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Public broadcasting is poor economics

Published in Business Spectator (Melbourne), 11 June 2015

Interview with Michael McLaren, 2GB Sydney, 12 June 2015


Once upon a time, television was a different business. Not only was it broadcast in black and white, but you could also count the number of channels on the fingers of one hand (and sometimes on just one finger). Those were not only the early days of TV broadcasting; those were also the days when governments established state broadcasters such as Australia’s ABC.

The justifications for getting the state involved in TV broadcasting were simple. Few frequencies were available for TV channels, so there were concerns about a pluralist media landscape. It was also argued that TV broadcasting constituted a case of market failure since it was a so-called ‘public good’. This means that it was impossible to prevent anyone from receiving analogue TV signals while an extra viewer of a program did not cause the broadcaster any additional costs.

Such arguments may have been valid in the days of stone-age television. The arrival of new technologies should have made them obsolete by now.

In a world of hundreds of TV channels, internet streaming services and encrypted broadcasting, why do we still have giant public broadcasters? This is the question that German economists Justus Haucap, Christiane Kehder and Ina Loebert ask in a new paper for the Berlin-based think tank Prometheus Institute.

As a former chairman of the Monopolkommission (Germany’s version of the Productivity Commission) and head of the country’s leading competition economics institutes, Haucap is one of Germany’s highest profile economists.

Though Haucap and his co-authors single out their home country’s system of public broadcasting for criticism, their reasoning is directly applicable to Australia’s media scene as well. Besides, they present one shining example of how public broadcasting should be organised in the future: New Zealand.

It is unsurprising that German economists get enraged about public broadcasting. The German way of public broadcasting must be the costliest and most inefficient in the world. Even for Australian observers who are intermittently enraged about the costs of the ABC and SBS, the German public broadcasting system must be hard to imagine.

Just a few figures shall illustrate how large and expensive Germany’s state broadcasting sector is. For a start, there are no fewer than 23 TV and 63 radio stations run by Germany’s state broadcasters. Their market share may still be 43 per cent, however the age of their average viewers and listeners is around 60 years. The system is financed by a tax that each household and company has to pay.

In total, Germany’s public broadcasters have revenues of €8.3 billion ($12.3bn) per year. This is more than any other public broadcaster in the world, including the BBC ($10.1bn), the ABC ($1.2bn) and SBS ($380m).

When there is that much money available, one should not be surprised by how generously it is spent. To the 2012 Olympics in London, Germany sent 392 athletes … and 480 staff from its public broadcasters. The farewell party for the departing head of TV broadcaster ZDF was staged for €28,000 ($42,000). Producing a single episode of popular TV talk show Hart aber fair (“Tough but fair” – Germany’s equivalent of the ABC’s Q&A) costs €210,000 ($310,000). Even more expensive were the €2.7m ($4m) paid out to a TV presenter for the cancellation of his TV show before the end of his contract due to poor ratings.

In their paper, Haucap, Kehder and Loebert make it clear that such behaviour cannot be justified on economic grounds. The ‘public good’ argument, upon which public broadcasting was once established, no longer holds in any case.

There is no shortage of frequencies any more in a world in which anyone can broadcast on the internet. Putting content behind paywalls is also commonplace these days, so there is a way in which users can be made to pay for the programs they watch. Which leaves one (and only one) reason that defenders of public broadcasting could still cite: That public broadcasters produce content that private providers would not produce sufficiently.

Apart from the problem that it is hard to define what ‘sufficiently’ means in this context, it is not even clear that private providers would not produce, say, factual TV programs. Nor is it obvious why in order to get some high quality TV programs, public broadcasters need to be so generously funded that they can also produce soap operas, light entertainment and sports programs.

So what should be done about public broadcasters which have run out of economic justifications for their existence?

According to Haucap, Kehder and Loebert, these broadcasters should be privatised and the proceeds transferred to a public interest broadcasting foundation. This foundation would then finance and sponsor programs that are in the public interest.

By putting public interest programmes out for tender, it would be ensured that they would be produced in a cost effective way. It would also remove programme-making from the influence of active politicians, who currently dominate the governance structures of Germany’s public broadcasting system.

If all of this sounds too far-fetched, it is exactly what New Zealand has done in its broadcasting system. After a series of reforms in the early 2000s, an independent crown entity (NZ on Air) was tasked with funding ‘public good’ broadcasting content. This system is much leaner than public broadcasters in other countries, not least because it forces broadcasters to be profit-oriented and source the majority of their revenue from advertising.

Though the prevalence of advertising is often criticised in New Zealand, in one sense it is hard to argue with the success of its public-good broadcasting concept. For each million dollars of public funding, New Zealand generates an audience of 111,000 people per year. The same amount only creates an audience of 4,300 people in Australia and 2,800 people in Germany.

For friends of public broadcasting, the German economists’ paper will sounds like pure heresy. However, it makes its case by applying stringent economic logic. Even if in previous times when channels were few and pictures were black and white and there once was a case for public broadcasters like the BBC or the ABC, it is really hard to argue that these original justifications can still be maintained under vastly different technological circumstances.

Rather than continuing the public broadcasting system regardless, it is worth exploring alternatives, especially when a system has become as hypertrophic as Germany’s.

From an Australian perspective, it may be hard to believe but it is still true: If only Germany’s public broadcasters were as efficient as the ABC, it would save German taxpayers billions.

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