Broadcasters have been expecting good things from new FCC chief Ajit Pai. And he didn’t disappoint with the agenda for next month's FCC meeting. There was good news on two fronts. First was the plan to relax the local ownership rules. Then came word that the FCC will greenlight ATSC 3.0.
Pai Delivering Big For Broadcast On Nov. 16
When President Trump elevated FCC Commissioner Ajit Pai to the chairmanship of the agency last February, broadcasters expected good things to come of it.
While in the FCC minority during the Obama years, he established himself as a champion of deregulation and broadcasting in all its forms, even lowly AM radio.
On Nov. 16, if all goes well, Pai will make good on the high expectations.
On that day, he will lead the FCC in rolling back ownership limits that have hobbled broadcasters for years, and in authorizing broadcasters to use the new ATSC 3.0 broadcast standard, a powerful new weapon for competing in the digitized, IP-driven TV world.
Let’s talk about the ownership dereg first.
It’s not a radical move, but it’s another important step in the gradual structural deregulation of broadcasting that really started nearly four decades ago when the Reagan-appointed FCC Chairman Mark Fowler said a single broadcaster could own 12 TV stations, five more than before.
According to a draft of the ownership order released last night, the FCC will permit a broadcaster to own two stations in any market, regardless of size, by eliminating the so-called eight-voice test.
In addition, it will relax the prohibition against owning two top-four stations in a market, typically Big Four network affiliates. The FCC will consider allowing such combos or duopolies on a case-by-case basis.
Finally, it will affirm broadcasters’ ability to use joint sales agreements, often in combination with shared services agreements, to operate — not own — stations in excess of the number they are allowed to own. This is a built-in loophole that has allowed broadcasters to circumvent the local and national caps for years.
Because the JSAs were undermining the caps, the Tom Wheeler-led FCC had ordered that they be phased out. Ironically, it was Wheeler who got phased out, while the JSAs got a reprieve.
The big deal in all this, I think, is permitting ownership of two stations in any market. For years, broadcasters in larger markets (those with at least eight independently owned stations) have enjoyed the economies that come from owning a network affiliate and, say, a CW or Telemundo affiliate in the same market.
Now those same benefits will be available to broadcasters in small markets (those with fewer than eight independently owned stations). And that’s where they are needed most, where the margins are thinner and where the existence of any kind of independent — and some network affiliates — is dicey.
It will also give broadcasters who are now operating second stations in small markets through JSAs and SSAs the opportunity to buy those stations and save on administrative and regulatory expenses. By the FCC’s count, there are around 85 duopolies based on JSAs and SSAs.
That Pai chose to keep the top-four ban and make exceptions on a case-by-case basis is disappointing. But it may be smart. The half measure should make the action more palatable to the federal appeals court in Philadelphia, which will likely be called on to review the new rules and which has been hostile to past deregulatory efforts.
The problem with the case-by-case approach as set out in the draft is that it provides little guidance on what combos the FCC will approve or not approve. That will make it difficult for broadcasters to buy or sell stations based on it. Nobody wants to negotiate a deal and then sit around for months waiting to see if it passes FCC muster.
In a press briefing yesterday before the draft was circulated, a senior FCC official provided some insight on how the reviews might go.
He said the FCC will look differently at proposed combinations between the No. 1 and No 2 stations in a market than it would at combinations between the No. 3 and No. 4 stations that combined have the same ratings or revenue as the No. 1 station alone.
In other words, I think he was saying, yes to No. 3 and No. 4 getting together, no to No. 1 and No. 2 merging.
Over time, the problem will fade as the FCC processes transfer applications and sets precedents. And a footnote in the draft says the FCC hopes that the accumulated precedents will lead to the eventual adoption of “specific criteria” for acceptable top four combinations. That could take years. In the meantime, broadcasters will be left to muddle through.
The FCC official also acknowledged that antitrust regulators at the Justice Department would continue to act as a backstop.
It has been their practice to review proposed local duopolies and raise a red flag about those that would scoop up 40% or more of the market’s broadcast TV revenue.
(According to one broadcasters I spoke to today, Justice might be creating more room for duopolies not by raising the percentage, but by redefining the relevant marketplace to also include cable. That’s something to keep an eye on.)
The immediate beneficiary of the FCC’s action will be Sinclair Broadcast Group — or maybe not.
Its pending $3.9 billion merger with Tribune includes overlapping top-four stations in several markets. In Seattle, for instance, Sinclair owns the ABC affiliate (KOMO), while Tribune owns the Fox affiliate (KCPQ).
With the new rules, Sinclair might try to hang on to all or some of the stations now out of compliance by going through the case-by-case process. But it will do so at the risk of delaying the overall deal. Any request it makes is certain to draw plenty of opposition.
I know that Sinclair has been out looking for buyers and swaps in the overlap markets so, despite the prospect of looser rules, it might have already concluded that it’s best to sell and go.
The real benefit to Sinclair might be the restoration of the JSA. It could use the agreements not only to hang on to some of the duopolies, but also bring its Tribune deal in compliance with the 39% TV household national ownership cap.
Right now, the deal puts Sinclair 6.5 points above the cap and I know that Sinclair is looking to add even more markets, further increasing its out-of-compliance coverage.
Instead of JSAs, Sinclair could also ask the FCC for a waiver until the FCC gets around to raising the national limits. Word is that Pai may launch a rulemaking on the cap in December, but it will take at least a year to bring it to fruition.
Pai has been championing broadcasters’ Next Gen TV efforts since before he was chairman so it comes as no surprise that he is taking prompt action on it.
“Next Generation TV would be the first standard to marry the advantages of broadcasting and the internet,” Pai said in a blog yesterday trumpeting his Nov. 16 plans. “It holds the promise of delivering better video and audio, advanced emergency alerts, improved accessibility features, personalized and interactive content, and mobile television reception to American consumers.”
The draft gives broadcasters pretty much all they asked for when they petitioned the FCC for a rulemaking in April 2016. As these things go, 18 months from petition to order is not bad.
Implementing the standard will be voluntary, and each broadcaster who opts in will be free to use it for whatever purpose they deem best.
The only real burden the FCC places on 3.0 broadcasters is that they simulcast their programming using the current standard so that over-the-air viewers don’t have to run out and buy new sets.
For five years, the simulcast programming has to be “substantially similar” to the programming aired on the 3.0 channel. This means that the programming must be the same, except for programming features that are based on the enhanced capabilities of 3.0, spots and promos, the FCC explains.
The FCC also said that it would not dictate what format 1.0 simulcasts would have to be broadcast in. In other words, the simulcasts could be in SD rather than HD or any shade in between.
The burden of offering simulcast channels is not a light one, but it is one that 3.0 proponents had figured on. It will involve considerable expense. They will have to secure so-called lighthouse stations in each market for the simulcasts and, if they try to get away with only SD on the simulcasts, they risk a consumer revolt and Washington blowback.
Significantly, the draft also rejects the MVPD’s effort to prevent broadcasters negotiating for carriage of their 3.0 signals as part of retransmission consent. Such a probation would have put another big obstacle in the way of broadcasters implementing the standard.
If the FCC follows through and adopts the order on Nov. 16, it will take effect in January and broadcasters will be free to implement the standard and build out new businesses and service enhancements.
It’s all very exciting, but it will take a tremendous investment and unprecedented cooperation among broadcasters to bring it off. I really don’t know if they can.
But, if it fizzles, it will not be because of the FCC or Chairman Pai.
They did their part.