of operation. He must survey the community leaders to determine the needs of the community and describe how he proposes to meet these needs. He must also show that he is financially capable of setting up and operating his business for one year without any revenue from the sale of his product.
To facilitate the acquisition of the license he must hire a lawyer in Washington, D.C., spend tens of thousands of dollars, and wait perhaps five years before the license is approved. He must also have a permit from the same regulatory agency to begin construction of his operating facilities and must apply for an extension of the permit if construction is delayed by causes beyond his control. Before beginning operation, he must have approval of his operating hours and the name of his company.
If he should die or become legally disabled, permission must be obtained for transfer of control to a legally qualified successor. If he lives long enough to want to expand his business, he must obtain permission for that also.
Every three years he must apply for renewal of his license to continue operating his business, at which time he must supply detailed examples of his previous production process and proof that he has used a sufficient amount of a certain factor which the authorities consider beneficial to society but which may actually be unproductive. At this time he may be denied permission to continue operation.
Considering the difficulty of obtaining a license, the high costs involved, and the eagerness with which licenses are sought, it seems safe to assume that the possible return on investment is high.
This has been a brief and incomplete description of some of the regulations of the radio broadcast industry imposed by the Federal Communications Commission. The FCC was brought into being by the need to allocate a scarce resource—the radio wave bands. The Radio Act of 1927 gave the Federal Radio Commission (now the FCC) the power to license radio broadcast stations according to guidelines, a few of which have been listed above.
The Rationale for Licensing
Licensing was deemed necessary because of the limited number of frequencies and the impossibility for simultaneous broadcasts on the same frequency in the same area at the same time. But the limits to competition in the radio broadcast industry caused by the barriers to entry—namely, limited and costly licenses and the high costs of meeting regulatory requirements—does a disservice to the listening audience by limiting their choices of broadcast entertainment and a disservice to advertisers by increasing the cost of advertising on the radio. A radio broadcaster produces one product, an audience to sell to advertisers. His inputs are land, labor and capital (buildings, equipment, license). The costs of these factors can run into millions of dollars a year. The production process is his programming, which is geared to attract the largest audience to sell to advertisers. Local advertising sales are a station’s major source of revenue. Radio stations direct their programming toward a particular age or social group and advertisers choose the station from which to buy time according to the group of people they wish to reach. Small communities often have only one station serving a particular group and so it may be considered the only supplier of that audience. This is in effect a monopoly, with other radio stations or newspapers as partial substitutes.
The number of competing stations is limited by the relative unavailability and high costs (in money and time) of new licenses. The number of licenses available is restricted, of course, by the desire to avoid interference by one station with another. But the number of licenses is also limited (by the FCC) according to the population of the community. Smaller communities are allocated fewer frequencies. Also, powerful distant stations are allowed a large range of reception which precludes the use of their frequencies in neighboring communities. The unavailability of new licenses, of course, increases the value of existing licenses, which amounts to a windfall gain for the original licensee. Nevertheless, many licensed broadcasters consider most FCC regulations to be costly, wasteful, and inappropriate in relation to the freedom of other news and entertainment media.
Alternative Allocation Methods
The allocation of frequencies to prevent interference is necessary. However, the present method of allocation is questionable because of the amount of government intervention and regulation it entails. Alternative methods come to mind that would require little if any detailed government control.
One method would be to allocate newly available frequencies to the highest bidders. This would tend to keep the cost of licenses high. But, at least, it would allocate the frequencies to those who value them most. Another method could be the allocation of frequencies by draw, thereby awarding some licenses to people who could not afford to bid high enough. This, however, may result in a misallocation of resources as some frequencies would go to low-value users. A third method could be on a first come, first served basis with a "homestead" provision that would require the recipient of the license to commence broadcasting within a specific period of time. This last method would be similar to the present method if there were not also the elimination of the volumes of requirements and regulations that control the broadcasters now.
Once a license has been given (sold, awarded or earned), the normal success motives, talents and abilities of the licensee should be all that is needed to determine whether the station operates successfully or joins the ranks of thousands of business failures that occur every year in other industries. Success or failure would be determined by the ability of the station to attract an audience. Thus, the broadcaster would be guided by the market to offer what the public demands, not what the FCC mandates.
The elimination of the FCC rules and regulations would decrease the operating costs of stations considerably and also allow for more local stations. Their increasing competition for advertisers would lower costs of advertising. Local advertisers, who supply most of a station’s revenue, are interested in the local market; therefore, the restriction of stations to local broadcasting to prevent interference in neighboring communities would not reduce their attractiveness to advertisers and would allow the existence of more frequencies in each community. The increased number of stations would increase the service to the public by providing a larger variety of entertainment and news.
In short, the FCC controls in minute detail the ownership and operation of all radio broadcasting, ostensibly to achieve efficiency, equity, safety, and satisfaction of public needs. The primary results of these regulations are to protect the stations from competition and to limit the satisfaction of the radio audience. Just as the airline companies, with the recent deregulation )f the airline industry, experienced in increase in profits, so the broadcast industry would see an increase in the quantity of air time demanded and an increase in profits if the restrictions and costs of regulation were eliminated. Just as more people are now enjoying what was once the luxury of flying, so more people would enjoy listening to their radios with an increase in amount and variety of broadcasting offered.