Articles Posted in Ownership Law & Regulation

While the perennial cliche is that the FCC is perpetually behind the curve in trying to keep up with new communications technologies, my experience has been that the FCC and its staff are pretty up to date on these developments. As a result, when we see a rule remain on the books after its usefulness has ended (or the discovery that it was never useful in the first place), it can usually be attributed to one of two possibilities: either fixing the rule hasn’t risen high enough on the FCC’s list of priorities to dedicate limited staff resources to the process (for example, modifying the FCC’s full power television rules to eliminate the rules and references applicable only to analog TV), or political pressures are impeding the process.

Rules that remain on the books because of a lack of staff resources tend to be addressed eventually. In contrast, rules that remain in place due to political pressures are well nigh immortal. In a 2010 C-SPAN interview with three former FCC chairmen regarding various issues, including the FCC’s media ownership rules, Chairman Hundt was quoted as saying “Why don’t we get an eraser and just get rid of them? None of us thought these rules made sense.” To which Chairman Powell responded “It’s a simple reason. It’s politics.” The third party to that conversation, Chairman Martin, had tried to slightly loosen the prohibition on broadcast/newspaper cross-ownership in 2008 in the nation’s largest markets, only to encounter a firestorm of protests and court appeals from media activists. As a result, the prohibition remains in place, although the FCC announced this past December that it is once again considering loosening the rule in the largest media markets (are you seeing a pattern here?).

Rules residing in political purgatory–those kept on political life support long after their purpose has ended–survive until the facts on the ground change to such an extreme degree that even those who reflexively defend the rule can no longer do so. While some would justifiably rail against that system and demand that the nature of politics change, with rules created, modified, or eliminated based upon the cold hard facts of the situation, the nature of politics is actually the most relevant cold hard fact, and realistically, the least likely to change. Many rules will outlive their usefulness, and in fact become harmful, long before their demise. The only question is how long it takes after that tipping point is reached before it becomes politically feasible for the FCC to modify or eliminate the rule.

Of course, none of this occurs in a vacuum, and both individuals and businesses living with a rule must adapt to the changing situation on the ground, even as the rule itself remains unchanged. Recent “adaptations” make me wonder if we haven’t reached the point where the broadcast/newspaper cross-ownership rule, which certainly had a reasonable purpose at one time, has reached the point where it can no longer be defended with a straight face.

In particular, I am thinking of two recent events which suggest the rule has outlived its time. The first is the announcement last month by Media General that it is selling its newspapers to Berkshire Hathaway in order to concentrate on its broadcast and digital content delivery. When a company that actually does have both broadcast and newspaper interests does not find the combination sufficiently compelling to retain its newspaper operations, the premise of the rule–a fear of powerful broadcast/newspaper combinations dominating the market–appears misplaced.

More interesting, however, is the recent announcement by Newhouse Newspapers that it will be scaling back its daily newspaper in New Orleans (the well-known Times-Picayune), as well as those in Mobile, Huntsville, and Birmingham, Alabama. According to the announcement, these daily newspapers will now be published only three times a week, with increased focus on website content.

Why the drastic cutback from seven days a week to just three, rather than the more measured approach perennially proposed by the U.S. Postal Service of ending only Saturday delivery as a cost saving measure? Given that daily newspapers make a substantial portion of their revenue from publishing legal notices (which are usually required by law to be published in a daily newspaper), these newspapers must have thought long and hard before ceasing daily publication and placing that significant revenue stream at risk.

However, there may be one other factor at play. While the FCC’s rule prohibits ownership of both a broadcast station and a daily newspaper in the same area, the FCC defines a “daily newspaper” as one that is published at least four times a week. Whether by accident or by design, the decision to scale these newspapers back to three days a week makes them exempt from the FCC’s ownership restrictions, thereby expanding the pool of potential buyers to include those most likely to be interested in taking on such an asset–local broadcast station owners.

Whether that fact played into the owner’s decision to publish only three times a week frankly doesn’t matter much. If it did enter into it, then the newspaper cross-ownership rule has become actively harmful, forcing a newspaper that might have been happy to publish four, five or six times a week to instead publish only three times a week to avoid being subject to the rule. If it didn’t, then Newhouse’s decision to cut back to three days a week is merely an indication of things to come in a struggling newspaper industry. Either way, the FCC’s newspaper cross-ownership rule is being mooted by factual changes on the ground.

The clock is therefore ticking on how long it takes for the political pressure to also fade, allowing the FCC to finally proceed with its plan to loosen (or perhaps eliminate) the rule. During that wait, the only question is whether the rule is merely a curious anachronism, or if it actually harms the newspaper industry, either by preventing broadcasters from investing in local newspapers, or by forcing newspapers to cut back to publishing three times a week in order to circumvent the FCC’s rule. Unfortunately, by the time the political pressures keeping the rule alive finally recede, the damage may already be done, with newspapers ceasing existence or scaling back publication until the FCC’s rule becomes irrelevant. If that happens, the rule’s elimination may turn out to be no more consequential than the FCC’s eventual elimination of analog TV rules–an act of administrative housekeeping done when the item regulated no longer exists.

The Comment and Reply Comment dates have been set for the FCC’s Notice of Proposed Rulemaking in the Congressionally-mandated Quadrennial Regulatory Review of the FCC’s broadcast ownership rules. Comments are due on March 5, 2012 and Reply Comments are due on April 3, 2012.

As discussed in more detail in our Advisory, the NPRM can fairly be described as the regulatory equivalent of moonwalking–appearing to go forward with deregulation while actually going backward–and it is important for broadcasters to step up and get involved.

While the FCC tentatively has concluded that, other than minor tweaks that may not be so minor, it will make almost no changes to any of its broadcast ownership rules, the NPRM asks many questions about the future of the media marketplace. In particular, the NPRM seeks to scrutinize many contractual relationships among broadcasters, such as Local News Services (“LNS”) agreements and Shared Services (“SSA”) agreements, that currently fall outside of the FCC’s ownership rules, and asks whether those rules should be modified to make such agreements attributable ownership interests.

The commissioners’ separate statements regarding the NPRM make clear that the lack of definitive forward movement is the result of significant differences among the commissioners along the traditional regulatory/deregulatory fault line. This fault line is particularly apparent with regard to the suggestion that the ownership rules be expanded to encompass a wide array of contractual and operational practices in the industry.

When the FCC released the Notice of Inquiry in 2010 that commenced this proceeding, it did not ask for comment regarding whether any contractual arrangements should be deemed attributable under the FCC’s ownership rules. The FCC’s sudden interest now is therefore the result of comments filed by public advocacy groups in response to the Notice of Inquiry. These comments follow on the heels of calls for disclosure of such agreements in other proceedings, such as the proceedings concerning online public inspection files and quarterly public interest programming report requirements for television broadcasters, and the FCC’s report on the Information Needs of Communities. These advocacy groups assert that inter-broadcaster agreements result in layoffs, lower the quality of news programming, reduce the number of diverse voices in a market, and allow a station to have as much control over another station’s programming and operations as a Local Marketing Agreement (“LMA”), which the FCC already regulates under its ownership rules.

The FCC notes in the NPRM that its attribution rules are intended to restrict any arrangement which confers such influence or control over a station that it has the potential to impact programming or other “core” functions of that station. The FCC asks whether LNS and SSA arrangements confer a level of influence similar to an LMA, and if so, whether they should therefore be regulated like LMAs. Related to this question, the FCC asks whether the amount of local news programming available in a market would be reduced if LNS and SSA agreements are restricted in the same manner as LMAs.

While the FCC’s future treatment of such agreements is only one of many consequential matters presented by the NPRM, it is one that will have a significant impact on how broadcasters operate in the future. Although the FCC’s NPRM may itself be an exercise in regulatory moonwalking, broadcasters now need to put their best foot forward, or face the prospect of more regulation from this “deregulatory” proceeding.

In a setback for media interests, the United States Court of Appeals for the Third Circuit yesterday issued its Opinion in Prometheus Radio Project v. FCC (“Prometheus II“). The case focuses on the Federal Communications Commission’s most recent revisions to its media ownership rules, which were adopted in a 2008 Order (the “2008 Order“) concluding the FCC’s 2006 Quadrennial Regulatory Review.

The Prometheus II Opinion generally upheld those portions of the 2008 Order which retained the pre-2003 versions of the:

• Radio/Television Cross-Ownership Rule
• Local Television Ownership Rule, including the Top-Four Station and Eight Voices Tests
• Local Radio Ownership Rule
• Dual Network Rule

With respect to each of these rules, media interests had argued that the limitations were no longer necessary in the public interest as a result of increased competition, and that the FCC was therefore obligated under Section 202(h) of the 1996 Telecommunications Act to repeal or modify those regulations. The Third Circuit rejected those arguments and found the FCC’s analysis supporting a continuation of its pre-2003 ownership limitations to be reasonable, and not arbitrary, capricious, and/or unconstitutional.

The Third Circuit also remanded some portions of the 2008 Order to the FCC. First, the Third Circuit spent a considerable portion of the Opinion determining that the FCC failed to meet notice and comment requirements of the Administrative Procedure Act with regard to its decisions affecting the Newspaper/Broadcast Cross-Ownership (“NBCO”) rules. The court repeated at length criticisms raised by FCC Commissioner Copps and former Commissioner Adelstein and ultimately decided that these defects were so significant as to require that the NBCO rules be vacated and remanded to the FCC to be considered again as part of the 2010 Quadrennial Regulatory Review.

Also with respect to the NBCO rule, the 2008 Order had granted five permanent waivers of the rule to Gannett and to Media General. A group of public advocacy groups challenged those grants, but the Third Circuit held that the FCC had not been given an opportunity to pass on the arguments below and that the court therefore lacked jurisdiction to hear those challenges.

Finally, the Court ruled that the FCC failed to adequately address proposals to foster minority and female ownership of broadcast media in the 2008 Order and the related Diversity Order. It particularly criticized the FCC’s use of SBA criteria in determining whether a party was an “eligible entity” under the failed station solicitation rule adopted in the 2008 Order, and its failure to give adequate consideration to proposals from interest groups to limit eligibility to socially and economically disadvantaged businesses. As a result, this ruling was also vacated and remanded to the FCC.

From here, the FCC will now have to address the items that the Third Circuit has remanded to it. In addition, the FCC is again considering its multiple ownership rules in conjunction with its 2010 Quadrennial Regulatory Review. Therefore, the ball is yet again in the FCC’s court.