Deregulation Picks Up Steam: New Media Ownership Rules Foreshadow a New Terrain for Broadcasters

Photo by Frank Okay on Unsplash

When Ajit Pai took over as Chairman of the FCC, it was widely expected that he would take steps to relax existing restrictions on media ownership. The last month, in particular, has seen a flurry of activity on that front. As we reported, the Chairman released at the end of October the proposed text of an Order on Reconsideration relaxing or eliminating a number of broadcast ownership rules. That Order on Reconsideration was, as expected, adopted at the FCC's November meeting in essentially the same form as it was proposed. The Chairman days later also released a draft Notice of Proposed Rulemaking opening a separate proceeding to conduct beginning a "comprehensive review" of the national television ownership cap. That NPRM is due for a vote at the Commission's Dec. 14 Open Meeting.

The Chairman clearly is interested in making significant changes to the media ownership landscape. What do those changes mean and what can we expect going forward? Read on to find out.

Order on Reconsideration - 2010/2014 Quadrennial Ownership Review

At its Nov. 16 meeting, the Commission, on a three-two party-line vote, adopted an Order on Reconsideration that significantly relaxed a number of media ownership rules. This Order brought an end (at least for now) to the Commission's 2010 and 2014 quadrennial reviews of its media ownership rules.

Last September, the Commission, under former Chairman Tom Wheeler, had attempted to conclude those reviews with its own Second Report and Order. That decision, at least for the most part, left the media ownership rules unchanged. A number of parties, however, asked the Commission to reconsider that decision and, with the change in administration following last November's elections, has now reconsidered and reversed most of the decisions made in the 2016 Order. As noted above, this Reconsideration Order was essentially the same as the version proposed by the Chairman in October, so we will just briefly address the major changes it makes to the media ownership rules when it becomes effective (more on that later).

• Elimination of the newspaper/broadcast cross-ownership rule. Based in large part on its findings regarding the changes in the overall media landscape since this rule was adopted in 1975, the Commission found that prohibiting common ownership of newspapers and broadcast stations is no longer necessary to protect viewpoint diversity or competition - and could, in fact, harm localism. As a result, the Commission eliminated any prohibition on newspaper ownership by broadcast station owners.
• Elimination of the radio/television cross-ownership rule. The elimination of this rule was based primarily on two related conclusions. First, the Commission found that the record showed that broadcast radio stations, which produce diminishing amounts of local news, no longer contributed to viewpoint diversity enough to justify the rule. This is particularly in light of the increasing contributions to viewpoint diversity from cable, the internet, and other "non-traditional" voices. Second, in light of the fact that the rule already allows significant cross-ownership, and there continue to exist separate television and radio local ownership caps, the Commission found that eliminating the rule would not have a significant effect on common ownership.

• Elimination of the "eight voices" test for local television ownership. In the Reconsideration Order, the Commission determines that the eight-voices test for local ownership cannot be supported by any evidence in the record. This test prohibited common ownership of two television stations unless at least eight independent television station owners remained in the market. Indeed, the Reconsideration Order questions whether there has ever been sufficient evidence to support drawing a line at eight voices remaining in a market, or at any other specific number. Finding that the rule may in fact prevent combinations that would enhance localism, particularly in small and mid-sized markets,the Commission eliminated the eight-voices test. With elimination of this portion of the rule, duopolies will now be allowed in all markets both stations are not among the top-four rated stations.
• Relaxation of the top-four restriction on television duopolies. The Reconsideration Order retains, at least formally, the existing prohibition on common ownership of two of the four most highly-rated stations in a market (generally the ABC, CBS, Fox, and NBC affiliates). The Commission, however, also adopts a policy that will allow, on a case-by-case basis, waivers of the top four prohibition. The Reconsideration Order does not adopt a rigid set of criteria for such waivers, but does identify some of the factors it will consider in granting waivers. These factors include, among others: the stations' ratings and revenue share (from both advertising and retransmission consent fees) in the market; other market characteristics, such as the existence of strong competitors outside the top-four; and likely effects on programming serving local needs and interests. Waiver requests should be based on data covering a "substantial period," which the Commission suggests could be around three years, to minimize the impact of short-term changes.
• Elimination of attribution of joint sales agreements (JSAs). The Commission finds that there was not sufficient evidence in 2014 to support making JSAs attributable to the overall ownership calculations, nor is there such evidence now. Concluding that the record does not show that JSAs allow one station to exert undue influence over the operation of a second station, they will no longer be treated as attributable.
• Minimal relaxation of the local radio ownership rule regarding embedded markets. The Reconsideration Order largely leaves the local radio ownership rule untouched with one small exception. Currently, a number of radio markets (which are defined in most cases by Nielsen ratings information) include embedded submarkets. Any combination in such markets must show compliance with the rule in the larger market and in each embedded market. Recognizing that this may produce unintended consequences, at least in the Washington D.C. and New York markets, each of which contains multiple, non-contiguous embedded markets, the Reconsideration Order adopts a presumption in favor of certain waivers in those markets.
• Establishment of a diversity/incubator program. The Reconsideration Order also includes a section that serves as a Notice of Proposed Rulemaking regarding the establishment of some type of incubator program to encourage greater diversity in media ownership. Such a program, as envisioned by the NPRM, would work by granting waivers of the ownership rules to applicants who establish programs to enhance broadcast ownership by new and diverse entrants. Finding that such a program may be desirable in the abstract, the Commission requests comment on how any such program should be structured and implemented to serve its goals effective and comply with legal requirements.

Interested parties are now waiting for the Reconsideration Order to be published in the Federal Register. When that happens, a shot clock will begin for the filing of court appeals. It seems almost certain that such appeals will be filed by the public interest groups that have long opposed media ownership deregulation. Portions of the Reconsideration Order may also be appealed by other parties. This could include, for example, the waiver policy for top-four combinations in television which has been criticized by the cable industry.

When any such appeals are filed, it is likely that they will include a request to stay the effectiveness of the rules. As in the case of the reinstatement of the UHF discount earlier this year, courts are generally reluctant to grant stays, although the potential impact of these rules, and the difficulty in unwinding combinations in the event they are ultimately overturned, may change a court's calculus somewhat. If the rules are stayed, it may be an extremely long time before they go into effect.

Whenever the rules do go into effect, it will also take some time for the Commission to flesh out the parameters of its top-four waiver policy. As with any such case-by-case policy, the exact nature of policy will depend on the filing, and resolution, of specific requests for waiver. , Given that it would include combinations of top-four rated stations in a number of markets, it is easy to imagine that the pending Sinclair-Tribune merger will be the first "test-case" of the new policy. If so, the resolution of any such waiver requests is itself certain to be controversial and could, potentially, lead to further appeals to the courts. In any event, this relaxation may not trigger an immediate flood of waiver requests, as some potential applicants may decide to wait for additional clarity as to how those requests will be evaluated.

If you're left feeling unsatisfied by this wave of deregulation (as many radio licensees may be), it is worth remembering that the next quadrennial review begins in 2018. As a result, all of the Commission's media ownership rules (except, as explained later, the national television ownership cap) will once again be subject to further review.

Notice of Proposed Rulemaking - National Ownership Cap

Just days after the Commission adopted the Reconsideration Order, Chairman Pai released the proposed text of a Notice of Proposed Rulemaking to amend the Commission's national television ownership cap. If adopted, this would continue the Chairman's push to deregulate television ownership. The national ownership cap currently prevents any entity from owning or controlling television stations that reach more than 39 percent of the television households in the country. (Although, with the reinstatement of the UHF discount, the actual percent of households reached may be substantially higher.)

As the Chairman promised to do in reinstating the UHF discount back in April, the NPRM begins a "broad review" of the national ownership cap. The NPRM requests comment on whether the Commission has the legal authority to modify or eliminate the 39 percent cap at all. This may prove perhaps the most interesting question in this proceeding.

Unlike many of the specific limits set forth in the Commission's rules, the 39 percent cap was explicitly established by Congress in 2004 and was removed from review in the quadrennial ownership reviews. The NPRM seeks comment on whether the Commission cannot review it at is prohibited from reviewing it at all, or just cannot do so in the context of the quadrennial reviews.

While the NPRM certainly suggests that the Commission has at least tentatively concluded that it has the authority to review the national ownership cap, Commissioner O'Reilly (one of the two other Republican votes Chairman Pai will almost certainly need to adopt any change) has clearly indicated in the past that he disagrees. In his dissent to the Wheeler Commission's 2016 decision to eliminate the UHF discount, he "reject[ed] the assertion that the Commission has authority to modify the National Television Ownership Rule in any way." Nevertheless, Commissioner O'Reilly has indicated that he supports asking the question again now in the NPRM. It will be interesting to see how this plays out over the coming months.

Assuming the Commission has the authority to modify the national ownership cap, the NPRM seeks comment on whether the rule should be modified or eliminated in light of the changes in the media landscape since 2004. This includes the proliferation of non-broadcast programming, changes in the network-affiliate relationship, and consolidation among MVPDs, among other things. The NPRM also seeks comment on how compliance with any modified cap (or the existing 39 percent cap, if it is retained) should be calculated, including whether the UHF discount should be modified or eliminated. Finally, the NPRM asks how any existing ownership combinations should be grandfathered if any changes to the rules make them non-compliant.

Assuming it is adopted at the Commission's December meeting, comments would be due 30 days after Federal Register publication, and reply comments 30 days after that. Absent any extension of those deadlines, the comment cycle could reasonably be expected to close by late in the first quarter of 2018, meaning a potential decision could come during the second quarter of the year. Any such decision, assuming the Chairman is able to garner three votes, will almost certainly be appealed. This is particularly likely here in light of the rather thorny legal questions surrounding the Commission's authority in this area.

Taken as a whole, it seems clear that Chairman Pai is moving with significant speed to adopt a deregulatory agenda. Of course, this should not really come as a great surprise, since he has long been an outspoken advocate of deregulation.

The ultimate outcome of these efforts remains uncertain, and will almost certainly be decided in the courts. Stay tuned to Commlawblog for updates.