GT Alert

FCC Media Consolidation Decision

June 2003
By Mitchell Brecher and Judith O’Neill, Greenberg Traurig

  View or download the PDF version of this Alert here.

On June 2, 2003, a bitterly-divided Federal Communications Commission enacted new rules governing ownership of broadcast television and radio stations. The vote was along party lines, with the three Republican FCC Commissioners (including FCC Chairman Michael Powell) voting to modify in important respects the rules governing how many television stations may be owned by a single entity, how much of the population may be reached by stations owned by major television networks, and whether, and under what circumstances, there may be common ownership of newspapers and broadcast stations in the same geographic markets.

"By revising the rules governing broadcast station ownership, the FCC has significantly altered the landscape for delivery of TV and radio programming as well as the economics of those industries."

The FCC’s review of its broadcast ownership rules was compelled by a provision of the Telecommunications Act of 1996. The 1996 Act directed the FCC to make certain changes to its rules governing broadcasting ownership. In addition, Section 202(h) of the 1996 Act directs the FCC to review those rules every two years and to determine during each of those so-called "biennial reviews" whether any of the ownership rules remain necessary in the public interest as a result of competition. The FCC also is required to "repeal or modify any regulation it determines to be no longer in the public interest." The June 2 decision was taken as part of the "biennial review" process which began in September 2002.

Summary of Rule Changes

The following is a summary of the most important changes to the broadcast ownership rules promulgated by the FCC:

1. Dual Network Ownership Prohibition

The FCC continues to prohibit mergers among any of the top four national broadcast networks. The top four networks are 1) NBC (owned by General Electric Co.); 2) ABC (owned by Disney Corporation); 3) CBS (owned by Viacom); and 4) Fox (owned by News Corporation). Viacom and News Corporation were both plaintiffs in a court action which challenged the prior regulation that prevented them from owning stations that broadcast to more than 35% of U.S. households. The new regulations eliminate the requirement of Viacom to divest any of the stations it acquired in its merger with CBS in 2000, which put it over the 35% limit.

• In markets with five or more TV stations, a company may own two stations. However, only one may be among the top four stations in that market in ratings at the time of the acquisition.
• In markets with 18 or more TV stations, a company may now own three TV stations, only one of which may be among the top four rated stations at the time of acquisition.
• In determining the number of stations in a market, both commercial and non-commercial stations are to be counted.
• For markets with 11 or fewer TV stations, the FCC will consider requests for mergers of two of the top four rated stations on a case-by-case basis, based on a waiver policy announced by the FCC.

The FCC increased the percentage of U.S. households that may be served by over-the-air broadcast to 45 percent from 35 percent. Under this rule, the share of households served is calculated by adding the number of television households in each market in which a company owns a TV station, irrespective of the station’s ratings in any market. Under an existing FCC rule, the number of households in a market served by UHF TV stations (stations broadcasting on channel 14 and above) is "discounted" by fifty percent, based on the principle that UHF stations cover smaller geographic areas so that fewer households receive those stations over-the-air in a market. The FCC will retain the UHF discount in applying the new 45 percent rule. The UHF discount is being retained notwithstanding the fact that many consumers receive television stations via cable or satellite-based systems. Where a UHF station signal is delivered via cable or satellite, its coverage is the same as that of VHF stations delivered in the same manner.

The current limits or "caps" on local radio ownership will be retained. They are as follows:

• In markets with 45 or more radio stations, a company may own eight stations, only five of which may be in one class, AM or FM;
• In markets with 30-44 stations, a company may own seven stations, only four of which may be in one class;
• In markets with 15-29 stations, a company may own six stations, only four of which may be in one class;
• In markets with 14 or fewer stations, a company may own five stations, only three of which may be in one class.

The rules governing ownership of radio stations were changed following enactment of the 1996 Telecommunications Act. Those changes led to a period of increasing concentration of ownership of commercial radio stations. One company, Clear Channel Communications, now owns more than 1,200 stations, including multiple stations in many radio markets. Although the FCC has retained the number of stations which may be owned in any market, the FCC has changed the manner in which markets are identified. In the past, the FCC has based market determinations on signal contours (maps showing predicted coverage areas of stations based on such factors as operating power, antenna location, etc.). Instead, the FCC will utilize geographic market definitions established by Arbitron. Under the Arbitron method, all stations licensed to communities in a market as well as stations licensed to other markets but considered "home" to that market will count. Commercial and non-commercial stations will be counted in determining the number of stations in a market.

The FCC will replace the old broadcast-newspaper cross-ownership rule with a new rule whose provisions will include:

• In markets with three or fewer TV stations, no cross-ownership is permitted among TV, radio and newspapers. Waivers may be granted if a company shows that the television station does not serve the area served by the cross-owned property.
• In markets with between four and eight TV stations, combinations are to be limited to one of the following:
  1. A daily newspaper, one TV station, and up to one-half the radio station limit for the market, or
  2. A daily newspaper, and up to the radio station limit for that market, or
  3. Two TV stations (if permissible under the local TV ownership rule), and up to the radio station limit for that market.
• In markets with nine or more TV stations, the newspaper-broadcast cross-ownership ban and the television-radio cross-ownership ban have been eliminated.

The FCC recognized that certain existing ownership arrangements may violate the new TV and radio ownership limits. These arrangements have been "grandfathered." However, such above-cap clusters may not be sold, subject to a limited exception which will permit sales of above-cap clusters of stations to small businesses. In creating this small business exception, the FCC is attempting to avoid hardships on existing above-cap cluster owners who are themselves small businesses, and to promote entry into broadcasting by small businesses, many of which are (according to the FCC) minority or female-owned.

What do the FCC Media Ownership Rule Changes Mean?

Throughout the eighteen month debate on media ownership, much was said and written. Proponents of the new rules (including the three FCC commissioners who voted for them) have claimed that the rules were necessary and appropriate. Their statements to this effect were more declaratory than focused on market phenomena, though statistical studies were used to support the declarations. However, the claims of necessity for the new rules do not specifically address any wrong or problem that the new rules are designed to correct. Rather, they are claimed to be necessary because several previous attempts by the FCC to justify previous ownership rules were struck down by appellate courts, and there was a fear that without judicially sustainable rules there would be no rules in place to govern media ownership. Proponents of the new rules also noted that the market has changed dramatically in the years since the broadcast multiple ownership, network ownership and newspaper-broadcast cross-ownership rules were adopted. Specifically, they point to the dramatically increased sources of information, e.g., cable television channels, satellite services, and the Internet, none of which existed when the original rules were adopted (an era which FCC Chairman Powell has referred to as a "black and white world").

Opponents of the new rules (including the two FCC commissioners who voted against them and who have written dissents that are highly critical of the action taken) argue that the new rules effectively eliminate meaningful limits on control of the media by the largest media companies, while not correcting any suggested problem that required fixing. They point out that five large companies – the four network owners plus AOL Time Warner, will control much of what is seen and heard on television. They also note that the FCC received more than 750,000 "comments" on the proposed rule changes, more than 99 percent of which opposed further media consolidation. The two dissenting FCC commissioners conducted a series of regional hearings around the country where they heard from many who opposed the proposed rule changes.

The FCC stated that its guiding principles in the media consolidation proceeding were localism, diversity and competition. Whether the rule changes will, as the proponents claim, promote those goals, or whether they will undermine those goals and lead to unfettered consolidation, remains to be seen.

The FCC did not "deregulate" media ownership, nor did it outright eliminate the limits on the number of media outlets which may be owned by any one entity. However, the new rules are borne of a deregulatory philosophy and will (assuming they are sustained) significantly increase the number of television stations which large companies, including those that own television networks, may own. The rules also will hasten the ability of large companies to own and operate two, and in some cases, three television stations in individual markets. While the precise impacts of these changes cannot be determined, such concentration is likely to increase the leverage enjoyed by those station owners in their negotiations with the creative community for programming and in the prices charged for advertising.

This recent FCC action is the latest in what has been a two-decade movement toward reduction of the regulation of broadcasting. In the early 1980s, then-FCC Chairman Mark Fowler (a Republican appointed by President Ronald Reagan) described television as a "toaster with a picture." In a dissent to the June 2 decision, FCC Commissioner Jonathan Adelstein (a Democrat appointed by President George W. Bush) said that following this decision, if television is "the toaster with pictures, soon only Wonder Bread will pop out."

Congress is split largely, but not exclusively, along party lines on the matter. Rep. Markey (D-MA) referred to the order as "making Citizen Kane look like an underachiever," while Rep. Tauzin (R-LA) applauded it as removing the "muzzle" on free speech in America. The independent programmers and the caucus for television writers, producers and directors, vowed to "keep fighting." While the cable industry was largely without immediate comment, Fox Communications President Jim Robbins opined that the decision would exacerbate what he claims are already unreasonable requirements levied by national television broadcasters to consent to the retransmission of programming. Mr. Robbins fears that this would tend to increase cable bills to consumers and decrease the ability of local cable companies to provide programming customized to their local communities. It should be noted that the FCC’s rules do not address cable ownership. Previous efforts by the FCC to establish ownership limits on cable operators have been struck down by the courts.

What Happens Now

As of the date of this memo, the FCC report and order containing the new rules has not yet been issued. It is virtually certain that many parties will seek to appeal the FCC ruling to the Federal Court of Appeals. Opponents of the rules (including many citizens groups and public interest organizations, as well as such special interest organizations as the National Organization for Women and the National Rifle Association) are likely to appeal on the basis that the FCC decision was too "deregulatory" and will limit the number of voices which may be heard over public airwaves. They will also challenge the decision on the basis that it was not supported by the record and that the FCC did not follow proper procedures. Proponents of the rules, including the broadcast networks and other large media companies, are likely to appeal on the basis that the rules did not go far enough, i.e., that under the "necessary" standard contained in Section 202 of the 1996 Telecommunications Act, all ownership limitations are unnecessary and should have been eliminated. It is also possible that legislation will be introduced in Congress, which would roll back certain portions of the new rules, e.g., the increase in the percentage of households which may be reached by stations owned by any one company to 45%. Some parties affected by the FCC rule changes may elect to ask the FCC to reconsider aspects of the new rules by petitioning the FCC for reconsideration. If such reconsideration petitions are filed, it is likely that the FCC would ask the courts not to proceed with the appeals until the agency has acted on the reconsideration petitions. That could further delay appellate review of the FCC ruling.

Unless the rules are stayed either by the FCC or by a court, the rules will become effective following publication in the Federal Register and following approval of the Office of Management and Budget (which must "sign off" on all federal regulations which have budgetary or paperwork aspects).

Conclusion

By revising the rules governing broadcast station ownership, the FCC has significantly altered the landscape for delivery of TV and radio programming as well as the economics of those industries. The effects of these rule changes will be felt by broadcasters, network operators, alternative programming and information sources (cable operators, satellite companies, etc.), as well as by the creative community and those that use the electronic media for advertising. There is little doubt that the new rules will lead to further consolidation in the television and radio industries. For example, mid-sized broadcasters may well see an increase in share value as they become a desirable target for absorption by the larger companies. Smaller broadcasters, who complain of existing economic problems due to the lack of economies of scale and digitalization expenses, yet who are in markets too small to benefit from the new consolidation rules, may actually lose value if they do not take creative action. Investment banks and other investors in the industry should be and likely will be active to evaluate each of these situations as they become involved in facilitating these transactions.

If you would like further information about the new FCC media ownership rules and how those changes may impact your business, please contact us.

© 2003 Greenberg Traurig

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