• by Mitch Oscar , Op-Ed Contributor, November 20, 2007

FCC chairman Kevin Martin has been in the news with more regulatory recommendations -- though even by his regal pronouncement, he deems his latest "modest." Key tenets of his "modest" modified media ownership rule for newspaper/ broadcast cross ownership transactions are:

¨ The properties are in one of the 20 largest DMAs.

¨ The transaction involves a major daily newspaper and one TV or radio station.

¨ If the transaction involves a TV station, at least eight independently owned and operating major media voices would remain in the DMA following the transaction.

¨ If the transaction involves a TV station, that station is not among the top four ranked stations in the DMA.

¨ A case by case consideration of newspaper-broadcast mergers that don't meet his criteria.

Aside: I'm particularly fond of the last point given the speed by which the FCC has demonstrated how quickly they can resolve adjudication issues from the past.

Minutes prior to his "modest" recommendation, there was his soon to be wishful triggering of the 70/70 rule established in the Cable Communications Act of 1984, which states that the agency can adopt rules to promote more forms of "information source" if cable is available to 70% of American households and 70% of those households subscriber to cable.

And months prior: his "a la carte" and "profanity" statutes.

Then it occurred to me. Something is missing: a coherent, all encompassing, articulated media cross-ownership and digital industry regulatory strategy. A reference point by which the community can begin a dialogue and encourage debate.

 

The last time I can remember that there was some sort of blueprint laid out to the media community was, I think, in the early months of 2003. I can't say that I agreed with most of the recommendations. However, at least the categories and issues were identified --laid out for digestion. Much different than the haphazard approach the FCC seems to be proffering now.

 

So, I went back to review my archives to see if I had written anything on the topic. For those who are interested in what little progress the FCC has made providing leadership and guidance for our media institutions in the challenging but exciting digital transition, I have attached my 2003 analysis -- with some minor modifications in the form of updating statistics.

 

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FCC Regulatory Statutes & Implications

Prologue

In late February 2003 three judges from the United States Court of Appeals for the District of Columbia Circuit, prompted by lawsuits initiated by News Corp., Viacom, NBC and AOL Time Warner, ordered the Federal Communications Commission (FCC) - the U.S. media regulatory agency - to reconsider two key TV ownership regulations: the National Television Station Ownership Rule and the Cable/Broadcast Cross Ownership Rule. The unanimously opinionated judges concluded that "the FCC's decision to retain the rules were arbitrary and capricious and contrary to the law" and the National Television Station Ownership Rule was remanded to the Commission for further consideration and the Cable/Broadcast Cross Ownership Rule was vacated because "we (judges) think it unlikely the Commission will be able on remand to justify retaining it."

The Court's decision has sparked much speculation about the future of the media landscape in the United States. All are in agreement that the country will experience a new flurry of media ownership consolidation - perhaps unparalleled since the mid-nineties when the Hollywood studios ravenously devoured media companies: broadcast television networks could gobble up their affiliates, cable multiple systems operators (MSO) could grab TV networks along with their station properties, and local cable operators and local TV stations could unite to dominate the metropolitan footprint. These transactions will further strengthen the dominance of the major media conglomerates enabling them to save money through the elimination of operational redundancies (sales, traffic, planning, marketing, systems) and will enhance their ability to negotiate favorable programming, talent and distribution deals as well as provide added clout in their deliberations with the advertising community and the consumer. And, of course, the investment community will generate exorbitant fees for their contributions.

On the flip side of the coin the advertising community and consumers will be negatively impacted by further de-regulation and consolidation: advertising rates will increase as the avenues for brand messaging diminish - which was the situation after the FCC passed legislation permitting radio station groups to own up to eight stations in a single market, and the consumer will begin to experience an even greater lack of diversity in programming choices as well as fewer services and higher premiums.

Prologue (cont'd)

The purpose of this report is to analyze the possible consequences of the court's decision as well as to scrutinize the key regulatory statutes that are in the process of being vivisected by the FCC in the near future, and perhaps modified accordingly to accommodate the new administration's laissez-faire market philosophy. Also, we will provide capsulated background information for each major regulatory statute as well as commentary concerning possible relaxation ramifications.

Key regulatory statutes/categories to be scrutinized include:

¨ National Television Station Ownership

¨ Cable/Broadcast Cross Ownership

¨ Duopoly Expansion

¨ National Cable Systems Ownership

¨ Newspaper/TV Station Cross Ownership

¨ Broadcast Network Ownership Limitation

¨ Digital Terrestrial TV (DTT)

¨ Broadband Internet Services Via Baby Bells

¨ Cable Modem Classification

National Television Station Ownership

 

The Court of Appeals has ordered the FCC to reconsider a TV ownership regulation that had its antecedents in the 1940's and was rooted in the fears of the European experience at the time that the television industry in the United States could come to be dominated by a few powerful interests. The regulation, the National Television Station Ownership Rule, was intended to "prevent any undue concentration of economic power" and support diversity and localism of the airwaves by promoting the power of the local affiliate stations that broadcast programming from the networks but are not owned by them. The Court stated that the FCC failed to produce "a single valid reason" to demonstrate that the rule barring stations owners from reaching more than 35% of TV households in the U.S. - which was augmented from 25% of TV households in the mid-nineties - was necessary to protect competition or ownership diversity.

The argument from the major station group owners News Corp. Viacom, NBC and Sinclair is simply that in the current multi-channel provider universe (cable, DBS and the internet) TV station groups are at a disadvantage given that the multi-channel providers are not hamstrung by ownership limitations within their sector i.e., recently, the same Court of Appeals abolished the 30% maximum U.S. penetration limit for cable system operators citing that the ceiling was arbitrary as well as unconstitutional. A new cable system penetration ceiling will be imposed at a future date; what it will be is anybody's guess.

The consensus among the industry's analysts is that the Court of Appeals and the FCC will either elevate the TV ownership ceiling to 50% of all TV households in the country shortly and establish a future date for its abolition or do away with the statute completely.

National Television Station Ownership (cont'd)

 

What the raising of the TV station group ownership penetration ceiling could mean in a theoretical sense/cents:

¨ TV station groups would have greater leverage with producers of television fare (Hollywood studios and independents) for program clearances, which would translate into sweeter licensing deals.

¨ Since all Hollywood studios, save Warner Bros., own TV station groups, expansion of their owned & operated (O&O) TV stations would translate into substantial savings on the amount of money spent annually on affiliate compensation.

¨ Broadcast networks, which are all owned by Hollywood studios - save NBC, would be able to exert more pressure on affiliates to accommodate their demands, i.e. program clearances, new business ventures (online, digital terrestrial, data transmission), compensation, and commercial inventory splits.

¨ Given that at a minimum 50% of the country will already have the capability of clearing a first run or off-net program, the TV station groups and broadcast network O&O's will be in a much stronger position to launch syndicated programming and therefore their demands will grow commensurately.

¨ The more consolidation and control the Hollywood studios, broadcast networks and syndication companies have over the programming broadcast on TV the more likelihood of less TV programming diversity. Hence we will most likely experience a diminution of independent production studios - which has become a trend since the mid/late 90's - and will continue to see the syndication sector's programming contributions being primarily limited to repositories for off-net programming. In the future original syndication production will be relegated to tabloids, talk shows, maybe game shows - although present broadcast network infatuation with the genre suggests that syndicators will most probably end up with producing original episodes for programs that were introduced as broadcast network fodder - and movies, if the genre returns, which at this juncture seems unlikely.

National Television Station Ownership (cont'd)

 

¨ TV station groups could band together to form the backbone of future broadcast networks as well as demand more concessions in their current affiliation agreements with the established broadcast networks. The following chart delineates the Top 25 TV station groups in the U.S in 2006:

 

Rank	Station Group	# of Stations	FCC % U.S.
1	CBS	33	38.5%
2	Fox TV Stations	35	38.0%
3	Ion	54	31.3%
4	NBC	26	29.8%
5	Tribune	26	30.0%
6	ABC	10	23.3%
7	Univision	39	22.8%
8	Gannett	21	17.8%
9	Tinity Private	23	17.0%
11	E.W. Scripps	15	14.0%
12	Belo	21	13.2%
13	Sinclair	57	12.5%
14	Raycom	45	10.2%
15	Cox	15	10.0%
16	Media General	27	10.0%
17	Clear Channel	32	8.6%
18	Pappas	19	7.7%
19	Meredith	12	7.6%
20	Lin TV	30	7.5%
21	Post-Newsweek	6	7.4%
22	Entravision	19	6.4%
23	Young	11	5.8%
24	Gray	36	5.7%
25	Nexstar	29	4.8%

 

Source: Broadcasting & Cable

Cable/Broadcast Cross Ownership

 

Along with its directive to defend the National Television Station Ownership Rule, the Court of Appeals has ordered the FCC to abolish a rule adopted in 1970 indirectly banning cross ownership between broadcaster and cabler by forbidding a cable system operator from carrying any TV station in a market where the system and station shared the same owner. Although cable systems operator Time Warner had challenged the rule decades ago, the company dropped its petition when it realized that it would be prohibited from carrying any TV stations in a market other than the one it owned.

Once the prohibition is officially eulogized we expect a plethora of rumors, articles and premature announcements that never come to fruition focusing on the predatory activities of the broadcast networks, cable systems operators and technologists.

Also, an alliance between a local cable system operator and local broadcaster in a market - whether through acquisition or strategic partnership - could mean utilizing their clout to negotiate aggressive advertising deals that blanket the entire metro (TV, radio, cable, internet and possibly print) as well as share programming, sales/marketing and operating cost, which would add coin to their coffers.

National Cable Systems Ownership

 

Last year (2003) the Court of Appeals struck down the FCC rules barring cable systems operators from controlling more than 30% of the nation's total pay TV market. Although the FCC has not yet established new ownership penetration ceilings there is buzz in the community indicating that consolidation will proceed. Most recently, Comcast and Time Warner carved up the financially bankrupt Adelphia cable systems operator. And rumors abound that if the Dolans are not successful with taking majority controlled Cablevision private they will sell the company.

The following is breakdown of the top cable systems operators in the United States in 2007:

 

Cable Operator	Homes Passed	Analog Subscribers
Comcast	47,200,000	24,200,000
Time Warner	25,900,000	13,500,000
Charter	12,000,000	6,000,000
Cox	9,200,000	5,400,000
Cablevision	4,500,000	3,100,000
Bright House	3,800,000	2,200,000
Mediacom	2,800,000	1,500,000
Insight	2,300,000	1,300,000

 

Source: Company Data

Similarly to the broadcast industry, consolidation of cable operators would offer economies of scale in the reduction of redundancies and infrastructure costs, augmentation of cash flow from monthly subscriber charges, which totaled $55+ billion last year, and superior negotiating clout with programmers, service providers, consumers and advertisers.

Duopoly Expansion

 

Until recently, a TV station owner was not permitted to own more than one TV station in a market. In August 1999 the FCC expanded individual TV station ownership to include no more than two TV stations per market with a cap on the number of VHF TV stations not to exceed one as long as eight independent TV stations owners remained after the transaction. Also, the new statute barred any of the four highest rated stations in the market from merging.

Presently TV station owners are petitioning the FCC to de-limit ownership restrictions of TV stations in individual markets due to an always challenging financial environment i.e., advertising and competition. To ease financial burden over the last few decades, the FCC has allowed the formation of Local Marketing Agreements (LMA), which permit two TV stations in a given market to work cooperatively by sharing programming, sales and marketing resources. Generally this has occurred between a dominant VHF and weak UHF TV station. Now that the LMA concept has been expanded to include outright ownership - one VHF and one UHF - the TV viewer will most probably see more duplication of entertainment programming between the two TV stations and less diversity of news coverage. While the broadcast networks are striving to be more profitable, TV stations have always been a cash cow generating as much as 50+% pre-tax profit. As TV station owners are able to own more TV stations in one market, fewer entities will own more cows milking greater cash benefits.

We should point out that ever since the FCC expanded radio station ownership in 1996 from the 2 FM/2 AM station rule (with a national ownership ceiling of no greater than 20 FM/20 AM accumulation) to the expanded ceiling of owning up to 8 radio stations per market (with a limitation of no more than 5 FM radio station per market) there have been cries from the ad community concerning artificial price fixing, lack of diversity of programming and the shrinking presence of local talent in local markets.

Newspaper/TV Station Cross Ownership

 

The FCC has always cherished the idea of diversity of news sources. To that end the commission has forbidden TV station and newspaper ownership by the same entity in the same market. Only when the survival of one is in jeopardy will the FCC proffer a waiver as in the case of News Corp., the New York market and its ownership of TV station WNYW-TV and daily newspaper the New York Post.

If this statute disappears, those in favor of its existence claim that the diversity of news coverage will also disappear. Those in favor of the abolition of cross ownership rules argue that there are many sources of news (radio, internet, broadcast, cable, wireless) and therefore the original intent of the statute no longer applies. Given the depth of the vertical integration of the major media companies we would most likely experience a similarity in news presentation, commentary and coverage.

Currently, the FCC is reviewing whether to modify or repeal the rule banning the common ownership of a broadcaster (TV station or radio station) and an English language daily newspaper in the same market. However, until the rule is changed newspaper owners could lose out to the TV networks, TV station groups and cable systems operators that have the opportunity to pick off the most eligible acquisition candidates, if the FCC modifies its National Television Station Ownership and Cable/Broadcast Cross Ownership rules prior to its evaluation of the Newspaper/TV Station Cross Ownership rule.

Broadcast Network Ownership Limitation

 

Last year (2003) for the first time the FCC allowed a major media/entertainment company, in this case Viacom, to own both a major broadcast network (CBS) as well as a fledgling broadcast network (UPN). Prior to the ruling, the closest the media community had come to experiencing the ownership of two broadcast networks by one entity was NBC's 33% investment in fledgling family friendly broadcast network Pax TV as well as the acquisition of Spanish language broadcaster Telemundo. The only complaint about this transaction so far has emanated from Pax TV, who is concerned that the value of its stations would be diminished by NBC when NBC's option to purchase the remainder of Pax TV shares comes into play. To date, the FCC has not expressed interest in the case nor suggested that it would butt regulatory restrictions.

If the FCC permits a major broadcast network to acquire another major broadcast network then there will be demonstrable benefits to the owners:

¨ The broadcaster could threaten to drop recalcitrant affiliates when they do not tow the line - as NBC did after its equity purchase in Pax TV.

¨ There will be less diversity in programming as the owners control more distribution real estate - presently the broadcast networks are producing upwards of 75% of their programming schedules.

¨ Programming will receive longer lifelines because it will generally be produced in-house, or in a one sided co-production arrangement and therefore the broadcaster will have a vested interest in its success other than program ratings as it translates into advertising revenue and audience flow.

¨ News coverage will be pooled so there will be less commentary and more conformity.

¨ And lastly, the owners will have more leverage in the advertising marketplace because of their control of networks (broadcast and cable), TV station groups, syndication and local stations - not to mention radio and/or in some cases newspapers as well.

Digital Terrestrial Television

 

In April 1997, the FCC allocated digital broadcast licenses, which were valued at $14 billion but were given away for free, to all broadcast TV stations in the U.S. At that time there were hopes that the TV stations would jump on the digital bandwagon and the country would be speedily on its way to becoming digitalized. Today, nearly 99% of the U.S. can receive digital signals, between 12.7 million and 36.0 million U.S. households own one or more high def TVs - depending upon the source, and content distributors (cable networks, independents and broadcasters) promise to deploy hundreds of high definition channels.

Also, the FCC has made little headway in dealing with unresolved, problematic issues such as: will they force broadcasters to transmit in high definition (1080 or 720) or allow them to split transmissions into the lesser quality 480 multiplex, which will still be better than present day analog.

Regardless of how these issues are settled, the Hollywood studios, broadcast networks and broadcast stations will have greater opportunities to exploit their existing models. Will the consumer see any benefit. We are not sure, but doubtful. More channels for distribution will be available - but at what price. Also, one of the important issues facing the distribution of digital terrestrial TV signals is whether the cable system operators (MSO) will allocate channel capacity for both digital and analog broadcast transmissions i.e., must carry. Instead of providing guidance, the FCC has abdicated its responsibility for the time being and stated that the market must decide. The latest proposal proffered by the broadcasters is that the cable operators will have to guarantee carriage of either an analog or digital signal but not both. As of yet cable operators haven't responded to the concession.

Lastly, one of the remaining crucial questions left unresolved by the FCC is when will the broadcasters give back their analog spectrum to the government. Originally, the FCC was supposed to auction analog broadcast spectrum in 2002 when small market TV stations were scheduled to broadcast digitally and 2006 was the year designated for broadcasters to return their existing analog licenses. However, after much deliberation, February 2009 was selected as the official date of ceasing analog broadcast transmission. We shall see.

Broadband Internet Services Via Baby Bells

In 1984 AT&T was forced by the U.S. government to disengage from its local telephony services business but was allowed to maintain its long distance operations. Its local business was siphoned off into seven regional bell operating companies (RBOC). In 1996 the Telecommunications Act banned the RBOC's from entering the long distance telephony and internet marketplace without first demonstrating that they have opened their local phone markets to competition. Since the creation of the Telecommunications Act the seven RBOC's have merged to create four bell companies: Verizon, BellSouth, SBC Communications and Qwest. Basically what happened was that instead of spending time, money and intelligence against entering competitive markets i.e., long distance, and video, the Bells concentrated on eliminating competition within their sector - not without, as was the original intention of the statute. The Bells grew stronger as they utilized their expanded local infrastructure to offer not only local telephony but wireless and local internet access in the guise of DSL (digital subscriber lines) as well.

 

As the Bell's coffers grew, the long distance companies - AT&T, WorldCom and Sprint - have withered due to huge debt and ruthless competitive pricing, which in turn has diminished revenue generation. Subsequently, the long distance major telephony service providers have entered dangerous fiscal territory with rumors circulating daily that they might be hostilely acquired. On the other end of the receiver the Bells dominate the local arena, have become leaders in the wireless realm and now wish to secure another lucrative telecommunications entry point: internet access.

 

As of the second quarter 2007 approximately half the country is subscribing to high speed internet access: there are nearly 32 million cable modem subscribers and 26 million DSL subscribers. The following chart is a breakdown of the dominant providers:

 

Sector	Provider	Subscribers		Sector	Provider	Subscribers
Cable	Comcast	12,380,000		Telcos	AT&T	13,253,000
	Time Warner	7,188,000			Verizon	7,686,000
	Cox	3,545,000			Qwest	2,405,000
	Charter	2,583,900			Embarq	1,156,000
	Cablevision	2,168,000			Windstream	752,600
	Insight	674,000			Century Tel	500,000
	Mediacom	613,000			Citizens	479,317
	Cable One	316,357			Cincinnati Bell	211,800
	RCN	270,000			Total	26,443,717
	Others	1,780,000
	Total	31,518,457
Total	-	-		-	-	57,962,174

 

 

Cable Modem Classification

 

For some time now the FCC has been attempting to figure out how to classify high speed internet access service over cable wires called cable modems. There are two choices: information service or telecommunications service. If the FCC designates cable modem service as a telecom service, common carrier rules may apply entitling internet service providers, telephone companies and others to "open access" which translates into allowing them to utilize a cable's infrastructure for their services. Also, local franchise fees would have to be paid to the municipality on an annual basis. If the cable high speed access is classified as an information service First Amendment protections come into play and there is no such right of "open access."

 

Although this issue might seem arcane to some, its importance resides in the fact that cable operators are attempting to wrestle as much revenue out of their pipes as possible - after all, as they continually remind everyone, they did invest heavily in the infrastructure. Their aspiration is to provide the famous triple play in service offerings: video, telephony and internet access. If the cablers are required to share their pipes at a discounted rate then there is a strong possibility they will lose valuable revenue streams. Also, as broadband capacity increases and audio and streaming video grow in popularity, cable operators will reap the benefit as gatekeepers charging content provider tolls to pass through their pipes as well as garnering a share of all interactive television and t-commerce transactions.

Epilogue

 

Regardless of the de-regulatory enthusiasm expressed by the media owners and the telecommunications industry as well as the propensity of members of the press and investment community to expound about the coming mergers and acquisitions feeding frenzy, economic times are tough and legislative modification is a long process. The recession has depressed the stock price of likely buyers, which translates into the fact that stock will not buy as much as buyers would like. Many companies are carrying extremely significant debt loads, which would impede their ability to pay and maintain deals once consummated as well as possibly further depressing their stock valuations, which would ultimately cause shareholder unrest. Also, many of the large media companies have not yet completed their digestion of past acquisitions and therefore are still concentrating on integration of staff, assets and operations hoping to shortly enjoy the economies of scale advantages.

 

With that said let the negotiations begin.

 

There are two other topics we would like to provide commentary on before the completion of this paper: the FCC's "two year" review period and the FCC's mathematical equation to generate TV station coverage within a market:

 

Two Year Review Period

Another important aspect of the Court of Appeal's ruling was the warning to the FCC that by law the agency had to justify all media ownership rules every two years. If the FCC did comply with the statute and with due diligence reviewed media ownership regulations every two years it would in effect cripple the efficacy of the agency, hampering its ability to keep pace with technological innovations and the implications to media and its distribution. It is our opinion that this ruling needs to be modified to help foster an environment that keeps pace with the times we live in rather than focusing the majority of its energy on seasons past.

 

Mathematical Equations

Once upon a time the FCC created a mathematical equation to determine the value of TV station transmissions - VHF and UHF - in terms of signal reach within a market or designated market area (DMA) to delineate a station's individual market penetration. A VHF TV station, the stronger of the two in terms of strength of signal, would generate the full value of the market, whereas a UHF TV station's representation would be halved. As an example:

The New York DMA, the largest TV market in the U.S., represents over 7% of the total TV households in the United States. VHF TV stations in the New York market, such as WNBC, WCBS and WABC would be credited with reaching 7% of the U.S. TV market, whereas UHF TV stations in the same New York market would be credited with reaching only 3.5% of the U.S. TV market.

 

Epilogue (cont'd)

 

 

Mathematical Equations (cont'd)

When one compares the official FCC TV station group reach versus the straightforward DMA calculations, this creative formula gave the TV station group owners a significant legitimate advantage towards skirting the National Television Station Group Ownership ceiling. The chart below lists the top 25 TV station group owners' FCC and DMA percentage U.S. market penetration:

 

Rank	Station Group	# of Stations	FCC % U.S.	DMA % of U.S.
1	CBS	33	38.5%	42.4%
2	Fox TV Stations	35	38.0%	44.6%
3	Ion	54	31.3%	62.6%
4	NBC	26	29.8%	34.4%
5	Tribune	26	30.0%	40.2%
6	ABC	10	23.3%	23.6%
7	Univision	39	22.8%	43.7%
8	Gannett	21	17.8%	17.9%
9	Tinity Private	23	17.0%	33.9%
11	E.W. Scripps	15	14.0%	21.9%
12	Belo	21	13.2%	14.0%
13	Sinclair	57	12.5%	21.9%
14	Raycom	45	10.2%	12.5%
15	Cox	15	10.0%	10.2%
16	Media General	27	10.0%	10.9%
17	Clear Channel	32	8.6%	12.4%
18	Pappas	19	7.7%	12.5%
19	Meredith	12	7.6%	9.1%
20	Lin TV	30	7.5%	8.7%
21	Post-Newsweek	6	7.4%	7.4%
22	Entravision	19	6.4%	12.7%
23	Young	11	5.8%	5.8%
24	Gray	36	5.7%	6.3%
25	Nexstar	29	4.8%	7.1%

Source: Broadcasting & Cable

Epilogue (cont'd)

 

Mathematical Equations (cont'd)

As indicated above, in many instances the real total is nearly double that of the FCC equation. In fact, for years this formula has successfully hidden the fact that TV station groups in the U.S. reach many more households than represented by the FCC. Does it matter. We feel strongly that the answer is affirmative based upon two practical considerations: when TV syndicators clear their programs, their market clearances are based upon DMA reach not FCC market formulas, enabling syndicators to reach the minimum clearance barometer of 75+% of U.S. critical for advertiser acceptance - so in essence the station groups are the beneficiaries of creative accounting; and secondly, if the TV station group U.S. penetration level is raised from the current 35% to 50% it is in effect providing station group owners with even greater distribution clout to launch programs, raise advertising rates, limit diversity and localism and corral recalcitrant partners. Also, we would like to mention that now that most TV signals are carried through the cable operator or DBS platform into the television viewing household all signals have equal reach within the community. And therefore cable/DBS distribution has become the great signal equalizer and therefore this archaic accounting formula has little justification for support.