Loss Of Exclusivity Rules Is Not Nothing

In its second-quarter earnings call yesterday, Tribune executives were careful to reassure investors that FCC Chairman Tom Wheeler’s intention to eliminate the network non-dupe and syndicated exclusivity rules would not have much effect on the company’s ability to keep piling up retransmission consent dollars.

Tribune EVP and General Counsel Edward Lazarus explained that even if the rules go, Tribune and other broadcasters will still be able to enforce their exclusive local rights to network and syndicated programs in court.

“And as a result of that, we don’t anticipate any dramatic change in the basic balance of retransmission today,” he said.

Lazarus graduated from Yale Law and was FCC chief of staff during Julius Genachowski’s run as chairman during Obama’s first term, so I wouldn’t presume to challenge his pocket analysis.

But I will say that there is far more in play than Lazarus and his boss Peter Liguori let on during the call.

The exclusivity rules don’t grant local exclusivity rights to stations. They come from the broadcasters’ agreements with the networks and syndicators. They are — or should be — baked into every affiliate renewal and syndication deal the broadcasters sign.

What the rules do, however, is provide a simple and straightforward means for enforcing those contracts. If a cable system decides to import an ABC affiliate from elsewhere into its market, the local ABC affiliate can call on the FCC to force the system to cease and desist.

Over the years, the rules have proven extremely effective. No FCC-regulated company wants to get dragged into an enforcement action that could negatively affect everything else it has before the agency.

Lazarus is probably right. In the absence of the rules, the offended broadcaster could turn to the courts to enforce its contractual exclusivity rights. Left unsaid is litigation involves great costs in time and money with far less certainty about the outcome. It would also likely require the rewriting of many affiliate and syndication contracts, some of which directly reference the FCC exclusivity rules.

But the prospect of messy litigation is not the real problem.

The real problem is that getting rid of the rules is Step One in a larger campaign by cable and satellite operators to undermine broadcasters’ retrans rights.

Of the cable operators, Time Warner Cable has been the most aggressive in its efforts to “reform” the retrans to make it tougher for stations to negotiate.

Its entire argument to the commission for getting rid of the exclusivity rules is built  on its desire to strengthen its hand in negotiations.

“By invoking these rules to prevent MVPDs from choosing among potential competitors for the supply of network and syndicated programming, stations increase their power to extract spiraling fees from MVPDs and their subscribers in exchange for retransmission consent,” the Time Warner comments say.

“The exclusivity rules also harm consumers by denying them access to broadcast programming in various circumstances—most notably where a network affiliate has pulled its signal from an MVPD’s system in a retransmission consent dispute, and the affiliate has perfected its right under the rules to prevent the MVPD from carrying another station affiliated with that network in an effort to ameliorate the harms caused by the blackout. “

It doesn’t stop there.

In joint comments, three mid-sized cable operators — Mediacomm, Suddenlink and Bright House — argue that the FCC should prohibit broadcasters from entering into any contracts that would interfere with cable operators importing distant signals into markets.

The prohibition, the comments say, should apply not just to agreements between stations and programming suppliers, but also to agreements between the stations themselves. The stations should not be allowed to prevent permit operators from importing their signals into each other’s markets.

So, in other words, these three operators — there may be more —  would not only take away the most effective way to enforce exclusivity in contracts, it would take away the broadcasters’ rights to make the contracts in the first place.

Such proposals may be a stretch, but the idea that Wheeler’s proposed elimination of the exclusivity is aimed squarely at retrans is not.

How do I know?

Wheeler says so in his blog item announcing that he had floated a proposal to the other four commissioners. The exclusivity rules, he says, “prevent an MVPD from providing subscribers an out-of-market broadcast station, for example, when a retransmission consent dispute results in a local station being dropped from carriage.”

Wheeler says also that by eliminating the rules the FCC would be taking its “thumb off the scales.” Can he really believe that? By eliminating the rules, he is clearly putting some extra weight on the cable/satellite pan.

As the head of the NCTA in 1980, Wheeler successfully led the charge at the FCC for repeal of the syndication half of the exclusivity rules so that Ted Turner’s WTBS and other superstations could get a foothold in the business. The FCC had second thoughts and restored the rule eight years later. Wheeler now seems determined to have the last word.

What the Tribune executives also failed to note was that Wheeler also used his blog to say that he was launching the Congressional mandated review of what constitutes ”good faith” in retransmission negotiations.

This proceeding is where the FCC will address the rules governing retrans head on. The cable and satellite operators will come in with scads of ideas — expand the prohibition against stations banding together in negotiations, clarify the tier-placement requirements, revise the sweeps rules, establish a dispute resolution mechanism, ban networks from blocking access to their programming online and who knows what else.

Look for Mediacomm and the others to keep pressing for restrictions on the kinds of exclusivity agreements stations may enter into.

What all these ideas have in common is that they would make it harder for broadcasters to win their next retrans increase.

I don’t know how far Wheeler will go with any of them or how far he will be able to go. The clock runs out on his administration at the end of next year.

But the likely loss of the exclusivity rules is a setback. And if things continue to go bad for broadcasters on the retrans front, they may want to start thinking about convincing Congress to dump the entire compulsory license regime, of which the exclusivity rules and retrans are parts.

The compulsory license works OK, but it’s a Rube Goldberg contraption — a 40-year accumulation of regulatory water wheels, levers, belts, gears and whatnot. And the cable guys just won’t leave it alone.

In place of the compulsory license, the broadcasters could erect a streamlined system based on private contracts and built on the far firmer foundation of conventional copyright law. It would guarantee local exclusivity and enable broadcasters to negotiate for programming fees just as they now do for retrans fees.

The pure marketplace approach works for cable networks. There’s no reason it can’t work for broadcasters.