Equity pooling and media ownership.

• Author: Chinloy, Peter

1. INTRODUCTION

   This Article examines methods to increase the diversity of ownership of media outlets. There are several reasons why public policy might be focused in this direction. First, the media has a public goods characteristic where private pricing is not proportional to the benefits obtained by any one consumer. With high fixed costs and virtually no marginal costs, there are barriers to entry for capital-constrained entities. Second, the media disseminates education and culture, which are not homogeneous. Third, corporate ownership may target programming and content toward median and representative consumers, restricting access to a diverse audience.

   Technological advances in media have blunted some of these arguments. The free disposal cost and an inability to charge consumers may create niche markets that advertisers are willing to support, such as in "free" newspapers and cable television--both media have targeted minority audiences. While network television has focused on median consumers, cable television has adopted a more aggressive, "narrowcasting" format, and its growth of advertising revenue exceeds that for radio and network television. These developments do not necessarily diversify the ownership base for media properties.

   This Article offers a proposal for pooling equity for purchase of media properties. It is based on widespread practices for savings pooling used in inner city and immigrant communities, but with certain wrinkles that facilitate securitization, diversification, and increased access. The basis of the contract is the rotating savings and credit account used to pool savings to achieve capital accumulation. These accounts provide funds for a down payment on a house or to buy a small business. Investors combine their funds into a common pot. Each investor bids for the pot, the winner being the low bidder.

   For media properties, the bidding is for a package of a financial pool and a management right. A group of investors contributes to a pool of funds and is concentrated into teams. Each team has the right to bid for both the pool and the management. The low bidder receives both the pot and a management right in exchange for offering a larger lump sum to the unsuccessful bidders. The management right can be resold, allowing a separation of ownership. The base package provides a preferable alliance of equity ownership and management.

   Only one investor group receives the management right, which is bid for by surrendering a part of the investment return to the other investors. Investors who do not manage receive compensation from those who do. The successful management group has a minimum equity stake in the business to avoid conflicts between ownership and management. The equity pool bids consecutively on several properties, allowing diversification and access to management by several groups. Alternatively, the same management group can acquire several properties.

   The proposal has two principal advantages over tax credits and other policies targeted at specific media properties. First, the pooling allows investors to diversify across several properties and markets, reducing the risk of default and loss of equity. Second, markets are introduced for bidding on management and programming. Those wishing to have a management role or to select the content pay for it by compensating other equity holders. Incentives to dissipate resources are reduced by requiring a management entity to have a sizeable stake in the venture.

   Part II of this Article discusses the background for media outlet ownership. Part III has an analytical structure of media firms, where revenue comes from national and local advertising. The local station or property's expenses are paying for the national network feed and local costs. Media properties that depend on local advertising are particularly vulnerable to shocks in their domestic markets. Particular media properties that are vulnerable in this way are radio stations and "free" throwaway newspapers to which this proposal is targeted.

   The proposal is less relevant in media with a more national focus, such as cable television and Internet service providers. These latter types of media can be seen more as content deliverers. Diversification across markets has a greater benefit in such cases, or at least it is more risky to promote programs that involve acquisitions of single properties. Part IV discusses financial data and analyses of media ownership. Diversification across media properties has benefits tied to the proportion of revenue coming locally. Part V discusses issues and caveats in implementation.

2. MEDIA OWNERSHIP

   Media outlets have the characteristics of a "public good": watching a television program does not reduce the amount of time that one's neighbor can watch it. This characteristic makes it difficult to charge each individual a price for viewing time. Pay-per-view is an alternative only in one-shot items such as boxing events. In private markets, the price of a good or service is proportional to the marginal utility or benefit that a consumer receives. Pricing that service assures its allocation to consumers willing to pay for it and removes its consumption from those not willing to pay. None of these concepts applies to media properties. There is no scarcity in supply, and virtually all of the cost of production is fixed: The marginal cost of reaching another home with a broadcast signal is virtually zero. Under these conditions, market pricing equilibria fail, and large-scale entities charging zero for their service emerge, crowding out smaller firms.

   A second issue is that the media disseminate the culture of the society. If the outlets are owned by corporate or other entities targeting the same advertisers, there is a tendency to appeal to the median consumer, even though that market segment represents a small slice of the overall population. Television markets focus on women ages eighteen to forty-nine in their advertising pitch, even though this group is a minority of the overall population and audience. The target excludes the elderly, minorities, and males ages eighteen to forty-nine. The first two groups have low propensities to consume, and the last group tends not to watch network television. Achieving high ratings has traditionally meant targeting median consumers.

   The targeting of the median consumer and its corresponding neglect of minorities is no longer a successful strategy, as cable television has shown. Advertising revenue on cable television has grown more rapidly than on radio and network television during the 1990s. Network television now attracts only half of viewers watching the medium, excluding those who have gravitated to the Internet. Figure 1 shows advertising revenues for the three types of media outlets.

   [Figure 1 ILLUSTRATION OMITTED]

   During the 1990s, cable television advertising revenue has grown at a rate of 12 percent annually, more than double the growth rate of network television. To the extent that cable emphasizes "narrowcasting" and a targeted audience, the strategy of appealing to median consumers is no longer necessarily optimal. The problem with cable television is the fixed cost for entry access onto local cable company lineups. This fixed cost is another barrier to entry for undercapitalized minority entrepreneurs. Economies of scale in production, high fixed costs and low variable costs, and the inability to charge at the margin have continued to favor concentrated ownership in media.

   The response by the federal government has been to promote diverse ownership by tax expenditures. Favorable tax treatment is granted to minority buyers or to the sellers of these buyers. In 1978, the Commission adopted the Minority Tax Certificate Program, which gave preferential treatment in the sale of media companies to minority ownership.(1) Minorities included African Americans, Hispanic Americans, Asian and Pacific Island Americans, Native Americans, and women. If these groups bought an interest in a media company, the seller received preferential tax treatment on the capital gains. The program was controversial since some relatively affluent owners benefited, and it was repealed in 1995.(2) The program has remained under review. William Kennard, the Chairman of the Federal Communications Commission, has expressed interest in reintroducing some program to expand minority ownership.(3)

   Minority ownership may offer a different perspective. The content of the programming might...