Brass Tacks Time On TV Ownership Dereg

During a Q&A with reporters this week, FCC Chairman Ajit Pai played coy when asked about his plans for the TV ownership rules. “This is another one of those areas we are studying,” he said. “You can see what I said in the past, but I’m not prepared today to make comments about where we might go in the future.”

Well, last week in this space, I told you what Pai has said about the ownership rules in the past and from that record you would (as I did) logically deduce that he will significantly relax them now that he has the power.

In general, that would be a good thing.

Network affiliate groups need bulk to keep from being bullied by the networks, and all broadcasters need scale to negotiate for retrans fees and keep up with the other TV media — everything from cable to Netflix and Facebook Live — that keep encroaching on their audiences and siphoning off revenue.

But the questions are, how far can Pai go in relaxing the rules and how far should he go.

First, let’s quickly recap the caps.

As things now stand, the local rules say that a broadcaster may own two stations in a market only if two conditions are met:

• There are at least eight other independently owned stations or “voices” in the market.
• Only one of the stations is among the market’s top-four rated — that is, in most cases, only one is a Big Four network affiliate.

The first condition means no duopolies of any kind in medium and small markets, while the second means no Big Four duopolies in the big markets.

The communications bar has shot plenty of holes in the rule with joint sales agreements (85 by the FCC’s count) and sales service agreements. These agreements allow one station to operate two stations, even two network affiliates, in markets where the rules say they may own only one.

The national rule is much simpler. It says that a station group may not have stations in markets covering more than 39% of the 114.7 million TV homes.

Up until a few years ago, stations could exceed the 39% limit because of the UHF discount. A vestige of the analog days when UHF signals were inferior to VHF signals, UHF station coverage counted for half in calculating coverage under the cap. So, for instance, while a VHF station in New York counted as 6.4% toward the cap, a UHF station counted as just 3.2%.

Because of the discount, Ion Media was able to amass stations that today collectively reach 64.8% of TV homes. But by the FCC’s count, with the discount, its reach its just 32.4%, safely below the cap.

After the switch to digital broadcasting in 2009, it gradually became clear that UHF was no longer inferior to VHF. It fact, as many were surprised to discover, it was better at delivering digital signals.

With that realization, the Obama FCC eventually let it be known that it would no longer recognize the discount and that no group would be allowed to exceed 39% regardless of what type of stations it had.

That policy culminated last September when the FCC finally got rid of the discount, but grandfathered those like Ion and Tribune that have passed the cap while the discount was still available.

So, again, how far should Pai go in relaxing the rules?

The NAB has staked out its positions in two FCC filings in the last two months.

On the local side, it proposed that the FCC permit common ownership of multiple stations in all markets, but only two top-four rated (read two Big Four network affiliated) stations. The local clusters, it pointed out, would also be “subject to the limits of antitrust law.”

That makes a lot of sense to me.

Our experience with JSAs, SSAs and the co-called virtual duopolies they spawned have taught us that one broadcaster controlling two stations, even two network affiliates, in a market is not fatal to diversity or to other stations in the market.

Rather, it taught us that common control can preserve and strengthen local newscasts. In railing against the Wheeler FCC’s decision to ban JSAs in 2014, Pai himself cited case after case where duopolies helped sustain local news.

The NAB has also called on the FCC to restore the UHF discount. Theoretically, that would allow a station group to reach as many as 78% of TV homes if it has all UHF stations. Remember, if the discount is restored, UHF coverage is halved. So, 78% would be counted as 39% — that nominal cap.

But nobody has just UHF stations. About 25% of the 1,384 commercial TV stations are VHF. And the percentage of VHFs might go up following the incentive auction in which the FCC encouraged station owners to sell their U’s and move to V’s.

So as a practical matter each station group will be capped at different percentages somewhat less than 78% depending on how many markets they served with Vs and how many with Us.

But still, those individual caps will be much higher than 39%. Take Sinclair. Without the discount, it is right up against the cap, at 38.6%. (The coverage percentages in this story come courtesy of BIA/Kelsey and its extensive station database.)

But with the restored UHF discount, it’s at only 24.3%.. And if it’s careful to buy only UHF stations in its next buying spree, it could increase its actual reach to 68%. (Send me an email if you want me explain how I got to that number.)

In the same way, Tegna could increase its actual coverage from 31.3% to 56.7% if it sticks to buying U’s. CBS could go from 37.7% to 66.5%.

These group-specific caps shrink a little every time a group buys a VHF rather than a UHF in a market.

Yes, I know, it’s confusing and more than a little screwy.

What Pai should do is step back and forget about the UHF discount and try to set a new cap that makes no distinction between V’s and U’s and is based on a thorough examination of the TV marketplace and broadcasting’s place in it.

Such a proceeding would give everybody a chance to weigh in and make their best case for keeping the cap where it is (sans discount), eliminating it or placing it at some in-between spot — 45%, 55%, 65% or even higher. Right now, I think the cap should be higher, but I would be interested in hearing what small broadcasters have to say,especially those not interested in selling out to larger groups.

Unfortunately, it’s not clear that the FCC has the authority to fiddle with the cap. The 39% cap was set by Congress in 2003 and some believe that only Congress can change it.

Among them, significantly, is FCC Commissioner Michael O’Rielly, Pai’s able Republican ally on the commissioner. He said so in dissenting on the FCC vote to eliminate the UHF discount last fall.

So, if Pai wants to give broadcasters some headroom under the national cap, he might be stuck with having to simply restore the UHF discount, no matter that it is an outdated and crude mechanism with no real-world basis.

Keep in mind that anything Pai does will likely be challenged in federal courts by activists and perhaps others (cable operators?) who believe that broadcast consolidation has gone far enough. It will be important to harden the new cap against those challenges.

So, raising the national cap poses tough legal questions and would have enormous implications for broadcasting.

In combination with a relaxation of the local rules, it would trigger a wave of buying and selling that will reduce the number of station groups, reorder their ranking and reshape the business in unpredictable ways. And once done, it cannot be undone.

It would swing open the door for consolidators like Nexstar and Sinclair to at least double in size. Even a group as large as Tribune (now grandfathered with an actual reach of 43.7%) could be gobbled up by other groups in two big bites.

And who knows? The networks, once freed of worrying about bumping up against the cap, may become active buyers of stations again. That should give their affiliates pause.

Maybe Pai wasn’t being coy when he said he wanted to think about this for awhile. Maybe he was just being smart.

Harry A. Jessell is editor of TVNewsCheck. He can be contacted at 973-701-1067 or here. You can read earlier columns here.