RAW: HKTV, ATV and TV licensing: A framework for licensing

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Decisions on TV licensing are seen as increasingly controversial. Reform could benefit from a re-think on the purpose of licensing and how licensing should be undertaken…

(RAW is our series of long-form contributions on topics.  Minimal editing, thoughtful work.  We reserve the right  to accept or reject contributions.)

Licensing and the free market

After much ado, HKTV is live. Not exactly in the format as originally envisioned – that is, as a free-to-air television station. Instead, HKTV is delivering its contents via the internet, combined with an internet-shopping platform.

Ricky Wong HKTV free tv licensing
Photo: Ricky Wong’s Facebook

Such stories of entrepreneurship are much loved by pro-market theorists and political commentators alike. Those who trumpet minimal regulation, low taxation and free trade must surely point to something as the success of that advocacy – and the flourishing of small and medium enterprises must surely be some of the best evidence. ​Relevantly, Hong Kong is – and always has been – proud of its economic freedom. Milton Friedman was famous for his praise of Hong Kong’s economy; in 2006, when then-Chief Executive Donald Tsang announced that his administration would abandon the principle of “positive non-interventionism”, Alan Leong, the pan-democratic candidate in the 2007 Chief Executive election accused Mr Tsang of angering Milton Friedman to death. In 2014,  like every year since 1995, the Index of Economic Freedom has ranked Hong Kong once more as the freest economy in the world. It is not difficult to notice, at a glance, the traits that make Hong Kong the freest economy in the world. It has a low tax rate. Government spending is minimal. It has, and is perceived to have, the rule of law.

Licensing regimes are significant channels for the public sector to provide input into the market and influence its direction. It is therefore crucial, in any analysis of economic freedom, to look not just at the tax rate or the level of government spending as a proportion of the economy or whether there are rent and price controls. One must also look at licensing mechanisms – specifically, the amount of licensing regimes which govern business in any economy, and the manner in which those licensing regimes are exercised. It is not difficult to see that Hong Kong has a low tax rate or name public utilities that are now privatised and listed on the Hong Kong Stock Exchange. Yet Hong Kong possesses a comprehensive licensing regime for a huge variety of industries and businesses, including finance, medicine, law, telecommunications, gambling, security services, operating a commercial bathhouse, a funeral parlour, a cinema, a theatre, and baking bread commercially.

A review of the Government’s decision on the particular case of HKTV – or indeed any particular licensing regime – is beyond the scope of this article. However, from a more general point of view, this article advocates three approaches which would maximise the chances of a licensing regime producing benefits without overly hampering economic freedom and growth. These approaches are not targeted to any specific government, industry or society, and are intended to be applicable in most developed societies.

Consider whether there is a real need for a licensing regime

First, one must consider whether a licensing regime needs to exist at all in the first place. The obvious example of a largely unregulated but wildly successful industry is the internet: nowadays, celebrities and fortunes are made on Youtube and Facebook as well as on television. Another obvious example would be the Eurobond market in its early days, with scarcely any scandals or controversy despite little regulation.  It is fundamental to recognise that any licensing regime – no matter how noble in intention or purpose – raises the barriers to entry to its targeted industries. Such barriers reduce market competition and the corresponding benefits in quality and cost that  competition can bring. As such, when determining whether a licensing regime should exist, one must ask whether the benefits of the licensing regime justify its effect of reducing competition.

A licensing regime might arise because there is a need to protect the public from the provision of poor services. But one must distinguish between cases where the provision of poor services is actually dangerous as opposed to merely undesirable or costly. To protect the public from, for example, the drastic consequences that can result from a botched medical procedure or unsanitary food preparation is manifestly different – both in priority and nature – to protecting the public merely from suffering a business loss or disappointment. It is the former – actual (and sometimes potentially irreversible) danger – which a licensing regime should predominantly tackle.

There might also be a need to allocate limited resources in a manageable fashion – a completely laissez-faire approach to, for example, fishing, might lead to overfishing; a completely unregulated regime for the allocation of radio spectrum would likely lead to chaos on the airwaves. However, one must carefully consider whether the so-called limited resource is, in fact, objectively limited as a matter of fact.

Say, for example, the licensing authority decides to issue a limited number of licences for a particular industry on the basis that more licences would over-saturate the market. Saying that a market will be oversaturated is a subjective business judgment; it is distinguishable from an objective fact – for example, the number of fish in the sea available for fishing is an objectively finite number, no matter which way you perceive it. One must also be aware that technological advancement may transform once limited resources into unlimited resources. In the case of television, for example, Corinne Schweizer, Manuel Puppis, Matthias Künzler and Samuel Studer published an article in the Journal of Information Policy this year which noted that the digitalisation of television means that “with spectrum scarcity no longer presenting a major problem, traditional market entry regulation by way of licensing of private broadcasting is called into question, and it becomes more challenging to commit private broadcasters to public interest goals in exchange for a license.”

It is perhaps best to perceive licensing regime as a necessary evil, as opposed to thinking that more is merrier or better. One must keep in mind licensing’s ability to hamper competition and growth, and therefore ask: do the benefits of a particular licensing regime – whether in protection of the public or allocating exhaustible resources equitably – justify its costs?

Technicalities, not merits

Second, if one determines that a licensing regime should exist, a licensing regime should then focus chiefly on compliance with technicalities instead of merits. For example, a licensing regime may prescribe that a licensed miner of unobtainium must possess a minimum set of equipment and relevant knowledge which can be ascertained via standardised testing. This is manifestly not the same as a licensing regime which simply prescribes that a licensed miner of unobtainium must satisfy the regulating authority that he or she will be a proper person to mine unobtainium, or that granting the licence to a particular producer is in the public interest.

The former is aimed at the compliance with a specific, technical set of conditions; the latter maximises the regulating authority’s discretion. It is, in brief, not the role – nor the expertise – of any authority in assessing the soundness of a particular business case. That role and that expertise, so far as possible, belongs chiefly to the free market and its participants – namely, producers and consumers. It would be odd, for example, for a licensing authority to refuse to license a restaurant on the grounds that its food was not delicious (but was otherwise completely safe), or that the licensing authority thought that the restaurant would not be profitable. For a society to reap the rewards of competition, businesses must be allowed to fail as well as succeed. In sum, where the licensing regime is not concerned with the allocation of a limited resource, it should be difficult for a licensing authority to justify denial of a licence on grounds of merit and not technicalities.

To focus exclusively on technicalities and not merit is obviously not feasible when it comes to allocating limited resources. If one must grant a licence to every producer who meets a particular set of technical requirements, then either the limited resource in question will suffer from overuse or the pie may be cut into so many pieces that the licence is no longer commercially attractive. If one must turn to the evaluation of merits, it would perhaps be advisable to first attempt to present merits requirements as technical conditions by expanding the existing list of conditions – for example, by stating that a producer must have an existing market capitalisation of a certain amount, or a certain credit rating. The licensing authority should then exercise its discretion regarding merit sparingly and according to a clear and limited set of considerations. In sum, one should perceive the assessment of technical requirements as the primary concern of a licensing requirement, with the assessment of merit as a secondary concern, applicable only when technical requirements do not provide a satisfactory conclusion.

Proscriptive, not prescriptive

A licensing regime’s requirements should, as far as possible, focus on the proscriptive and not the prescriptive. That is to say, the focus should be on what the licensed producer should not do, rather than what the licensed producer should do. It will obviously not be possible in most cases for a licensing regime to contain no positive requirements whatsoever – for example, the requirement to possess a particular qualification or to comply with a particular set of conditions are commonplace requirements that also prescribe positive obligations upon the producer. Yet there are other requirements which may be better expressed in terms of not what one must do, but what one must not do.

For example, the familiar obligation for one to be a “fit or proper person” before gaining a licence might be more efficiently expressed as an obligation not to have a criminal record, or to have been found liable for fraudulent behaviour in the past. Likewise, it is commonplace to find licensing authorities considering what the “public interest” should be when granting a licence. Corinne Schweizer, Manuel Puppis, Matthias Künzler and Samuel Studer note the use of the phrase “public interest” in broadcasting is “often vague”. In place of attempting to define and use a concept as general as serving the public interest, it may be more effective to break, as far as possible, the concept into proscriptive elements: for example, by noting that a broadcaster must not broadcast morally offensive material. As with the previous point on focusing on technicalities over merits, maximising the proscriptive and minimising the prescriptive may produce guidelines that are more specific and concrete, which in turn may produce fewer obstacles to compliance and therefore market competition.

Conclusion

In 1966, Sir John James Cowperthwaite, then Hong Kong’s Financial Secretary, noted that “in the long run, the aggregate of the decisions of individual businessmen, exercising individual judgment in a free economy, even if often mistaken, is likely to do less harm than the centralized decisions of a Government; and certainly the harm is likely to be counteracted faster.” Such a statement is as true in Hong Kong as in any other market economy, and has arguably formed part of the bedrock of Hong Kong’s prosperity. It would therefore be a worthwhile pursuit to ensure that licensing regimes are rare, and, where needed, exercised sparingly, with matters of discretion and business merit largely left to market participants themselves. While the controversy about HKTV is coming to a close, a decision on the renewal of ATV’s licence is coming soon. It seems that television licensing will continue to be a popular topic of discussion offering more food for thought for some time to come.

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Thomas Ho

Thomas Ho graduated from the University of Melbourne with a Juris Doctor and a Bachelor of Arts, double-majoring in Political Science and Literature. He writes about culture and political economy.”]