WashingtonA federal court decision last week on media ownership potentially could accelerate consolidation in the industry and disrupt the landscape on numerous fronts, including a pending merger, the digital television transition, Washington trade associations and policymaking at the Federal Communications Commission.
In the decision, a panel of the U.S. Court of Appeals for the D.C. Circuit ordered the FCC to abolish a rule that effectively banned the common ownership of a TV station and cable system in the same market.
The rule, adopted in 1970, indirectly banned cross-ownership by forbidding a cable system from carrying any TV station in a market where the system and station shared the same owner.
Time Warner Entertainment Co. challenged the rule. When Time Warner bought Turner Broadcasting System Inc., the FCC's rule prompted the MSO to sell an Atlanta-area cable system because it shared the same market with Turner's WTBS.
In practical terms, under the rule, cable system owners were unwilling to forfeit the right to carry all local TV stations because they opted to own one of them in the same market. The rule did not bar cable ownership of out-of-market TV stations. Cox Enterprises Inc., which is the majority owner of top-five MSO Cox Communications Inc., has pursued that strategy for years.
Rather than return the rule to the FCC for refinement, the court ordered the agency to eliminate it immediately because the court reasoned that the FCC would have no basis for sustaining it on further consideration.
The court called the FCC's defense of the rule "flimsy" and "half-hearted" and said future FCC defense of the rule was "a hopeless cause."
"We are very pleased that the court has vacated the cable-broadcast cross-ownership rule. That rule had long ago become an anachronism that did not serve the public interest," executive vice president and general counsel of AOL Time Warner Inc. Paul Cappuccio said.
The 31-page opinion was written by chief Judge Douglas Ginsburg and joined by Judge Harry Edwards and Judge David Sentelle.
In the second decision, the court returned to the FCC for reconsideration a rule that placed a national limit on TV-station ownership, saying the FCC failed to produce "a single valid reason" showing the rule was necessary to protect competition or ownership diversity.
That rule barred station owners from reaching more than 35 percent of TV households, but did not place a numerical cap on the number of stations one company could own nationally.
The national ownership cap was attacked by Fox Broadcasting, NBC, Viacom Inc. and Viacom's CBS Broadcasting Inc. subsidiary.
Both Fox and Viacom, due to recent TV station acquisitions, exceed the 35 percent cap.
The National Association of Broadcasters — from which all of the major networks except ABC have fled — fought on the FCC's side to keep the 35 percent cap.
Few expect the FCC to keep the cap; most feel the agency will raise it or eliminate it.
When the rule was retained in 2000, FCC member Michael Powell, now chairman, opposed the decision, saying the agency failed to show that the rule was necessary to protect competition and ownership diversity.
NAB's backbone of support comes from hundreds of network affiliates, which refused to accommodate the networks on raising the cap, prompting the three networks to quit NAB.
In light of the court's decision and the FCC's apparent willingness to raise the cap at a minimum, the networks and cable operators could absorb NAB affiliate members, either piecemeal or in groups.
Without directly referring to the impact of the court decision on the health of his organization, NAB president Edward Fritts said: "This rule has been instrumental in promoting localism and diversity. NAB will continue to build a solid record to convince the FCC, Congress and the courts to preserve the 35 percent cap."
The FCC can appeal the decision to the full D.C. Circuit or to the Supreme Court, but Powell said he hasn't made a decision.
Consumer groups involved in the case plan to appeal, but their exact strategy remains uncertain.
"I am willing to say that we're definitely appealing," said Andrew Jay Schwartzman, president of the Media Access Project, who represented the Consumer Federation of America in the case.
Talking to reporters, Powell said the most important aspect of the ruling was the court's warning to the FCC that by law the agency had to justify all media-ownership rules every two years.
The court also ruled that an agency decision not to launch a rulemaking to modify or repeal a rule constituted final agency action that could be reviewed by the court. But the FCC argued that a decision not to embark on a rulemaking was not reviewable in court.
"That's a huge burden on the commission," Republican Powell said. "I think it is something we have to adjust to immediately."
Powell called the court's ruling "a monumental case in the media space" that could be just the beginning of court invalidation of FCC media-ownership rules. "It's not the only shoe potentially to drop," he said.
A case aimed at overturning an FCC local-TV-station ownership rule is also pending before the same court. That rule allows the common ownership of two TV stations in a market if eight independent TV-station owners remain after the transaction.
The rule bars any of the four highest-rated stations in the market from merging.
Michael Copps, a Democrat appointed to the FCC by President Bush, urged the agency to appeal the case to the Supreme Court and indicated Congress might have to step in to modify the biennial rule-review process established in the Telecommunications Act of 1996.
Taken together, the decisions could spark a new period of consolidation that could see TV networks grabbing affiliates, cable MSOs buying TV networks along with their TV stations properties and just straight-out local cable-TV station combinations.
"We believe this decision, which was not unexpected, is likely to lead to a dramatic change in the underlying economics and structure of the traditional mass media, with the large broadcast television networks and cable operators the primary beneficiaries," said Legg Mason media analyst Blair Levin, a former FCC chief of staff.
If the court's decision triggers a media land grab, newspaper owners could be caught leaning on their hoes.
The FCC is separately reviewing whether to modify or repeal a rule that bans the common ownership of a broadcaster (TV or radio) and an English language daily newspaper in the same market. Until that rule is changed, newspapers could lose out to the TV networks and cable operators that pick off the most eligible acquisition candidates.
John Sturm, CEO of the Newspaper Association of America, said his trade group was not planning to press the FCC in a new filing to expedite the broadcast-newspaper rulemaking.
"The commission has got a proceeding whose record closed [Feb. 15], so it's ripe for picking. We will do whatever we can to urge the commission to move that proceeding along," Sturm said.
The court's decision allowing cable operators to buy TV stations in their home markets could help EchoStar Communications Corp. in its effort to win federal regulatory approval to acquire Hughes Electronics Corp., parent of DirecTV Inc. The proposed $25.8 billion direct-broadcast satellite deal has been criticized as a merger to monopoly that the Justice Department should reject.
If operators owned some TV stations in a market, it is possible that they could carry those TV stations exclusively on their cable systems and deny access to DBS.
Such a move would be illegal today, but the requirement that TV stations negotiate retransmission consent in good faith with cable operators and DBS carriers expires on Jan. 1, 2006 under the Satellite Home Viewer Improvement Act.
EchoStar and DirecTV could attempt to pursue the same strategy, but since cable has many more subscribers than satellite, DBS operators would forego a lot of money by not selling the TV station's programming to cable.
Facing a slew of cable-TV station combinations, EchoStar and DirecTV could argue that their merger is necessary in light of the court ruling because a broader, unified DBS subscriber base would reduce the economic incentive of a cable-TV station combination to withhold TV station programming or play one DBS firm against another.
"This ruling will greatly expand the power and reach of cable operators by allowing them to own broadcast stations in the same markets where they offer cable service, which in turn means cable operators will have yet another tool to undermine the competitiveness of DBS operators," said EchoStar spokesman Marc Lumpkin.
"In the end, without this merger, this will lead to higher prices and less choice in the pay-TV market for consumers."
The ruling could alter thinking at the National Cable & Telecommunications Association, especially if some of the big MSOs were to lose their cable-centric profile due to large investments in local TV stations.
Would the NCTA modify its position on the carriage of digital-TV signals if its members loaded up on TV stations? The association, so far with support from the FCC, has refused to endorse government-imposed dual carriage of analog and digital TV signals during the DTV transition.
Some in the cable industry argued last week that the complications associated with the DTV transition might steer cable operators away from acquiring TV stations.
But One cable industry lawyer suggested that if a cable operator cut a digital TV carriage deal with an affiliated TV station but not with other stations in a market, the reaction from regulators could be harsh.
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