DUOPOLY WARS: ANALYSIS AND CASE STUDIES OF THE FCC's RADIO CONTOUR OVERLAP RULES David M. Hunsaker* TABLE OF CONTENTS I. Political and Economic Antecedents ...................................... ..... 21 A. The Deregulatory Philosophy of the 1980s ........................... ..... 21 B. The Altered Landscape of the 1990s ................................ ..... 22 C. Initial Attempts at Damage Control ................................. ..... 22 II. Revision of the Radio Ownership Rules .................................. ..... 23 A. Decisional Antecedents: The Growth of "Local Marketing Agreements" ... ..... 23 B. T he R eport and Order ........................................... ..... 25 C. The Reconsideration Order ................................... ..... 26 1. Tightening of National Ownership Limitations .................... ..... 27 2. Revised Definition of Radio "Market. ........................ ..... 27 3. Use of Audience Rating Data as a Determinant of Market Power .... ..... 28 D. Restrictions on Time-Brokerage Agreements and Other Joint Ventures .... ..... 29 III. C ase Studies ... ... ... .... ... ... ...... ...... ....... ...... ........ ..... ..... 29 A. Ratings in Motion - The Charleston, West Virginia Case .............. ..... 30 B. In Search of Anomalies, I - The Richmond, Virginia Case .............. ..... 32 C. In Search of Anomalies, II - The Jonesboro, Arkansas Case ........... ..... 34 D. The Case of the Disappearing Market: Staunton - Waynesboro, Virginia.. ..... 35 IV . C on clu sion . ... ... ... .... .... .... ..... ..... ........ ...... ........ .... ..... 37 A . Effect of FC C R ulings ............................................ ..... 38 B . Im pact on the Industry ........................................... ..... 38 C. Future Trends in D uopolization .................................... ..... 40 I. POLITICAL AND ECONOMIC broadcast communications industry. All that was ANTECEDENTS needed was to remove the handcuffs from Adam Smith's "invisible hand," and the public interest, A. The Deregulatory Philosophy of the 1980s convenience, and necessity would be served more ef- ficiently and economically than by any bureaucracy In the early 1980s the Federal Communications in Washington. Commission ("FCC" or "Commission") embarked upon a series of deregulatory policies reflective of the During the 1980s, the FCC promoted not only the political and economic philosophy of the Reagan ad- growth of existing electronic media, but also the de- ministration.' That philosophy supported the dis- velopment and profusion of new alternative media to mantling of specific substantive regulations in favor compete with the old. In the case of commercial ra- of "market forces," which it was believed, were more dio, the Commission adopted a number of policies responsive and more efficient than a micromanaged which significantly proliferated the number of com- * Mr. Hunsaker is a partner at Putbrese & Hunsaker, Mc- 1 To be fair, a number of deregulatory proposals, such as Lean, Virginia, and Adjunct Professor of Law, George Mason the deregulation of radio, the Clear Channel Proceeding, 9 University School of Law; B.A., 1966 University of California kiloHertz spacing, and Docket 80-90, were all the brainchildren Santa Barbara; J.D., 1969 Columbia University; M.A., 1972 of the previous administration under Chairman Charles Ferris, Bradley University; LL.M., 1977 University of Virginia. a Democrat appointed by President Carter. COMMLAW CONSPECTUS [Vol. 2 mercial radio frequencies, both AM and FM. In the two short years. By 1991, more than half of all com- Clear Channel Proceeding,2 the protection for Class mercial radio stations were operating in the red,' I-A Clear Channels was reduced by 50% in order to and for small market stations the percentage was permit the allocation of new regional channels and even higher.6 local daytime-only stations.' BC Docket 80-90, pro- The FCC, seeing that it was presiding over an in- posed by the Ferris administration, but implemented dustry in serious economic trouble, came to realize by Fowler over a three-year period, added over 700 that its "more is better" and "diversity at any cost" new FM channels throughout the country, most of policies, like most panaceas, worked much better in which were low-powered Class "A" local channels. theory than in practice. These, and a number of other regulatory moves, all adopted under the philosophy that "more is better," created a plethora of new audio and video services C. Initial Attempts at Damage Control during the 1980s." During this period of phenomenal growth in elec- Even before the turn of the decade, the Commis- tronic media, the bubble continued to expand. Huge sion began to realize that its system of mixing alloca- mergers took place, restructuring a large segment of tions of regional and local stations had created an the industry. Prices paid for radio and television sta- economic imbalance, making it difficult for the small tions rose substantially, resulting in financing plans stations to compete.7 The Commission instituted a completely dependent on future increases in valua- number of policy initiatives to address these imbal- tion rather than realistic cash flow. It became evident ances in order to permit small AM and FM stations that the bubble was being stretched beyond its to compete more effectively in the media capacity. marketplace. First, the Commission modified its rulemaking 8 B. The Altered Landscape of the 1990s procedures involving FM channel allotments mak- ing it easier for licensees of low-power FMs to seek At the end of the decade, the bubble inevitably and obtain an upgrade to a higher-powered class of burst. Station values plummeted, cash flows de- station, without placing their existing facilities in creased, and business failures and bankruptcies were jeopardy under the Ashbacker rule.' Subsequently, common. Commercial radio stations were hit partic- the FCC adopted, by an across-the-board rulemak- ularly hard. Some media brokers estimated that ra- ing, a power increase for all eligible Class A FM dio station values had declined by as much as 50% in stations from three kilowatts effective radiated power ' In re Clear Channel Broadcasting in the AM Broadcast Maximum Transmitting Power for Class A FM Stations, Sec- Band, Report and Order,78 F.C.C.2d 1345, 47 Rad. Reg. 2d (P ond Report and Order, 4 FCC Rcd. 6375, 66 Rad. Reg. 2d (P & F) 1099 (1980). & F) 1473 (1989) [hereinafter FM Stations Second Report and 1 Id. para. 18. While the Fowler administration is blamed Order]. The term, "small" is used here in the sense of power for much of the deregulatory excesses that contributed to the eco- and coverage limitations. For example, Class A FM stations up nomic woes of radio, Fowler should be credited at least with the through the mid-1980s were authorized to operate at a maxi- wisdom to reject the proposed 9 kiloHertz spacing for AM radio mum effective radiated power ("ERP") of three kilowatts and a that was seriously urged by his predecessor, Charles Ferris. maximum antenna height above average terrain ("HAAT") of ' In re Modification of FM Broadcast Rules to Increase 100 meters (328 feet). Id. paras. 1, 15. Its "interference-free" Availability of Commercial FM Broadcast Assignments, Report coverage was protected at about fifteen miles from the transmit- and Order,48 Fed. Reg. 29,486, 53 Rad. Reg. 2d (P & F) 1550 ter site. Id. para. 47 n.75. (1983). o In re Amendment of the Commission's Rules Regarding ' In re Revision of Radio Rules and Policies, Report and Modification of FM Broadcast Licenses to Higher Class Co- Order, 7 FCC Rcd. 2755, para. 2, 70 Rad. Reg. 2d (P & F) 903 channel or Adjacent Channels, Report and Order, 51 Fed. Reg. (1992), recon. granted in part, 7 FCC Rcd. 6387, 71 Rad. Reg. 20,290, 60 Rad. Reg. 2d (P & F) 114 (1986) [hereinafter FM 2d (P & F) 227 (1992) [hereinafter Radio Rules and Policies Adjacent Channels Report and Order]. Report and Order]. 9 Id. para. 2. The Commission previously had held that the ' Id. para. 2. Finding that "as a direct result of this tremen- policy announced in Ashbacker Radio Corp. v. FCC, 326 U.S. dous market fragmentation, many participants in the radio busi- 327 (1945) (that section 309(e) of the Communications Act re- ness are experiencing serious economic stress. More than half of quires an evidentiary hearing in all cases where there are mutu- all commercial radio stations lost money in 1990, and small sta- ally exclusive applications) did not apply to FM rulemaking tions in particular have been operating near the margin of via- proceedings where a licensee sought an upgrade on its same or bility for years." Id. an adjacent channel. In re Application of Malrite of New York, ' In re Amendment of Part 73 of the Rules to Provide for an Inc. for Constr. Permit in File No. BP-820408AB, FCC 84-338 Additional FM Station Class (Class C3) and to Increase the (July 12, 1984). 1994] DUOPOLY WARS ("ERP") to six kilowatts ERP.' In the same another station in the same market with respect to rulemaking, the Commission also created a new class the sale of advertising time. Most of the agreements of FM Station, C-3 (25 kilowatts at 100 meters that were made included either an option to maximum HAAT), stating that the principal pur- purchase, or a right of first refusal on the part of the pose of such action was "to provide additional op- brokering station to acquire the brokered station.15 portunities for improvement of the facilities of ex- The inclusion of such a right was to protect the time isting Class A FM broadcast stations."" Finally, the broker's long-term investment in building up the sta- Commission modified its radio duopoly rules to per- tion's ratings and sales. If the licensee could termi- mit common ownership of facilities with overlapping nate the agreement at any time, or sell it to a third primary service contours'2 so long as their principal party, the time broker would have lost all of the community contours'" did not overlap."' long-term benefits of its investment. Conversely, the licensee would often have some II. REVISION OF THE RADIO OWNERSHIP protection in the agreement to prevent the time bro- RULES ker from walking off and leaving the station in a shambles.