FCC 94-322 Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter o) ) Review of the Commission's ) MM Docket No. 91-221 Regulations Governing Television ) Broadcasting ) ) Television Satellite Stations ) MM Docket No. 87-8 Review of Policy and Rules ) FURTHER NOTICE OF PROPOSED RULE MAKING Adopted: December 15, 1994 Released: January 17, 1995 Comment Date: April 17, 1995 Reply Comment Date: May 17, 1995 By the Commission: Commissioners Quello and Ness issuing separate statements. TABLE OF CONTENTS Paragraph I. Introduction 1 II. Background 2 A. The Rules 2 B. The Proceeding 6 C. The Further Notice 12 III. Competitive Analysis of Television Broadcasting 15 A. Framework for Competitive Analysis 16 B. Television Broadcasting's Relevant Markets 22 C. The Delivered Video Programming Market 24 D Advertising Markets 35 E. The Video Program Production Market 46 F. Tentative Economic Conclusions52 IV. Diversity Analysis of Television Broadcasting54 A. The Traditional Diversity Goals and Methods for Achieving These Goals 57 B. New Approaches to Diversity 62 C. The Relevant Product Markets for Assessing Diversity64 D. The Relevant Geographic Markets for Assessing Diversity 75 V. National Ownership Rule81 A. Effects on the Market for Delivered Video Programming 83 B. Effects on the Market for Advertising 86 C. Effects on the Video Program Production Market 89 D. Other Economic Effects 92 E. Effects on Diversity 95 F. Tentative Proposals 98 VI. Local Ownership Rule 105 A. Effects on the Market for Delivered Video Programming 106 B. Effects on the Market for Advertising 108 C. Effects on the Video Program Production Market 110 D. Other Economic Effects 111 E. Effects on Diversity 113 F. Tentative Proposals 116 VII. Radio-Television Cross-Ownership Rule 124 A. Effects of the Market for Delivered Programming 125 B. Effects on the Market for Advertising 126 C. Effects on the Video and Audio Program Production Markets 127 D. Other Economic Effects 128 E. Effects on Diversity 129 F. Tentative Proposals 130 VIII. Local Marketing Agreements 133 A. Description 133 B. Analysis and Tentative Proposals 138 IX. Summary 141 X. Administrative Matters 142 XI. Initial Regulatory Flexibility Act Statement 145 List of Commenting Parties Appendix A Comment Summary Appendix B Breakdown of Leisure Activities Appendix C Breakdown of Advertising Revenues Appendix D Relevant Product Market Alternatives Appendix E I. IN TRODUCTION 1. With this Further Notice of Proposed Rule Making ("Further Notice" or "FNPRM"), the Commission proposes a new analytical framework within which to evaluate our ownership rules applied to television stations. This new framework provides a more structured approach to a comprehensive economic and diversity analysis of the rules. While we have found the comments received in response to the Notice of Inquiry ("Inquiry") and Notice of Proposed Rule Making ("Notice" or "NPRM") useful, we believe that the issuance of this Further Notice is necessary to permit us to compile a record based upon this new framework which will enable us to make a fully informed decision in this important area. Additionally, we solicit further comments here in MM Docket No. 87-8, Television Satellite Stations, on issues relevant to the two proceedings. II. BACKGROUND A. The Rules 2. Regulation of broadcast station ownership has been a constant feature of the Commission's Rules for decades. In the early 1940's the Commission, for the first time, established limits on the number of licenses that could be held under common control nationally. These initial multiple ownership rules prohibited the issuance of a license to anyone already possessing a license in the same broadcast service unless the applicant could demonstrate that the issuance of the license (1) would have a pro-competitive impact, and (2) would not result in the concentration of control of broadcasting facilities in a manner inconsistent with the public interest. Absolute limits were placed on the common ownership of FM stations (6 stations) and TV (3 stations, raised to 5 in 1944), and, in 1946, the Commission placed a de facto limit of 7 on the ownership of AM stations by denying CBS an application for an eighth such station. In 1953, the Commission adopted national multiple ownership rules that allowed for the common ownership of 7 AM, 7 FM and 5 TV stations. The stated rationale for limiting ownership on a national basis was twofold -- to encourage diversity of ownership in order to foster the expression of varied viewpoints and programming, and to safeguard against undue concentration of economic power. 3. The national ownership rules remained substantially unchanged between 1954 and 1984. At that time, citing an "explosive growth and change" in the mass media market, the Commission initially decided to phase out national ownership limits but, on reconsideration, established a twelve station limit in each service. Additionally, it established an "audience reach cap" that limited the aggregate ownership interests in television stations to those which reached a maximum of 25 percent of the national audience. Also, the Commission established a minority "bubble" which increased to 14 the permissible ownership limitation in any service for minorities; persons acquiring cognizable interests in minority owned and controlled broadcast stations were also entitled to these higher limitations. Similarly, the aggregate reach of TV stations was raised to 30% of the national audience, provided that at least 5 percent of that reach is contributed by minority controlled stations. Although the Commission has since amended the national and local ownership limitations for radio stations, the limits have remained the same for television since 1984. 4. With respect to local ownership, the Commission, early in its existence, addressed "duopoly," the common ownership of more than one station in the same service in a particular community. In 1938, the Commission adopted a strong presumption against granting license applications that would result in duopolies. This was based in part on a "diversification of service" rationale, which suggests that the Commission believed its diversity concerns were better promoted by a greater number rather than a lesser number of separately owned outlets. Rules prohibiting FM duopolies were adopted in 1940 and a rule banning AM duopolies followed in 1943. As indicated in the NPRM in the instant proceeding, the current version of the television duopoly rule was adopted in 1964, when the Commission promulgated ownership restrictions based on fixed contour overlap standards. The Commission relaxed the limitations on radio in 1992. 5. The duopoly rule did not prevent a single party from owning or controlling more than one station in the same area if each station was in a different service. In 1970, the Commission adopted a one-to-a-market rule proscribing common ownership, operation, or control of more than one broadcast station in the same area, regardless of the type of broadcast service involved. The Commission again cited fostering maximum competition in broadcasting and the promotion of diversification of programming sources and viewpoints as justification for the one-to-a-market rule. Later, in 1989, citing a dramatic growth in the number of local broadcast outlets, the resulting reduction in the risk that relaxing the one-to-a- market rule would significantly decrease competition, and evidence that joint ownership of two or more media outlets in the same market does not necessarily lead to a commonality of viewpoints, the Commission added Note 7 to Section 73.3555 of the Commission's Rules. That Note stated that the Commission would look favorably upon requests for waiver of the one-to-a-market rule if the television-radio combination would occur in one of the top 25 television markets and 30 separately owned, operated, and controlled broadcast licensees would remain after the combination, or if the request involved a "failed" station. It also indicated that the Commission would evaluate, on a case-by-case basis, waiver requests predicated on any of five other grounds set out in the Commission decision adopting Note 7. The rule has remained unchanged since that time. B. The Proceeding 6. In 1991, the Commission's Office of Plans and Policy (OPP) issued a wide-ranging report on broadcast television and the evolving market for video programming. That report observed that the market had undergone tremendous changes over the previous fifteen years. It found that the policies of the FCC and the federal government, chiefly in enacting the 1984 Cable Act, had generated new competition to "traditional" broadcast services resulting in increased choices for viewers. Further, the report suggested that these increased choices meant increased competition for broadcast television and were, indeed, affecting its ability to contribute to a diverse and competitive video programming marketplace. 7. As a result of the OPP report, we issued a Notice of Inquiry soliciting comment on whether our existing ownership rules and related policies should be revised to enable television licensees to be more responsive in meeting this competition. After reviewing the record developed in response to the Inquiry, we issued a Notice of Proposed Rule Making in order "to consider changes to several of the structural rules that have governed the television industry for many years." These rules included those limiting the ownership interests that a person or entity may have in television stations on both national and local levels. We also solicited comment on certain rules governing the relationship between a network and its affiliates. We believed that these rules needed to be amended in order to strengthen the potential of over-the-air television to compete in the current video marketplace and enhance its ability to bring increased choice to consumers. 8. The commenting broadcasters, with one exception, favored elimination or relaxation of the current national ownership limits. Public interest groups and one broadcaster (Fisher Broadcasting Inc.) favored their retention. Those commenting in favor of elimination or relaxation of the limits argued that the proliferation of television stations and alternative video delivery services has weakened the diversity rationale of the rules. Additionally, they asserted that increased group ownership will permit broadcasters to achieve economies of scale that would enhance their ability to compete with cable. Those favoring retention argued that increasing the national limits will undermine diversity and that any savings realized as a result of economies of scale will be used to reduce debt or purchase more expensive syndicated programming -- not to produce new, diverse local programming. 9. There was also substantial comment in favor of relaxation of the duopoly rule which prohibits common ownership of broadcast television stations whose Grade B signal contours overlap. Most commenters believed that prohibiting only Grade A signal contour overlap is warranted and that changing the rule accordingly would enhance broadcasters' viability by enabling them to realize economies of scale. A number of other rule changes were suggested ranging from elimination of the rule altogether to allowing VHF-UHF combinations. Public interest groups and a few broadcasters advocated retention of the rule. Chiefly, they believed that only strong stations will be able to take advantage of relaxation of the rule, and that weak stations that are not purchased by these stations will be priced out of the quality programming market and will have to either rely on "infomercials" or be forced to shut down. Either result, they contended, will harm diversity. 10. A majority of the comments submitted with regard to the television/radio "one-to- a-market" rule -- which generally prohibits the common ownership of television and radio stations serving the same area -- favored its relaxation or complete elimination. These commenters argued that its elimination or liberalization would allow marginal stations to remain on the air (by being owned in common with another local station in a different service) and that the number of independent broadcasters that would remain in most markets would be sufficient to prevent undue concentration. Those in favor of relaxation of the rule proffered a number of alternative ways in which the rule could be eased, such as by allowing common ownership of one AM, one FM and one TV station with overlapping signal contours or by allowing TV/radio combinations where anywhere from 12 to 30 independent broadcast "voices" would remain. The only clear opponent of elimination or relaxation of the rule -- Barnstable Broadcasting, Inc. -- argued that doing so would adversely affect radio-only operations. 11. The NPRM also discussed one other issue: the treatment of time brokerage agreements, also known as local marketing agreements ("LMAs"), for television stations. These agreements, which are discussed in more detail later in this document, allow one station to purchase blocks of time on another separately owned station which the broker then uses for his own programming and advertising sales. The Commission has adopted some guidelines for radio LMAs, but has not adopted any guidelines for TV LMAs. Few comments were submitted in response to our queries in the NPRM about TV LMAs. Some commenters argued that, unless the duopoly rule is relaxed or eliminated, adoption of the radio model for television LMAs would doom many such agreements because interests that would be attributed as a result of LMAs would give many participants in television LMAs an attributable and impermissible interest in a second local television broadcast station. Other commenters proposed adoption of ownership TV LMA attribution rules similar to those governing radio LMAs. C. The Further Notice 12. We are issuing this Further Notice to consider the effects of several major developments since the 1992 NPRM that have altered the telecommunications landscape and accentuated the need to further explore the desirability of modifying the TV ownership rules. In particular, the Commission has re-regulated cable television pursuant to Congressional mandate, leading to rate reductions and raising the prospect of increased cable penetration. DBS and wireless cable (MMDS) are becoming increasingly important players in the video marketplace, and some telephone companies may soon begin to provide video dialtone service. These developments should increase the number of competitors to TV stations and thus may justify relaxing restrictions placed on television ownership. We wish to analyze the extent to which our TV ownership rules should explicitly take into account the existence of other competing media. Finally, in 1992, we adopted a regulatory scheme, recently reaffirmed and clarified, governing LMA rules for radio and wish to consider whether similar rules should be adopted for TV. 13. To this end, this Further Notice is intended to provide further analyses of the economic and diversity issues with respect to the various proposals to revise our national and local multiple ownership rules for television stations. This Further Notice provides a statement of frameworks for the economic and diversity analyses of these rules within which we solicit additional comment. 14. We therefore provide the following two sections. The first section, Competitive Analysis of Television Broadcasting, provides the framework for structuring the economic analyses of the rules under consideration. The second section, Diversity Analysis of Television Broadcasting, provides the framework for structuring the diversity analyses of the rules under consideration. The Commission encourages the public to comment on the issues raised by these sections, and to use them to frame comments on the subsequent analyses of the rules. III. COMPETITIVE ANALYSIS OF TELEVISION BROADCASTING 15. An important part of the Commission's public interest mandate is to promote competition, because competition promotes consumer welfare and the efficient use of resources. To examine the effect on competition of changing the rules under consideration, we must set out the framework within which we will consider the economic issues. In Section III A we briefly describe the economic framework within which we structure the economic analysis. In Section III B we set out the relevant product markets which our rules affect. In Sections III C, D, and E, we address fundamental issues in delineating and describing these relevant product markets. Finally, in Section III F, we summarize the key economic assumptions we apply in subsequent economic analyses of the rules under consideration. A. Framework for Competitive Analysis 16. The purpose of competitive analysis is to describe the markets at issue in light of established economic theory and legal precedent to determine how the current market structure and regulatory scheme affect competition and consumer welfare. A policy of encouraging competition attempts to achieve this goal by protecting consumers and companies from the abuse of market power by a firm or a group of firms. As a result, the Commission's competitive analysis of the rules at issue in this proceeding focuses upon whether and to what extent market power exists and is being exercised, and what effect these rules have on the existence and exercise of this market power. This analysis requires two steps: (1) definition of the relevant product markets, and (2) examination of these markets' structure for evidence on the existence and exercise of market power. 17. The Supreme Court has stated that in defining a "product" for antitrust law purposes, "no more definite rule can be declared than that commodities reasonably interchangeable by consumers for the same purposes" constitute one product market. Examining "cross-elasticities" of demand and supply is one way to define the "product," an approach which is generally accepted among economists and commentators. A variety of product or service attributes determine the degree of substitutability between different products. For example, a consumer might view a low quality car as a poor substitute for a high quality car and require a large price differential to consider the purchase of the low quality car. A standard method to define the product market a particular firm operates within is to ask the question: if this firm raised the price of its product, to what degree would consumers continue to purchase that product or turn to the products of other firms, and what are these other products and other firms? 18. After the relevant products are determined, the geographic extent of the market is outlined. In general, the geographic market refers to the area where buyers of the particular product can practicably turn for alternative sources of supply, or the area in which sellers sell this product. It should be noted that the "geographic market" is not limited to the region where the relevant product is currently traded but where it can practicably be traded. It has been said that the geographic market is the "area of effective competition" or the area in which products compete with substantial parity. A useful technique in determining the geographic market a particular firm operates in is to examine the geographic region where buyers would buy and where sellers would sell in response to a "small but significant and nontransitory" price increase by that firm. No single geographic market definition is likely to be decisive for all purposes of examining a particular industry. 19. Once reasonably interchangeable substitutes are identified and the geographic extent of the market is delineated, the participants in the relevant product market can be identified. This identification allows market shares to be calculated to characterize the market's structure and its concentration. Such calculations are useful as one component of a competitive analysis of potential market power. 20. As with many other human activities, a firm's possession and use of market power is a matter of degree. However, a firm abuses such power when it attempts to "control prices or exclude competition." Therefore, conditions that allow a firm or a group of firms to set price profitably above (or reduce quality below) the competitive level and maintain such a price or quality over time without attracting competitive entry raise concerns about the potential for abuse. The potential for abuse is limited by the degree to which its consumers can turn to substitutes, the competition offered by its existing competitors, the potential competition offered by new entrants, and the degree to which its suppliers can sell their product to other firms. If the relevant product markets are properly defined, the ability of consumers to turn to substitute products offered by other firms will already be reflected in their definition. Market share and concentration can only be reasonable proxies to estimate market power if the market is properly defined. 21. Market power cannot be adequately assessed by mere reference to market shares, however, because other factors, such as barriers to entry, can influence the degree to which market share conveys market power. As a result, in addition to market share and concentration, the conditions of entry and other structural features in each market must be examined to determine whether the exercise of market power is possible. B. Television Broadcasting's Relevant Markets 22. With the above principles in mind, we first turn to an identification of the product markets influenced by the rules under consideration. Some have argued that broadcasters "are in the business of producing audiences." Commercial broadcasters fund their activities by selling advertisers access to the audiences they produce. To do this, a commercial broadcast television station organizes and transmits a single schedule of video programming and advertising over the air. This activity involves broadcast TV stations in the purchase or production of video programming, the sale of video advertising, and the delivery of the bundled video programming (i.e., entertainment, news and advertising messages) to consumers with television sets able to receive its broadcast. In providing delivered video programming, any given broadcast station's signal is limited in its geographic reach. This creates an incentive for an organization, such as a broadcast network, to forge arrangements with more than one station so advertisers interested in reaching a national audience can do so. Also, in providing delivered video programming, broadcast television stations purchase, barter, or carry the video products of others (e.g., broadcast networks, syndicators). This activity means that broadcast TV stations exercise some influence on the program production market. As a result of the above points, we judge that TV broadcasters operate in three economic markets relevant to the rules under consideration: the market for delivered video programming, the advertising market, and the video program production market. 23. For each of these markets, as posited earlier, we need to delineate selected measures of their structure. Specifically, we need to identify what products are relevant substitutes for one another, who are suppliers of these products, what is the geographic scope of the relevant market, and how to measure market share for the different suppliers. It is these questions to which we now turn for each of television broadcasting's relevant markets. C. The Delivered Video Programming Market 24. Delineation of Relevant Substitute Products and Suppliers. To identify the relevant substitutes to delivered video programming, we must recognize that Americans can spend their leisure time doing other activities. A list of possible uses of a consumer's time is provided in Appendix C. The data reported in Appendix C indicated that in 1970, Americans spent about 46.5% of their leisure time on watching television. In 1988, they spent about 45.3% of their leisure time on watching television. The stability of Americans' use of television as a leisure activity suggests that video programming seen on television may be a sufficiently different economic product from other entertainment that it should be treated as a separate product market. However, parties are requested to comment on this view and supply data and/or analysis which demonstrates the economic relevance of their proposed substitutes for delivered video programming. 25. Turning to an identification of economically relevant suppliers, we are confronted by a more difficult demarcation of this market. Public broadcast station operators clearly compete with commercial broadcast television operators for viewer attention. The number of broadcast television stations has increased substantially in recent years. In 1984, there were 1,180 commercial and noncommercial television stations, in 1994, there were 1,520. Consequently, there has been an almost 30% increase in the number of television stations since the last time the television ownership rules were modified. 26. Cable system operators have also grown over this time period in importance as a group of suppliers of delivered video programming. At present, cable systems pass nearly 96% of all U.S. households, and 62.5% of U.S. TV households (approximately 59 million households) subscribe to cable services. The number of cable video networks and the channel capacity of cable systems continue to grow dramatically. However, even among those households subscribing to cable, retransmitted broadcast network signals had a 46% prime time viewing share in the 1992-93 season, while retransmitted independent broadcast and public television stations maintained 17% and 3% shares respectively. Therefore, more than half of all viewing hours in cable households during the 1992-93 season were of retransmitted broadcast signals. In addition, more than one-third of all households that could subscribe to cable elect not to do so. High profile sporting events that people watch, like the Super Bowl, the NBA Championships, the NCAA basketball championships, and the World Series (when played) remain on broadcast television. Because some consumers choose not to purchase cable service, the degree to which cable TV channels are substitutes for broadcast television channels is an issue on which the Commission requests specific comment. 27. In addition to cable, there are now several emerging for-subscription multichannel providers of video programming which may compete with broadcasters in the same manner as cable. As described in detail in the recent Cable Competition Report, many consumers can now subscribe to a "wireless" cable ("MMDS") service, purchase a home satellite dish ("HSD"), and subscribe to direct broadcast satellite ("DBS"). In 1994, 143 MMDS systems served 550,000 subscribers. Currently, satellite master antenna television ("SMATV") systems serve approximately one million subscribers, and about four million television households own a home satellite dish. In 1994, DBS providers began operating, with providers and equipment manufacturers optimistic about potential subscriber growth. DirecTV and United States Satellite Broadcasting ("USSB") predict that by the end of 1994, equipment will be available in approximately 10,000 locations with unit sales reaching 1,000,000 by the summer of 1995. Further, USSB estimates that in seven years, almost 40% of all television households may receive programming via DBS. Finally, in the future, consumers may be able to receive video entertainment through their telephone lines -- twenty-four applications have been filed with the Commission by local exchange carriers seeking video dialtone ("VDT") authorizations which would cover a total of 8.5 million households. 28. Another possible competitor in the delivered video programming market is the use of a videocassette recorder ("VCR"). VCRs allow viewers to see programs at times other than when they are broadcast and also permits viewers to choose pre-recorded tapes in lieu of watching whatever is on television that evening. VCR penetration has continued to grow -- at present, over 80% of U.S. TV households own a VCR. 29. While all the above listed alternative suppliers currently provide some amount of delivered video programming, we will tentatively include, for purposes of this FNPRM, commercial broadcast television operators, public broadcast television station operators, and cable system operators to be economically relevant alternative suppliers of delivered video programming. While we wish to tentatively include some of the other suppliers (e.g., MMDS, DBS, VDT, etc.) in our demarcation at this time, we concede that it may not be appropriate to include them because their current market penetration is so low that they are not relevant substitutes to a majority of Americans. However, this situation may rapidly change, especially as a result of the Commission's regulatory stance towards encouraging entry into the delivered video programming market through other delivery media. Therefore we seek comment on which of these suppliers we should include in our demarcation. 30. Finally, while VCRs are present in a large number of television households, they do not provide a complete schedule of video programming and so are treated as sufficiently different as to suggest that perhaps they should not be included at this time. However, we ask commenters to provide information on the degree of economic substitutability of all the alternatives considered above to a broadcast TV station's video programming. In submitting comments, we request that commenters provide evidence on the extent to which these are economically relevant substitutes as demonstrated by their cross-price elasticities of demand and supply, or other evidence. 31. Delineation of the Market's Geographic Scope. As discussed above, the geographic scope of the relevant market is defined by the geographic area to which buyers will reasonably turn and from which competing suppliers sell their products. Since commercial broadcast television stations have a limited signal range, it appears that, from these operators' perspective, the "area of effective competition" is geographically limited to a "local" area. This suggests that commercial broadcast television operators compete in a "local" market for delivered programming. However, the alternative suppliers that might be included in the product market have different service areas. Cable operators, for example, operate at a local franchise or system level, and are increasingly becoming composed of regional clusters. In addition, many cable systems are owned or managed by cable multiple system operators ("MSOs"), which might operate these local franchises at a national level. Wireless cable and SMATV systems may serve entire metropolitan areas, and a video dialtone service offered by a local exchange carrier may eventually serve an entire geographic region of the country. DBS service providers operate on a national level. Therefore, while we will assume that the market for delivered video programming is primarily local, since most providers operate locally, we recognize that as competition and technology change the geographic reach of the relevant competitors, our notions of the geographic scope of the market for delivered video programming may change. 32. Earlier comments suggested several alternatives for defining the boundaries of the "local" market for delivered video programming. They were a television station's predicted Grade A contour, its predicted Grade B contour, its Metropolitan Statistical Area (MSA), and its Area of Dominant Influence (ADI) or Designated Market Area (DMA). Grade A and Grade B contours represent geographic delineations based upon the predicted field strength contours of a broadcast television station. While in the past, the Commission has used the Grade B contour to define a local market, prior comments tended to suggest the use of either the smaller geographic area definition (the Grade A contour) or the larger geographic area definition (the DMA). The benefit of the Grade A contour definition is that it covers less area than the Grade B and thus better represents the quality of signal necessary for television stations to compete effectively. The benefit of the DMA definition is that it attempts to capture the actual television viewership patterns and each county is assigned to a unique television market, unlike the Grade A and Grade B contour standards which ignore the carriage of broadcast signals over cable systems. 33. We propose to continue to rely on a contour overlap standard but will consider the DMA definition of "local" for determination of the relevant geographic dimensions of the market for delivered programming. However, we request further comment on the use of the DMA definition of the geographic scope of these markets. Are DMAs equally applicable for alternative distributors such as cable? Are they too large? 34. Choice of Market Power Measurement. To determine whether market power exists, we must also determine how to measure market concentration within the local delivered video programming market. There are four different measurement scales that were frequently mentioned in earlier comments. They are: (1) the number of separately owned stations or outlets, (2) the audience share of the separately owned stations or systems, (3) the number of available channels, and (4) the audience share of the separately available channels. We tentatively propose to use the number of separately owned stations or outlets serving a market as our unit of measure. We use this unit of measure because it is consistent with prior Commission practice and minimizes the variability of measurement due to fluctuations in the popularity of an outlet's programming. However, we recognize its potential limitations and would like additional comment on which of these four measurement scales should the Commission use. Specifically, if we were to use the audience share of the separately available outlets or channels, how should we address the variability this introduces into our television station ownership rules because of changes in the number of outlets or channels offered and the popularity of those outlets' or channels' programming over time? Further, if we were to count the number of available channels, how should mandated-access channels on cable systems be included? And finally, we invite comment on the condition of entry and other structural features of this market that influence the existence and exercise of market power. D. Advertising Markets 35. TV broadcasters operate in two advertising markets -- national and local. The basis for this distinction rests on the following observations. For reasons discussed earlier, all TV broadcasters are limited in the geographic area for which they can supply advertising services. The substitutes available to an advertiser desiring national coverage may be different from those available to an advertiser desiring local coverage. While individual broadcast television stations sell advertising spots to national advertisers, much of the video advertising directed toward national audiences is sold or bartered by either broadcast networks or syndicators. Consequently, we will assume that broadcast television stations operate in two advertising markets. 1. National Advertising Market 36. Delineation of Relevant Substitute Products and Suppliers. In Appendix D, we present data from McCann-Erickson, Inc. on the distribution of advertising revenues by media and year for the last several years. Examination of these data suggests that video advertising is the mass medium of choice for advertisers wishing to reach national audiences. Unfortunately, we have no clear evidence on the degree to which all the other alternatives listed in this Appendix are economically relevant substitutes for video advertising. One study finds some substitutability amongst some of these alternatives, but also finds a significant degree of price inelasticity for each alternative considered. Consequently we will tentatively consider video advertising an economically distinct segment of the national advertising market. However, we solicit any evidence that commenters can provide which demonstrates that some of the other alternatives provided in Appendix D are economically relevant substitutes for video advertising in the national advertising market. 37. We believe that the primary suppliers of video advertising in the national market, as suggested by Appendix D, consist of the broadcast networks, program syndicators, cable networks, and perhaps cable multiple system operators (MSOs). The broadcast networks sell national advertising time for their television affiliates, and, according to the McCann-Erickson estimate, approximately 74 percent of the national video advertising expenditures go to network advertising. We tentatively exclude individual broadcast television stations' and cable system operators' sale of advertising to media buyers (i.e., spot sales) from this market because spot sales of advertising to national advertisers are frequently made to allow the national advertisers to reach a more targeted geographic focus and not to reach a national audience (e.g., selling trips to the Bahamas to persons in the snow belt during January). Further, at this time, we do not include wireless cable operators, DBS operators, or VDT operators because they do not presently provide appreciable amounts of national advertising. However, we solicit evidence which would demonstrate that we have either included too many or too few alternative suppliers of national video advertising. 38. Delineation of the Market's Geographic Scope. As stated earlier, we view the national advertising market as distinct from the local advertising market. By its very characterization, we view this as advertising directed to a national audience, and hence national in its geographic scope. 39. Choice of Market Power Measurement. To measure market share for the purpose of discerning the concentration of this market, we propose to use advertising revenues. However, we invite suggestions of alternative measures which might be better indicators of market share in the national video advertising market. These suggestions should also address the availability of data necessary to use the measure. And finally, we invite comment on the conditions of entry and other structural features of this market that influence the existence and exercise of market power. 2. Local Advertising Market 40. Delineation of Relevant Substitute Products and Suppliers. Advertisers wishing to reach a "local" market are not necessarily limited to video advertising. As the McCann- Erickson Inc. data in Appendix D demonstrates, an advertiser wishing to get its message to a local market appears to have, in addition to video advertising, the following options: radio (spot and local), newspapers (local), magazines (regional magazines, and regional editions of national magazines), direct mail, outdoor/billboards, and yellow pages. For these options, we would like commentors to discuss the following issues. To what extent do advertisers regard radio advertising as a substitute for local broadcast television advertising? To what extent do advertisers regard local newspaper advertising as a substitute for local broadcast television advertising? If local newspaper advertising is a substitute for TV advertising, should all newspaper advertising be included or should classified advertising be excluded? Finally, do advertisers seeking to reach a local market find regional magazines/regional editions of magazines, direct mail, outdoor, and yellow pages to be acceptable substitutes for local broadcast television advertising? 41. More generally, to help the Commission draw the boundaries of the local advertising market relevant to the rules under consideration, we request commenters to provide answers to two questions. First, how do advertisers seeking to reach a local market view the above-listed alternatives and how do they make their decisions on which media to use? Second, how do these advertisers react to changes in the price of advertising on one medium relative to another that the commenter thinks is a relevant substitute? For this last question, commenters are requested to quantify the cross-price sensitivity of the proposed substitutes. 42. Turning to video advertising, a local broadcast television station sells advertising time to a variety of advertisers, both national and local in scope, who wish to reach its local market. If that broadcast TV station raises its advertising rates, the advertisers that buy time on that station have several reasonably interchangeable alternatives by which to get their message out. First, they could buy time on another broadcast TV station serving the same local market. Second, they could buy time through the local cable operator. This option is growing in importance, as the recent surge in cable operator advertising revenues demonstrates. In addition, cable operators have started using "cable interconnects" -- regional consortia of cable systems that sell spot advertising for all cable systems in a metropolitan area. The growth of cable system "clustering" is also likely to enhance cable's ability to sell local advertising. And as other regional or local distribution media grow, such as wireless cable, SMATVs and VDT, the number of outlets for firms desiring local video advertising grows as well. 43. For the purpose of further discussion, we will tentatively consider the local advertising markets to include video advertising, radio advertising, and newspaper advertising. For video advertising, we will tentatively include local cable operators as an alternative supplier of video advertising to broadcast television station operators. We will treat other alternative suppliers as not presently significant enough economically to constrain the exercise of economic power by a broadcast television station in selling local advertising. However, we are open to economic analysis which demonstrates that this view of the relevant substitutes and suppliers for the local advertising market is too narrow. 44. Delineation of the Market's Geographic Scope. The essential issue is what is the "area of effective competition" TV broadcasters face in the sale of advertising? Earlier, we set out four geographic delineations for "local" in our discussion of the market for delivered video programming. To issues raised there, we add the following questions. Can there be two or more "local advertising markets" inside the Grade A or B contour or DMA of a broadcast station? Commenters are also requested to specifically comment on the effect of broadcast retransmission by cable on the advertising market. Does the fact that, for example, a person can watch Boston broadcast TV stations on the Albany, New York cable system have any impact on defining the geographic scope of a "local" advertising market? Finally, would the regulatory burden of using a different geographic delineation of market for local advertising from that of video programming delivery be justified by the gains in economic relevance? With this last point in mind, we nevertheless tentatively define the geographic scope of the local advertising market for any broadcast television station as the DMA that it falls within. 45. Choice of Market Power Measurement. To measure market share for the purpose of discerning the concentration of this market, we proposed to use advertiser revenues. However, we invite suggestions of alternative measures which might be better indicators of market share in the local video advertising market. These suggestions should also address the availability of data necessary to use the measure. Finally, we invite comment on the conditions of entry and other structural features of this market that influence the existence and exercise of market power. E. The Video Program Production Market 46. Aside from advertising, TV broadcasters must organize a schedule of video programming, either produced by themselves or by others. This involves broadcast television stations in the program production market. The competitive concern about multiple ownership of television stations in this market is one of either monopsony or oligopsony power -- i.e., the ability of one or several firms to artificially restrict the consumption of programming or price paid for programming. 47. Delineation of Relevant Substitute Products and Suppliers. The video program production market involves video products from movies to first-run syndicated television series. The products are readily distinguishable from other types of programming, like radio programming, and are therefore relevant substitutes. There are a number of sellers or suppliers in this market. Programs that are aired on broadcast television are produced by program production companies. To a certain extent, broadcast television networks also produce programs through their in-house production companies for broadcast through their affiliates. Most television programs that are produced for the networks or independent stations are produced by the major movie studios, independent program producers (who often affiliate with a movie studio in order to produce the program), or syndicators. 48. Broadcast television stations are major buyers of video programs, who typically acquire the video programs they deliver to consumers in one of three ways. First, a broadcaster can affiliate with a broadcast network and obtain an entire package or schedule of programming directly from its network (the network "feed"). The network, in this regard, acts as a broker between the program supplier and its affiliated stations. Each of the three major networks distributes its programs to over two hundred television stations nationwide that are connected with the network by cable or satellite. For clearing its airtime for network programming, an affiliate is compensated according to the time of the day it clears time for network programming and the size of its potential audience. Networks encourage their affiliates to carry the entire network "feed" so as to maximize the audience they can sell to advertisers. Second, television broadcasters can also obtain programming from suppliers called "syndicators" -- national or regional entities that sell programming to television stations on a market-by-market basis. And finally, television broadcasters can produce their own programming. Network affiliates and independent stations both, in general, air locally- originated programming, primarily local news and sports programming. 49. Over the last 15 years the list of additional buyers of video programs for delivery to consumers has grown. For example, it now includes, in addition to broadcast television networks and syndicators, cable networks, cable operators, direct broadcast satellite operators, low power television stations, and telephone companies. The increasing number of potential purchasers would seem to imply that there is competition among buyers of video programming and thus, concerns that television broadcasting companies exercise oligopsony power in the purchase of video programs have lessened to some extent. However, we solicit comment on the effect of nascent broadcast networks and these alternative buyers of video programming on competition in this market. 50. Delineation of the Market's Geographic Scope. The video programming production market is clearly national and perhaps international in scope, because television broadcasters obtain a large portion of their programs from national providers. The fact that television broadcasters produce some programming locally does not detract from the national scope of this market, because the television broadcasters could reasonably turn to national sources of supply for programming. 51. Choice of Market Power Measurement. We propose to use expenditures on video programming as the proper means of determining market shares for the purposes of examining the buying power of the relevant purchasers of video programming. Commenters are requested to discuss whether this is a proper measure for assessing the potential for oligopsony power in this market. And finally, we invite comment on the conditions of entry and other structural features of this market that influence the existence and exercise of market power. F. Tentative Economic Conclusions 52. Above, we have reached a series of tentative conclusions about the three markets that broadcast television stations are involved in that are important to consider in the context of this FNPRM. We will assume these delineations of relevant substitutes and suppliers, geographic scope, and measures of market power for the market for delivered programming, the market for advertising, and the video program production market in subsequent analyses of the effect of broadcast ownership rules under consideration. To aid the reader, we set out the alternatives in Appendix E, and star those alternatives that we will tentatively use as working assumptions about the relevant markets in further discussion. Clearly these delineations should be the focus of comments on our competitive analysis of television broadcasting, and so are subject to change based upon comments and evidence received in response to the FNPRM. 53. In analyzing the economic effects of the rules under consideration, we assume the above product market descriptions, and focus upon the questions: (1) do we have any evidence of the abuse of market power currently (focusing upon prices in the different markets), and (2) will relaxing our current rules substantially increase the concentration of these markets to levels which raise concerns about the potential for the abuse of market power? IV. DIVERSITY ANALYSIS OF TELEVISION BROADCASTING 54. The Commission has historically examined the effectiveness of its broadcast regulations in achieving diversity goals by primarily assessing the level of outlet diversity within the broadcasting industry, on national and local levels. That approach may be too narrow in today's world, in which the American public can receive home delivered video programming from a variety of outlets. Under such circumstances, it makes less and less sense to regulate a market on the grounds of ensuring diversity, without taking into account whether there is an available diverse array of non-broadcast media. That being said, we believe we need a new framework for assessing diversity, which takes into account the developments in the communications marketplace and that captures the rigor of our economic analysis. 55. In the sections that follow, we lay out our traditional diversity goals and approaches for achieving them, raise questions concerning new approaches for defining diversity, and seek comment on how to apply a framework for assessing the efficacy of our broadcast regulations in achieving these goals. More specifically, Section A describes (a) the three types of diversity that our rules have attempted to foster -- viewpoint, outlet and source diversity, and (b) the two basic techniques the Commission has used to achieve these diversity goals -- direct means (such as nonentertainment programming guidelines) and indirect means (such as our structurally-based ownership rules). Then, in Section B, we discuss new approaches to our concerns with diversity. In the last two sections, we set forth possible methods for defining what markets should be evaluated to determine whether our diversity goals are being served by the particular broadcast regulation in question. Thus, Section C proposes a broadening of the "product" market that we have traditionally examined for diversity purposes, to go beyond just broadcast-delivered video programming received in the home. Section D suggests the geographic markets we would examine in determining whether our diversity goals are being furthered by the broadcast regulation in question. 56. Once we have determined the appropriate product and geographic markets that are relevant for assessing whether the diversity goals of a rule are being met, we will examine each rule at issue by (a) identifying which diversity goal or goals the rule seeks to foster (e.g., viewpoint, outlet and/or source), (b) determining whether the rule in fact fosters such goals in the relevant markets, and (c) deciding whether, in those markets, there is a need for continued regulation to maintain or increase existing levels of diversity. A. The Traditional Diversity Goals and Methods for Achieving These Goals 57. Traditionally, at least as important as the Commission's concern about undue economic concentration among broadcast stations, has been its concern for ensuring diversity of viewpoints in the material presented over the airwaves. This notion is derived from the same concept that underlies the First Amendment. As the Supreme Court has said, the First Amendment "rests on the assumption that the widest possible dissemination of information from diverse and antagonistic sources is essential to the welfare of the public...." We have tried to ensure such diversity using two basic techniques -- one direct and the other indirect. 58. Our direct techniques have consisted of regulations specifically designed to act directly on the programming -- and, more particularly, the nonentertainment programming -- presented by broadcast stations. Even the earliest renewal forms promulgated by the Federal Radio Commission (the Federal Communications Commission's predecessor agency) required applicants to attach a printed program and provide information on the average amount of time devoted weekly to various types of programs, clearly conveying the impression that the FRC favored some types of programming. Since then, other methods of direct regulation have been used by the Commission. For instance, in 1949, the Commission adopted its Report on Editorializing by Broadcast Licensees which, among other things, stressed the duty of all licensees to devote a "reasonable amount of time" to the discussion of public issues. Later, in 1960, the Commission adopted a policy that explicitly listed certain types of programming as being in the public interest. Subsequently, it adopted nonentertainment programming guidelines mandating that applications proposing less than the guideline amounts could not be processed by the staff but, instead, would have to be brought to the attention of the full Commission. Additionally, over time the Commission developed community ascertainment obligations that required broadcasters to familiarize themselves with the needs and interests of their communities and to offer some programming in response to those needs. Currently, the Commission has generalized requirements for both radio and television mandating the presentation of programming relevant to issues facing the broadcaster's community. 59. The direct technique of regulating viewpoint diversity has fallen out of favor. This is due to both changes in the marketplace -- chiefly, the large increases in the number of broadcast stations and in competition to broadcasting -- and to heightened concern over First Amendment issues. Accordingly, as indicated, most of our rules and policies employing the direct technique for ensuring viewpoint diversity have been eliminated. 60. The indirect method used by the Commission for obtaining viewpoint diversity has been through our structural rules. These attempt to increase the diversity of viewpoints ultimately received by the public by providing opportunities for varied groups, entities and individuals to participate in the different phases of the broadcast industry. There are a number of examples of structural regulations designed to have an impact on viewpoint diversity. For example, our ownership restrictions, including those limiting the number of stations that a person can own on both the national and local levels and those limiting the ownership interests that broadcasters may have in other media, are intended to assure that information is dispensed from "diverse and antagonistic sources." Similarly, our licensing process has given incentives to those not yet involved in the broadcast industry by according a preference to those having fewer broadcast interests than their opponents in the comparative context, and our minority ownership and EEO policies are designed to encourage more participation in the broadcast industry by those historically under-represented in it. Indeed, Congress' concern with diversity has led to its approval of the use of structural methods to assure both source and outlet diversity in cable television, as well. Section 11 of the Cable Television Consumer Protection and Competition Act of 1992 ("1992 Cable Act") was adopted by Congress to address its concerns that the cable industry had become increasingly vertically integrated -- with common ownership of both programming and distribution systems -- and that, as a consequence, cable operators had obtained the ability to favor affiliated programmers and cable systems over unaffiliated or competing programmers and distributors. 61. The indirect technique for encouraging viewpoint diversity (i.e., structural rules) fosters two other kinds of diversity that the Commission has regarded as integral to the ultimate goal of providing the public with a variety of viewpoints. First, certain of the Commission's structural rules, such as the ownership limits, promote "outlet" diversity, which refers to a variety of delivery services (e.g., broadcast stations) that select and present programming directly to the public. Second, other Commission structural rules, such as the Prime Time Access Rule and the Financial Interest and Syndication Rule, were designed to foster "source" diversity, which refers to ensuring a variety of program producers and owners. The Commission has felt that without a diversity of outlets, there would be no real viewpoint diversity -- if all programming passed through the same filter, the material and views presented to the public would not be diverse. Similarly, the Commission has felt that without diversity of sources, the variety of views would necessarily be circumscribed. B. New Approaches to Diversity 62. As indicated above, we have traditionally equated an increase or decrease in outlet diversity with a corresponding change in viewpoint diversity. Accordingly, we have limited ownership of broadcast facilities on both the national and local levels. However, there is information suggesting that it may be possible to have a decrease in outlet diversity without a corresponding decrease in viewpoint diversity. For instance, in our earlier proceeding analyzing the national multiple ownership limitations, the record suggested that group television station owners generally allow local managers to make editorial and reporting decisions autonomously and that group-owned stations are more likely than others to editorialize. 63. There are two schools of thought concerning the relationship between ownership and diversity. The one school holds that the more independently owned outlets there are, the greater the viewpoint diversity. This is the "51 stations provide more diversity than 50" approach to diversity as typified by the First Report and Order in Docket No. 18110. A second school of thought concerning diversity posits that the greater the concentration of ownership, the greater the opportunity for diversity of content. Under this view, where there are competing parties, each of their strategies would be to go after the median viewer with "greatest common denominator" programming, leaving minority interests unmet. But where one party owned all the stations in a market, its strategy would likely be to put on a sufficiently varied programming menu in each time slot to appeal to all substantial interests. While this model may, indeed, promote diversity of entertainment formats and programs, we question whether it would act similarly with regard to news and public affairs programming and ask commenters to address this point. Similarly, in our radio multiple ownership proceeding, we found that greater concentration of ownership, especially on the local level, could enhance diversity by allowing stations that would otherwise go off the air to remain in service. We ask commenters to address whether, in view of the current situation in the home delivered video programming market, the traditional school of thought concerning diversity, as described above, remains valid. If not, they should provide a description of the model that they feel more accurately provides an analytical approach and explain why they believe it to be preferred. C. The Relevant Product Markets for Assessing Diversity 64. In adopting regulations having an impact on diversity, whether direct or indirect, we have traditionally limited our consideration to the situation present in broadcasting at the time of the regulations' adoption, without implicating other information/entertainment services. More recently, we have begun to view the broadcast media, and particularly television, as being part of a wider media environment and have included them in our diversity analysis, at least in a general way. We now believe it is unrealistic to consider broadcast television station ownership in isolation when analyzing outlet diversity, and we propose to take other media into more specific account in assessing diversity. If consumers can choose from among several video programming services which they view as being substitutable for each other, an accurate analysis of outlet diversity must reflect that fact. In determining which services should be treated under our diversity analysis as substitutable, we first survey the universe of possibilities. As discussed above, available outlets for video programming include broadcast television, cable television, telephone companies offering video dial tone service, MMDS, video cassettes and, increasingly, DBS. Approximately 62.5 percent of American households (i.e., approximately 59 million households) subscribe to cable. VCRs are owned by over 80 percent of U.S. television households. Additionally, computer networks and services, such as Internet, Compuserve, America-on-Line, and Prodigy, increasingly provide access to information that, while not technically video programming, is still video-displayed and contributes to the total number of sources and outlets of information available to the public. Additionally, some consumers may view radio or newspapers as substitutes for television for some purposes. 65. Our next task is to determine which of the above media to include and how to weigh them, by identifying the relevant product. In the past, the relevant product has been relatively easy to discern: video service delivered to the home by over-the-air television. In terms of diversity analysis, this was the primary product that had to be considered. Now, however, there are a myriad of other video media, and it is our duty, with the assistance of the record compiled in this proceeding, to determine which of these we should consider in determining the level of diversity our television ownership rules should achieve and the extent to which each medium should be considered. Section III, above, requested comment on the degree to which these alternative video media should be considered as economic competitors to, or substitutes for, broadcast television. In the current section, we are soliciting comment on whether, and to what extent, these media should be considered as substitutes for over-the- air television from a diversity standpoint. 1. Arguments For and Against Including Specified Non-Broadcast Television Services in Our Diversity Analysis 66. Cable television clearly substitutes for broadcast television in many ways. Like broadcast television, it delivers video programming directly to the home. Certainly, cable provides similar entertainment programming and national and international news. However, unlike broadcasting, one must subscribe to cable. And only approximately two-thirds of those having cable available subscribe. Also, and perhaps more importantly, cable television operators have fewer public interest obligations. An over-the-air broadcast television station is required to provide programming responsive to issues facing its local community, afford equal opportunities to political candidates, and to provide reasonable access to candidates for federal elective office. These are bedrock public interest obligations retained by broadcast stations and involve interests central to the Commission's concern with diversity. Cable's obligations in these regards are rather more limited. Nevertheless, some cable systems do have origination cable channels that provide coverage of local issues. Similarly, pursuant to Section 611 of the Communications Act (47 U.S.C.  531), many cable systems have public, educational and governmental ("PEG") access channels that provide programs of information, instruction and opinion to cable subscribers. While a cable operator is not required by the Act to dedicate such channels, the Act does permit a franchising authority to establish requirements in a franchise with respect to the designation of PEG access channels. Finally, Section 612 of the Act (47 U.S.C.  532) provides for commercial leased access channels, which the cable operator must make available for lease by parties unaffiliated with it. 67. Similarly, a plethora of other emerging video media exist that we may wish to take into account in considering whether a programming market is sufficiently diverse. As previously indicated, the Commission's recent Cable Competition Report detailed many video delivery systems either currently available or just on the horizon. MMDS, DBS, SMATV, and VDT are all systems that are, or soon will be, providing video programming to the home. Like cable, and, for that matter, broadcast television, these systems carry primarily entertainment programming. Some will offer national and international news but, with the exception of DBS, none have public interest obligations. Furthermore, these are all subscription services. As is the case with cable television, this is a factor we must consider in weighing whether they can be considered for diversity purposes as substitutable for broadcast television. 68. Finally, we turn to radio and newspapers which, like television, are mass media sources of information, opinion and advertising. Radio has many of the attributes of television and, to that extent, may be substitutable for diversity concerns. Like television, radio is "free." Additionally, it has public interest obligations similar to television's. Radio also acts as an important source of information. Many radio stations have regular newscasts and a large number feature all news or partial news formats. Additionally, talk radio often provides an important source of information and opinion on local, national and international issues. Currently, there are 636 radio stations in the United States with an all news format, 820 with a news/talk format and 461 radio stations that have an all talk format. Although some radio stations may have a news format, the visual dimension provided by a television broadcast can be so compelling as to overshadow even an in-depth treatment of the same issue by a radio station. This may account for people turning to television as their primary news source. 69. Also, it may be appropriate to count newspapers, to some extent and in some contexts, as being a substitute for television stations for diversity purposes. The Commission has previously documented the important role played by newspapers in the country's marketplace of opinions in an earlier examination of the national ownership limitations. Additionally, our newspaper-broadcast cross-ownership rule (47 C.F.R.  73.3555(d)) must be viewed as accepting that newspapers are in some measure substitutable for broadcast media for diversity purposes. "Prohibition of...newspaper and television, and radio and television cross ownership in the same market would make little sense unless these different media were important substitutes for each other." However, newspapers have no public interest obligations similar to those governing broadcast stations. Additionally, newspapers are less immediate than either of the broadcast media. If a person hears of a breaking news story, he or she can obtain additional information almost immediately through the broadcast media; but, unless it is available through the electronic media (e.g., Internet), he or she cannot simply "order up" a newspaper. Instead, he or she will have to await the next day's edition. 2. Tentative Conclusions on the Non-Broadcast Television Services to be Included in Our Diversity Analysis 70. It is our tentative belief that cable is a mature technology that is well-established and well-entrenched in the media marketplace. Moreover, because cable systems are franchised locally and because many have PEG access channels (and some have locally oriented origination news channels) we believe that the presence of a local cable system can play a role in any assessment of the local diversity market, at least under some circumstances. In no case, however, does it appear that we should count, for diversity purposes, each channel on a cable system as a substitute for a broadcast television station. By definition, all cable origination channels are subject to the exclusive control of the cable operator. Being subject to control by the same person or entity, each such channel does not contribute to outlet diversity, or, under traditional analysis, to viewpoint diversity. Nevertheless, it may make sense to recognize a cable system as contributing more than a single television station because on a given system there may be a number of channels that, for diversity purposes, would each be a bona fide substitute for a broadcast television station. These substitutes would include PEG access and commercial leased access channels, which are not subject to the editorial control of the cable operator and, therefore, are net additions to diversity. 71. In sum, we believe that cable ought to be included as a substitute for television stations for diversity purposes. Although not subject to public interest obligations to the same extent as are broadcast stations, many cable systems, through PEG and leased access channels, and even locally originated cable news channels, provide service that contributes to outlet and source diversity and, accordingly, to viewpoint diversity. However, in order to determine the extent to which cable should be counted, commenters should address the weight we should give it. For instance, should we condition our counting of a system upon its having PEG or local news channels? Should each such channel count as a separate voice, or merely enable the cable system as a whole to be considered? If the former, are there other types of channels that should also be counted as contributing to diversity to the same extent as a PEG channel? Should we require a sufficiently high degree of cable penetration by a system before we count it for diversity purposes and, if so, what should that degree of penetration be? Comment is invited in these regards. 72. We tentatively see no reason to include in our diversity analysis the other named electronic video media, such as MMDS, VCRs and VDT, as substitutable for a broadcast television station. None of these has nearly the ubiquity of cable and most do not have the capability for local origination that cable has. All provide similar entertainment programming; however, our core concern with respect to diversity is news and public affairs programming especially with regard to local issues and events. This core concern does not seem to be addressed by any of these media. It currently appears to us that the presence of these media in a market has little more relevance to our diversity concerns than would the presence of motion picture theaters in that market. Of course, commenters may wish to supply us with evidence to the contrary. But, based on the present state of our knowledge, none of these currently appear to have the availability or subscribership or programming that would enable us to conclude that for diversity purposes they are substitutable for broadcast television. 73. Next we turn to the issue of whether radio and daily newspapers should be included in the mix for diversity purposes. A case can be made for considering both radio and newspapers to be substitutes, to some extent and for some purposes, for broadcast television stations in terms of diversity. Both newspapers and radio provide their own unique contributions to the coverage of news and public affairs, especially with regard to the more in depth coverage they often can offer with respect to some issues. And, although newspapers are not as immediate as the broadcast media, they do have the capacity for more detail. Also, though not required to do so, newspapers seem to provide access to information and opinion at least as extensive as television stations. Typically, local dailies cover local issues, endorse local candidates and provide a platform for the presentation of local opinion. While radio, of course, does not provide the visual impact of television, it can, especially through all news or news/talk formatted stations, provide more extensive coverage of news and opinion than is often the case with broadcast television stations. Also, local radio stations provide access to information and opinion on issues of local concern that can be the equivalent of that presented by a television station. Most markets appear to have news, news/talk or talk formatted stations to which consumers may tune for information and opinion. For these reasons, both radio and newspapers could be considered to some extent as substitutes for television, at least for diversity purposes. 74. Although neither radio nor newspapers should be disregarded as competing media for television we, nevertheless, cannot consider each radio station, or each newspaper, as being the equivalent of a broadcast television station for diversity purposes. Television is: 1) more immediate than newspapers; 2) has public interest obligations not shared by newspapers; 3) has more visual impact than either newspapers or radio; and, 4) is used by more people as their primary news source than are either radio or newspapers. And while there may be a number of news and news/talk format radio stations, counting only such stations as being fungible with television stations would not square with our traditional approach to format regulation. Additionally, it would create the paradox of counting for diversity purposes only radio stations that present a particularly high volume of news while any television station would count as a "voice" notwithstanding what may be its minimal efforts to meet its public interest obligations. Also, while each television station and, for that matter, radio station has a legal obligation to address issues facing its local community local daily newspapers do not. While neither radio stations nor newspapers appear to be fungible for television stations for diversity purposes on a one-for-one basis, commenters may wish to provide their views as to the extent to which we should count these media in our diversity analysis. D. The Relevant Geographic Markets for Assessing Diversity 75. It does not appear that there is a single geographically relevant market for diversity purposes. Instead, the relevant geographic market depends upon the nature and intent of the particular ownership rule under scrutiny. For example, for purposes of the national ownership limits, the relevant geographic market to be examined would be the nation as a whole. That is, the question to be asked is whether there is sufficient diversity of outlets in the nation as a whole that the twelve station limit is too restrictive, or not restrictive enough. 76. For the duopoly rule, the relevant geographic market is more restricted. The examination of diversity would be limited to, for instance, the area reached by a station's Grade B signal contour or whatever area we determine is appropriate and capable of being applied in an administratively convenient fashion. In no case, however, would the relevant geographic market for local diversity concerns be the same as that used for examination of the national ownership limits. 77. Diversity on the national level has been part and parcel of government concern since the inception of broadcast regulation. In adopting the Radio Act of 1927, the predecessor to the Communications Act of 1934, under which we operate today, Congress was, in part, motivated by the existence of the "Radio Trust," a comprehensive, vertically integrated combination of electronic media related companies. Congress feared that, absent regulation, these companies would completely monopolize radio broadcasting. It feared that the "Radio Trust" was "hooking up stations in every community on their various wave lengths with high-powered stations and sending one program out, and they are forcing the little stations off the board so that the people cannot hear anything but one program." This came at a time when there were only 536 broadcast stations nationwide so that most consumers had a severely circumscribed choice of programming available. Limiting ownership on a national basis would assure that there would be strict limits on the ability of the "Radio Trust" to propagate a single point of view to the American public as a whole. In spite of a sea change in the media marketplace over the last 60 years, we remain committed to diversity on the national level. 78. While we are no longer concerned that a "Radio Trust" will dominate broadcast communications, we still believe it essential to consider national ownership diversity, in large measure because of the resulting impact it has on diversity at the local level. The reasons for seeking diversity on the local level are readily apparent. Monopolization on the means of mass communication in a locality assure the monopolist control of information received by the public and based upon which it makes elective, economic and other choices. Measures to prevent such control have taken the form of our duopoly and one-to-a-market rules and our newspaper/broadcast cross ownership rule, all of which limit the ability of a single person or entity to control local organs of mass communication in a geographic locale. 79. Accordingly, as in our competition analysis, there is a geographic component to our diversity analysis. Not only must we determine which media generically are substitutable for broadcast television for diversity purposes but, also, where media outlets must be located in order to be considered. For instance, if we determine that from a diversity standpoint cable systems are to a greater or lesser extent substitutable for broadcast television stations, which cable systems should a particular television broadcaster be able to count? Should our standard be that the cable system has to be franchised to the broadcast station's community of license or be located in some part within the broadcaster's Grade A or Grade B signal contour? 80. Certainly, if we were to determine that cable television is substitutable for broadcast television for diversity purposes, it would not do to consider a cable system serving a far away market as being the equivalent of a local broadcast station. Similarly, a newspaper would have to have some nexus with the television broadcaster's market before we could allow it to count as a substitute for the local television for diversity purposes. We seek comment on what sort of standards we should adopt with respect to our local ownership regulations. V. NATIONAL OWNERSHIP RULE 81. As described earlier, at present a company is limited to owning 12 broadcast TV stations nationally in different local markets and to a maximum aggregate 25% national audience reach. The reach limit was added to the rule when the station limit was increased from seven to 12 stations. It was added in an attempt to resolve the problem that a rule based solely on station counts ignores the market size served by a station. The reach limit presently prevents a group owner from owning television stations in each of the 12 largest markets. The national networks and some other group owners have concentrated their station purchases on stations located in markets with the largest audiences. As a result of this strategy, some group owners have reached the 25% audience reach limit before they have acquired 12 stations. Thus, it appears that for many of the existing national TV group owners, the 25% national audience reach limit is the more binding regulatory constraint on group acquisition of additional stations nationally. 82. To examine whether the national ownership limits should be relaxed, we first conduct a competitive analysis and then a diversity analysis. In conducting the competitive analysis, we seek to examine the effects of relaxing these rules on the potential competitiveness of the markets for delivered video programming, advertising, and video program production. The primary focus in each of these discussions is on the effect of changing the rules on the concentration of the market. In conducting the diversity analysis, we seek to examine the effects of relaxing these rules on the diversity of viewpoints available to the public, paying particular attention to the diversity of outlets. A. Effects on the Market for Delivered Video Programming 83. Relaxing the national ownership limits will not by itself increase or decrease the number of separately owned broadcast TV stations in the video program delivery market. This is because, as discussed earlier, the video program delivery market is a local market. So, as long as a company is allowed to own only one broadcast television station in a local market, relaxing the national ownership limits will have no affect on the concentration of these local markets. Similarly, if we measure concentration in this market by the number of available outlets or channels of delivered video programming, then relaxing the national broadcast television ownership rules should have no effect. Consequently, by these measures, relaxing the national ownership limits for broadcast television stations should not change the existing concentration of these local markets. 84. On the other hand, if we measure concentration in local markets by the audience share of each of the available channels of video programming, then relaxing national group ownership rules might have an effect on concentration of the different local markets for delivered video programming. This could occur because a group owned stations develop efficiencies in the acquisition or production of video programming which allows such stations to become more profitable and win larger viewing audiences. Such a consequence seems a desirable, rather than an undesirable, outcome of the competitive process, and therefore should not be a basis for maintaining current national ownership limits. We would like comment and evidence on the popularity of programming provided to consumers served by a group owner versus the popularity of programming provided to consumers served by an individual station owner, accounting for network affiliation (i.e., compare group versus individual for affiliated stations, group versus individual for non-affiliated stations). 85. Based upon the above considerations, we do not expect relaxation of the national ownership limits to have any effect on competition in the local market for delivered video programming. However, if commenters disagree with this expectation, we request that they provide evidence on how such a relaxation would increase concentration in these markets. For example, we would like commenters to justify their measure of concentration, provide a measure of it for existing markets, and detail the links between changes in the national ownership limits and concentration in these markets. B. Effects on the Market for Advertising 86. One of the motivations for owning a group of TV stations nationally may be to increase a company's audience reach. This may give a company a chance to increase its bargaining power in the sale of video advertising time to advertisers in the national advertising market. However, as pointed out earlier, commercial broadcast networks, commercial cable networks and syndicators are the primary alternative providers of national advertising. Consequently, it is not clear why increasing national ownership limits should have any harmful effects on this market when these providers already reach a national audience. 87. On the other hand, there may be a potential for harm from increasing national ownership limits on the local advertising markets. A group owner might use any market power it might have in one local advertising market to subsidize anti-competitive efforts in another advertising market. However, given existing substitutes (e.g., other broadcast television stations, cable operators, radio operators, newspapers), it is not clear that any given broadcast television station possesses such market power, nor is it clear that such a strategy would even be profitable. Consequently, we do not expect relaxing national ownership limits to have a deleterious effect on the different local advertising markets. 88. These expectations comport with prior analyses of video advertising, which find no evidence that group ownership had a significant effect on advertising rates. While dated, we know of no recent analyses which demonstrate that a company owning a group of TV stations across the nation has and uses significant market power to charge higher advertising rates to national or local advertisers. However, we solicit any evidence on this issue, especially that which also takes into account other relevant factors in the pricing of video advertising. Further, we solicit comment on how relaxing the national ownership limits might affect the concentration of local advertising markets. These comments should provide measurement of existing concentration, as measured by advertising revenues, as a background for discussion. C. Effects on the Video Program Production Market 89. Broadcast television stations purchase programming in a national market. Assume, for the sake of argument, that broadcast television stations face no other competitors than themselves. Nationally, there are 1,157 commercial broadcast television stations to which this rule applies. The current rule allows that, under certain circumstances, one person may hold an attributable interest in up to 14 commercial television stations nationally. If all television station owners consolidated so that each controlled 14 stations, the Herfindahl- Hirshman Index (HHI), a common measure of market concentration, would be 121. This number is very low by antitrust standards. Thus, even assuming that broadcast television faces no other competition in the purchase of programs, it would appear that the current national limits could be relaxed substantially before a competitive concern would arise. 90. With the relaxation, and likely future expiration, of the financial interest and syndication rules for broadcast television networks and the possible relaxation of prime time access rules, some will argue that there is the renewed potential for broadcast networks to exercise market power in the purchase of video programming. This view mixes concerns with broadcast networks's market power with television group owners's market power. However, two facts may mitigate the concerns evoked by this view. First, the ever growing list of alternative buyers of video programs suggests real limits on the exercise of any such power. Second, we have no evidence that broadcast television stations have monopoly power in their local markets for delivered video programming. Lacking such power, there is little way these stations could exercise market power in the purchase of video programs. Consequently, we do not foresee that relaxing the national ownership limits for broadcast television stations will cause any significant economic harm to these markets. 91. The notion that group owned television stations lack market power in the purchase of programming is supported by available evidence. For example, the FCC's Network Inquiry Special Staff found no evidence that group owned stations were able to obtain programming from suppliers at more favorable terms than an individually owned station. Consequently, we are unaware of evidence which suggests that any existing group owned broadcast TV stations exercise market power in the video program production market. D. Other Economic Effects 92. Networks and group owners have indicated in their comments that there may be substantial economies of scale or cost savings from owning additional stations. However, they have not provided clear evidence that there are significant economies in the delivery of video programming which might accrue to the owner of a group of broadcast TV stations spread out across the country. When we increased the national limits from 7 to 12 stations, we stated that group ownership could have three beneficial effects. First, group ownership might foster news gathering, editorializing and public affairs programming, and the development of independent programming by regional or national ad hoc networks. Such improvements generate both programming preferred by consumers and more efficient use of the broadcast spectrum. Second, some buyers of stations may have superior skills. Those with superior managerial abilities may be able to do a better job of matching programming to local tastes. Third, some group owners may have cost advantages derived from the ability to spread the services of management, bookkeeping, secretarial, sales, and programming personnel over a number of stations, and the potential for group advertising sales and program purchases. The empirical evidence about the magnitude of this effect was weak at the time we adopted the 12 station rule, and continues to be so today. Accordingly, we seek evidence and data concerning economies in the distribution of video programming which may accrue to group owners of television stations. We particularly seek evidence on this issue from those group owners who increased their ownership holdings in response to our prior relaxation of the national ownership limits. In providing this evidence, it would be particularly helpful if commenters would distinguish between the effects of owning a group of stations and the effects of affiliating with a network. 93. Another economic effect of relaxing national group ownership limits might be on the rate of incorporation of technological innovation into television broadcasting. Larger group owners might have the financial capital and geographic diversification necessary to bear the costs and take the risks associated with introducing advanced television broadcasting technologies into existing television broadcasting stations. On the other hand, if the technological innovation is expected to be profitable, and financial markets will fund any profitable investment, then it is not clear why larger group ownership will increase the rate of introduction of new technologies in television broadcasting above what it would have been with the current rules. We would like comment on these views which help to evaluate their comparative validity. 94. Finally, another economic effect of relaxing national group ownership limits might be on the prices of broadcast television stations. Such a relaxation could increase somewhat the number of potential bidders and hence the bid price for any non-group owned stations. The increased prices of broadcast TV stations may pose a concern with respect to the ability of minorities and other new entrants to acquire TV stations. However, it should be recognized that it is not the price per se that is the problem, but minorities' ability to finance the purchase of a higher priced station. We are concerned about this possible consequence and are addressing issues relating to the difficulties of minorities and women in obtaining access to capital in MM Docket No. 92-51 and in the minority and female ownership rule making we adopt today. We are also concerned about the possibility that changes in the national ownership limits may adversely affect the pool of independent television stations available for acquisition and affiliation by nascent broadcast networks. We ask for comment and analysis of this concern. E. Effects on Diversity 95. As we previously indicated, we will first identify which diversity goals the national ownership rule seeks to foster. One of the assumptions behind national television ownership limitations has been that placing limitations on the number of stations in which a party can have a cognizable interest promotes diversity of outlets and viewpoints. This assumption, which dates from the inception of broadcast regulation, had as its genesis a fear that a small number of owners would dominate viewpoint diversity, keeping off the airwaves any views with which they did not agree. Limiting the number of outlets that an entity could own on a national level, the Commission has believed, increases the number of entities engaged in the ownership of broadcast facilities. This, in turn, limits degree of control over viewpoints expressed nationally that any entity could have and, as a consequence, furthers the First Amendment values in pluralistic national political discourse. 96. While the national ownership rules may foster these goals, and especially outlet diversity, the rules may not be essential to achieving such diversity. It is axiomatic that if we limit the number of television stations nationally in which an entity can have an attributable interest, there will be more outlet diversity (i.e., more separate owners of television stations) than would be the case if, for instance, we allowed an entity to own an unlimited number of outlets nationally. But this does not necessarily translate into viewpoint diversity. Television and competing outlets are viewed locally, and we question whether an increase in concentration nationally affects diversity on the local level. In this regard, also, many stations are affiliated with a network. As a result, these stations, even though not commonly owned, air the identical programming for a large portion of the broadcast day irrespective of our national ownership limits. Moreover, the multiple sources and outlets of video programming currently -- and increasingly -- available now call into question the basic assumption that there are no close substitutes for over-the-air television. And, as seen above, there is evidence that group owned television stations are more likely than others to editorialize and their local managers tend to make editorial and reporting decisions autonomously. This, at the least, suggests a reduced relationship between ownership diversity at the national level and viewpoint diversity especially at the local level. This lessens our diversity concerns with respect to liberalizing the national ownership cap and suggests that current limits on the number of television stations in which a single party may have a cognizable ownership interest nationally may no longer be appropriate. 97. It appears that such factors as increased video media competition, network affiliation and diversity on the local level all favor alteration of the national ownership limitations. While our analysis suggests that, from a diversity standpoint, changes in the current national ownership limitations may be warranted, commenters should nevertheless address what effect, if any, group ownership and consolidation of ownership nationally would have on viewpoint diversity in news and public affairs programming, especially locally. For instance, do group owners tend to reduce the amount of news and public affairs programming by consolidating budgets and staffs, or does group ownership encourage more and better quality news and public affairs programming by providing access to more resources and allowing economies of scale? Additionally, for national news, network affiliated stations primarily use their network affiliation to provide national news programming, and broadcast networks must compete with each other and with cable news networks in providing national news. Consequently, we ask whether changing national group ownership rules would have any impact on the delivery of national news and, if so, what that impact would be. Finally, given that the pursuit of large audiences may drive all licensees -- whether group owners or not -- towards the exclusion of controversial, non-mainstream subjects from their programming, does ownership diversity, indeed, have a major effect on viewpoint diversity with respect to television? F. Tentative Proposals 98. Based upon our review of the available evidence and literature, it appears to us that liberalization of the national ownership limits would not have an adverse impact upon competitiveness of the markets for delivered video programming, the market for advertising, or the video program production market. As already discussed, relaxing the national ownership limits will not increase the concentration of broadcast TV ownership within a local market. Further, the current national levels of industry concentration are low by antitrust standards. Therefore, extensive consolidations could take place before any competitive concerns would arise. 99. Nor do we believe that raising the national ownership limits would have serious adverse effects on diversity. As we have previously stated: Within the United States, the most important idea markets are local. For an individual member of the audience, the richness of ideas to which he is exposed turns on how many diverse views are available within his local broadcast market. For that individual, whether or not some of those views are also disseminated in other local broadcast markets does not affect the diversity to which he is exposed. Accordingly, national broadcast ownership limits, as opposed to local ownership limits, ordinarily are not pertinent to assuring a diversity of views to the constituent elements of the American public. 100. Based upon these considerations, we propose raising national ownership limits and seek comment about the manner in which they should be expressed (e.g., number of stations or outlets, number of stations or outlets with a reach cap, reach cap without any limit on the number of stations or outlets, or audience share cap) and the extent to which they should be raised. We observe that in our 1984 Report and Order, using competition and diversity analyses similar to those discussed supra, we concluded that national ownership limits could be phased out without harming competition or diversity at the national level. Accordingly, we adopted a 12 station limit in that Order, with an automatic sunset provision whereby these limits would expire in six years. On reconsideration, we reaffirmed the numerical station limit, adopted the 25 percent reach limit, and eliminated the automatic sunset, recognizing that a complete and abrupt elimination of our national multiple ownership rules might engender a precipitous and potentially disruptive restructuring of the broadcast industry. We continue to believe that changes in the national multiple ownership rules should be incremental in order to avoid significant dislocation in the television industry. The NPRM in this proceeding proposed several adjustments to the multiple ownership rules, which we ask commenters to consider in the context of the analysis herein. We proposed amending the national numerical limit to permit common ownership of 18, 20 or 24 television stations and altering the national reach restriction to permit a group owner to reach 30 or 35 percent. Alternatively, we sought comment on whether we should modify only the numerical limit, retaining the 25 percent reach limit. We stated that this moderate approach would allow some growth in the size of group owners and provide us an opportunity to assess over time the benefits and any costs of increased station ownership. Commenters were mixed in their responses to each of these proposals and provided little structured analysis by which we could compare contrasting positions. Consequently, we ask for comments on these proposals which are structured in a manner consistent with the analytical framework proposed herein. 101. We also seek comment on the following new proposal. We could eliminate the numerical station limit entirely, and allow the reach limit to increase by some fixed percentage, such as 5% every 3 years, until the reach limit rises to 50%, the final limit. During this period, the Commission would monitor the relevant markets and determine whether or not problems have arisen which call for a halt in the relaxation of the national ownership limit. This proposal would allow the Commission to take a measured approach to relaxing national television station ownership limits and would be framed in a manner consistent with our earlier analyses. Specifically, we think that formulating national limits only in terms of reach, rather than in conjunction with a number of stations limit, may be preferred because it captures the relevant dimension of interest (i.e., the total audience potentially available) and it allows companies flexibility to own either a few stations serving large population markets or a larger number of stations serving small population markets. This would mean that all licensees would be given the same opportunity to reach an equal share of the national audience. In addition to these advantages, we believe it would be desirable to allow the reach limit to rise gradually rather than immediately to 50%, in order to monitor industry changes. Parties are encouraged to comment on all the above proposals and any others they wish to suggest. We ask parties to analyze their benefits and costs in the context of relevant product and geographic markets and their impacts on both competition and diversity. 102. In applying the above to full power stations, we note that UHF stations are now attributed with only 50 percent of their theoretical reach within the ADI. In other words, acquisition of a UHF television station only adds half as much to a multiple owner's reach limit as the acquisition of a VHF television station located in the same television market. The Commission incorporated this adjustment in the 1984 rules to account for the physical limitations of the UHF signal. We seek comment on whether this adjustment should be retained. On one hand, improvements in UHF signal propagation and extensive cable carriage of UHF signals may have reduced the signal-quality disparity with VHF signals. On the other hand, approximately 5 percent of potential viewers are not reached by cable and 37.5% of television households do not subscribe to cable. These viewers must rely on over-the-air reception of UHF/VHF signals. Accordingly, we seek comment on whether and, if so, to what extent, there remains a disparity between VHF and UHF signal propagation and how this should affect the UHF discount, if at all. Should we determine that, based on the record, the UHF adjustment should be modified or eliminated, we would still be concerned that existing group ownership not be disrupted and we specifically would not intend to force divestiture by any such change. Therefore, we also seek comment on whether, should the UHF discount be modified, existing group owners should have the reach discount for any currently owned UHF stations "grandfathered," or whether this should be done only where divestiture would otherwise result from a new UHF reach rule that no longer reduced the theoretical reach by 50%. 103. As noted above, our current rule allows a single entity to hold interests in up to 14, rather than 12, televisions stations reaching 30, rather than 25, percent of total television households if the additional stations are minority controlled. In a separate and concurrent proceeding, MM Docket No.94-150, we are more fully considering a variety of issues related to minority ownership and participation in broadcasting, and parties may wish to comment in that docket. However, we welcome related comments which are particularly pertinent to issues raised in this FNPRM. 104. Finally, we note that a television station that qualifies as a satellite is exempt from the national ownership restrictions. This means that the satellite station does not count against the owner's national station limits. TV satellite stations are full power terrestrial broadcast stations authorized under Part 73 of the Commission's Rules to retransmit all or part of the programming of a parent station that is ordinarily commonly owned. The Commission has an outstanding Second Further Notice of Proposed Rule Making, that seeks comment on the issue of whether this exemption should be continued, as well as on related issues such as whether some national ownership benchmark other than the number of stations would be preferable to apply to TV satellite stations. Since we are now considering modifying all aspects of the national and local ownership rules in this proceeding, we believe it is appropriate to incorporate the outstanding proceeding on satellite television stations and resolve all ownership matters in this proceeding. In light of the new competition and diversity analysis presented in this FNPRM, we invite additional comment on whether satellite television stations should continue to be exempted from the national multiple ownership rules. VI. LOCAL OWNERSHIP RULE 105. The local ownership rule prohibits common ownership of two television stations whose grade B contours overlap. The rule is intended to preclude ownership of more than one television station in a local community in order to promote competition and diversity. As we discussed earlier, television stations compete for viewership and sell advertising in local markets. Thus, it is important that the Commission's rules ensure workable competition in local markets. Ownership of several broadcast stations can increase the likelihood of anticompetitive behavior if (a) the stations serve the same market, (b) the market is concentrated, i.e., has few competitors, and (c) allowing ownership of several broadcast stations substantially increases concentration in the market. In the following discussion, we will address the effect of relaxing the local television station ownership rule on our competitive and diversity concerns. We set out one specific proposal and request comment on other possible rule changes. For the above reasons, we view changes to the local ownership rule as giving rise to more serious concerns than changes to the national ownership rule. We intend to carefully evaluate the economic factors that affect the local marketplace, including changes that occurred after the NPRM was adopted in 1992. We will also look at how the proposal herein to modify the contour overlap rule from Grade B to Grade A is affected by other proposals in this FNPRM and how it and these other proposals influence the effects of allowing common ownership of broadcast television stations with contour overlap in local markets . A. Effects on the Market for Delivered Video Programming 106. As we discussed earlier, we believe that, at present, commercial broadcast television station operators effectively compete with each other, with public broadcast television stations, with cable system operators, with wireless cable operators, and possibly with DBS operators serving their "local" market. Consequently, some existing large markets for delivered video programming appear to be unconcentrated when we use either the number of independent operators measure or the number of channels of programming measure for market share calculations. 107. Allowing one entity to own more than one broadcast TV station within a "local" market may permit the company to realize economies of scale, reducing the costs of operating the two stations. As we have stated in our proceedings relaxing other local ownership rules (i.e., radio ownership and the "one-to-a-market" waiver standard), joint ownership of stations in the same market permits cost-sharing in administrative and overhead expenses, sharing of personnel, joint advertising sales, and the pooling of resources for local program production (such as news and public affairs programming). We believe the cost savings from these economies could then be used to provide better programming to the public. We seek hard evidence from commenters of the existence and magnitude of such economies. We particularly seek information regarding the experience of those group owners who have consolidated pursuant to our relaxed local radio ownership rule and the one-to-a-market waiver standard. We also ask whether experiences with respect to the radio market can be used to predict the benefits of relaxing ownership rules in local television markets. B. Effects on the Market for Advertising 108. Allowing a company to own more than one broadcast TV station in a local market might give the company the economic power to raise video advertising rates within the local service area, if, by virtue of the combination, the local market became concentrated. Evidence on whether significant market power in the local advertising market already exists is mixed. One study found that the relationship between advertising rates and broadcast concentration, for different measures of concentration, is either insignificant or negative. This suggests that there is little evidence of market power being exercised by commercial broadcast television stations on local advertising rates. On the other hand, another study found evidence of a positive relationship between market concentration and CBS affiliate advertising pricing. Consequently, prior evidence is mixed on whether commercial broadcast television stations possess any market power in the sale of advertising. 109. Allowing one company to own two broadcast television stations in a "local" market should have no effect on the concentration of the national advertising market because of differences in the geographic dimensions of these markets. However, allowing a company to own more than one broadcast television station within a "local" advertising market can increase that market's concentration. Local cable advertising revenues are small when compared to local commercial broadcast television station advertising revenues, but they are expected to increase in size and importance. Prior studies have found mixed evidence on the effect of cable on broadcast TV station advertising revenues. Thus, at this time, it is not clear whether cable system operators offer effective competition to broadcast station operators in providing local advertising. Further, as was discussed earlier, it is not clear how substitutable radio and newspaper local advertising is for broadcast television local advertising. If they are effective substitutes, then many "local" markets would appear to be competive with respect to advertising. We request interested parties to provide whatever data and analysis they can on the substitutability of these media in the local advertising market at present and in the future. Assuming that they are not effective substitutes, then we also request comment on how many independent providers of local video advertising are necessary to insure effective competition in this market. Statistical evidence supporting fact-based analyses from commenters will especially be welcome. C. Effects on the Video Program Production Market 110. Television stations purchase or barter for video programming in a national market in the sense that producers of video programming typically create product which is marketed to be broadcast in more than one local market. However, the program market could be affected if Commission relaxation of the local ownership rules permitted one or a few broadcast station owners to exercise significant market power in the purchase of video programming. The result might be that suppliers of video programming would be forced to sell their product at below competitive market prices in order to gain access to the local market controlled by one or a few local group owners. Prior evidence suggests the potential for the exercise of such market power depends critically on the absence of a sufficient number of competitors. For example, the Network Inquiry Special Staff report examined the effect of an independent station on the prices paid for off-network syndicated programming. It found that the price paid for programming per viewer is significantly higher where there is even one technically comparable independent station in the market in addition to the network affiliates. The ever increasing number of alternative providers of delivered video programming in just about every major market, described earlier, may mitigate the potential for distorting the prices of video programming through control of broadcast access to local television sets by providing program producers with additional outlets for their product. We solicit comment on this point and evidence on the potential market power in the purchase of video programming in different markets if we were to relax the local ownership rule. D. Other Economic Effects 111. As with relaxing the national ownership limits, relaxing local ownership limits could increase the price of broadcast television stations. The potential for increased prices of broadcast TV stations concerns us when we consider the ability of minorities and women to purchase TV stations. As we previously noted, the problem is the ability of such individuals to finance the purchase of a higher priced station. We are concerned about this possibility and are addressing issues relating to the difficulties of minorities and women in obtaining access to capital in the minority and female ownership rule making we are adopting today. We ask for comment and analysis of these issues. 112. We are also concerned about the possibility that changes in the local ownership limits may adversely affect the pool of independent television stations available for acquisition by and/or affiliation with nascent broadcast networks. Subsequent to the publication of the NPRM, the fourth network has flourished and the fifth and sixth networks are being introduced. Consequently, we solicit comment on the effects of allowing station ownership consolidation at the local level on the future development of these nascent broadcast networks. A separate, but related concern, is with allowing the owner of a station affiliated with or owned by an established broadcast network to own another broadcast television station serving the same market. This possibility may confer on such an owner more market power than would arise from an independent station operator acquiring a second station in the market. We solicit comment on the importance of this concern. E. Effects on Diversity 113. As indicated previously, our concern with diversity is most acute with respect to local ownership issues. Both television and competing video outlets are viewed at the local level. The Commission has consistently believed that a reduction in local outlet diversity would translate into a reduction of viewpoint diversity. While the existing duopoly rule may foster diversity by assuring that only one television outlet in a given market can be owned by a single entity or individual (assuring that each local television outlet is owned by a different person or entity), we believe it is appropriate to solict comments on whether the rule remains essential in its current form to ensure diversity. 114. In recent years the totality of information outlets on the local level has increased. Not only has the number of television outlets increased since our last review of the television multiple ownership rules but, additionally, nearly all viewers now have access to cable television (whether or not they subscribe), and other video services. In our recent radio ownership proceeding, we found that the abundance of radio and other media outlets now available "make clear that the local marketplace is far more competitive and diverse -- indeed, has been virtually transformed -- since the local ownership rules were first promulgated." On this basis, the Commission liberalized the duopoly rule with respect to radio. 115. With respect to television, however, we must be cautious in our analysis of outlet diversity, and the impact of mergers among TV stations on the local level on such diversity. All services are not equally available to the general population. For example, consumers can receive broadcast television for "free." Access to cable (or, for that matter, to any of the other video services), requires the direct payment of a subscription fee (plus, in the case of some alternate video media, the purchase of equipment), which some consumers might not be able to afford or wish to pay for. Thus, we must take into account that the apparent level of outlet diversity may not reflect what is, in fact, available to, or obtainable by, many consumers. If we decide to relax our local ownership regulations on the premise that if local television markets become more consolidated other media, including cable and newspapers, will provide sufficient diversity, how should we take account of the fact that some viewers are unable to subscribe or to acquire special equipment? How, if at all, should the portion of viewers that chooses not to subscribe affect our analysis of available programming outlets? Is an outlet of opinion less available simply because it is not popular or is more costly? We note that when analyzing local diversity in specific cases, we have often cited the number of area newspapers; their subscriber levels have not played a role in our analysis -- only whether they exist. Accordingly, we seek further comment on the degree to which such fee-based sources and outlets for video programming provide true alternatives to over-the-air television for purposes of ensuring viewpoint diversity. F. Tentative Proposals 116. The current rule prohibits common ownership of broadcast television stations with overlapping Grade B contours. Because the delivery of video programming by broadcast television stations is local in nature, we are more concerned about the effects of relaxing the local ownership rule, than the national ownership rule, on our competitive and diversity concerns. As discussed below, however, we believe that the record already established is sufficient to justify proposing to relax the rule by decreasing its prohibited contour overlap from Grade B to Grade A. We also seek comment on other possible ways in which the rule could be modified. 117. In the NPRM, we asked whether we should modify the contour overlap rule, balancing the greater flexibility afforded broadcasters against the potential harm to our underlying competition and diversity concerns. We invited comment on whether the predicted Grade B contour should continue to determine prohibited overlap, or whether we should change it to the Grade A contour. This change would narrow the geographic area in which common ownership of television stations would trigger our rules to an area that more accurately reflects a station's core market. The vast majority of commenters agreed that a Grade A contour standard provides a substantially more realistic and accurate measure of a station's core market than the existing Grade B contour rule. The commenters also stated that the switch from a Grade B standard to a Grade A standard will increase broadcasters' long- term viability by enabling them to reap the benefits provided by "economies of scale" -- without any commensurate loss in program diversity. In fact, several commenters indicated that the savings allowed by streamlining management, marketing, and station administration will actually increase broadcasters' ability to provide program diversity, variety and quality. In light of the support for this concept in the record of this proceeding, we propose to modify this rule so that joint ownership will be precluded only where there is overlap of the Grade A contour. We seek further comment on this proposal in light of our competitive and diversity analyses of the television broadcasting industry. We also request comment on what the impact would be of moving from a Grade B to a Grade A contour rule on particular markets. Further, how many cases would occur in which relaxing the rule to a Grade A contour would allow an entity to own two stations within a single designated market area or within a single metropolitan statistical area? 118. As a separate matter from whichever contour test we ultimately decide to use, the issue arises as to whether, in at least some situations, we should allow a company to acquire stations with overlapping contours. We ask for comment on whether we should permit common ownership in local markets, such as UHF/UHF combinations or UHF/VHF combinations, or maintain the current prohibition against contour overlap and allow waivers either under a presumptive guideline or a case-by-case basis. 119. In the NPRM, we asked whether or not an entity should be permitted to own two UHF stations with overlapping contours. In making this proposal, we recognized the historical handicap of UHF stations relative to VHF stations in terms of signal coverage and operating expenses. We also sought comment on whether we should permit a UHF station to merge with a VHF station as a more effective way of preserving or improving the service of UHF stations. We also inquired whether it would be appropriate to consider such consolidations only where a minimum number of separately owned television stations would remain after the proposed combination (e.g., a minimum of six independently owned stations). These proposals were specifically targeted to provide competitive enhancements to the weaker segments of the broadcast television industry. Commenters were very divided as to whether the economic benefits to licensees outweighed the potential harm to competition and diversity. Commenters are invited to submit further analyses of these proposals with reference to a Grade A contour definition of the relevant local geographic market for purposes of establishing local television ownership limits. However, commenters arguing that the economic benefits outweigh the potential harm to competition and diversity need to provide more specific evidence of the projected economic benefits as weighed against the potential harm to competition and diversity. 120. If we were to maintain the existing prohibition against common ownership of broadcast television stations with contour overlap but allow waivers, then we must determine whether to follow a case-by-case approach. Parties may wish to address the factors we currently consider in our one-to-a-market waiver, which include the financial condition of the station to be purchased, the competitive and diversity characteristics of the market, and potential public interest benefits. 121. Whether we relax the rule or adopt a waiver standard, we feel it necessary to consider the number of independent suppliers serving the market. In other words, in deciding upon whether to allow certain broadcast television station mergers, we seek to determine whether we should indicate how many independent suppliers must remain in a given region after the mergers and who should be considered alternative suppliers. In a number of our past ownership proceedings, we described and generally took into account the growth of new media that provide competitive and diversity enhancing alternatives to over-the-air television (or radio). However, with the exception of our one-to-a-market rule, when it came to the actual rule itself, we fashioned a rule that counted only television stations or only radio stations in the local or in the national market. Hence, we did not take explicit account of other alternative or competitive media outlets. In Sections III and IV above, we arrive at different conclusions about who are the relevant alternative suppliers, depending upon the market we were discussing (e.g., market for delivered home video programming, advertising market, and video program production market) and the kind of analysis we were concerned with (e.g., competitive analysis versus diversity analysis). This raises the issue of which market or analysis should control the determination of who are the independent suppliers that we count for purposes of setting local ownership limits. We solicit comment on this issue. 122. In determining the number of independent suppliers for either competitive or diversity analysis of a relaxation to the contour overlap rule, we must define the region in which we perform the count. One proposal is to treat the overlap area as the relevant region. In other words, we might possibly allow a company to own two broadcast television stations with contour overlap as long as there are a sufficient number of independent suppliers serving the same area (within their contour overlap). Another proposal would be to treat the relevant region as the DMA within which the two broadcast television stations operate. This second alternative is motivated by the economic and diversity analysis which suggests that the DMA region definition may be more descriptive of a broadcast television station's potential market. Thus this proposal might allow joint ownership of two broadcast television stations with contour overlap when such joint ownership does not reduce the number of independent suppliers in their DMA below some critical level. We solicit comment on both these proposals. 123. Finally, should we decide to designate a minimum number of independent suppliers that should remain in a local market, we must address whether we should choose a number which allows everyone in the market currently to acquire another station or whether we should allow firms to be acquired on a first-come first-served basis until some minimum number of independent broadcast television stations remain. The first approach might be to permit joint ownership of any two television stations in large television markets, even where there is contour overlap. If we were to adopt such a rule, the number of competitors, or independent voices, in each of these local markets could be reduced by as much as one-half, if all those entities that were now permitted to merge, did. Our initial analysis of this rule proposal is that since only the the largest television markets have more than 15 commercial broadcast television stations, and most other markets do not have many other separate video outlets, competition as well as diversity could be seriously harmed if all licensees in these markets, including larger markets, were permitted to purchase a second television station. The second approach, allowing companies to acquire broadcast television stations with contour overlaps on a first-come-first-served basis until the number of remaining independent suppliers reaches some lower bound, raises the issue of how many independent suppliers are enough to ensure workable competition and sufficient diversity in those markets. One approach to answering this question would be to focus upon the DOJ/FTC merger guidelines in deciding upon the minimal number of independent suppliers we would allow. However, we are concerned that, given our diversity requirements, a merger guideline based standard might be too low. The purpose of the merger guidelines is to define the point at which heightened antitrust scrutiny is required. Our purpose in encouraging diversity in broadcast services is not to merely meet a minimum acceptable benchmark, but rather, to encourage a wide array of voices and viewpoints. Consequently, we seek guidance on which threshold number, if any, of remaining independent suppliers would satisfy both our competition and diversity concerns. Further, we ask for comment on whether simply counting outlets is preferable to examining audience share for addressing the impact of an outlet on our competitive and diversity concerns. Finally, we seek guidance on which of the above approaches is the preferred approach with respect to these concerns. VII. THE RADIO-TELEVISION CROSS-OWNERSHIP RULE 124. The radio-television cross-ownership rule, or the one-to-a-market rule, basically provides that a company cannot own both a radio station and a television station located in a given "local" market. This rule was adopted to limit any potential market power in the media market, and to ensure a sufficient diversity of broadcast outlets. The Commission amended this rule in 1989 to permit, on a waiver basis, radio-television mergers as long as the combination occurred in one of the top 25 television markets and 30 separately owned broadcast licensees remained after the combination, or if the waiver request involved a "failed" station, or if the waiver request satisfactorily addressed five criteria which relate to public interest concerns. Whether this limit is still needed to promote these ends will be considered in the following discussion. A. Effects on the Market for Delivered Programming 125. In Section III A above, we tentatively concluded that delivered video programming and delivered audio programming were sufficiently distinct products so as to represent different product markets for competitive analysis purposes. Thus, since television and radio stations do not operate in the same relevant markets for delivered programming, allowing cross-ownership between them in a local market would not appear to harm competition in either. Commenters are asked to provide information on the nature and extent of harm, if any, from relaxing this rule on these markets. B. Effects on the Market for Advertising 126. The main potential economic cost of permitting the owner of a broadcast TV station to own a broadcast radio station in a local market, or vice versa, appears to be that it might give the company the market power to raise local radio and/or television advertising rates. The above discussion does not speak to this point because people may listen to radio and watch television at different times, but advertisers might view either means as an acceptable substitute for getting their message to the same people. On the other hand, some advertising messages may be more effective on television; others on radio. However, as our earlier discussion indicated, we do not have sufficient evidence on this issue to address the effects of relaxing the one-to-a-market rule on the local advertising market. Assuming for the purposes of soliciting comments, that they are economically relevant substitutes, then the issue arises as to how many independent suppliers of local advertising are necessary to ensure that these markets are workably competitive. We invite comment and evidence on both these issues. C. Effects on the Video and Audio Program Production Markets 127. In Section III C above, we tentatively concluded that video programs are sufficiently distinct products that the market for video program production should be considered a separate product market. By this logic, the markets for video program production and audio program production are arguably distinct markets. Consequently market power in the video program production market should not translate into market power in the audio program production market, unless the company already has such market power. However, these program production markets are national markets and presumably the national ownership limits for either broadcasting station type should prevent a company from acquiring such market power. Thus we see no reason why relaxing the one-to-a-market rule should harm competition in either of these supply markets, but seek comment on this tentative conclusion. D. Other Economic Effects 128. The benefits of permitting the owner of a broadcast TV station to own a broadcast radio station in the same local market, or vice versa, are similar to the benefits of permitting joint ownership of two local television stations and were documented in our recent proceeding to adopt a waiver standard to approve such radio-TV combinations. The company can reduce its video and audio programming costs through a reduction in personnel and overhead expenses. Further, the company could use one advertising sales force instead of two for the two stations. This reduction in expense could make the joint enterprise more economically viable than the separate operations were before the combination took place. It would be important for commenters to provide evidence on the size of such efficiency gains so the Commission could weigh them against any potential costs of relaxing the one-to-a- market rule. E. Effects on Diversity 129. The radio-television ("one to a market") rule is intended to foster outlet and viewpoint diversity on the local level. That is, it is designed to assure that no individual or entity can have control over outlets in different media in the same location unless the area is so rich with competitive media outlets that a radio-television combination will not undermine diversity or where the combination is necessary to preserve a failing station, the failure of which would reduce diversity in the market in any case. The rule appears to be achieving the diversity goals for which it was adopted, but may not be necessary in its current form to ensure competitive and diverse radio and television markets. We have previously noted that even smaller markets have a considerable number of television, radio and other programming sources available. In markets ranked between 126 and 150 on the basis of their ADIs, we noted, there are on the average six broadcast television signals and 18 radio signals. Additionally, most such markets have access to cable. Nevertheless, as we noted above, diversity has the most impact in the local context and we must be cautious in taking any action that could serve to reduce that diversity, particularly in smaller markets. F. Tentative Proposals 130. The NPRM in this proceeding sought comment on a variety of proposed relaxations to the one-to-a-market rule, including: (1) elimination of the rule -- using local limits of each service to prevent undue concentration; (2) allowing common ownership of one AM, one FM and one TV station per market; (3) allowing TV-AM combinations only; and, (4) codifying current waiver criteria and applying them to all markets, and not just the top 25 markets, where 30 independently owned voices remain. Commenters were generally in favor of elimination or relaxation of the current rule, arguing that the economies from joint operations would allow more stations to remain on the air and would also permit licensees to provide better service to the public. 131. In light of our earlier competitive and diversity analyses, we tentatively conclude that there are two alternative approaches towards modifying the one-to-a-market rule. If we conclude, after review of the comments and our own analysis, that radio stations and television stations do not compete in the same local advertising, program delivery, or diversity markets, we propose to eliminate this rule entirely and rely on our local ownership rules to ensure competition and diversity at the local level, i.e., proposal number 1 above. This would mean that we would allow entities to own one AM, one FM, and one TV station in even the smallest markets. In large markets, one entity would be allowed to own up to two AMs, two FMs, and one TV station. 132. If, on the other hand, we conclude that radio and television do compete in some or all of the same local markets, then we must address how to modify the one-to-a-market rule, if at all. In this case, we propose a modified form of proposal number 4 above. Specifically, we propose to allow radio-television combinations (AM-TV, FM-TV, or AM- FM-TV) in those markets that have a sufficient number of remaining alternative suppliers/outlets as to ensure sufficient diversity and workable competition. In this regard, we seek comment on whether "30 separately owned, operated and controlled broadcast licensees" continues to represent the appropriate minimum requirement, or whether our diversity and competition concerns can be satisfied if a lesser number of licensees remain, such as 20. This lesser number may be justified by the increased role of cable and the future role of DBS and video dialtone offerings in providing areas with alternatives to broadcast media. Under this proposal such combinations would be automatically allowable by rule; it would not be necessary for applicants to seek a waiver. Further, we seek comment on whether this count should be for independent suppliers/outlets within a DMA or some other geographic market delineation. Finally, we note that if we were to adopt this modified version of proposal 4 above, we also propose to continue accepting waivers for "failed" broadcast stations as currently provided for in note 7 of 73.3555 of the Commission's Rules, and to continue evaluating other waiver requests on the basis of the five considerations set forth in the Second Report and Order and the Memorandum and Order in MM Docket No. 87-7. VIII. LOCAL MARKETING AGREEMENTS A. Description 133. We now turn our attention to the issue of Local Marketing Agreements (LMAs). As stated above, an LMA is a type of joint venture that generally involves the sale by a licensee of discrete blocks of time to a broker who then supplies the programming to fill that time and sells the commercial spot announcements to support it. Such agreements enable separately owned stations to function cooperatively via joint advertising, shared technical facilities, and joint programming arrangements. In the radio ownership proceeding, we adopted guidelines primarily applicable to the AM and FM services for LMAs. These guidelines were affirmed and clarified in both the First Reconsideration Order, 7 FCC Rcd 6387 at 6400-6402 (1992), and the Second Reconsideration Order, 9 FCC Rcd 7183 (1994). Specifically, we required that a licensee's time brokerage of any other radio station in the same market for more than fifteen percent of the brokered station's weekly broadcast hours would result in counting the brokered station toward the brokering licensee's national and local ownership limits. See 47 C.F.R. Section 73.3555(a)(2)(i). We also required that most radio LMAs be kept in the public inspection files of the stations involved and also be filed with the Commission. See 47 C.F.R. Section 73.3613(d). We also decided that TV station LMAs should be kept at the station and be made available for inspection upon request by the Commission. See 47 C.F.R. Section 73.3613(e). 134. In the TV NPRM, we sought comment on the prevalence of TV LMAs, whether they presented the same types of competitive and diversity concerns that we found in the radio context, and whether they should be subject to some limitations. Few commenters addressed LMAs, and none provided specific information concerning their prevalence. The comments we did receive basically expressed two divergent general views. Some commenters felt that TV LMAs should remain unregulated absent evidence of abuse, irrespective of whether new TV multiple ownership rules are adopted. Other commenters felt that if the Commission did adopt rules governing TV LMAs, such rules should be no more restrictive than those governing radio LMAs. 135. From our experience with radio LMAs, it appears that such agreements, subject to some general Commission guidelines, can provide competitive and diversity benefits to both the brokering parties and to the public. To maximize such benefits in the TV context, while minimizing potential adverse consequences, we believe that guidelines similar to those governing radio LMAs may be necessary with regard to TV LMAs as well. Accordingly, since the comments regarding LMAs from the TV NPRM require elaboration, we now seek such further comments to enable us to adopt appropriate guidelines for TV LMAs. 136. Although we are aware that LMAs are currently used by some TV stations, we have already noted that the previous comments did not address the prevalence of such agreements in the TV industry. Accordingly, as an initial matter, we seek comment providing specific quantitative data about this issue indicating the number of such agreements currently in existence. If such comment is not received, it may be necessary for the Commission to conduct a survey to obtain this quantitative data. 137. Experience has shown us that in the radio context, LMAs are often used as precursors to the sale of radio stations pending the acquisition of financing and Commission approval of the assignment application. Such agreements may also enable radio stations to enjoy the benefits of economies of scale by combining various operations and facilities. Although it seems probable that LMAs serve the same general purposes for TV stations, we seek comment on the following issues. Do TV LMAs serve the same purposes as radio LMAs or are there significant differences between them? What benefits accrue to the parties involved in TV LMAs? What benefits accrue to the public from TV LMAs? B. Analysis and Tentative Proposals 138. To ensure that stations using LMAs comply with the Commission's new national and local radio ownership rules, we adopted certain attribution principles for radio LMAs. Specifically, we determined that time brokerage of another radio station in the same market for more than fifteen percent of the brokered station's weekly broadcast hours, would result in counting the brokered station toward the brokering licensee's national and local multiple ownership limits. Similarly, to ensure that TV stations using LMAs comply with the TV multiple ownership rules, regardless of whether such rules are modified, we believe that some guidelines may be necessary. We tentatively propose to treat LMAs involving television stations in the same basic manner as we did for radio stations. That is, time brokerage of another television station in the same market for more than fifteen percent of the brokered station's weekly broadcast hours would result in counting the brokered station toward the brokering licensee's national and local ownership limits. If the local TV multiple ownership rules are not relaxed, such an attribution provision would preclude TV LMAs in any market where the time broker owns or has an attributable interest in another TV station. Additionally, TV LMAs would be required to be filed with the Commission in addition to the existing requirement that they be kept at the stations involved in an LMA. Furthermore, our TV LMA guidelines would allow for "grandfathering" TV LMAs entered into prior to the adoption date of this Notice, subject to renewability and transferability guidelines similar to those governing radio LMAs. 139. To test the appropriateness of this proposal, we seek comment on the following issues. Are there any compelling reasons why the Commission should not apply the existing radio LMA guidelines, including the filing requirements, the limitation on program duplication, and the ownership attribution provisions, to TV LMAs? If the radio ownership attribution rule applies to TV LMAs, should the Commission use the fifteen percent benchmark that it used in the radio context, or is some other percentage more appropriate? What effects, if any, should LMAs have on the renewal expectancy of TV stations? What effects, if any, would these proposed attribution guidelines have on ownership of TV stations by minorities and women, and how should the Commission deal with such effects? Comments relating to the effects of LMAs on ownership of broadcast stations by minorities and women, should be directed to our concurrent Notice of Proposed Rulemaking dealing specifically with the issues of minority and female ownership in MM Docket No. 94-150. 140. To avoid any unnecessary disruption to existing contractual relationships, we also seek comment on guidelines concerning the termination, transferability and renewal of TV LMAs. Should the contract rights associated with existing TV LMAs be transferable when the brokering station is sold? If so, what restrictions, if any, should apply? Should TV LMAs entered into before the adoption date of this Notice be subject to the same "grandfathering" and renewability guidelines that govern radio LMAs as set forth in the Second Radio Reconsideration, supra, irrespective of whether the local TV multiple ownership rules are modified? Specifically, should existing LMAs be "grandfathered" for the remainder of the initial term of the LMA and then be subject to the governing local TV multiple ownership rules? IX. SUMMARY 141. By this Further Notice of Proposed Rule Making, we hope to receive comments on the myriad of issues pertinent to our proposed changes in the Commission's television ownership rules. These comments should attempt to frame their discussion and analysis in a manner consistent with our proposed analytical frameworks for addressing our historic competition and diversity concerns. However, if there are issues pertinent to these concerns, which we have not specifically addressed in the above discussion, then we would expect commenters to bring those issues to our attention. Further, for these newly identified issues, commenters are asked to provide sufficient data and/or analysis so we can determine the importance of the newly raised issue. X. ADMINISTRATIVE MATTERS 142. Pursuant to applicable procedures set forth in Sections 1.415 and 1.419 of the Commission's Rules, 47 C.F.R. Sections 1.415 and 1.419, interested parties may file comments on or before (April 17, 1995), and reply comments on or before (May 17, 1995). To file formally in this proceeding, you must file an original plus five copies of all comments, reply comments, and supporting comments. If you want each Commissioner to receive a personal copy of your comments, you must file an original plus nine copies. You should send comments and reply comments to Office of the Secretary, Federal Communications Commission, Washington, D.C. 20554. Comments and reply comments will be available for public inspection during regular business hours in the FCC Reference Center (Room 239), 1919 M Street, N.W., Washington, D.C. 20554. 143. This is a non-restricted notice and comment rulemaking proceeding. Ex parte presentations are permitted, except during the Sunshine Agenda period, provided they are disclosed as provided in the Commission Rules. See generally 47 C.F.R. Sections 1.1202, 1.1203, and 1.1206(a). 144. Additional Information: For additional information on this proceeding, contact Roger Holberg (202-418-2134), or Robert Kieschnick (202-418-2183), Mass Media Bureau. XI. INITIAL REGULATORY FLEXIBILITY ACT STATEMENT 145. The Initial Regulatory Flexibility Act Statement found in paragraphs 45 through 52 (7 FCC Rcd at 4120) in the Notice of Proposed Rule Making in this proceeding remains unchanged. 146. As required by Section 603 of the Regulatory Flexibility Act, the Commission has prepared an Initial Regulatory Flexibility Analysis (IRFA) of the expected impact on small entities of the proposals suggested in this document. The IRFA is set forth in the Notice of Proposed Rule Making in this proceeding as set forth above. Written public comments are requested on the IRFA. These comments must be filed in accordance with the same filing deadlines as comments on the rest of this Further Notice, but they must have a separate and distinct heading designating them as responses to the Initial Regulatory Flexibility Analysis. The Secretary shall send a copy of this Further Notice of Proposed Rule Making, including the Initial Regulatory Flexibility Analysis, to the Chief Counsel forAdvocacy of the Small Business Administration in accordance with paragraph 603(a) of the Regulatory Flexibility Act. Pub. L. No. 96-354, 94 Stat. 1164, 5 U.S.C. Section 601 et seq (1981). FEDERAL COMMUNICATIONS COMMISSION William F. Caton Acting Secretary APPENDIX A: LIST OF COMMENTING PARTIES Comments 1. Abry Communications 2. Act III Broadcasting, Inc. 3. Associated Broadcasters, Inc. and Galloway Media, Inc. 4. Association of Independent Television Stations, Inc. 5. Barnstable Broadcasting, Inc. 6. Buck Owens Production Company, Inc. 7. Capital Cities/ABC, Inc. 8. Capitol Broadcasting Company, Inc. 9. CBS Inc. 10. Clear Channel Communications 11. Commonwealth Communications Services, Inc. 12. Fisher Broadcasting Inc. 13. Fox Inc. 14. Home Shopping Network, Inc. 15. Jet Broadcasting Co., Inc. 16. KFVE Joint Venture 17. LIN Broadcasting Corporation, Midwest Television, Inc., Paducah Newspapers, Inc., Post-Newsweek Stations, Inc., Providence Journal Company, and The Spartan Radiocasting Company 18. Malrite Communications Group, Inc. 19. Marion TV, Inc. 20. McKinnon Broadcasting Company 21. Morgan Murphy Stations 22. National Association of Broadcasters 23. National Broadcasting Company, Inc. 24. National Telecommunications and Information Administration 25. Network Affiliated Stations Alliance 26. Office of Communication of the United Church of Christ 27. Press Broadcasting Company, Inc. 28. Sinclair Broadcast Group, Inc. 29. Trinity Broadcasting Network 30. United States Catholic Conference 31. Vetter Communications Company, Inc. 32. Westinghouse Broadcasting Company, Inc. 33. WKRG-TV, Inc. and WEVV, Inc. 34. WNAL-TV, Inc. Reply Comments 1. ABC Television Affiliates Association 2. American Federation of Television and Radio Artists 3. Associated Broadcasters, Inc. and Galloway Media, Inc. 4. Association of Independent Television Stations, Inc. 5. Blackburn & Company, Inc. 6. Federal Trade Commission, Staff of the Bureau of Economics 7. Jet Broadcasting Co., Inc. 8. KMTR, Inc. 9. Morgan Murphy Stations 10. National Association of Black Owned Broadcasters 11. National Association of Broadcasters 12. National Broadcasting Company, Inc. 13. Office of Communications of the United Church of Christ 14. Paramount Stations Group, Inc. 15. Telecommunications Research and Action Center/Washington Area Citizens Coalition Interested in Viewers' Constitutional Rights 16. WJAC, Inc. 17. WKRG, Inc. and WEVV, Inc. APPENDIX B: COMMENT SUMMARY National Broadcast Television Ownership Rules Current regulation limits the number and audience reach of television stations in which an entity may hold an attributable interest to 12 stations and 25% of total television households on a national basis. The NPRM proposed several alternatives including: -increasing the numerical limit to 20 or 24 and the reach limit to 35% -increasing the numerical limit to 18 and the reach limit to 30% -increasing the numerical limit only and retaining the 25% reach limit. Public interest groups commenting in this proceeding and one broadcaster, Fisher Broadcasting, favored retention of the existing limits. They argue that increasing the ownership limits will harm the Commission's core goal of promoting diversity of programming. Contrary to the Commission's assertion that the economies of scale made possible by increased ownership limits could permit the production of new, diverse, and locally produced programming, they argue that such savings will be used to reduce debt or purchase more expensive syndicated programming. All other comments filed favor elimination or relaxation of the rule. NTIA and CBS, among others, urge total elimination of the rule. Fox believes that the Commission should relax the national ownership limitations to permit entities to hold attributable interests in television stations reaching less than 50% of the nation's households. If a numerical limitation is retained, Fox continues, it should be increased to 25 stations and the Commission should retain its current rule attributing UHF stations with 50% of the households in their ADI market. NBC argues for a more moderate increase, such as raising the numerical limit to 18 stations and the audience reach limit to 35%. ABC, NAB and INTV also favor a numerical limit of 18 stations, but argue for a 30% audience reach limit. INTV argues, in addition, that we should review the national TV ownership limits again every three years, applying a presumption that the limits should be relaxed. The proponents of elimination or relaxation of the rule argue that the proliferation of television stations and competing video sources has obviated or undermined the diversity rationale that has supported regulation in this area. Moreover, they contend that increased group ownership would foster competition by permitting broadcasters to achieve economies of scale that would enable then to better compete with cable, which enjoys a dual revenue stream from subscribers as well as advertisers, not available to over-the-air television. Local Broadcast Television Ownership Rules - Duopoly A vast majority of commenters agreed that relaxation of current local duopoly rules will promote broadcasters' overall competitiveness in the video marketplace. Nearly all proponents think that a Grade A contour standard provides a substantially more realistic and accurate measure of a station's core market than the existing Grade B contour rule. Moreover, most proponents believe that the switch from a Grade B standard to a Grade A standard will increase broadcasters' long-term viability by enabling them to reap the benefits provided by "economies of scale" -- without out any commensurate loss in program "diversity." In fact, several commenters indicate that the savings allowed by streamlining management, marketing and station administration will actually increase broadcasters' ability to provide program diversity, variety and quality. While NAB and Fisher Broadcasting oppose any further relaxation of the rule, some commenters suggest that additional relaxation should be considered in two to three years. Several commentators, particularly broadcasters, urge the Commission to go further. Generally, CBS, INTV, Westinghouse and others support relaxation of the rule, particularly with respect to UHF-UHF combinations in any market. Westinghouse and others would permit VHF-UHF combinations in the same market, although conditions they would place on these arrangements vary. Some commenters would support only VHF-UHF combinations within the Grade A contour while others would allow any television duopoly combination as long as a certain number of voices remained in the market. Still others would only allow the combination if both stations were non-network affiliates while others would permit it if the UHF station was an independent. A few commenters would drop contour-based duopoly restrictions altogether. Proponents of this view, such as Fox and NTIA, believe that the Commission should adopt an actual audience share approach by utilizing Arbitron ADI data because it is the most accurate indicator of a broadcaster's market power. While Fox proposes that a minimum number of independents remain in the market after acquisition, along with ADI data to prevent undue local concentration, NTIA proposes a system based solely on audience reach, regardless of the number of remaining independently controlled community voices. A few commenters suggest the adoption of an ad hoc regulatory scheme, in order to take into consideration the uniqueness of a particular market. Still others propose a two-to-a-market rule, so long as there remain four to six independently owned stations in the local market. Arby Communications proposes perhaps the most radical approach, suggesting that local duopoly restrictions should be dropped altogether--indicating that diversity and undue concentration concerns are best kept in check at the national level. Some commenters, such as Sinclair Broadcast Group, Inc., feel that duopoly restrictions should only be eliminated for UHF licensees, (keeping the rule otherwise in its current form) thereby leveling the playing field between UHF stations and dominant VHFs. Trinity Broadcasting Network, owning 11 independent UHF stations, however, urges the Commission to adopt Grade A contour restriction for all stations, except unaffiliated UHF broadcasters, who would be free to come under common ownership, regardless of contour overlap. Vetter Communications Company, Inc., suggests that the duopoly rules be relaxed to two-to-a-market combinations between VHF-UHF or UHF-UHF combinations only, while also replacing the Grade B standard with a Grade A standard. WNAL-TV, Inc., (UHF, Gadsden, Alabama) which approves a relaxation of current duopoly rules, wants the Commission to consider "additional television services" like LPTV, DBS, and local translators in ascertaining the number of community voices for market concentration determination, and to create a rebuttable presumption that UHF-UHF acquisitions in same market will not undermine diversity or foster undue market control. Along the same lines, Home Shopping Network would eliminate duopoly altogether for "unaffiliated" UHF's, as defined by 47 C.F.R. s. 73.662(i), citing UHF's historical handicaps. In general, public interest groups (e.g., The United Church of Christ (UCC), United States Catholic Conference (USCC), Telecommunications Research and Action Center (TRAC)) and a few broadcasters (e.g., Press Broadcasting Company, and Malrite Communications Group, Inc.) oppose relaxing local duopoly rules. They believe that the "economies of scale" benefits provided to already financially strong stations will not only cause loss of diversity due to common control (via acquisition), but that those stations that cannot secure economic partners will ultimately be forced to shut-down operations. Opponents to duopoly relaxation insist that stations who do not merge will be "priced out" of the quality programming market, and will increasingly rely on the broadcast of "infomercials" for profit, rather than programming in the public interest. Thus, they continue, relaxation of the current rules will undermine all the goals that the Commission was created to promote; competition, diversity, localism, and public affairs programming. Moreover, opponents are in general agreement that the "economies of scale" justification for duopoly is unconvincing. According to those commenters, relaxation will financially burden many stations because the costs associated with acquiring and maintaining co-owned stations will not be commensurate with the only minimal or non-existent savings that will occur. These commenters assert that the existence of commonly controlled stations will lead to a sharp increase in the demand for, and costs of syndicated programming -- placing it out of the reach of individually owned stations, and even taxing the cash flow of the combinations. As a result, UCC argues that all broadcasters will be further weakened, allowing other video service providers such as DBS, cable, and other competitive video outlets to threaten the prolonged viability of "free" over- the-air television. Local Broadcast Television Ownership Rules - "One to a Market" The NPRM proposed alternatives to the current restrictions on common ownership of radio-television combinations in the same market, i.e., "one-to-a-market" rule. Although the Commission currently grants presumptive waivers in the top-25 markets, if 30 independent voices will remain after the merger and normally issues waivers when certain specified factors are present, the Commission offered four alternative proposals for commenters to consider. A majority of commenters who discussed this rule, including NTIA, CBS, INTV, and Westinghouse, favored its complete elimination, based on an "economies of scale" rationale. Commenters such as Associated Broadcasters, Inc., and Galloway Media, Inc., argue that elimination is justified as it would allow marginal stations to remain on the air, and would likely spur the activation of unused channels, or permit upgrade of facilities. Clear Channel Communications, Inc., argues that 12 "independent operators" remaining in the market would be sufficient to prevent undue concentration, so long as the definition of "operators" include cable, commercial and non-commercial radio and TV broadcasters. Barnstable Broadcasting, Inc., licensee of nine stations (three FM's, two FM-FM's, and one AM-FM), was the only commenter that specifically opposes repeal of the current rule, citing the economic advantage allowed to TV broadcasters, adversely affecting radio-only operations. As an alternative to repeal, INTV suggests allowing common ownership of at least one station per service (e.g., an AM, an FM and a single TV), with the potential ownership of additional stations up to the maximum number permitted for each particular service. Similarly, NAB urges the Commission to allow cross-ownership up to the limits for each service, so long as 15 independently-owned total voices remain in the local market. ABC concurs, but suggests that 30 such voices should remain. Fisher Broadcasting, Inc., who opposes changes in the national ownership rules and local duopoly, supports "liberalizing" cross-ownership, particularly for the smaller markets. Fisher points out, however, that the Commission's proposal of 30 remaining independently controlled voices would not direct "help" where it is needed, i.e., the smaller markets, where stations would be unable to avail themselves of the rule. JET Broadcasting Co. ("JET"), owner of a grandfathered radio-TV combination, favors the elimination of the one-to-a-market rule and states that the quality of public affairs programming on its FM station is vastly improved by utilizing its TV news facilities. Moreover, JET argues that the inherent separation of the two different media prevents the build-up of viewpoint concentration for TV-radio combinations. Unlike Fisher, however, JET asserts that markets of all sizes would benefit from relaxation. Buck Owens Production Company, working under a "failed station" waiver in Bakersfield, CA, urges the Commission to adopt an AM-FM-TV rule, in order to prevent a penalty of divestiture if "rescues" are successful. Local Marketing Agreements Current FCC policy does not restrict television local marketing agreements ("LMAs"); the licensee is, however, required to remain in control of the station at all times. In the radio context, the Commission recently restricted unattributable time brokerage to 15% of the brokered station's weekly broadcast hours; agreements exceeding that will result in ownership attribution to the broker. In the NPRM, the Commission questioned the extent to which LMAs were pervasive in television, whether they present the same competitive and diversity concerns in television as in the radio industry, and whether restrictions on LMAs should be imposed if the television local ownership rules are substantially relaxed. Few commenters addressed LMAs, and none provided specific information as to their prevalence in the industry. LIN Broadcasting Corp., et al., comments that LMAs are beneficial, but argues that unless duopoly restrictions are relaxed, imposition of the radio model, in which LMAs may be considered an "attributable ownership interest", would preclude such arrangements between television stations in the same area--undermining the potential reduction in local costs. Such a result, they say, is inconsistent with previous policy articulations by the Commission, which has characterized such agreements as beneficial mechanisms that "enable stations to pool resources and reduce operating expenses without necessarily threatening competition or diversity". Associated Broadcasters, Inc. and Galloway Media, Inc. believe that the Commission should not limit LMAs. Rather, they say, the Commission should encourage separately owned television stations to enter LMAs, time brokerage, program affiliation, and simulcast agreements, and other cooperative arrangements, so long as they are consistent with antitrust laws. INTV suggests that if the Commission substantially relaxes the local television ownership rules, it should govern time brokerage and local marketing agreements by the same standards as attributable ownership interests. Fisher Broadcasting believes that the Commission should restrict television LMAs with limits identical to the radio limits (i.e., brokering more than 15% of a station's broadcast time should result in the station's treatment as an attributable ownership interest for purposes of the multiple ownership rules). In addition, NBC agrees that the Commission's rules regarding television LMAs should be no more restrictive than those regarding radio, because common utilization of newsgathering and production facilities may yield substantial cost savings and thus benefits viewers. In fact, NBC argues that such arrangements may increase diversity by allowing both experimental programming and programming targeted to specific groups. KFVE contends that LMAs should remain unregulated absent evidence of abuse, whether or not the duopoly rule is liberalized and without regard to the adoption of new television multiple ownership rules. The Office of Communication of the United Church of Christ believes that the Commission should adopt safeguards to prevent de facto transfers of control by requiring brokered stations to develop issues/program lists based on community ascertainment. APPENDIX C: BREAKDOWN OF LEISURE ACTIVITES* % of total time acccounted for by each activity Leisure Activity 1970 1988 Television 46.5 45.3 Network affiliates 26.3 Independent stations 10.7 Basic cable programs 5.5 Pay cable programs 2.8 Radio 33.1 33.9 Home 16.4 Out of home 17.5 Newspapers 8.3 5.3 Records & tapes 2.6 6.4 Magazines 6.5 3.2 Leisure books 2.5 2.8 Video games (home) 0.4 Movies 0.4 0.4 Spectator Sports 0.1 0.4 Videocassette recorders 1.8 Video games (arcade) 0.1 Cultural events 0.1 0.1 Total 100.0** 100.0** * These data come from Table 1.3: Time spent by adults on selected leisure activities, 1970 and 1988, published in H. L. Vogel, Entertainment Industry Economics: A guide for financial analysis, (2nd edition, 1992, Cambridge University Press). ** Due to rounding, these columns do not added up to 100 exactly. APPENDIX D: BREAKDOWN OF ADVERTISING REVENUES* MEDIUM 1990 1991 1992 1993 TELEVISION Total 28,405 27,402 29,409 30,584 Network 9,383 8,933 9,549 10,209 Syndication (national) 1,288 1,853 2,070 1,576 Spot (national) 7,354 7,110 7,551 7,800 Spot (local) 7,612 7,565 8,079 8,435 Cable (national) 1,197 1,521 1,685 1,970 Cable (local) 330 420 475 594 RADIO Total 8,323 8,476 8,654 9,457 Network 476 490 424 458 Spot 1,547 1,575 1,505 1,657 Local 6,300 6,411 6,725 7,342 NEWSPAPERS Total 32,368 30,409 30,737 32,025 National 3,720 3,685 3,602 3,620 Local 28,414 26,724 27,135 28,405 MAGAZINES Total 6,803 6,524 7,000 7,357 Weeklies 2,864 2,670 2,739 2,850 Women's 1,713 1,671 1,853 2,009 Monthlies 2,226 2,183 2,408 2,498 DIRECT MAIL Total 23,370 24,460 25,391 27,266 OUTDOOR Total 1,084 1,077 1,031 1,090 National 640 637 610 605 Local 444 440 421 485 MEDIUM 1990 1991 1992 1993 YELLLOW PAGES Total 8,926 9,182 9,320 9,517 National 1,132 1,162 1,188 1,230 Local 7,794 8,020 8,132 8,287 FARM PUBLICATIONS Total 215 215 231 243 BUSINESS PUBLICATIONS Total 2,875 2,882 3,090 3,260 MISCELLANEOUS Total 15,955 15,773 16,427 17,281 National 11,608 11,588 12,124 12,759 Local 4,347 4,185 4,303 4,522 TOTAL National 72,780 72,635 76,020 80,010 Local 55,860 53,765 55,270 58,070 GRAND TOTAL 128,640 126,400 131,290 138,080 * These data were prepared for Advertising Age by McCann-Erickson Inc., and represent in millions of dollars, total expenditures by advertisers (not merely receipts by media). APPENDIX E: RELEVANT PRODUCT MARKET ALTERNATIVES** 1. Market for delivered video programming Suppliers of Substitutes Geographic Dimensions of Market Metrics of Concentration broadcast television stations* U.S. Borders Number of independent operators/suppliers* cable system operators* DMA Number of separate channels direct satellite operators* Contour B Audience share of each channel wireless cable operators* Contour A* Audience share of each supplier* telephone companies* video cassette recorders 2. Market for National Advertising Suppliers of Substitutes Geographic Dimensions of Market Metrics of Concentration commercial broadcast television networks* U.S. borders* Number of independent suppliers* commercial cable television networks* DMA Revenue share of each supplier* direct satellite networks* Contour B national magazine publishers Contour A national newspaper publishers radio networks direct mail 3. Market for Local Advertising Suppliers of Substitutes Geographic Dimensions of Market Metrics of Concentration broadcast television stations* U.S. borders Number of independent suppliers* cable system operators* DMA* Revenue share of each supplier* radio station operators* Contour B newspaper operators* Contour A* direct mail 4. Market for Video Program Production Purchasers of Video Programs Geographic Dimensions of Market Metrics of Concentration broadcast television networks* U.S. borders* Number of independent purchasers* cable television networks* DMA Expenditures of each purchaser on first run video programs direct satellite networks* Contour B Expenditures of each purchaser on video programs* broadcast television stations* Contour A ** Items with single asterisk represent our tentative selection of the alternatives considered. Because competition concerns and diversity concerns sometimes suggest different units of measure, there may be more than one metric of concentration selected.