The Broadcasting Reforms

Appendix to Chapter 4 of Commercialisation of New Zealand. An excerpt was published in J. Farnsworth & I. Hutchinson (ed) New Zealand Television: A Reader, 2001, Dunmore Press, p.225-230.

Keywords: Governance; Literature and Culture;

It is very easy to argue that there is something special about some economic commodity such as broadcasting, but to overlook there are other activities which are just as special, such as hard copy periodicals. A good magazine shop sells over 5000 titles. They range from daily newspapers to monthly science journals, from gardening to financial investment. In a big city there will be dozen of competitors also selling titles, as well as specialist shops for ethnic language literature, rock music, obscure political views, to whatever. Alternatively there is subscription by post. This extraordinarily rich supply in response to a myriad of public demands is provided without significant government involvement other than the framework for normal commerce.

What are the characteristics, if any, of broadcasting which means that the government has to treat it specially, including providing non-commercial funding? Why cannot funding be left to the market? It is not hard to see radio and television as providers of magazine type services, albeit using a different method of delivery. How are they fundamentally different?

Royal Commission on Broadcasting

In the early 1980s broadcasting faced a number of issues including:
– new technologies: video, cable and satellite television, and FM radio;
– the ongoing issue of the management of public broadcasting system;
– private radio, and a third private channel (introduced in 1989);
– Maori, in particular, and minority ethnic broadcasting;
– the independence and the accountability of the broadcasting system.

The Royal Commission on Broadcasting and Related Telecommunications in New Zealand was commissioned to consider such questions in February 1985. But its recommendations in its report of September 1986 were hardly implemented. Instead Treasury’s alternative vision of commercialisation of the public system, and the opening up of broadcasting to competition. The general thrust was for the full commercialisation of broadcasting, in practice an advertising driven system.

Treasury evidence to the Royal Commission was in three general sections which illustrate this general conclusion.[1] The first on the management of the radio frequency spectrum (RFS) argued for its privatisation, and regulation via commercial relations, relying on the Coase approach (Appendix to Chapter 2). The proposal was, however, very impractical and the outcome could have been extremely inefficient because of the transaction costs. Court cases would have been necessary to deal with minor frequency interference, better organised spectrum owners would have chosen configurations which would have been detrimental to the users, and the competitive solution would only have practically worked for radio, but not for TV where there were few players and entry costs are very high.

Treasury’s proposals for the government owned Broadcasting Corporation (BCNZ) can also be dealt with quickly. It thought it should be corporatised. One supposes the ultimate destination was privatisation, although that Treasury agenda was not public at that time.

The one Treasury proposal from this section which has been whole-heartedly rejected was the recommendation of the abolition of the TV License (now called Broadcasting) Fee. Treasury recommended that instead the government make grants from departmental votes to provide non-commercial broadcasting services, with the ironic consequence that Treasury would have obtained more political control over the media, in that it would have been recommending on each departmental grant for broadcasting.

The discussion on advertising driven broadcasting was muddled, ignoring the economies of scale which are crucial in terms of production and distribution, the inability of broadcasters to charge consumers for their product (although less true with pay and cable TV), and any conflict in interest between advertisers and audience. The best way of understanding Treasury proposal is to assume that there is a highly competitive, multiple supplier, advertising driven broadcasting system. If it exists (and there are not people who object to advertising) then the outcome may well be efficient and in the consumer interest. But this ignores the fundamental problem: the idealized system does not, and probably cannot ever, exist. Not surprisingly Treasury then concluded that there is no great justification for government intervention. It opposed content regulation, and considered whether there are equity grounds for intervention.

Treasury concluded that non-commercial broadcasting favours the well-off and in that sense is anti-poor. Even so, the rich have as much right as the poor to use collective means to meet the demands, if the market can not. Thus the state might provide cultural facilities such as museums, recreation facilities, orchestras, without charge or subsidy from general funds – even though the rich may use them more – providing the overall government revenue and expenditure system is progressive – if that is a social objective. The report also reflected briefly on merit goods arguments which it dismisses, although the argument is put naively, ignoring such issues as political independence, national integrity, and cultural attainment.

Most of the Treasury case was rejected by the Royal Commission, although they comment there was not enough evidence presented for the Commission to come to a overall conclusion on the economic issues. The Royal Commission reflected a view of economic, social, and cultural management from the 1970s, while Treasury one was of the commercialized economic regime of the 1980s.

Special Economic Characteristics of Broadcasting

There are two special justifications for a high degree of state intervention which should be quickly rejected. In the past broadcasting might have been a monopoly justifying some special measures. But today there is typically a substantial choice of radio stations, three commercial television channels, often pay-channels, and a supply of commercial videos (plus films). Many households are likely to have cable channel within a generation.

Also dismissed is the Reithian argument that the government is duty bound to manage the broadcasting system so that it is `uplifting’. There would be little agreement in the New Zealand as to who should be our next Reith – or James Shelly, his local equivalent.[2] Any attempt to `lift up’ broadcasting services is likely to be manipulated for baser ends. That does not mean there should be no government subsidised classical music program or whatever. All is being argued is that more subtlety than a simple Reithian justification is needed.

There appears to be two important economic features of the broadcasting media which distinguish them from magazines. The first is that most programs, especially television ones, have high fixed costs relative to total costs of supply. That means they experience substantial economies of scale – with average costs falling significantly as numbers viewing increase.

Once there are economies of scale the market ceases to be fully efficient. Economies of scale are common, but providing they are small – the average cost of supply is not too far from the marginal cost – the inefficiency of market delivery is small. Thus while economies of scale exist for periodicals – it being cheaper to produce the last one than to produce the first – they are not so great as to seriously damage the efficiency of market supply. In the case of broadcasting the divergence is much greater.

The analysis is further complicated by international dumping, for that is the effect of foreign producers selling their programs at prices far below their costs of production – at marginal costs rather than average costs. This does not happen to the same extent in the magazine market, for although there may be price variations by countries, the differences are not as great as in television where a multimillion dollar program may be sold to a New Zealand station at a price of only thousands of dollars.

Insofar as there are non-economic objectives in broadcasting, a matter which belongs to the second group of issues, a pure market delivery system would suppress New Zealand supply. But the payment system for broadcasting compounds the dumping story. New Zealanders might prefer New Zealand content programs, and be willing to pay for them over the foreign imports in an ideal world. When you read a magazine, someone – perhaps you, perhaps the dentist – has paid for it. That is not true, as a rule, in the broadcasting market, dominated by free-to-air transmission. Exceptions include pay-television, competing video and film activities, and, in the future, cable television Even here, though, one does not pay per service.

Instead, most commercial television is advertising driven, that is the production and transmission is funded by the sale of advertising time. This is not to criticize advertising per se. But it is easy to show that an advertising driven broadcasting system does not readily maximise social welfare. As a simple example, consider a station choosing between two programs, one of which will attract a small audience who will value their program greatly, and a second which attracts a much larger audience but who are not fussed by the particular program. In the user-pay system of the conventional market, the smaller audience might be able to outbid the large audience, thus maximizing the efficiency (as conventionally defined) with which the broadcasting slot was being used. However without user pays, there is no signal from the audience of the relative intensity of their preferences. How would a broadcaster know there were differences in intensity of preferences between the two audiences, for there is no signalling mechanism? That audience surveys do not bother to ask is indicative that this is not the manner in which the media thinks. Advertising funded broadcasting seeks audience size. The medium becomes a vehicle for business purposes, so the audience’s needs are only tangential. An advertising-driven media is a commercialized media. The station likely to take in consideration only audience size in choosing its programs.

The first distinguishes between a broadcasting system whose purpose is cultural but is subject to market disciplines, as distinct from a broadcasting system which is to meet market objectives, and thereby contribute to culture. Under the current profit driven requirement TVNZ might think it could make a better dollar providing health services, say. Most people would think that odd, because they see its purpose as providing television. Thus there is a higher objective for the agency than the profit objective it has been set. Conversely there is no automatic reason to suppose the pursuit of that objective as its primary goal will result in the successful attaining of the agency’s real purpose.

The Cultural Role of Broadcasting

All commodities have non-economic features which are distinctive to themselves. Are any features of broadcasting services which are so unusually distinctive that we need to take them into consideration when designing any public intervention?

Broadcasting uses resources and hence interacts with the commercial system. Indeed commerce needs broadcasting, not least for advertising, and there are those who would argue it is also needs a favourable image in the media. Yet broadcasting may have a purpose more than merely satisfying consumer wants as defined in the conventional market analysis. Society has various collective objectives, which can neither be reduced to some maximization of the sum of individual welfare (as defined by conventional economic analysis), nor can the objectives be attained merely by pursuing that maximum economic welfare.

Culture needs to be used in its widest sense of `the human creation of symbols and artifacts'[3] or, as Nick Perry entitled his book, `a dominion of signs’.[4] This is much more encompassing than the `high’ culture of the concert program, which for the purposes here has the same fundamental status as popular culture, even though they may be delivered through the broadcasting system by different funding arrangements. Pat Day’s recent study of the radio years up to the early 1960s illustrates well how the new media moulded the New Zealand community.[5]

To what extent does a totally commercial broadcasting system meet the broader cultural needs of a society? There has been a rather interesting legal debate about this issue. The essence of the Maori broadcasting claim, eventually settled in the Privy Council, was that a commercially driven broadcasting system could not meet Maori needs, especially insofar as their concerns for te reo and tikanga (language and culture). Fortunately the Maori had a principle (set down in the Treaty of Waitangi), and a statutory process by which they could successfully pursue that principle. As a result they have obtained their own public funded Maori network. Others in the community are not so fortunate, and yet they may have parallel needs. If, as the courts decided, commercially based broadcasting system fails one minority, the Maori, then surely it is likely to fail most.

Democracy and the Media

There is no automatic connection between market outcomes (and the maximization of material welfare) and democracy (or liberty), once we eschew the New Right tautological linkage of the notions. Editorial independence is especially important, as is well illustrated by a New Zealand radio station which broadcasted both the BBC World Service and a New Zealand content breakouts, with an extraordinary contrast between the editorial lines of each. BBC independence is an international standard, although clearly there is some contention as to the meaning of `independence’. The New Zealand breakouts did not even pretend to be independent, actively espousing a New Right editorial line which also happened to reflect that of the station’s owner.

This is not to not object to a magazine or station, or certainly not to columnists and talk back hosts, taking an editorial line. What is important in a democracy is that there should be a variety of opinions. But what mechanism is there to prevent the editorial lines of media driven by commercial goals promoting only pro-commercial views or the views of owners? Suppose the material prosperity which commerce promises to deliver (a promise it may or may not be able to keep), is not the ultimate goal of society. What is their to stop the entire media converging to promoting a commercialist doctrine?

There can be no simple solution, but an important mechanism is the way in which the public owned broadcasting stations are protected from outside editorial interference. The classic example is, of course, the BBC with the ultimate test that when there is an international crisis people turn to it because they can rely on the quality and independence of its reportage. That places a constraint on the rest of the world broadcasting systems, be they government or private driven. In a similar way RNZ and TVNZ set a standard for reportage not only for broadcasting, but also in the printed media as well. That does not mean there is no editorializing there, but it does constrain them and encourages them to separate opinion from fact. Otherwise the public turns to RNZ and TVNZ.

Because a democracy has higher objectives that materialism, there seems to be a need for some none commercial mechanism to ensure some elements of editorial balance and independence in one part of the total media system, to influence the entire system.

The Outcome[6]

People grumble about the magazine industry in terms of the choice available to them, but there is no significant demands for its reform. However there is a widespread perception that the broadcasting system is failing markedly. The reforms of the 1980s are seen as too pro-market, and the system is failing to delivery on choice (advertising free programs) and community and culture.

Nevertheless the current broadcasting regime has some advantages compared to the past one. The supply side is regulated almost entirely by market considerations, with the cumbersome licensing system repealed. It seems much more responsive to the introduction of new technologies – although the size of the New Zealand market remains a major restraint. The funding of the international service and the symphony orchestra have been shifted off the broadcasting fee to parliamentary funding where each more properly belongs.

There is also anecdote, but little hard evidence, that the public broadcasting system is more `efficient’ and less resource using,[7] although many would argue such alleged efficiency gains ignore a deterioration in quality of programming and, especially, the increased advertising. There is certainly more broadcasting choice than there was a decade ago, especially in the main centres, although much of the variety would have happened under other regimes also.

An unexpected, and unplanned, taonga from the changes has been Maori broadcasting, with a national network of iwi radio stations, separately funded from the broadcasting fee by the Maori equivalent of the Broadcasting Commission (Te Mangai Paho). Funding is now being provided for Maori television. While the primary purpose of this development is to support Maori cultural and language development, there have been benefits to the non-Maori from the distinctive local Maori television programs, the encouragement of Maori artists valued by the entire community, and news bulletins from Maori perspectives.

Probably the main bugbear to the public is the loss of advertising free television, and the very high proportion of time advertising commercials take up on the screen. An advertising free channel would be very popular, but the cost is such that it could not be funded from the current broadcasting fee. As a result there has been a policy stand-off. Its resolution is likely to depend upon alternative sources of funds.

Meanwhile, the state owned Radio New Zealand’s commercial network has been privatized in exchange for giving the non-commercial networks of RNZ an independent entity under a parliamentary charter. It would appear that the combined RNZ was not a total success because its commercial and non-commercial activities involve different corporate cultures.

Clearly the nature of the public funding matters. The non-Maori funding agency, the Broadcasting Commission (a.k.a. `New Zealand on Air’) has, excluding some miscellaneous spending, almost two distinct policies towards radio and television. Funding RNZ is a resolution to the issue of providing a non-advertising driven free-to-air network. Meanwhile the television funding is for New Zealand made programs, contributing to their costs of production to make such programs competitive with overseas alternatives. The programs themselves are broadcast in association with advertisers, so advertising free programs are hardly addressed in television. With the exception on the non-commercial and Maori radio, there is little funding for radio production by the Commission.

Not all the changes in the last decade have been bad. There is more choice, the system is more flexible to technological change, developments in Maori broadcasting are heartening, and there have been efficiency gains. Yet the present system is not ideal. Its weaknesses is that it is too dependent on commercial decisions, so there are is insufficient mechanisms to ensure true public demand and needs are properly incorporated into the system. Commerce does not always produce the best outcomes. Yet very often it is an effective provider of goods and services. When it manifestly fails in a major way, especially where the failure is in as important an activity as broadcasting, we should be willing to contemplate non-commercial mechanisms. Magazines can be left as they are.

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1. Treasury, Submission to the Royal Commission on Broadcasting and Related Telecommunications, Sept 1985, and Synopsis of the Treasury Submission to the Royal Commission on Broadcasting and Related Telecommunications, Nov 1985.
2. I. Carter, Gadfly: The Life and Times of James Shelley (Auckland University Press, 1993)
3. D. & J. Jarey, Dictionary of Sociology (HarperCollins, 1991)
4. N. Perry, The Dominion of Signs (Auckland University Press, 1994)
5. P. Day, The Radio Years: A History of Broadcasting Vol I (Auckland University Press & the Broadcasting History Trust, 1994)
6, See P. Smith, Revolution in the Air (Longman, 1996) for a broadcasting based account of the television reforms
7. D. Harcourt, How Should Broadcasting be Funded? (Ministry of Commerce, 1994) & J. Yeabsley, I. Duncan & D. James, Broadcasting in New Zealand: Waves of Change (NZIER Contract Report No 634, 1994)

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