In reviewing station deals for their impact on competition in the local ad marketplace, the Justice Department has been stubbornly refusing to factor in the $6 billion that cable operators take out of local markets. That makes it tough to merge two top-four stations. Broadcasters’ best strategy might be to manuever Justice into having to defend its stingy analysis in court.
Two weeks ago, I wrote that FCC Chairman Ajit Pai left broadcasters hanging by failing to establish bright line criteria for owning two top-four stations a market. As it is, broadcasters must argue for the right to such duopolies on a case-by-case basis. That’s costly and time-consuming.
But at least Pai met broadcasters half way. If they make a strong enough showing, you get the sense that they will probably be able to own two, side-by-side network affiliates in most cases.
Not so at the Justice Department.
There, the antitrust regulators are giving little or no ground.
Their job is to scrutinize proposed TV duopolies and block those that they believe will significantly undermine competition in the local advertising marketplace. Their standard is 40%. If a TV combo would control 40% or more of a market’s TV broadcasting revenue, they will shoot it down.
That’s terribly limiting. It not only means that duopolies of the top two stations are out, but potentially any other combination. In some markets, the network affiliates are so tightly grouped that any two would cross the 40% threshold.
And it appears that there is no guarantee that even if you are below 40% you will get the Justice OK.
Sinclair apparently found this out in trying to get Justice approval of its Tribune merger.
In early FCC filings, Sinclair said it planned to keep its Tribune’s Fox affiliate WGHP in Greensboro, N.C., even though it already had ABC affiliate WXLV and MNT affiliate WMYV in the market.
I can see why. I checked with BIA Advisory Services, the TV research firm. If you total the revenue of the three stations, it comes to 36.6%, comfortably under 40%.
No problem, right?
The lawyers at Justice wouldn’t go for it. I know because the ABC affiliate was among the nine stations that Sinclair announced it was reluctantly spinning off to Soo Kim’s new station group, Standard Media.
The whole thing sounds kind of arbitrary to me. (Let’s hope it is not political. Sinclair has enemies all across the political spectrum.)
But I don’t want to quibble about a few percentage points.
There is a more fundamental problem with the way Justice analyzes local station deals. That is, it looks only at the broadcasting revenue, ignoring all other local media.
According to BIA, in the average market, TV broadcasters share of the local ad pie is just around 14%. Advertisers have plenty of other options, including cable, mobile, newspapers, digital (mostly Google and Facebook), radio, directories and even direct mail.
I can see why Justice dismisses some of the other media in its analyses. They are not all good substitutes for TV broadcasting.
But one certainly is, and it cannot be ignored by any honest thinker. And that is cable.
Local cable, often organized across multiple operators in markets, is a local advertising force and has been for a long while. It generated more than $6 billion in revenue last year, according to BIA.
If Justice would accept the reality of local cable and factor it into its analyses of local markets and proposed TV combos, the 40% would not be much of an obstacle anywhere.
Let’s go back to Greensboro. As I said above, the three stations involved in the Sinclair-Tribune merger control 36.6% of the broadcasting revenue. But plug in $33.6 million in local cable revenue into the equation and the three-station share of the market total TV revenue drops to 24%.
Cable changes everything. The top two stations — Hearst’s WXII and Tegna’s WFMY — would account for only 37.1% of the market’s broadcast and cable revenue. That too would be winner under Justice’s 40% standard.
In its effort to keep the overlapping network affiliates in Greensboro and several other markets in its merger with Tribune, Sinclair made the cable argument.
Last fall, Sinclair CEO Chris Ripley told securities analysts during an earnings call that it is “it’s sort of un-defendable” for Justice “not to at least look at” cable’s share of market.
Added Sinclair COO Steven Marks: “Sooner or later, the Justice Department, it seems to us, is going to have to get aligned with the reality of the marketplace.”
I think it should be sooner.
So, what we need is a couple of intrepid broadcasters to force the issue.
They do a deal. One agrees to buy a network affiliate from the other where it already has one. The price would have to be $85 million or more, big enough to automatically trigger a Justice Department review.
Together, the two affiliates would control more than 40% of the broadcast TV revenue in the market, but less than 40% when cable is factored in.
The parties would trudge through the FCC case-by-case process to get its approval. Once they had it, they would tell Justice that they were going to close with or without its imprimatur.
I’m told that the FCC traditionally waits for Justice to act before it does, but perhaps the FCC can be persuaded to go first. It must be tired of Justice usurping its power over communications policy under the guise of antitrust enforcement.
The lawyers at Justice might say OK, but more likely they would sue in federal court to block the deal.
That’s how it works. That’s what Justice did in its effort to scuttle the Time Warner–AT&T merger.
A trial would force the Justice lawyers to do what they have never had to do before. Explain, in public, the distinction between broadcasting and cable and why it is so great that it justifies disrupting the natural flow of the marketplace.
The trouble with this strategy is that it costs money and takes a lot of time to litigate. But since this case is aimed at benefitting the industry as a whole, other broadcasters — maybe even the NAB — should help with the expense.
I am not going to suggest which broadcasters should make this case, but I am going to suggest one that should not. That’s Sinclair. It’s bad rep, deserved or not, would introduce all kind of political crosscurrents into a case that should be solely about economics.
Before embarking on this course, the broadcasters and their supporters would have to carefully consider their chances of success. Losing the case would put the industry in a worse spot than it is now.
But I have to believe their chances are good. Cable is TV. It’s common sense. That’s still got to count for something.