FCC Should Forego TV Standard

Americans love a good superhero. And while we typically reserve our enthusiasm to the silver screen or comic books, a recent Supreme Court decision in a patent dispute over licensing for a Spider-Man toy could – and should – pave the way to alleviate consumers of a hidden tax on all televisions sold in the United States.

Late last month, in a case between a patent holder and Marvel Entertainment, the Supreme Court ruled 6-3 not to overturn a prior decision positing that patent agreements cannot require royalty payments be made indefinitely after they expire.

“Patents endow their holders with certain super-powers, but only for a limited time,” Justice Elena Kagan wrote in the official opinion. “And when the patent expires, the patentee’s prerogatives expire too, and the right to make or use the article, free from all restrictions, passes to the public.”

For any entrepreneur or business owner, that verdict should make sense. Patents are designed to foster innovation by guaranteeing the property rights for a new product or service to the individual or business that comes up with it. But once these protections run their course – in this case after 20 years – they can actually serve to impede development, stifle competition, and in this case saddle consumers with added costs.

The ATSC which is mandated to be included on all televisions sold in the U.S. by the Federal Communications Commission, demonstrates just how such outdated protections can run counter to their purpose and backfire on consumers.

Initially, these standards – a group of complimentary patents bundled together under a single license – were enacted to provide a common baseline for digital cable feeds as providers and households transitioned away from now obsolete analog service. It was a way to be sure your TV could recognize your cable signal. Today, that transition has been completed, for all intents and purposes. In fact many have transitioned away from broadcast television entirely. More and more households are “cutting the cord” and foregoing cable altogether. According to one study, last year 8.2 percent of TV subscribers cancelled their service. More than 45 percent said they reduced their cable or satellite service.

Unlike many government-mandated standards in technology, the for-profit company, MPEG LA exclusively licenses the ATSC standard. And according to MPEG LA’s website; “Since ATSC receiver products include an MPEG-2 decoder, a license is also required under MPEG-2 Video and Systems patents, and users may benefit from MPEG LA’s MPEG-2 Patent Portfolio License offering coverage under patents that are essential to the MPEG-2 Video and Systems standard.” Of course this benefit comes at a price; $2 dollars per television in addition to the $5 MPEG LA charges for the ATSC standard license on every television sold in the U.S.

But these patents have value right? Television buyers are paying for legally cataloged and protected technology. Not exactly, the majority of the patents bundled into ATSC and MPEG-2 – in fact, more than 75 percent of them – are expired. Essentially the F.C.C. is forcing the intellectual property equivalent of expired milk into your grocery cart.

Still, whether a person plans to use their television for traditional cable or otherwise, they have to pay a $7 fee for the ATSC and MPEG-2 technologies. While that may not seem like much, with over 40 million television sets sold each year it quickly adds up to some $280 million annually.

Like so-called convenience fees from a bank or ticket vendor, the ATSC and MPEG-2 requirements add up to hidden cost from which buyers get little or no value. And while they may seem nominal, studies show these kinds of burdens have a big impact on consumer behavior. In a report last year, for example, 45 percent of respondents said banking fees determined which financial institution they would use. In the highly elastic consumer electronics market, such costs can have an equally significant role.

Free-market competition requires businesses large and small to continually innovate and develop new products and services to ensure they meet customers’ needs. When mandates outlive their expiration dates, customers ultimately pay.

In the Supreme Court’s ruling, the justices made clear they were interpreting the law, not rewriting it. That puts the responsibility on Congress to review and revise mandates like ATSC.

The Supreme Court’s ruling in the Marvel Entertainment case laid the ground to alleviate consumers of the hidden ATSC and MPEG-2 fees. Let’s ask Congress to put into law protections that will ensure patent laws don’t come at consumers’ expense.

Andrew Langer is President of the Institute for Liberty.