Big Owners Worried Over UHF Discount

With the FCC making clear that it is likely to shut down a long-time loophole in its national ownership cap, some broadcasters are scrambling to ensure that they don’t get caught in the regulatory squeeze.

The loophole, known as the UHF discount, allows station groups to exceed the nominal cap that limits them to coverage of no more than 39% of U.S. TV homes by discounting the reach of stations operating in the UHF band (ch. 14 and above) by half.

While eliminating the discount, the FCC is expected to grandfather the portfolios of groups that long ago blew past the 39% cap thanks to the discount, notably Ion Media (64.8% coverage), Trinity Broadcasting (40.1%) and Univision (44.1%).

But without expansion of the grandfathering provisions, jettisoning the UHF discount could force Tribune to unravel all or part of its pending $2.7 billion deal to acquire Local TV LLC and block the growth ambitions of Fox and Sinclair Broadcast Group.

In their effort to secure these provisions, affected broadcasters should not expect much help from the NAB. With so few broadcasters affected, the industry’s principal lobby looks like it will be sitting this one out.

At deadline, FCC officials were declining comment on the details of the rulemaking, including when it would be officially released for public comment.

But during an Aug. 9 news conference, FCC Chairwoman Mignon Clyburn described the proposal as a “clean-up item” left over from the agency’s  initiative requiring TV broadcasters to switch from analog to digital broadcasting in 2009.

“We made a commitment to look at this [discount] at the appropriate time, and the appropriate time is now,” Clyburn said.

Under the FCC’s current rules, there is no limit on the number of TV stations a single company may own nationally. Instead, the regulation restricts how many TV homes a station group can reach collectively through its stations. The national reach cap is currently set at 39% of TV households.

The UHF discount, which was incorporated into the agency’s rules by the Reagan administration’s FCC in 1985, made an accommodation for stations operating in the UHF band. Broadcasters count the UHF stations in their portfolios as having only 50% of the reach of VHF TV stations in the same markets.

For instance,  New York accounts for 6.47% of all TV homes. If a group has a VHF station in the market, it counts as 6.47% toward the cap. But if it has a UHF station there, it counts for half that, 3.23%.

Relying on the discount, a broadcaster today could, therefore, swap each VHF TV station it owns for two UHF TV stations in each of its markets, doubling the total number of stations it could own nationwide toward the FCC’s nominal 39% threshold. A group with all UHF stations could go all the way to 78% coverage.

At the time the discount was adopted by the FCC, broadcasters were still broadcasting over the air using analog transmission technology, and VHF stations (chs. 2-13) were generally considered superior to UHF ones for analog transmissions.

The discount was supposed to provide incentive for that apparent disadvantage.

But at least since broadcasters switched from analog to digital transmission technology in 2009, virtually everybody in the industry has realized that the technical underpinnings for the discount had been zapped — and that UHF channels are now generally considered to be superior to VHF channels for digital because UHF channels provide better coverage.

“Most people recognize that the UHF discount doesn’t make sense anymore,” said one broadcast industry lobbyist.

Getting rid of the discount now could create major headaches for some big station groups.

As the only Big 4 TV network group thought to be entertaining expansion ambitions, Fox may have a problem because absent the discount, its current reach is 37.28% of homes, according to Fox. With the discount, its reaches just 24.85% and has plenty of room to grow.

Fox is said to have its eye on Fox affiliates in three of the four markets with National Football Conference franchises where it doesn’t already own stations — San Francisco (coverage of 2.2% of TV homes), Seattle (1.6%) and St. Louis (1.1%). Fox holds the national TV rights to the NFC.

“Any top-30 market with an NFC franchise is fair game for them,” one source told TVNewsCheck. “They’ve done it before, and they’ll do it again.”

Fox got the full attention of its affiliates last January with its decision to take its network affiliation away from incumbent Bahakel Communications’ WCCB Charlotte, N.C., so that it could buy Capitol Broadcasting’s WJZY there as an outlet for Fox programming. Charlotte is the home of the NFC’s Carolina Panthers.

Assuming approval of its $2.7 billion pending acquisition of the Local TV stations, Tribune could also have a problem, because its reach would hit 42.7%, according to BIA/Kelsey, well above the 39% mark.

Assuming approval of all its pending deals, meanwhile, Sinclair would reach 38.2% of TV homes through the 149 TV stations it would own and operate without the discount, putting a serious crimp on the Baltimore-based broadcaster’s expansion plans. With the discount, Sinclair’s TV stations would reach only 21.9%, leaving it substantial headroom for additional station purchases.

Fox and Sinclair declined to comment for this story.

Tribune spokesman Gary Weitman said the company doesn’t know if the FCC will review the UHF discount, but fully expects the agency “will deal fairly and promptly with a transaction undertaken and filed at the commission in reliance on the current rule.”

To blunt the potential impact of the anticipated regulatory change, the FCC is expected to grandfather existing group station portfolios so that no company would have to sell stations it already owns to come into compliance with the new regulatory regime, sources said.

Under one approach that the FCC is said to be giving serious consideration only the portfolios of the station groups that exceed the 39% cap as of the date the agency’s rulemaking is issued — Ion, Univision and Trinity–would receive grandfathered protection, according to some sources.

Some industry lobbyists are also urging the FCC to grandfather the station portfolios of any companies that would exceed the 39% cap with stations they own or for which they have transactions pending as of the rulemaking’s issue — a provision that would appear to cover Tribune’s acquisition of the Local TV stations.

Still another possibility, which would provide plenty of headroom for most industry group owners to grow, would be for the FCC to protect the existing discounts of all UHF stations already in a group’s portfolios, requiring broadcasters to count the full reach of new UHF stations added to their portfolios only after the rulemaking is issued — an alternative that would appear to protect Sinclair’s growth ambitions.

But the watchdog organization Free Press, though unlikely to oppose grandfathering for groups like Ion and Univision, would oppose relief for companies that haven’t already exceeded the 39% threshold, according to Matt Wood, the group’s policy director.

“The big station groups on big spending sprees [including Tribune and Sinclair] should not be allowed to benefit from this outdated rule,” Wood said.

If things go badly for the affected broadcasters at the FCC, they have options. They could challenge elimination of the discount in court. Fox and Tribune could cherry pick, keeping the stations they want the most and spinning off others to stay below 39%.

One industry attorney, who has been monitoring FCC developments on the discount closely, said the NAB and unaffected broadcasters are unlikely to support grandfathering provisions that would help out the few affected broadcasters, particularly Sinclair.

“Sinclair is not always the most popular girl at the dance, and they have been winning a lot of the auctions recently, and some of the bidding losers would be happy to see them hemmed in,” said one attorney close to the action.

The NAB has yet to take a position on the discount.

“We’re discussing this issue with our members and are reserving comment at this time,” said Dennis Wharton, an NAB spokesman.

If the NAB can find a way to keep all of its members generally on the same page on the discount, it will come as a big relief.

The last big intra-industry fight over FCC ownership regulations saw all four of the TV networks and their owned stations — starting with Fox in 1999–pulling out of NAB.

 At the time, the ownership rule prohibited broadcasters from owning stations reaching more than 35% of U.S. TV homes, and the networks wanted to eliminate the cap altogether, or at least raise it to 50%.

NAB’s network affiliates wanted to keep the cap in place, fearing that its elimination would give networks too much power over them, and the affiliates forced NAB to lobby in support of the affiliate position. The networks dropped out of NAB because the association was lobbying against the network interests.

In the heat of the battle, the FCC raised the cap to 45%, but Congress lowered it back to 39% mostly to accommodate CBS and Fox, which were near the cap. All of the networks had returned to the NAB fold by 2010.

The FCC has eased its broadcast TV rules considerably since 1984, when a single company was barred from owning more than seven TV stations.

That year, the Reagan FCC raised the numerical limit to 12, with the condition that the combined coverage of a group’s stations could not exceed 25%.

The UHF discount was left in place after Congress dropped the numerical limit and went to a reach-only cap of 35% in 1996 and then raised the limit again to 39% in 2004.