An important operative question arose in the wake of the FCC launching its media-ownership rule review two weeks ago, with broadcasters prepared to unveil a raft of third-quarter revenue declines.
Big names—Ion, Pappas, Freedom and Tribune among them—have had to reorganize under bankruptcy protection. According to Jack Goodman, an attorney with WilmerHale and former general counsel at the National Association of Broadcasters, hundreds of stations have declared bankruptcy since the economy tanked in 2008. “There's been a lot,” agrees another communications attorney.
But with all these troubled stations, why has the FCC not faced a flood of requests for failing-station waivers of its multiple-ownership rules? The waivers allow stations in distress to be combined with others in a market where doing so would otherwise violate FCC limits on multiple ownership. According to communications attorneys, only a handful of requests for failing-station waivers have been filed in the 10 years since they were established. There is also a failed-station waiver, but that is for stations in involuntary bankruptcy and has never been used, Goodman says.
The answer, according to Media Access Project President Andrew Schwartzman, is that broadcasters don't need the waivers because they are using “questionable contracts that amount to sales.” Those include various joint sales and services agreements, such as the one between Raycom and MCG in Honolulu; the FCC is currently investigating a complaint against the deal. “They don't ask for a waiver because under their theory they don't need one,” Schwartzman says.
'Helpful' or 'hokum'?
Communications attorneys see it differently. “A shared services agreement is helpful,” says another veteran broadcast attorney who asked not to be identified, but he called the suggestion that broadcasters don't need more help from the FCC to combine operations “hokum.”
He says the agreements are not a substitute for outright ownership since they limit the amount of programming the managing station can produce. He concedes that the joint agreements result in operating economies, but programming, finances and personnel, he points out, are supposed to remain separate.
That works against the kind of cross-platform model broadcasters need to be competitive, as George Mahoney, VP and general counsel of Media General, told the FCC last week.
“Unfortunately, the way the commission has established the [waiver] policy, it ends up leaving out a number of situations where stations are failing or have failed but cannot seek relief from the commission,” Goodman says.
Goodman has represented stations that wanted to sell and buy in midsize and smaller markets, but faced the gantlet of the failing-station waiver's presumptive criteria. Those require, among other things, that the station have an all-day share of less than 4% for the previous three years and negative cash flow for those years, he says.
By that standard, however, almost no network affiliate would qualify for the waiver. The 4% audience share effectively leaves out all Big Four affiliates, according to Goodman. Yet, he says there is “undisputed evidence” that, particularly in smaller markets, affiliates that are not the top-earning station have been losing money.
Schwartzman says that since the FCC no longer collects data on “salaries paid to owners, pension boondoggles and other devices used to get around IRS requirements,” there isn't enough data submitted “under penalty of perjury” to determine whether stations are losing money on an operating basis. He also says it is likely that the current “economic crisis” (he puts the term in quotes) is cyclical, and “will be fixed when ad spending returns to more normal levels.”
According to Goodman, the current FCC waiver policy fails in part because it puts stations in a no-win situation, forcing them to cut services to keep from defaulting on their loans. But by trying to keep above that default line, the stations also remain just out of reach of help from the failing-station waiver.
In addition, a big dilemma with the three-year negative cash flow requirement, Goodman adds, is that a lot of stations' lender agreements have negative cash flow as a trigger of default. “What stations have tended to do in a number of circumstances is to keep jettisoning costs,” he says. “Kill the news, kill as much expensive programming as possible just to keep that positive cash flow.”
What's the fix? Goodman says the FCC should eliminate the market-share test and allow stations that are failing, no matter what their market share, to seek a waiver if they can show that it benefits the public interest. There are ways to demonstrate that you cannot provide the revenues needed to operate a station with a news department, for example, and if you aren't making it, that should be an indication you're failing.
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