Virtual Duopolies Coming Under Fire

So-called virtual duopolies are a fact of life in TV broadcasting.

For more than 20 years, broadcasters, through various contractual arrangements, have enjoyed the efficiencies of running multiple stations in a market, even where FCC rules limit broadcasters to owning just one.

But such duopolies may now be in jeopardy.

Advocacy groups concerned about media consolidation and the American Cable Association, concerned about broadcasters’ leverage in retransmission consent negotiations, want the FCC to tighten up its rules to break up virtual duopolies or, at the very least, prevent the formation of new ones.

“Some of these agreements are clear violations of the rules,” says Angela Campbell, who represents the Communications Workers of America and Media Council of Hawaii in their effort to block Raycom Media from controlling three stations in Honolulu. “What’s the point of having rules if you’re not going to enforce them?”

The ACA railed against virtual duopolies last month in an FCC inquiry into whether new rules or procedures are needed to protect small cable operators from being gouged by stations in retrans negotiations.

Through the various duopoly arrangements, “one entity is allowed to conduct retransmission consent negotiations on behalf of two ‘must-have’ affiliates, resulting in small cable operators paying substantially more for retransmission consent than if the two affiliates had to negotiate separate deals,” says the coalition of small operators.

“These broadcaster negotiating alliances drive up the cost of retransmission consent by about 21%,” it claims.

Although ACA’s principal interest is reform of the retrans regulations, it may also support limits on virtual duopolies. “Nobody should be surprised to see ACA weigh in on this issue as part of the media ownership review,” says Ross Lieberman, ACA’s VP of government affairs.

The extent to which virtual duopolies are to be allowed is likely to be revisited in the FCC’s quadrennial review of all its broadcast ownership rules, which the agency kicked off last month by inviting comments on them.

In that proceeding, broadcasters will urge the commission to relax its duopoly rule so that they can own multiple stations in small markets and convert virtual duopolies into real duopolies.

Opponents of media consolidation will oppose any relaxation of the rule and ask to close “loopholes” now allowing broadcasters to control multiple stations in smaller markets.

As part of its review, the FCC is commissioning several studies. Among them may be one that will gauge the scope and nature of the many virtual duopolies now in place, according to commission sources.

Virtual duopolies emerged in the late 1980s when the FCC began allowing stations to engage in local marketing agreements under which one station would, for all practical purposes, run another in the same market.

In 1999, the FCC revised its local TV ownership rules to permit common ownership of two stations in larger markets where there are at least eight competing television owners as long as one of the two stations was not rated among the top four.

Significantly, the FCC also OK’d virtual duopolies created through the local marketing agreements, but limited them. The controlling station could not program more than 15% of the programming day of the other station, it said.

The agency also adopted a “failed station” policy to allow common ownership of two stations in a small market if it could be demonstrated that one of the stations might go dark without help.

The deregulatory moves triggered a wave of local consolidation in the larger markets with major station groups like CBS, Fox, Tribune and NBC doubling up.

At the same time, other broadcasters pushed ahead with virtual duopolies in smaller markets (those with fewer than eight owners) through a variety of contractual arrangements — local marketing agreements, shared services agreements and joint operating agreements.

By whatever name, they enabled broadcasters to operate multiple stations in small markets and enjoy the operational efficiencies, even where they cannot own multiple stations.

The virtual duopolies take a variety of forms. In some cases, the arrangements are between two completely independent and established broadcasters.

Just last week, LIN TV said it would be taking over the management of stations owned by Acme Communications in three markets: Albuquerque-Santa Fe, N.M.; Dayton, Ohio; and Green Bay-Appleton, Wis.

But, in many other cases, duopoly broadcasters have taken control of second stations in markets by creating and financing ownership entities to acquire them and then enter into duopoly agreements.

Sinclair Broadcast Group and Nexstar Broadcasting are masters of these types of virtual duopolies. They have put together entire station groups — Cunningham and Mission, respectively — to own second stations that they may operate under current rules.

The FCC does not have a good handle on how many duopolies — real or virtual — there are today among the approximately 1,800 full-power TV stations or where they are. In one proceeding, it said there were 175 duopolies based on data supplied by BIA/Kelsey, but offered no details.

If the FCC commissions a duopoly study in connection with its current review of the ownership rules as expected, it may finally get a definitive picture.

For the retrans proceeding, ACA took a hard look at duopolies and virtual duopolies involving affiliates of the Big Four broadcast networks — the stations that have the most clout in retrans negotiations.

In its comments, ACA indentifies 57 virtual duopolies involving two Big Four network affiliates in 55 markets. Two markets — Springfield, Mo., and Peoria-Bloomington, Ill. — have two such duopolies.

In addition, ACA indentifies 36 instances where one broadcaster actually owns two Big Four affiliates in the same market, although 27 of them involve digital subchannels or low-power stations. Only nine involve two full-power stations.

Altogether, it says, there are “at least 93 sharing agreements or duopolies in 78 television markets, affecting more than 37% of the 210 DMAs and with the heaviest concentration found in smaller markets served by ACA members.”

Opposition against the virtual duopolies among foes of media consolidation has been galvanized by Raycom’s control of three stations in Honolulu.

Last year, Raycom, the owner of KHNL (NBC) and KFVE (MNT), took over the operations of KGMB (CBS) owned by MCG Capital through a shared services agreement.

The deal led to dozens of layoffs as Raycom merged the news operations of the stations and raised howls of protests that are now being heard in Washington.

The Media Council of Hawaii is demanding that the FCC unravel the deal. In doing so, it charges that such arrangements “directly reduce the diversity of local voices in a community by replacing independent newscasts on the brokered station with those of the brokering station.”

The FCC is actively reviewing the case. Significantly, it raised the profile of the case by allowing interested parties to make their cases in person to commissioners and their staffs. In the past, challenges of duopolies have been handled as paper proceedings at the Media Bureau level.

Opponents of lax duopoly regulation have an ally in FCC Commissioner Michael Copps. “I am concerned about what appears to be the increased prevalence of these shared service agreements,” he says. “The FCC needs to look into these far more rigorously than we have, with a special emphasis on whether such agreements are being used to end-run our ownership rules on how many stations a broadcaster can control.”

Other commissioners, most notably Chairman Julius Genachowski, have yet to show their hand on the issue.

However, the commission’s two Republicans, Robert McDowell and Meredith Atwell Baker, are seen as more likely to loosen ownership rules than tighten them in any way.

McDowell signaled his support for a more deregulatory approach in a statement released when the FCC launched its review of the ownership rules last month.

“This time, I hope we will get it right,” he said. “Burdensome rules that have remained essentially intact for more than a decade should not be allowed to continue impeding, or potentially impeding, the ability of broadcasters and newspapers to survive and thrive in the digital era.”

Much may depend on how aggressively the advocacy groups — Free Press, the United Church of Christ, the Benton Foundation — go after the virtual duopolies in the upcoming ownership review.

“We hope the FCC views with skepticism the unproven claims that media consolidation results in synergies that benefit the public, or that further media consolidation is the cure for all that ails the media industry,” says Corie Wright, Free Press policy counsel.

The ownership review, as well as the Honolulu case, are being watched closely by broadcast attorneys, some of whom have crafted virtual duopoly deals and shepherded them through the FCC.

“It’s a matter being emphasized by the public interest groups, so I think the commission will take a look at it,” says David Oxenford, of Davis Wright Tremaine.

“It’s hard to know what the commission will do,” says Howard Liberman with Drinker Biddle. “They’ll recognize in this economy they don’t want to undo situations that allow these stations to stay on the air in some cases or to do local news.”

Jack Goodman, with Wilmer Hale, agrees. “Historically the commission has avoided taking action that would cause widespread disruption in the market,” he says. “The ability of stations to cooperate in these ways has certainly improved television service in many markets and perhaps saved stations from going dark.”