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Protecting Television Consumers By Protecting Competition

by: Tom Wheeler, FCC Chairman

March 6, 2014 - 02:25 PM

Every four years, the FCC is required by law to assess its media ownership rules and determine if they need to be modified to serve the public interest. In fact, it’s been six years since the Commission last completed a quadrennial review, so it goes without saying that the video marketplace has changed dramatically since the FCC last updated these rules.

Later this month, the Commission will begin in earnest its 2014 quadrennial review, building on a record it has amassed over the years. This will be an open evaluation to understand how evolving market structures and competition should influence how we act to preserve the continuing values of competition, localism, and diversity of voices in our local media.

I come to the 2014 review with two bedrock beliefs: that broadcasting provides a vital public service as a part of its public trust, and that the overall changes in the media landscape are opening new opportunities for U.S. broadcasters.

While this review is pending, the current rules addressing media consolidation will remain in place.  But motivated by evidence that our rules protecting competition, diversity and localism have been circumvented, we will consider some changes to other Commission Rules to enforce existing rules.

JOINT SALES AGREEMENTS

One notable development that requires immediate attention is the rise of Joint Sales Agreements in small- and medium-sized TV markets. Commonly known as JSAs, these are arrangements in which one station sells advertising time for another station in the same market. In more than two-thirds of JSA transactions, one station sold 100 percent of the advertising time of the other.

What does that mean in plain English?

As many large companies have disclosed in filings with the Securities and Exchange Commission, it means these larger stations selling the advertising are the de facto owners of smaller stations – owning all of the assets, retaining a significant amount of profits and programming all of the news hours. Hence, these SEC filings make clear that, by any reasonable standard, these smaller stations in the JSAs are not independent.

JSAs are the centerpiece of what’s known as the “sidecar” business model, which also includes Shared Services Agreements (SSAs) and special financial arrangements. Under SSAs, stations pool resources such as news reporters or traffic helicopters.

THE FCC’S ATTRIBUTION RULES

In small- and medium-sized local markets, FCC rules have long restricted owners to a single TV station.  The logic of the restriction is to preserve the Communications Act’s core values of competition, diversity and localism.

To prevent this statutory mandate from being undermined, it is necessary to identify activities short of complete ownership that impart either control or forbidden influence over a supposedly independent television station.  This is where our ownership attribution rules come in. 

These rules identify the types of activity that would cause the Commission to attribute ownership. So, for example, the rules currently attribute ownership where there is a five percent or greater voting stock interest or where there are common corporate officers or directors.  

CLOSING THE JSA LOOPHOLE

Scrutiny of Joint Sales Agreements reveals that the Commission’s attribution rules have failed in their purpose and require a technical adjustment.  The SEC filings show beyond a doubt that the dependent station is “owned” in every respect except for formalities.  In other words, the independence of the controlled station is a legal fiction.  The attribution rules are supposed to identify these circumstances and apparently have not.

So how should we respond to the use of Joint Sales Agreements? The right answer is to make JSAs attributable in the television business just as they have been for many years in the radio business.  In radio, where 15 percent or more of a station’s advertising sales are generated by another station, that party is considered to have effective control. In addition, we should require the disclosure of all SSAs, collecting information to inform the record on such practices.

I completely agree with an important point made by recently by the Department of Justice in an FCC filing:  At a time of unprecedented change in the video business, the FCC should deal with facts, not reality-obscuring legal fictions.  Making JSAs attributable is simply recognizing reality.  And requiring, as proposed, that SSAs be made transparent enables the Commission and the public to gauge whether specific agreements between competing stations promote greater competition, diversity and localism, or suppress it.  The proposed initiatives are not designed to stop beneficial efficiencies in the television business.  They are designed to enable fact-based determinations to ensure competition, diversity, and localism at this very important juncture in the media marketplace.

WAIVERS: CASE-BY-CASE CONSIDERATION

Make no mistake about it, while the Commission has the responsibility to enforce its rules, the use of JSAs to promote the public interest will not be restricted by this proposal. There will certainly be entities that have a strong case for demonstrating that the public interest would not be served by the application of our rules.  That’s why the proposal specifically provides an opportunity for broadcasters, on a case-by-case basis, to receive a waiver from the rules. This waiver process should be simplified and expedited, not placing excessive burdens on small broadcasters. We will, of course, carefully review the petition of any such waiver. 

LOOKING AHEAD, ASKING QUESTIONS

While I believe the record clearly demonstrates the need for action in the case of JSAs, there are still outstanding questions surrounding many other issues.

That’s why the Commission should seek public comment on proposals to assess and preserve the local broadcast marketplace and increase transparency, including:

  • Proposing to retain the current ban on mergers between the four major TV networks, as well as local radio and television ownership rules;
  • Proposing to maintain a prohibition on the cross-ownership of newspapers and television stations and seeking comment on whether and how to modify the existing rule; and
  • Asking questions about improving the current waiver standards for broadcast ownership.

JOINT RETRANSMISSION NEGOTIATIONS: CONSUMERS LOSE WHEN BROADCASTERS BAND TOGETHER

I am also proposing another action to reflect changes in the media landscape and ensure that law is being enforced as intended.

By law, broadcasters can demand that cable and direct broadcast satellite operators compensate them to carry their stations.  The cost of these “retransmission consent agreements” has skyrocketed from $28 million in 2005 to $2.4 billion in 2012, a nearly 8,600 percent increase in seven years. 

Congress intended for retransmission consent agreements to be hammered out through one-on-one negotiations.  But increasingly, we’ve seen the largest stations in a local market negotiate retransmission fees jointly – even though they are competitors. This tends to put upward pressure on cable prices. Joint negotiations have been documented to increase prices to cable systems.  At least some of those costs ultimately are borne by the consumer in the form of higher cable or Direct Broadcast Satellite (DBS) fees.  Witness the fact that some operators have begun adding “below the line” retransmission fees to consumer bills.

When broadcasters and cable or DBS operators fight, consumers take the blows.  That’s why I’m proposing that the FCC prohibit two or more of the big four local broadcasters from banding together in local cable carriage negotiations and to require smaller stations to rebut the presumption that such joint negotiations violate the public interest. This action will return retransmission consent to one-on-one negotiations as intended by Congress, rather than many against one – with potential consequences for the consumer as one who ultimately pays the price. 

Collectively, these actions will not only preserve values like competition, diversity, and localism; they are simply the right thing to do. They would update our rules to reflect new realities, and they protect consumers from practices that can drive up their bills. This is common sense, and I look forward to working with my colleagues to advance the public interest.

Updated: March 6, 2014 - 02:32 PM
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