Before the Federal Communications Commission Washington D.C. 20554 In the matter of ) ) 2002 Biennial Regulatory Review − Review of ) MB Docket No. 02-277 the Commission’s Broadcast Ownership Rules and ) Other Rules Adopted Pursuant to Section 202 of ) the Telecommunications Act of 1996 ) ) Cross-Ownership of Broadcast Stations and ) MM Docket No. 01-235 Newspapers ) ) Rules and Policies Concerning Multiple Ownership ) MM Docket No. 01-317 of Radio Broadcast Stations in Local Markets ) ) Definition of Radio Markets ) MM Docket No. 00-244 COMMENTS OF THE NATIONAL ASSOCIATION OF BROADCASTERS AND THE NETWORK AFFILIATED STATIONS ALLIANCE ATTACHMENTS Henry L. Baumann Jonathan D. Blake Jack N. Goodman Robert A. Long, Jr. Jerianne Timmerman Jennifer A. Johnson NATIONAL ASSOCIATION OF Raymond A. Atkins BROADCASTERS Heidi C. Doerhoff 1771 N Street, NW COVINGTON & BURLING Washington, DC 20036 1201 Pennsylvania Avenue, NW 202-429-5430 (Phone) Washington, DC 20004-2401 202-775-3526 (Fax) 202-662-6000 (Phone) 202-662-6291 (Fax) Wade H. Hargrove Mark J. Prak Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P. P. O. Box 1800 Raleigh, NC 27602 919-839-0300 (Phone) 919-839-0304 (Fax) Counsel for Network Affiliated Stations Alliance January 2, 2003 LIST OF ATTACHMENTS Attachment 1 Marius Schwartz & Daniel R. Vincent, The Television National Ownership Cap and Localism (2003) Attachment 2 NAB/NASA Joint Survey of Broadcast Stations Affiliated with ABC, CBS, and NBC Attachment 3 NAB/NASA Request for Collection of Data By FCC and FCC Order Denying Request Attachment 4 Letter from Senators Fritz Hollings (D-S.C.), Trent Lott (R-Miss.), Daniel Inouye (D-Haw.), Ted Stevens (R-Alaska), Byron Dorgan (D-N.D.), Max Cleland (D-Ga.), John Edwards (D-N.C.), Conrad Burns (R-Mont.), Jesse Helms (R-N.C.), and Barbara Boxer (D-Cal.), and Representatives John Dingell (D-Mich.), Richard Burr (R-N.C.), Edward Markey (D-Mass.), and Chip Pickering (R-Miss.) to Michael Powell, Chairman, Federal Communications Commission (June 29, 2001) Attachment 5 Letter from Ken Sieve, District Director, Muscular Dystrophy Association, to Representative Ike Skelton (D-Mo.) (Aug. 15, 2000) Attachment 6 Letter from Jerry Lewis to Michael Powell, Chairman, Federal Communications Commission (Jan. 29, 2001) Attachment 7 Television Stations Owned by Companies Associated with the Big Four Networks Attachment 8 Early Submission of NAB and NASA ATTACHMENT 1 The Television National Ownership Cap and Localism by Marius Schwartz and Daniel R. Vincent January 2, 2003 Table of Contents Executive Summary 1 I. Introduction 2 II. Networks and Stations: Their Economic Functions and Incentives 5 A. Economic Functions 5 B. Common Interests But Also Conflicting Incentives: Networks’ Stronger Interest in Uniformity 7 III. Likely Effects of the Cap 8 A. The Cap Has No Obvious Impact on Affiliates’ Profits 9 B. The Cap Can Be Expected to Affect Viewers 11 C. The Cap Can Advance Viewpoint Diversity 12 IV. Despite Increased Video Alternatives, the Broadcast Networks Remain Significant 13 V. Conclusion 16 References 18 Appendix: A Model of Network and Affiliate Bargaining With and Without the Cap 20 Schwartz and Vincent Executive Summary The major TV broadcast networks distribute their programming in some local markets through stations they own and elsewhere through non-owned affiliates. The FCC’s national ownership cap (the “Cap”) prevents networks (or other entities) from owning stations in markets that collectively account for more than 35% of TV households. The FCC’s Right-to-Reject Rule (the “Rule”) constrains the type of financial inducements and other arrangements a network may use to influence the programming decisions of its affiliated stations. The Cap and the Rule can be seen as complementary policies for promoting localism in broadcasting. We interpret the localism goal as a desire to target broadcasters’ efforts to serving the interests of relatively small geographic communities. The Cap contributes to localism by ensuring that, in many markets, networks cannot acquire the rights to control programming choices through owning local stations, while the Rule constrains networks from controlling stations’ programming through contracts. Constraining the control networks may exert is relevant because choices made by independent affiliates typically will be more closely attuned to the interests of local viewers and advertisers. A network is an aggregator: it provides a national programming schedule aimed at a representative “national viewer” and its income from national advertisers depends on synchronized airing of its schedule in numerous markets. An affiliate is a local distributor, driven by the interests of the community in its license area. While affiliates have a clear interest in airing much of their network’s schedule, they may sometimes wish to depart from it to better address local preferences. The Cap, in conjunction with the Rule, limits networks from bringing about greater uniformity in programming across markets. By constraining the contracting options of networks and stations, this policy is likely to sacrifice profits and may reduce network investments in programming. Any such costs would have to be weighed against the benefits of localism that result from increased stations’ flexibility in programming. While network-affiliate disputes over the Cap are sometimes portrayed as “just a fight about money,” economic analysis contradicts this portrayal for two reasons. First, as noted above, the Cap alters the choices of stations and, hence, the programming viewed by local communities. Second, the Cap confers no obvious power to a typical affiliate in negotiations with its network, and therefore appears to have no systematic effect on boosting affiliate profits. Indeed, it may well reduce the profit the affiliate could collect through selling the station to the network (or through unconstrained contracting). A major change in the past decade has been the growth of competing video alternatives, notably cable networks. The evidence suggests, however, that broadcast television networks continue to be a significant force in the video marketplace, and are likely to remain so for some time. Thus, if localism remains a policy goal of the FCC, the limit on station acquisition by networks remains an important instrument for pursuing it. Schwartz and Vincent 1 I. Introduction The FCC’s national television ownership cap (the “Cap”) bars any entity from owning stations that collectively would reach more than 35% of U.S. television households.1 The Cap and other regulatory policies in broadcasting have historically pursued at least three goals besides economic efficiency – competition, diversity, and localism.2 This paper focuses on the role of the Cap in advancing localism. While the Cap applies both to networks and to other station-group owners, we shall explain that for purposes of analyzing the effects on localism what matters is the limitation of station ownership by networks. The precise meaning of localism in broadcasting is unsettled.3 One view is that localism refers only to the airing of content that is of local origin (e.g., local news or local public affairs). Such an interpretation, however, seems overly narrow. Serving the interests of a particular community requires not only the airing of some local content, but depends on additional decisions by the broadcast licensee, for example, the amount and timing of commercials made available for local advertisers, and the mix of national programming (network and syndicated) and local programming that appeals to local tastes. We interpret localism in broadcasting as the use of licensing terms to orient broadcasters’ efforts towards small geographic units.4 One step in this regard has been to award licenses that are geographically relatively limited, even if this meant sacrificing some economic efficiency.5 A second step has been to require that programming decisions be made by the licensee and to attempt to ensure that the licensee’s interests are closely aligned with those of the community in the local market covered by the license. Concern with a licensee’s incentives is evidenced in the FCC’s Right to Reject Rule (the “Rule”) that governs the relations between broadcast networks and their affiliated stations – i.e., the licensees in their respective local markets.6 The Rule seeks to maintain a degree of affiliate independence in determining which network programs it will air, by 1 Specifically, the geographic regions (TV Designated Market Areas, or DMAs) in which an entity owns stations can account for no more than 35% of national TV households, except that a UHF station is attributed as “reaching” only fifty percent of households in its DMA. 2 By “economic efficiency” we mean here the achievement of the maximum total benefit to all the affected parties, where benefit is measured in terms of its dollar equivalent and where a dollar of benefit to any party is given equal weight. Competition is often seen as an instrument for achieving economic efficiency (under certain conditions), but it may also be viewed as an independent policy goal. 3 See, e.g., Napoli (2001), chapter 9. 4 The ultimate objective may be to foster a strong sense of community and local identity. Noll et al. (1973, p.108) quote Commissioners Kenneth Cox and Nicholas Johnson as characterizing localism as follows: “A system of locally based stations was deemed necessary to ensure that broadcasting would be attentive to the specific needs and interests of each local community. [...] Ultimately, our broadcasting system is premised on concern that the very identity of local states and cities might be destroyed by a mass communications system with an exclusively national focus. 5 Noll et al. (1973, pp. 100-111) argue that the FCC’s decision to offer geographically limited licenses was motivated by localism as defined above, and they illustrate that such a decision was sometimes made even if it implied a reduction in network competition and presumably economic efficiency. 6 47 C.F.R. § 73.658(e).