Divided FCC Releases Text of Controversial Media Ownership Decision: Challenges Are Threatened by Congress and Dissenting Commissioners

Earlier this month, the FCC released its Report and Order and Notice of Proposed Rulemaking (the "Order") revising the ownership rules applying to radio and television stations. Opposition to the Order is mounting, some of which is being fanned by two dissenting Commissioners, and action is being threatened on numerous fronts to modify or stay the decision before it can go into effect.

The FCC's ownership proceeding attracted widespread public attention in the months leading up to its release, with the decision being hyped by the New York Times as "the most significant overhaul of media regulations in a generation." However, while the Order may have a substantial impact on broadcast station ownership, it represents only the latest in a long line of FCC decisions easing the restrictions on station ownership. As discussed in more detail below, the Order modified the FCC's local and national broadcast ownership rules in many respects, including: easing the conditions under which one party may own multiple television stations in a market; raising the national cap on television station ownership; and eliminating in all but the smallest markets the prohibition against co-ownership of broadcast stations and newspapers in the same market.

I. Efforts to Rollback or Stay Rules

Attention surrounding the release of this decision reached its peak on the day of the FCC's open meeting adopting this decision. The Commission adopted the order on a party-line vote, with Chairman Powell, joined by fellow Republicans Kathleen Q. Abernathy and Kevin J. Martin voting in favor of the item, with Democratic Commissioners Jonathan S. Adelstein and Michael J. Copps dissenting from the decision. All Commissioners issued dissents from the bench, with the presentations of Commissioners Adelstein and Copps matching the vigor of any dissenting statements previously presented by FCC Commissioners. Commissioner Adelstein labeled the decision "the most sweeping and destructive rollback of consumer protection rules in the history of American broadcasting," and Commissioner Copps said that the decision "empowers America's new Media Elite with unacceptable levels of influence over the media on which our society and our democracy so heavily depend."

In the weeks since the Order was formally released, the clamor for staying or rolling back the rules has grown. In the latest such developments, a bi-partisan group of U.S. Senators signed onto a "Resolution of Disapproval," which would invoke a rarely used congressional veto authority to roll back key aspects of the FCC's new rules. In a press conference held on July 15, Senators Byron Dorgan (D-ND), Trent Lott (R-MS), Russ Feingold (D-WI), and Susan Collins (R-ME) announced that they already have sufficient signatures on a petition to force consideration of the measure under expedited Senate procedures. The resolution would reinstate the national television audience cap at 35 percent (the FCC's decision raised the cap to 45 percent) and reinstate the newspaper-television cross-ownership prohibition. One reason the Senators may be trying to use this procedure is that if the resolution is passed by a majority of the Senate, it moves directly to the House floor, bypassing the House Telecommunications Subcommittee, whose Chairman W.J. "Billy" Tauzin (R-LA) has opposed efforts to overturn the new ownership rules.

In a related Congressional initiative, on July 16 the full House Appropriations Committee voted 40-25 to amend a bill funding the FCC and the Commerce, Justice and State Departments, by requiring the FCC to roll back the television audience cap to 35 percent of nationwide viewers. The bill, sponsored by Rep. David Obey (D-Wis.), now goes to the House floor. The White House has said it opposes the amendment and that it will veto the bill if it passes as amended.

Congress's efforts to overturn or modify the rule are being supplemented and perhaps fueled by the efforts of the two dissenting FCC Commissioners. On July 15, Commissioners Adelstein and Copps formally asked the Commission to vote on a temporary stay of the Order "to allow the people's elected representatives in Congress to debate media consolidation." In their letter to Chairman Powell requesting that the Commission take this action, the two Commissioners wrote:

Given the magnitude of this proceeding to our country and our democracy, we believe the right course of action is to ensure that we understand the full implications of our decisions. A stay would provide us the opportunity to obtain concrete feedback to avoid unintended consequences which could be devastating in an area as fundamental and irreversible as media ownership rules.

Separately, on July 15, Commissioner Adelstein called for the FCC to amend the new rules before they take effect by removing an anomaly in the new definition of television markets which he says could permit greater concentration in small markets.

The following is a summary of the rules as adopted by the FCC in the Order. Except as specified in certain parts of the Order, the rules are scheduled to go into effect 30 days after publication in the Federal Register; publication has not yet occurred.

II. Summary of New Ownership Rules

A. National Ownership Rules

1. National Television Ownership Rule

Current Rule. Currently the FCC's rules prohibit any entity from owning, operating, controlling, or having a cognizable interest in television stations that, in the aggregate, reach more than 35 percent of the country's television audiences. 47 C.F.R. § 73.3555(e)(1). Under the current rule, "audience reach" is measured by the number of households in a Designated Market Area (DMA) as determined by Nielsen. To account for the deficiencies in the over-the-air reception of UHF versus VHF television signals, the current rule also permits the audience reach of UHF stations to be discounted by 50 percent in calculating an owner's overall national audience reach.

FCC Findings. In examining whether the current ownership cap continues to serve the public interest, the Commission considered the effects of the cap on diversity, competition and localism within the national television marketplace. The Commission concluded that raising the cap would not raise concentration levels beyond the "moderately concentrated" range and thus not negatively affect competition in the media marketplace. However, eliminating the cap altogether would potentially harm localism by disturbing the balance of power between networks and affiliates. The Commission reasoned that because independently owned network affiliate stations have a greater incentive to serve their local audiences by airing local programs than do network-owned affiliate stations, limiting the national reach of a network will ensure the existence of such independently owned stations, thus preserving localism.

New Rule. The new national television ownership rule permits ownership of television stations which, in the aggregate, have a national audience reach that does not exceed 45 percent. Audience reach continues to be defined as "the total number of households in the Nielsen Demographic Market Areas in which the relevant stations are located divided by the total national television households as measured by DMA data…." The new rule continues to permit the 50 percent UHF discount. However, the UHF discount will sunset for stations owned by the top four broadcast networks (CBS, ABC, NBC and Fox) as the transition to digital television is completed on a market by market basis, unless the FCC determines that public interest would be served by continuing the discount beyond the digital transition.

2. Dual Network Rule

Current Rule. At present, the FCC rule prohibits any of the top four networks (i.e., ABC, CBS, Fox and NBC) from combining or merging. However, the rule permits all network organizations, including the top four, to create, maintain, and develop multiple broadcast networks by acquiring new broadcast or video networks.

FCC Findings. In examining whether the existing dual network rule continues to serve the public interest, the Commission considered whether maintaining the rule would promote the goals of competition, diversity and localism. Because it concluded that diversity is most affected at the local versus the national level, changes to the dual network rule, even the elimination of the rule, would have no effect on diversity. However, the Commission did find that elimination of the dual network restriction could dramatically affect competition in both the program acquisition market and the national advertising market. Further, it found that maintaining the dual network rule is necessary to protect localism. Without restrictions on the merger of the top four networks, the merged entity would wield considerable economic leverage over affiliates and could substantially diminish the ability of affiliates to serve their local communities by being forced to accept the will of the combined mega-network.

FCC Conclusion. The dual network rule remains necessary to ensure that the goals of protecting competition and promoting localism in the market place and will be maintained.

B. Local Ownership Rules

1. Local Television Multiple Ownership Rule

Current Rule. Under the current rule, an entity may own two television stations in the same DMA, provided: 1) the Grade B contours of the stations do not overlap; or 2) (a) at least one of the stations is not ranked among the four highest-ranked stations in the DMA, and (b) at least eight independently owned and operating full-power television stations would remain in the DMA after the proposed combination.

FCC Findings. The Commission determined that the current local television ownership rule is no longer necessary in the public interest to promote competition and diversity, and may even hinder the FCC's localism policy goal. However, finding that some limitations on local television ownership are necessary to promote competition, the Commission modified the rule.

New Rule. Under the new local television ownership rule, an entity may have an attributable interest in two television stations in markets with 17 or fewer television stations, and up to three stations in markets with 18 or more television stations¹, provided that the resulting combination does not result in a single entity owning more than one station that is ranked among the top four stations in the market based on audience share². The contour overlap provision of the rule will be eliminated, and the new rule will be applied without regard to Grade B overlap among stations—the Nielsen DMA will be the relevant geographic market.

Waiver Policy. The FCC will continue to grant waivers of the local television ownership rule, under appropriate circumstances.

• Currently, parties may request a waiver where a proposed combination involves at least one station that is failed, failing, or unbuilt and the parties can show that the "in-market" buyer is the only reasonably available buyer. The new rule retains the waiver standard, with one exception: parties need not demonstrate that the in-market buyer is the only available buyer.
  
  
• Parties may request waiver of the rule that prohibits one company from owning two of the top four rated stations where the proposed combination will produce public interest benefits.
  
  (a) When applying for such a waiver, the parties must submit television ratings information for the four most recent ratings periods.
  
  (b) The FCC will evaluate the proposed merger's effect on the stations' ability to complete the conversion to digital television.
  
  (c) The FCC will consider the effect of the proposed merger on localism and viewpoint diversity, e.g., whether the merger is likely to significantly increase news and local and local programming.³
  
  (d) Where the merger involves one or two UHF stations, the FCC will take into account the reduced audience reach of such stations. 
  
  
• The FCC will consider waivers of the local television ownership rule where the signals of the stations in the proposed combination:
  
  (a) do not have overlapping Grade B contours; and
  
  (b) have not been carried, via direct broadcast satellite (DBS) or cable, to any of the same geographic areas within the past year. 
  
  
• The transfer or assignment of a combination involving a station acquired pursuant to a waiver must comply with the FCC's rules and waiver standards at the time the application to transfer or assign the station is filed.
  

Satellite Television Stations. The FCC will continue to exempt television satellite stations from the broadcast ownership restrictions, i.e., ownership of such a station is not an attributable interest.⁴ However, television satellite stations will count in determining the total number of stations in a given DMA.

Transfer of Combinations. If an entity acquires a second or third television station in accordance with the new rule, it will not be required to divest if the number of the stations in the market subsequently falls below the outlet cap, or if more than one of the stations becomes a top-four ranked station in the market. However, absent a waiver, a combination may not be assigned or transferred to a new owner if the combination does not comply with the television ownership cap at the time of the proposed assignment or transfer.

2. Local Radio Ownership Rule

New Market Definition. The FCC made no changes to its limits on how many radio stations an entity may own in a market.⁵ However, it has changed the way in which it will define a market for purposes of applying the limits. Currently, the FCC uses a contour overlap method to define local radio markets. Under the new rules, it will use a geographic market approach, relying on Arbitron Metro Survey Areas ("Arbitron Metro") as the presumptive markets.

Counting Methodology. All radio stations licensed to communities in an Arbitron market will be counted in the market. In addition, all stations licensed to other markets but considered to be "home" to the market (i.e., those listed "above-the-line" in the Arbitron rating reports) will be counted.

Noncommercial Stations. In a departure from past practice, noncommercial stations will be counted in calculating the total number of stations in a market. The Commission reasoned that although noncommercial stations do not compete with commercial stations for advertising revenues, their presence in the market exerts competitive pressure as the stations seek to attract listeners from the same population.

Attribution of Joint Sales Agreements. Stations operating pursuant to Joint Sales Agreements⁶ (JSAs) will be attributable to licensee broker in the same manner that Local Marketing Agreements (LMAs) have been attributed. That is, under the new rule, stations brokered under JSAs will be counted toward the brokering licensee's local ownership totals where 15 percent or more of the advertising time on the station is brokered. However, JSAs will not be attributable to the brokering licensee when it does not own or have an attributable interest in any stations in the brokered station's local market. Parties having existing JSAs, located in Arbitron Metro Areas, that are attributable under the new rule must file a copy of the JSA with the FCC within 60 days of the effective date of the Order.⁷ If a JSA entered into prior to the adoption of the FCC's new rules will cause a licensee to exceed the new ownership limits, the parties will have two years from the effective date of the Order to terminate such an agreement, or otherwise modify their ownership interests to come into compliance.

Safeguards to Prevent Market Manipulation. The Commission established safeguards that it believes will deter parties from attempting to manipulate Arbitron market definitions in order to circumvent the local radio ownership rule. First, a party may not receive the benefit of a change in Arbitron Metro boundaries unless the change has been in place for at least two years. Second, a station combination that does not comply with the rule cannot rely on a subsequent change in the Arbitron Metro to show compliance, and thereby avoid divesting under the grandfathering provisions set out below, unless that change has been in place for at least two years. Third, a station will not be considered "home" to a Metro unless it has been considered home to that Metro for at least two years.

Non-Arbitron Markets. The Commission recognized that Arbitron Metros cover only about 60 percent of the commercial radio stations in the United States. For those stations not in an Arbitron Metro, the FCC is conducting a separate rule making proceeding (Docket No. 03-130) to determine how to define "market" in an effort to prevent "unreasonable aggregation" of station ownership by any one owner.

Interim Processing Procedures. During the pendency of the rule making proceeding, the FCC will continue to process applications for assignments and transfers of control of stations located outside of Arbitron Metros using the contour overlap counting method, with two exceptions: 1) radio stations owned by the party calculating the station totals will not count toward the total number of stations in the market; and 2) radio stations with a transmitter site located more than 92 km (58 miles) from the perimeter of the mutual overlap area will not be considered to be in the market.

"Flagging" of Applications Discontinued. FCC staff will no longer "flag" applications that propose radio station combinations above a certain market share. The Commission has concluded that its new method for defining markets will protect against undue concentration in local markets. If an interested party should believe otherwise in an individual case, it has the right to file a petition to deny and make the necessary prima facie showing that a proposed combination is contrary to the public interest.

Waiver of Local Ownership Rules. The Commission declined to adopt any specific waiver criteria for analyzing proposed transactions involving failed, failing, unbuilt or silent stations. Parties who believe the particular facts of their case warrant a waiver of the local ownership rules may seek a waiver under the FCC's "good cause" waiver standard in 47 C.F.R. § 1.3.

3. Cross-Ownership

Cross-Media Limits. The Commission adopted new cross-media limits (CML) to replace the former newspaper-broadcast and television-radio cross-ownership rules. The CML are intended to prevent a single entity from assuming a dominant position in local media markets in terms of the ability to dominate public debate through combinations of cross-media properties. The new rules are as follows:

• In markets with three or fewer television stations,⁸ no cross-ownership is permitted among television stations, radio stations and daily newspapers.⁹ The FCC may grant a waiver if an entity can show that the television station does not serve the area served by the radio station or the daily newspaper. 
  
  
• In markets with four to eight television stations, combinations are limited to one of the following:
  
  (a) One daily newspaper, one television station, and up to half of the radio station limit for that market (e.g., if the radio station limit for the market is six, an entity may own one daily newspaper, one television station, and three radio stations);
  
  (b) One daily newspaper and up to the radio station limit for the market (i.e., no television stations);
  
  (c) Two television stations (if permissible under the local television ownership rule) and up to the radio station limit for the market (i.e., no daily newspapers).
   
• In markets with nine or more television stations, the FCC eliminated the bans on newspaper-broadcast cross-ownership and radio-television cross-ownership. In such markets, the local radio station limits apply, as well as the local and national television station limits, without other restrictions on cross-media ownership.

4. Grandfathering and Transition Procedures

Existing Combinations Grandfathered. The FCC will grandfather existing combinations of radio stations, combinations of television stations, and combinations of radio-television stations.¹⁰ That is, entities will not be required to divest their current interests in order to come into compliance with the new cross-media limits.

Transferability. In general, the FCC will prohibit the sale of existing combinations that violate the new ownership rules. That is, parties must comply with the ownership rules in place at the time a transfer of control or assignment application is filed. However, the prohibition on the transfer of grandfathered stations will not apply to pro forma changes in ownership or to involuntary changes in ownership due to the death or legal disability of the licensee.

Eligible Transfers. In order to promote diversity of ownership, the FCC will allow the sale of grandfathered combinations to and by certain "eligible entities" as long as the transaction does not result in a new violation of the rules. An eligible entity is an entity that would qualify as a small business consistent with Small Business Administration (SBA) standards for its industry grouping.¹¹

• If purchasing a grandfathered combination, the eligible entity must hold:
  
  (a) 30 percent or more of the stock/partnership shares of the corporation/ partnership, and more than 50 percent voting power;
  
  (b) 15 percent or more of the stock/partnership shares of the corporation/ partnership, more than 50 percent of the voting power, and no other person or entity controls more than 25 percent of the outstanding stock;
  
  (c) if the purchasing entity is a publicly traded company, more than 50 percent of the voting power. 
  
  
• If selling a grandfathered combination, an eligible entity may transfer an existing grandfathered combination to any other eligible entity at any time, and to any noneligible entity after it has held the combination for a minimum of three years. 
  
  
• Eligible entities may not grant options to purchase or rights of first refusal to prevent noneligible entities from financing an acquisition in exchange for an option to purchase the combination at a later date.

Radio LMA Combinations. As with radio JSA combinations, if a radio LMA entered into prior to the adoption of the new ownership rules will cause a licensee to exceed the new ownership limits, the parties will have two years from the effective date of the Order to terminate such an agreement, or otherwise modify their ownership interests to come into compliance. If a licensee sells an existing combination of stations within the two-year grace period, it may not sell or assign the radio LMA to the buyer if the LMA causes the buyer to exceed the new ownership limits. Parties may not enter into a radio LMA or renew an existing radio LMA that would cause the broker of the station to exceed the new ownership limits.¹²

Television Temporary Waivers. Any licensee with a temporary waiver, pending waiver request, or waiver extension request must file one of the following, no later than 60 days after the effective date of the Order, or the date on which the waiver expires, whichever is later:

(a) A statement describing how ownership of the subject station complies with the modified local television ownership rules;

(b) An application for transfer of control or assignment of license of those stations necessary to bring the licensee into compliance with the new rules.

Cross-Media Conditional Waivers. Parties that currently have conditional waivers for radio-television combinations must submit a statement to the FCC to indicate whether the combination: 1) is located in an "at-risk" market (i.e., one with three or fewer television stations); 2) is located in a "small to medium" market (i.e., one with four to eight television stations); or 3) is in compliance with the new cross-media limits. For combinations in compliance, the FCC will issue a letter granting permanent approval. For combinations that violate the new rules, the FCC will issue a letter grandfathering the combination until a decision in the 2004 Biennial Review is final. As part of the 2004 Biennial Review, the FCC will re-evaluate such grandfathered combinations to determine whether they should continue to be grandfathered.

Other Cross-Media Waivers. The new cross-media limits are founded on the presumption that, due to cable carriage, television stations in a DMA are available throughout the DMA. However, recognizing that might not always be the case, the Commission will allow licensees to rebut the presumption in a waiver request, where appropriate. For example, a television licensee in a DMA in which there are only two other television stations (i.e., an "at-risk" market) may request a waiver of the bar on its ownership of a daily newspaper in the DMA if it can demonstrate that the newspaper's community of publication neither receives television service from the station over-the-air nor through cable carriage.

Flagging and Interim Policy Eliminated. Since 1998, FCC staff has been flagging public notices of radio transactions that they believed proposed a level of local radio concentration that could threaten diversity and competition.¹³ Flagged transactions underwent a further competition analysis under an interim policy adopted by the FCC in an earlier Notice of Proposed Rule Making concerning local radio ownership. However, in the Order the Commission concluded that the changes in market definition it is adopting will address the concerns that led to the flagging and interim procedures. Therefore, effective with the adoption of the Order, the Commission abolished the procedures.

Processing Pending and New Applications. Effective with the adoption date of the Order, the FCC implemented processing guidelines for pending and new commercial broadcast applications for assignment or transfer of control of radio and television licenses. The guidelines will also govern modification applications that implicate the multiple ownership rules. Applications filed on or after the effective date of the Order, as well as applications pending as of that date, will be processed under the new rules.

• New Applications. The FCC imposed a freeze on the filing of all commercial radio and television transfer of control and assignment applications filed on FCC Forms 314 or 315. The FCC will revise its forms to reflect the new rules, and the freeze on such filings will be lifted after notice is published in the Federal Register that the forms have been approved by the Office of Management and Budget (OMB). 
  
  
• Pending Applications. Applicants with pending 314 and 315 applications, or modification applications on FCC Form 301 that implicate the multiple ownership rules, may amend their applications to demonstrate compliance with the new rules. Such amendments may be filed once notice of OMB approval has been published in the Federal Register, as specified above. 
  
  
• Pending Petitions and Objections. Petitions to Deny and informal objections pending as of the adoption date of the Order that raise issues unrelated to competition against Pending Applications (as defined above) will be addressed when the FCC acts on such applications. Petitions and objections that challenge Pending Applications solely on grounds of competition pursuant to the interim policy will be dismissed as moot.

C. Miscellaneous Proposals

The Commission expressly declined requests to address numerous miscellaneous issues which parties had asked to be considered or adopted in the context of this proceeding. These proposals include requests that the FCC: (1) adopt "behavioral" rules, such as requiring television stations to run announcements warning of the risks of excessive viewing; guaranteeing public, educational, and governmental access on cable and DBS, and prohibiting new forms of payola; (2) adopt additional broadcast ownership rules, such as new alien ownership limits, expanded attribution, revised low power FM rules, and modified broadcast auction procedures; (3) revise its translator rules; (4) maintain its cable ownership rules; (5) define the public interest obligations of digital television broadcasters; and (6) re-adopt the former financial interest and syndication rules.

At this point, the status of the new ownership rules is changing on a daily basis and it seems increasingly likely that the rules may be modified or stayed, in whole or in part.

FOOTNOTES:

1 In counting stations for purposes of this rule, all full-power commercial and non-commercial television stations assigned by Nielsen to a given DMA will be included.

2 As a result, no combinations will be permitted in markets with four or fewer television stations.

3 At license renewal time, the parties must be able to certify that the public interest benefits are being fulfilled. The certification must include a specific, factual showing of the programming benefits of the merger. Cost savings or other efficiencies will not constitute a sufficient showing.

4 Television satellite stations retransmit all or a substantial part of the programming of a commonly owned parent station.

5 The current limits, set forth in § 202(b) of the Telecommunications Act of 1996, are as follows: (1) in a radio market with 45 or more commercial radio stations, a party may own, operate, or control up to eight commercial radio stations, not more than five of which are in the same service (AM or FM); (2) in a radio market with between 30 and 44 (inclusive) commercial radio stations, a party may own, operate, or control up to seven commercial radio stations, not more than four of which are in the same service (AM or FM); (3) in a radio market with between 15 and 29 (inclusive) commercial radio stations, a party may own, operate, or control up to six commercial radio stains, not more than four of which are in the same service (AM or FM); and (4) in a radio market with 14 or fewer commercial radio stations, a party may own, operate, or control up to five commercial radio stations, not more than three of which are in the same service (AM or FM), except that a party may not own, operate or control more than 50% of the stations in such market.

6 A typical radio JSA authorizes the broker to sell advertising time for the brokered station in return for a fee paid to the licensee. In the past, JSAs have not been attributable under the FCC's ownership attribution rules.

7 JSAs involving stations located outside the Arbitron Metros must be filed with the FCC within 60 days of the FCC's decision in Docket No. 03-130, which addresses how to define the "market" for such stations for attribution purposes.

8 The FCC will rely on Nielsen Designated Market Areas ("DMAs") to determine the number of television stations in a market, and will include both commercial and noncommercial stations in the calculation.

9 For purposes of these rules, a "daily newspaper" is one that is published four or more days per week, circulated generally in the community of publication and printed in the primary language of the market. 

10 The Commission stated that it is not aware of any existing newspaper/broadcast combinations that have been previously grandfathered or approved by the FCC that would be barred under the new rules, but to the extent that such exist, they will be subject to the grandfathering and transition provisions in the new rules.

11 The SBA small business size standard for radio stations is $6 million or less in annual revenue; for television the limit is $12 million. See 132 C.F.R. § 121.201 (NAICS codes 515112 (radio) and 515120(television)).

12 With respect to television LMAs, television LMA combinations that were entered into prior to November 5, 1996, have been grandfathered through the end of the FCC's 2004 biennial review. These LMAs are not affected by the grandfathering policy adopted in the Order.

13 Proposed transactions were flagged if they would result in one entity controlling 50 percent or more of the advertising revenues in the relevant Arbitron market, or two entities jointly controlling 70 percent or more of the advertising revenues in the market.