Thursday, June 23, 2011

Local Broadcasters Try for Relevance (Fun With Numbers)

Some recent headlines in trade magazines proudly proclaimed Local Broadcast TV's massive contribution to the U.S. economy -  claiming responsibility for generating $1.7 trillion annually (7% of GDP) and 2.52 million jobs.  The NAB-funded study is being used to help broadcasting in policy discussions with the FCC over having to give back unused or underused radio spectrum.  As NAB head Gordon Smith said, "Decision-makers now debating spectrum policies need to be cognizant of the millions of people and thousands of businesses reliant on the unparalleled impact of local TV and radio for economic survival."

So where did those totals come from?   
  • $60 billion and 300K jobs come from broadcasting, or from industries that support the broadcast industry (that's 3.5% of the claimed total that comes more or less directly from broadcasting)
  • $135 billion and 833K jobs come from multiplier effects (the ripple effect that comes from broadcasting's employee spending).
  • $986 billion and 1.38 million jobs come from "the additional economic activity generated ... as a forum for advertising goods and services."  What's that? - I'm guessing they are measuring a portion of all the economic activity that advertisers engage in.  The study gives a number of reasons for counting stimulative activity, but no information on how those numbers are derived.  In essence, it seems likely that they've come up with another multiplier effect.  (Not indicating how these numbers were derived is frowned upon in academic research)
There are several problems with combining the latter two components into a "generated by" result.  First, consider the estimated "stimulus" from advertising. Local broadcasting had about $42 billion in advertising revenue in 2010. To get $986 billion, one must presume that every dollar spent for advertising on local broadcasting  stimulates more than $23 dollars in GDP.  That's an extremely high multiplier.  If the same held true for all advertising revenues in media (about $140 billion in 2010), then you could claim that advertising "stimulates" around of one-quarter of all GDP. (And wouldn't it be fairer to claim that this "stimulus" impact is really from the advertising itself, rather than any unique distributive features of broadcasting)
Another problem with using general multipliers is that actual impacts are likely to vary geographically, and across different types of activities.  The study may partially address this, in that the full report also breaks down impacts by state.  But there's also a problem with that, as broadcast signals don't coincide with state boundaries and so any impacts can't be isolated to specific states.  All this raises questions about the validity and accuracy of these estimates.
But the biggest problem is a general one with this kind of analysis.  In treating these numbers as distinctive, it assumes that none of those economic activities would take place in the absence of broadcasting.  That is,  the 300,000 employed by broadcasting wouldn't be working or spending any money to support themselves and their families, or that the $42 billion in advertising wouldn't simply shift to other media - or if it did, then it wouldn't have any "stimulus effect" elsewhere.  In claiming that broadcasting is responsible or that it generates this amount, the report is implying that in the absence of local broadcasting, all of the direct or indirect economic activity associated with broadcasting would go away.  It's not a very reasonable presumption, if you think about it, 
(And thinking about the "stimulus" from advertising - shouldn't that be credited to the advertisers?  All broadcasters do is distribute the message.  The arguments the study uses to claim a stimulus effect are almost all a result of the information content of advertising, rather than any unique aspect of local broadcasting as a distribution system.  So shouldn't that almost 90% of the claimed impact generated by advertising be credited to the advertisers rather than broadcasters?).
Now, this kind of "multiplier" argument is fairly widely used, particularly by politicians and others hoping to inflate the significance of certain economic or political activities.  But as long as the assumed comparison is to a total lack of economic activity, it grossly overstates the real impact that can be traceable to any particular economic activity - the difference between the impact of that activity and the impact of its alternatives. This kind of analysis is (intentionally) highly misleading.  If you think about it, this argument is really saying that
To make the case that broadcasting is responsible for multiplier or "additional" activity, you really need to make a case as to how much would occur economic activity local broadcasters contribute, directly and indirectly, compared to other options - such as how much might result if the all broadcast content was to be distributed via IPTV and broadband systems, rather than local over-the-air broadcast stations.  You could then realistically claim that local broadcasting is responsible for the net difference, positive or negative.
It's a nice try, though.  It may work with policymakers who use the approach themselves (and also tend to be fairly ignorant of economics).

Updated: Fixed some typos, and extended discussion of "stimulus" claims.

Source: "Local broadcasting generates $1.17 trillion to annual GDP, study shows", Broadcast Engineering
Study report: "An Analysis of the Importance of Commercial Local Radio and Television Broadcasting to the United States Economy."

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