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                                                       FCC 95-254
                                Before the
                     FEDERAL COMMUNICATIONS COMMISSION
                          Washington, D.C.  20554


In the Matter of                   )
                                )
Review of the Commission's         )         MM Docket No. 95-92
Regulations Governing Programming       )
Practices of Broadcast Television            )
Networks and Affiliates            )
                                )
47 C.F.R.  73.658(a), (b), (d), (e) and (g) )


                      NOTICE OF PROPOSED RULE MAKING

Adopted:  June 15, 1995;                Released:  June 15, 1995

Comment Date:  August 28, 1995
Reply Comment Date:  September 27, 1995

By the Commission:




                             TABLE OF CONTENTS
                                                       Paragraph

I.   INTRODUCTION. . . . . . . . . . . . . . . . . . . .                                          1

II.  GOALS OF THE NETWORK/AFFILIATE RULES. . . . . . . .                      6

III. CHANGES IN THE MARKET FOR AFFILIATION . . . . . . .  8

     A.  Network/Affiliate Bargaining. . . . . . . . . . 12

     B.  Effects of Network/Affiliate Rules on Other Parties. 18

IV.  ANALYSIS OF SPECIFIC RULES

     A.  Right to Reject Rule. . . . . . . . . . . . . . 20

     B.  Time Option Rule. . . . . . . . . . . . . . . . 26

     C.  Exclusive Affiliation Rule. . . . . . . . . . . 33

     D.  Dual Network Rule . . . . . . . . . . . . . . . 38

     E.  Network Territorial Exclusivity Rule. . . . . . 44

V.  CUMULATIVE EFFECTS . . . . . . . . . . . . . . . . . 51

VI.  CONCLUSION. . . . . . . . . . . . . . . . . . . . . 58

VII.  ADMINISTRATIVE MATTERS . . . . . . . . . . . . . . 61

APPENDIX A:  Initial Regulatory Flexibility Act Statement
APPENDIX B:  Distribution of Commercial Television Stations Across DMA Markets, 1994
APPENDIX C:  Number of Broadcast Stations Nationally, 1946-1994


                             I.  INTRODUCTION

     1.  With this Notice of Proposed Rule Making (Notice), the Commission continues its
reexamination of the rules governing the relationship between broadcast television networks
and their affiliates.  The five rules under consideration here, which are included in Section
73.658 of the Commission's Rules, 47 C.F.R.  73.658, all regulate particular network/affiliate
programming practices and apply to all broadcast television networks.  The five rules are: 
(1) the right to reject rule (Section 73.658(e)); (2) the time option rule (Section 73.658 (d));
(3) the exclusive affiliation rule (Section 73.658(a)); (4) the dual network rule (Section
73.658(g)); and (5) the network territorial exclusivity rule (Section 73.658(b)).  The right to
reject rule provides that affiliation arrangements between a broadcast network and a broadcast
licensee generally must permit the licensee to reject programming provided by the network. 
The time option rule prohibits arrangements whereby a network reserves an option to use
specified amounts of an affiliate's broadcast time.  The exclusive affiliation rule prohibits
arrangements that forbid an affiliate from broadcasting the programming of another network. 
The dual network rule generally prevents a single entity from owning more than one
broadcast television network.  The network territorial exclusivity rule proscribes arrangements
whereby a network affiliate may prevent other stations in its community from broadcasting
programming the affiliate rejects, and arrangements that inhibit the ability of stations outside
of the affiliate's community to broadcast network programming.

     2.  The Commission has examined the network/affiliate relationship a number of times
over the years, although it has not conducted a comprehensive review since 1980.  It first did
so in its 1941 Report on Chain Broadcasting.  That report expressed the Commission's
general concern that the major radio networks' power over their affiliates was impeding the
development of new program sources and impairing the affiliated stations' ability to control
their day-to-day operations.  As a result of the findings of the Report on Chain Broadcasting,
the Commission adopted a number of rules prohibiting or limiting certain practices between
radio networks and their affiliates, including the practices covered by the five rules that will
be discussed in this Notice.  The rules adopted for the radio industry pursuant to the Report
on Chain Broadcasting were applied to television in 1946 without additional analysis or
comment.  A number of years later, the Commission appointed a staff committee headed by
Roscoe L. Barrow, which conducted a general inquiry into television network broadcasting
and culminated in the 1957 Barrow Report.  The Barrow Report voiced continued concerns
over the networks' ability to extract certain agreements from their affiliates.  As a result, the
Commission adopted additional restrictions on network/affiliate practices, including a more
restrictive version of the time option rule than the one that had previously been in place.

     3.  In 1977, the Commission repealed almost all of its network rules with respect to
radio, including four of the five rules at issue in this Notice.  The Commission cited major
changes in the character of network radio since 1941, including a tremendous increase in the
number of stations, the diminished economic role of radio networks, and a change in the type
and duration of programming provided by radio networks.  That same year, the Commission
again created a staff study group to examine, among other things, the effectiveness of the
existing television network/affiliate regulations.  The resulting Network Inquiry Report, issued
in 1980, found that a number of Commission rules and policies had unintentionally increased
the economic power of the three major national television networks by enhancing their ability
to exclude potential competitors.  As a result, the Network Inquiry Report suggested
elimination of most of the network/affiliate rules.  The Commission took no action on the
recommendations of the staff Report.

     4.  More than 50 years have passed since the Report on Chain Broadcasting was
issued.  At that time, television was in its infancy and radio was the broadcast medium of
mass national appeal.  The broadcasting industry has undergone tremendous change in the
intervening decades, yet four of the five rules we discuss in this Notice have remained
substantially unchanged since that time.  The rule that was changed, the time option rule, was
modified over 30 years ago to impose additional restrictions.  Moreover, it has been 15 years
since release of the Network Inquiry Report questioning whether these rules serve the public
interest.  In those 15 years, many have argued that the need to diminish the broadcast
networks' power over program production and distribution has been reduced by the emergence
of cable television and other alternative program distributors as vigorous competitors to
broadcast television for viewers and advertisers.  Further, the importance of protections for
affiliates vis-a-vis their networks appears diminished by the availability of an ever-growing
supply of alternative programming.  We believe that this continuing realignment of the market
for delivered video programming necessitates a comprehensive reevaluation of the five
network/affiliate rules that are the subject of this Notice.  

     5.  The overarching theme of our analysis is whether the rules continue to serve the
purposes for which they were developed, which were themselves rooted in the Commission's
primary goals of promoting competition and diversity in the communications industry.  To
answer this question, this Notice first examines the general reasons behind the five network
rules.  We then discuss the dynamics of the network/affiliate relationship, with an eye towards
identifying changes in that relationship that may have alleviated concerns regarding potential
abuse of power by the major broadcast networks.  Next, keeping in mind these two analyses,
we examine each of the five rules to understand how each was specifically designed to
accomplish the Commission's broad goals and to ascertain whether the rule at issue in fact
achieves its objectives, and we propose modifications as appropriate.  Finally, we raise
questions about the cumulative effects of our proposed actions.


                 II.  GOALS OF THE NETWORK/AFFILIATE RULES

     6.  At the time of the Report on Chain Broadcasting, the networks were including
provisions in their affiliation agreements that were viewed by the Commission as inhibiting
the development of competition by new networks and restricting licensees' control over their
stations.  Most of the rules adopted in the Report on Chain Broadcasting were based on either
or both of the following specific goals:

     (1) To remove barriers that would inhibit the development of new networks; 

     (2) To ensure that licensees retain sufficient control over their stations to fulfill
     their obligation to operate in the public interest.

Both goals serve the Commission's general objectives of maximizing diversity of viewpoint
and encouraging competition in the communications industry.  The first goal was based on a
belief that new television networks would provide viewers with more programming choices,
and that new networks would compete with existing networks for advertisers and viewers,
providing consumers with the economic benefits of a competitive marketplace.  The second
goal was premised on the requirement of the Communications Act that licensees retain control
over their stations, which is the basis of the Commission's ownership and attribution
framework for ensuring diversity and competition.  

     7.  Furtherance of diversity and competition remains the cornerstone of Commission
regulation.  The two specific goals upon which the rules are based accordingly continue to be
relevant in today's marketplace.  The question arises, however, whether the network rules are
necessary to achieve these goals or, conversely, whether the rules increase the costs of
networking without producing any real benefits.  Paramount in such a determination is an
exploration of the network/affiliate relationship as it stands today.  As detailed in the next
section, changes in the communications marketplace appear to have decreased to some extent
the networks' ability to exercise undue influence over their affiliates to affect the flow of
programming available to viewers.


                III.  CHANGES IN THE MARKET FOR AFFILIATION

     8.  The Report on Chain Broadcasting based its recommendations on an analysis of
three markets: "the market in which networks and stations meet advertisers, the market in
which networks and stations meet listeners, and the intermediate or internal market where
stations meet networks."  The Commission is considering the implications of changes in the
video marketplace on the "market in which networks and stations meet advertisers" in another
proceeding.  Additionally, we are conducting a similar analysis of the market in which
networks and stations meet viewers in two other proceedings.  We therefore focus in this
Notice upon the intermediate market where stations meet networks.  We will, however,
incorporate relevant comments from those other related dockets into this proceeding as
appropriate.

     9.  As discussed above, the network/affiliate rules under present consideration were
originally intended to reduce the barriers to entry by new networks and give stations control
over the video programming they broadcast, so that incumbent networks could not unduly
influence the "flow of programs from producers to listeners."   However, all of these rules
were promulgated when terrestrial broadcasting was the only video connection to a consumer. 
This fact no longer holds true as there are several possible ways to reach a consumer, such as
cable TV, direct broadcast satellite service and wireless cable.  Such alternative pipelines offer
multiple channels of video programming.  Consequently, our rules regulating the broadcast
television network/affiliate relations to promote the flow of programs from producers to
viewers may no longer be necessary because of the video programming alternatives available
to consumers.

     10.   Nonetheless, cable and other multichannel video programming distributors may
not reach enough viewers that they sufficiently address our diversity and competition concerns
with respect to the video marketplace.  While cable systems are available to nearly 96% of all
U.S. households, only 66.3% of those households (approximately 60.5 million) subscribe to
cable services.  It is notable that the remaining 34% do not necessarily only receive
terrestrial broadcast television signals; a number of these households subscribe to direct
broadcast satellite television, wireless cable or another multichannel provider.  At this point,
we do not have accurate data on this issue.  We accordingly solicit evidence regarding the
extent to which those television households that do not subscribe to cable do subscribe to
other multichannel providers.  We also ask for information regarding the broadcast networks'
share of the viewing audience vis-a-vis other programming providers.  Further, even if a
substantial portion of households subscribe to video services other than over-the-air
broadcasting, those non-broadcast video programming providers might not provide the kinds
of services that would satisfy our traditional public interest objectives.  To that end, we ask
commenters to address whether multichannel video programming distributors provide
sufficient local news and other programming responsive to community needs to satisfy the
Commission's longstanding goal that the public receive these types of programming.

     11.  Even if we do not consider these multichannel programming sources in our
analysis, we believe that changes in the broadcast industry itself may have significantly
altered the network/affiliate relationship.  For purposes of the following discussion, we will
focus on network/affiliate relations in the broadcast television industry regardless of the
proliferation of other providers.  However, we seek comment on the effects these other
providers have on the relationship between broadcast television networks and their affiliates.  
A.  Network/Affiliate Bargaining

     12.  The relative bargaining positions of broadcast television networks and their
affiliates will be determined in part by the specific conditions of each local market served by
broadcast television stations.  One likely determinant of a broadcast network's bargaining
power over an independently owned affiliate is the number of alternative outlets with which
the network could choose to affiliate in the same market.  In this regard, Appendix B
provides data on the number of commercial television stations per Designated Market Area
(DMA).  If we consider the four largest broadcast networks as currently competing with one
another for affiliates and assume for the sake of argument that these networks have
preferences for affiliating with VHF stations, then the networks would appear to have a
commanding position in bargaining with broadcast television stations in only 4% of the DMA
markets (serving 17% of television households in the U.S.).  This is because in those markets
the number of VHF broadcast stations exceeds the number of networks.  This analysis
excludes the recent entrants to national networking, United Paramount Network (UPN) and
Warner Brothers Network.  At this time, neither provides an amount of programming
comparable to that of the four other broadcast networks.  Commenters are, however, invited to
address the extent to which these new entrants are affecting competition between networks for
affiliates and therefore should be included in our analysis of network/affiliate relations.

     13.  The above analysis changes significantly if networks do not have strong
preferences for VHF stations over UHF stations.  The advantages to a network of a VHF
affiliate over a UHF affiliate would appear to be significantly reduced if both are carried over
the same geographic region via cable.  There are 103 markets with more than four
commercial television stations, including both VHF and UHF.  These markets represent 49%
of all DMA markets and 84% of all television households.  Based on the analysis discussed
above, the four major television networks may be in a better bargaining position than
broadcast stations in such markets.  This is not to say, however, that such a bargaining
advantage constitutes undue market power and would have a sufficient effect on 
programming available to the public to justify governmental intervention.  Taking into
account new network entrants UPN and Warner Brothers, there are 44 DMA markets with
more than six stations (serving approximately 59% of all television households).  We ask
commenters to discuss this analysis and, in particular, to address whether preferences for VHF
stations continue to exert a strong influence on this bargaining.

     14.  The key determinant of the relative bargaining position of networks and broadcast
television stations illustrated in the above discussion is the availability of alternatives.  For
affiliates, the critical issue is what are their alternatives for obtaining profitable programming. 
In contrast to when the network/affiliate rules were first applied to the broadcast television
industry, there is now an array of new network and non-network sources of programming. 
This fact was noted in our recent PTAR Notice.  We ask for comment and analysis of what
effects, if any, alternative programming sources, especially non-network sources, have had and
will have on network/affiliate relations.  

     15.  Further, the set of alternatives available to both parties is influenced by
technology, which may be expected to change bargaining between networks and affiliates in
the future in multiple ways.  Perhaps the most significant technological change in terrestrial
broadcasting's future is the possibility of a station multiplexing digital signals and thereby
broadcasting more than one channel of programming.  Such a development could reduce a
network's bargaining power if the network becomes only one of several suppliers of
programming for the station.  On the other hand, the existence of more broadcast channels
could increase competition between broadcasters for network affiliation to distinguish their
products.  We seek comment on whether we might exempt broadcast television stations from
the network/affiliate rules if and when they broadcast multiple signals.  We also seek
examples of any other foreseeable technological changes that could affect network/affiliate
relations in the near term.

      16.  The network/affiliate relationship could also be affected by the trend toward
group ownership in television broadcasting.  Networks are often negotiating with group
owners rather than individual station owners for affiliation contracts.  In 1994, under the
overall 12-station ownership limit, more than half (784 of 1,154) of all commercial U.S.
television stations were owned by entities that held more than one TV station license.  Group
ownership may bolster an affiliate's bargaining position in that the network may bargain with
a group owner over multiple affiliation contracts at once or over time.  These possibilities
force a network to recognize the effects that negotiating one affiliation contract with a group
owner may have on other affiliation contracts that the network may want to negotiate with the
group owner.  We solicit comment on the impact of group ownership on the bargaining
between networks and broadcast stations.  Further, we request comment on the relative
bargaining position of group versus single broadcast television station owners in negotiating
affiliation agreements.  We also ask commenters to provide data on the mix of individually-
owned versus group-owned stations by DMA, and the extent to which group-owned stations
tend to be network affiliates rather than independent stations.

     17.  If the Commission were to relax its national ownership limits for commercial
broadcast television group ownership, as it has proposed in the TV Ownership Further Notice,
then these changes would likely influence the relationships between broadcast networks and
their affiliates.  However, there appear to be two possible, and conflicting, effects of such a
relaxation on network/affiliate relations.  On the one hand, relaxation of the national
ownership limits could increase the bargaining power of networks by expanding their option
to own rather than affiliate with broadcast television stations.  On the other hand, relaxation
of the national ownership limits could increase the bargaining position of group-owned
affiliates by creating larger, more powerful groups.  We ask commenters to address how
potential changes in the ownership rules will affect the network/affiliate dynamic with respect
to the five rules reviewed in this Notice.

B.   Effects of Network/Affiliate Bargaining on Other Parties

     18.  Network/affiliate bargaining affects both current and future viewers.  It affects
current viewers through an affiliate's contractual ability to provide its potential audience with
the programming the audience wishes to view.  It affects future viewers by restricting or
facilitating entry by new broadcast television networks, which provide viewers with additional
programming choices.

     19.  It is important to recognize that existing networks and their affiliates may agree to
contracts that tend to make entry by new networks more difficult.  Existing firms serving a
common market compete not only among themselves but also with potential new entrants. 
Consequently, existing networks will have an incentive to block entry by new networks in
order to maintain their existing market positions.  One way they might do so is to pay their
affiliates sufficient compensation to accept long-term contracts that include contractual terms
that limit entry.  While we consider this issue below with respect to specific contractual
provisions, we solicit comment here on the effect of the length of the affiliation contract on
the effectiveness of contractual devices in blocking entry by new networks.  If the term of the
contract is an important determinant, then we also ask commenters to address whether it
might be appropriate to limit the length of affiliation contracts to mitigate these problems in
light of whatever actions we might take regarding the five rules at issue here.


                      IV.  ANALYSIS OF SPECIFIC RULES

A.  The Right to Reject Rule

     20.  Section 73.658(e) of the Commission's Rules, 47 C.F.R.  73.658(e), prohibits a
broadcast station from entering into a contract with a network that does not permit the station
to (1) reject network programs that the station "reasonably believes to be unsatisfactory or
unsuitable or contrary to the public interest," or (2) substitute a program that the station
believes to be of greater local or national importance.  The Report on Chain Broadcasting
concluded that stations must not be allowed to bargain away the right to reject programming
because they are ultimately responsible under the Communications Act for the programming
they air:

     We conclude that a licensee is not fulfilling his obligations to operate in the
     public interest, and is not operating in accordance with the express
     requirements of the Communications Act, if he agrees to accept programs on
     any basis other than his own reasonable decision that the programs are
     satisfactory.  [] Even after a licensee has accepted a network commercial
     program series, we believe he must reserve the right to substitute programs of
     outstanding national or local importance.  

Report on Chain Broadcasting at 66.

     21.  The right to reject rule is therefore based on what we identified in Section II,
supra, as goal number two -- to ensure that licensees retain sufficient control over their
stations to fulfill their obligation under the Communications Act to operate in the public
interest.  The Commission has traditionally interpreted this notion of control to mean that a
licensee must preserve its ability to exercise full responsibility over all matters involving the
operation of its station.  Our analysis of the continuing necessity of the right to reject rule
must therefore balance the public interest requirement that licensees retain control of their
stations with the health of the network/affiliate system.   

     22.  Ensuring an affiliate an unlimited right to reject programming provided by a
network enables an affiliate to pursue its short-term interests to the possible detriment of the
network system within which it participates.  An affiliate might reject network programming
in favor of more profitable programming for the affiliate, ignoring the fact that its rejection of
the network's program causes the network to lose advertising revenues.  Losses in network
advertising revenues imposed by affiliate preemption affect the network's ability to fund
popular new programming and thus affects the future profitability of the network and all the
affiliates.  Further, such behavior by stations may induce networks to avoid innovative
programming, because the network would bear most of the risk of airing such programming
with affiliates sharing in the benefits only when it serves their interests.   For these reasons,
the Commission's 1980 Network Inquiry Report concluded that the right to reject rule
increases the costs of networking and thereby reduces benefits to the public.  The public,
and other affiliates, can be harmed if some affiliates reject network programming too often.  
We solicit evidence on these costs.  We note, however, that it appears that affiliates generally
do not reject network programming, at least in prime time.  

     23.  On the other hand, providing licensees with the right to reject network
programming ensures that a licensee has the ability to respond to community needs, for
example, to cover a late-breaking event of local importance.  This concept of control also
ensures that ultimate programming decisions are made by the same entity that has
responsibility for rule violations.  For example, if a licensee that is a network affiliate aired a
network program that is later found to be indecent, the licensee and not the network would be
responsible for any sanction the Commission might impose.  

     24.  Notably, the rule is unclear as to whether a station, in invoking its Section
73.658(e) right to reject programming, may reject network programming for purely economic
reasons.  In a 1960 Report and Order slightly modifying the rule, the Commission was
specifically asked by commenters to clarify "that the station's right to substitute for a network
program must be based on bona fide public interest considerations rather than mere economic
benefit to the station."  The Commission did not specifically state one way or the other
whether the rule was intended to be limited in this way.  Indeed, our review of some network
affiliation agreements shows that a number of those agreements provide that an affiliate may
not reject network programming based solely on the fact that that programming is low-rated
and that the affiliate can make more money by preempting it and substituting a more
profitable program.  

     25.  We propose to retain the right to reject rule but to clarify that the rule may not be
invoked based solely on financial considerations.  We believe that this represents the most
appropriate balance between the competing public interest and economic efficiency concerns
inherent in the right to reject rule.  We do not intend that this clarification be interpreted to
mean that a station may only preempt network programming to air news or public affairs
programming.  We believe it appropriate to permit a station to reject network programming to
air, for instance, a local sporting event or a local entertainment program.  Further, the
substituted programming would not necessarily have to be local.  For example, an affiliate
located near a nuclear power plant might prefer to air a syndicated program about nuclear
accidents rather than network programming.  In addition, we do not intend that the substitute
programming must be less profitable than the network programming from the affiliate's point
of view; profit, however, must not be the sole motive behind preemption.  We seek comment
on this proposal. 

B.  The Time Option Rule

     26.  Section 73.658(d) of the Commission's Rules, 47 C.F.R.  73.658(d), prohibits
arrangements between a station and a network whereby the network retains an "option" on
certain hours of the station's time, which it may or may not decide to exercise.  If the network
chooses not to act on its option, the station is able to air other programming during the
optioned time.  In deciding to prohibit time optioning, the Report on Chain Broadcasting
raised two concerns.  First, the Commission stated its belief that time optioning interferes
with a station's ability to build a regular audience for a particular program because that
program could be preempted by the network with, at best, minimal notice.  The Commission
concluded that this could hinder the development of local commercial programming contrary
to the public interest.  Second, the Commission found that time optioning could inhibit the
development of new networks because it creates uncertainty as to the availability of network
affiliates' time for the programming of another network. 

     27.  Later, however, in its Supplemental Report on Chain Broadcasting, the
Commission recognized the business convenience of time option arrangements.  It therefore
decided to permit networks to acquire options in certain specified time periods, provided that
the network gave the station at least 56 days' notice that it would be using the time.  The
Commission adopted the current, more restrictive rule in 1963 based on its conclusion that
time optioning unduly restrains a station's freedom to choose what to air and when to air it
and interferes with other program providers' access to broadcast time, without providing
sufficient benefits to offset these concerns.  

     28.  A station's optioning of its time is a way of reserving broadcast time for use by
another party.  It is similar to a hotel reserving a room for a guest or an airline booking
reservations for a passenger, with the potential customer being able to cancel his or her
reservation.  Essentially, the time optioning prohibition forces a network to commit to use
particular blocks of a station's time rather than permitting a network to retain an option to use
such time. 

     29.  The prohibition on time optioning was based on both of the goals identified in
Section II -- to remove barriers that would inhibit new networks and to ensure that licensees
retain control over their stations so as to provide programming responsive to the public
interest.  However, the extent to which time optioning ever actually achieved its potential
negative consequences is questionable.  The Barrow Report, which recommended the
prohibition on time optioning, found that networks as a rule did not use time optioning to
force stations to clear programming they did not want to clear.  In fact, the Barrow Report
argued that there was no difference in station clearance rates or practices with respect to
network programming supplied to an affiliate for optional time (i.e., time a station optioned to
a network) and station time (i.e., time the station had not optioned).  

     30.  While the Commission's prohibition on time optioning may not pose a significant
impediment to established networks, it might inhibit the growth of new networks.  
Established networks can commit to use specific blocks of a station's time in advance of its
use because they have an inventory of programming.  We note that in some network
affiliation agreements, stations warrant that they have no obligations or conflicts with
broadcasting the network's programming during specific time periods set out in the contract
over the life of the contract (10 years), and promise to broadcast the network's programming
in pattern with the network's owned and operated stations.  A new network, however, may
want to book a time slot with enough stations so that it can raise funding to develop a
programming concept, but at the same time may want to retain the ability to opt out of those
time slots if the program does not work out as expected.  Thus, the new network may not be
able to bear the risk of a pre-commitment to use a block of a station's time, but may need the
option to use that time to develop a network programming schedule.  We seek comment on
the extent to which time optioning can be a useful device for new networks seeking to
develop programming.  

     31.  Further, we seek comment on the extent to which time optioning might impose a
burden on network-affiliated stations.  Because a station is responsible for what it broadcasts,
it must be concerned with what programming the party optioning its time plans to provide. 
To retain control of what it broadcasts in optioned time, the station would appear to need
enough time and information about the programming to discern whether it wants to accept the
programming.  Perhaps more importantly, the station would also need sufficient time to make
arrangements with alternative programming suppliers or to produce its own programming in
the event it chooses not to accept the network programming or the network decides not to
exercise its option.  The station would also need additional time to arrange for substitute
advertising.  Would eliminating the prohibition but adopting a mandatory notification period
within which a network must decide whether to exercise its option alleviate concerns that
time optioning would interfere with affiliates' long-range planning?

     32.  In light of the foregoing, we propose to modify our rules to permit stations to
option time to networks, subject to a predefined notice period.  We seek comment on this
proposal and on what would be an appropriate notice period.  Alternatively, we ask whether
this rule should simply be eliminated.  We note that even if networks are permitted to option
affiliates' time, affiliates will still have the right to reject network programming provided
during that time, as detailed in the previous section.  If networks do not afford stations
sufficient notice with respect to optioned time, however, stations may be effectively deprived
of their ability to exercise that right.  Should a distinction be drawn between established and
newly developing networks with respect to their ability to engage in time optioning?

C.  The Exclusive Affiliation Rule

     33.  Section 73.658(a) of the Commission's Rules, 47 C.F.R.  73.658(a), prohibits
arrangements between a station and a network that prevent the station from broadcasting the
programming of another network.  The Report on Chain Broadcasting adopted this prohibition
based on the first goal identified in Section II.  The Commission concluded that exclusive
affiliation arrangements inhibit the development of new networks because they prohibit
stations affiliated with one network from taking the programming of another network.  This
could make it difficult for new networks to line up stations to air their programming, thus
foreclosing competition and limiting the diversity of programming choices available to the
public.

     34.  The extent to which exclusive affiliation could be used by networks to preclude
entry by other networks is largely determined by the presence or absence of alternative outlets
for new entrants, whether terrestrial broadcast or other.  Large markets with a large number of
broadcast television stations available for affiliation may not present the same potential for
abuse that small markets with a small number of broadcast television stations present with
respect to exclusive affiliation agreements.  Given the substantial increase in the number of
broadcast television stations since adoption of the Report on Chain Broadcasting (see
Appendix C), it appears that there are a number of markets with enough broadcast television
stations that elimination of the exclusive affiliation rule for these markets should not unduly
restrict new network entrants.  On the other hand, retaining the prohibition against exclusive
affiliation could have benefits for new networks in that stations affiliated with an established
network may be able to provide new networks with prominent airtime, thereby enhancing
their potential to establish themselves.  We seek comment on these issues.

     35.  We note that in at least a few markets, two recent national television network
entrants have affiliated with stations that are also affiliates of ABC, CBS, NBC or Fox.  Prior
to the entry of UPN and Warner Brothers, only 23 out of 204 markets had stations affiliated
with more than one network (whether national or regional), and almost all of these cases were
in small markets with few stations.  Now, however, some UPN and Warner Brothers stations
have arranged for secondary affiliation in some sizeable markets.  Are these new entrants
simply taking advantage of the potential for increased audience visibility associated with
established national television network programming, or is there some other important reason
for these dual affiliations?  Is part of the reason that the new networks prefer to affiliate with
VHF rather than UHF stations, and what does this say about the perceived UHF/VHF
disparity?

     36.  There are benefits to exclusive affiliation.  The standard economic efficiency
argument in favor of exclusive dealing is that it reduces the problem of retailers taking
advantage of a producer's promotion to bring in customers and then switching them to more
profitable products for the retailers.  In the broadcasting context, an affiliate can use the
audience drawn to the station's broadcasts by virtue of a network's programming and
promotion of it to build an audience for programming it finds more profitable, at the
network's expense.  Permitting exclusive affiliation may reduce some of the concerns
associated with the potential for affiliates to use the right to reject rule in this way.  Further,
identification with a given network through exclusive affiliation may be important to
terrestrial broadcast stations attempting to differentiate themselves in an increasingly crowded
video marketplace.  
     
     37.  We propose to eliminate the current prohibition on exclusive affiliation, at least in
large markets.  We are concerned that permitting exclusive affiliation in smaller markets
might preclude the development of new networks in those markets, thus depriving the public
of the benefits of competition and diversity.  On the other hand, as pointed out in Section III,
supra, stations in small markets may be in a bargaining position to deny networks' exclusive
affiliation if they believe that exclusive affiliation would force them to forgo potentially
profitable programming opportunities.  While it is conceivable that a network may offer an
affiliate sufficient compensation that the affiliate will agree to such terms despite the potential
loss of profitable alternatives, it appears unlikely given the small audiences and profit
potential these markets represent.  We solicit comment on these issues.  If we do retain the
rule for small markets, how should such markets be defined?

D.  Dual Network Rule 

     38.  Section 73.658(g) of the Commission's Rules, 47 C.F.R.  73.658(g), provides that
a station may not enter into an agreement with a network that operates more than one
broadcast TV network, except if the networks are not operated simultaneously or if there is no
substantial overlap in the territories served by each network.  The Report on Chain
Broadcasting concluded that permitting an entity to operate more than one network might
preclude new networks from developing and affiliating with desirable stations because those
stations might already be tied up by the more powerful network entity.  The Commission was
also concerned that dual networking could give a network too much market power.  The dual
network prohibition therefore was intended to serve the first goal identified in Section II, as
well as the Commission's more general diversity and competition goals.

     39.  In its 1992 TV Ownership Notice, the Commission specifically proposed to repeal
the dual network rule.  The Commission observed that an increasing number of non-broadcast
multiple channel providers who are not subject to such a rule are able to enjoy economies of
scale and marketing advantages.  Consequently, the Commission noted, broadcast networks
affected by the rule are channeling their resources into non-broadcast media.  Moreover, in
light of the increase in the number of alternatives to broadcast television, the Commission
predicted that repeal of the rule would pose little risk to the Commission's diversity goals.
The Commission also stated that the advancement of satellite and digital compression
technology could enable broadcasters to use their existing facilities to provide multiple
channels, and that the dual network rule may forestall such innovation.  

     40.  A number of commenters in that proceeding favored repeal, arguing that the rule
is outdated.  Other commenters offered alternative proposals, but agreed that some kind of
modification is warranted.  Still others stated their belief that repeal might be worth
considering in the future, but that such action would be premature at this time.  In
opposition, commenters opposing repeal were concerned that permitting existing broadcasters
to operate more than one network would limit the number of available outlets for independent
program providers and would lead to undue concentration of advertising and programming
distribution by existing networks.  

     41.  While we incorporate commenters' prior submissions into this proceeding, we
believe it appropriate to seek further comment on eliminating the dual network rule.  This is
to permit commenters and the Commission to evaluate the rule in the context of our new
proposals regarding the other network rules.  In addition, we seek comment on the effects of
technological advances that have occurred since 1992 that will facilitate digitization of the
broadcast industry, and how the use of multiple channels by broadcasters would implicate the
dual network rule.

     42.  As we discussed in Section III, supra, it appears that the increased number of
broadcast TV stations and the reduced UHF/VHF distinction has led to greater opportunity for
new networks to develop.  Would permitting an entity to own more than one network reverse
this trend, thereby impeding competition and diversity, or are there so many stations now that
dual networking would not have a significant effect?  We are particularly concerned that
permitting merger of two or more of the existing major networks would lead to excessive
concentration of market power.  We seek comment on these issues.

     43.  We also seek comment on the cost of the prohibition; dual networking could
allow the realization of economies of scale and scope for networks and affiliates and provide
independent stations with an alternative programming stream.  Further, we note that no dual
network restriction applies to cable and direct satellite broadcasting.  Does the dual network
restriction impede broadcasters' ability to compete with these other media for viewers and
advertisers?  We note that concern that the dual network rule would impede advancement of
advanced television (ATV) has led to our proposal in the ATV proceeding that the rule be
suspended for ATV broadcasters.  Might we exempt broadcasters that multiplex digital
signals, as suggested in Section III-A, supra?  We also ask commenters to address the effects
of our waiving the dual network rule for Univisa, Inc. and the Home Shopping Network.

E.  Network Territorial Exclusivity Rule 

     44.  Section 73.658(b) of the Commission's Rules, 47 C.F.R.  73.658(b), prohibits a
station from entering into an agreement with a network that prevents (1) another station
located in the same community of license from broadcasting those network programs not
taken by the network affiliate; and (2) another station located in a different community of
license from broadcasting any of the network's programs.  The rule provides that it is
permissible for a network affiliate to have the "first call" within its community on
programming offered by the network.

     45.  The first prong of the network territorial exclusivity rule was based on the
Commission's finding in the Report on Chain Broadcasting that it is not in the public interest
for the audience to be deprived of network programming when other stations in the
community are ready and willing to carry it.  The second prong was also adopted in response
to the Report on Chain Broadcasting, although the Commission's rationale is less clear.  It
appears that this rule may have been adopted in response to certain practices of regional
networks that the Commission determined were contrary to the public interest because they
led to restraint of competition and compromised a licensee's ability to control its station.

     46.  The network territorial exclusivity rule differs from the other rules under
consideration in this Notice in that it does not address network dominance over affiliates but
instead involves the ability of one station to exclude another from obtaining network
programming.  Thus, this rule is more concerned with the competition between broadcast
television stations for viewers and advertisers than the competition between networks for
affiliates.  As a consequence, the basis for the rule does not fit squarely into either of the
goals identified in Section II but is premised on the Commission's more general objective of
maximizing diversity and competition. 

     47.   Exclusivity for an affiliate within a given geographic area, the first prong of the
network territorial exclusivity rule, has both potential benefits and costs.  On the one hand, it
has been argued that territorial exclusivity can have anticompetitive effects and should be
illegal unless there is a showing of efficiency gains.  On the other hand, territorial
exclusivity can produce efficiency gains.  For example, the standard efficiency argument for
territorial exclusivity in other businesses is that it encourages retail outlets to invest in
customer service and product promotion; otherwise, competing retailers selling the same
manufacturer's product would benefit from one retailer's investments in these services. 
Similarly, one could argue that giving one affiliate territorial exclusivity with respect to the
network's programming (i.e., its product) may encourage the affiliate to more vigorously
promote the network's programming and provide more local services.  

     48.  It appears to us that the potential costs of eliminating the first prong of the
territorial exclusivity rule are negligible for two reasons.  First, we observe that a number of
affiliation agreements provide that, while an affiliate is to be the network's exclusive outlet in
a defined area, the network reserves the right to terminate the affiliation agreement should the
affiliate preempt its programming too frequently.  Consequently, we question how frequently
a network's programs are preempted and thereby offered to another station in the same
community.  Second, we observe that in a number of affiliation agreements, networks confer
territorial exclusivity on their terrestrial broadcast station affiliates as against satellite and
other delivery mechanisms.  Network affiliates therefore have territorial exclusivity vis-a-vis
other video programming providers but not vis-a-vis other broadcast stations.  We accordingly
propose to eliminate the first prong of the territorial exclusivity rule.  We seek comment on
this proposal.

     49.   Exclusivity for an affiliate outside a given geographic area, the second prong of
the network territorial exclusivity rule, appears to us to confer no efficiency benefits but
potentially significant costs.  We can think of no benefit to the public that would arise from
allowing a station to block the broadcast of network programming outside of its market.  The
detriment to the public can be significant, however, as viewers in a given area could be
deprived of network programming, thus inhibiting competition and diversity.  We seek
comment on this issue.  In this analysis, we have assumed that a station's community of
license is coterminus with the geographic area in which an affiliate competes.  This may not
be true in many cases and so we solicit comment on whether we should extend the
geographic area contemplated by the second prong of the territorial exclusivity rule to more
closely approximate a station's market area, for example by modifying the rule to an affiliate's
DMA or Grade B contour.  We seek comment on such a modification and ask commenters to
address whether it is preferable to refer to a station's DMA, Grade B contour or some other
relevant geographical area.

     50.  In sum, we propose to eliminate the first prong and retain the second prong of
territorial exclusivity prohibition, but modify the second prong to apply to a broader area than
an affiliate's community of license.  We solicit comment on these proposals in light of the
above discussion and any other issues that commenters see as pertinent to our determination
of the costs and benefits of modifying this rule.  We also seek comment on whether we
should extend the geographic area contemplated by the first prong to be the same as the
second prong in the event we decide to retain the first prong of the territorial exclusivity rule.


                          V.  CUMULATIVE EFFECTS

     51.  Much of the above discussion has focused on the effects of relaxing one
network/affiliate rule or another.  We now consider the cumulative effects of the rule changes
proposed in this Notice.  To summarize, we have proposed to retain the right to reject rule as
clarified to eliminate financial considerations as a sole justification for program rejection, to
modify the time option rule to permit time option agreements if they contain an appropriate
deadline for invoking the option, to eliminate the exclusive affiliation rule, at least in large
markets, to eliminate the first prong of the network territorial exclusivity rule (prohibiting
exclusivity on rejected programs vis-a-vis other stations in the same community), and to retain
the second prong of the rule.  While we did not reach tentative conclusions about the
continuing need for the dual network rule, we have asked a series of pointed questions
designed to evaluate that rule's costs and benefits.

     52.  Changes to the first three rules listed above must be carefully coordinated,
because these rules have a common focus and are closely interrelated.  The Network Inquiry
Report observed that the right to reject, time option and exclusive affiliation rules all regulate
the restraints a network may impose on its affiliates' program choices.  In proposing to
retain the first one -- the right to reject rule -- we intend to preserve the most explicit
protection of an affiliate's control over program choice.  Thus, our proposal recognizes that a
network should not be permitted to control an independently owned affiliate's programming to
the same extent that the network controls programming on its owned and operated stations. 
In seeking comment on the cumulative effects of our proposals, one of the primary questions,
then, is whether modification of the time option rule and elimination of the exclusive
affiliation rule would undercut the explicit protections left by the right to reject rule.  In other
words, would a network be able to control, for all practical purposes, the programming of its
affiliates through time optioning and exclusive affiliation agreements?  If so, how likely is
such behavior to occur?  

     53.  Another fundamental question on cumulative effects is whether our proposals for
the first three rules would have any significant effect on the dynamics of the network/affiliate
relationship that has evolved under our current rules.  By comparing the current programming
practices of network owned stations and those of independently owned affiliates, we may be
able to discern whether the safeguards now embodied by the right to reject, time option and
exclusive affiliation rules have produced a measurable degree of programming autonomy on
the part of the independently owned affiliates.  We ask commenters to submit studies setting
forth such a comparison.  Once we have information on the type and degree of autonomous
affiliate behavior, we will be in a better position to assess the relative value of each of these
rules, how they act in concert and whether our proposals as a whole would yield results that
would best serve the public interest.

     54.  The fourth rule -- which restricts dual networking -- can be viewed as a
companion to the exclusive affiliation rule.  Designed to reduce a network's ability to block
entry by new networks, the dual network rule prohibits a station from affiliating with an
entity that operates two networks; the rule thus limits the barriers to entry that new networks
face in seeking to affiliate with broadcast stations.  The exclusive affilation rule also
encourages opportunities for other networks by prohibiting a station from agreeing with any
one network not to deal with others.  If there is a current need for protections along these
lines, we must assess the overall effects of eliminating one or both of these rules. 
Accordingly, we ask commenters to discuss the cumulative effect on the entry opportunites
for new networks of changing the rules at issue here.

     55.  The fifth rule -- the network territorial exclusivity rule -- limits a station's ability
to block network programming through an alternative broadcast outlet.  As we stated above,
in proposing to eliminate the prong of the rule that prevents a station from contracting for full
program exclusivity within its market, we intend to provide balance to our proposal to
eliminate the exclusive affilation rule.  Thus, an affiliate would not be placed in the position
of negotiating with a network over an exclusive affiliation provision -- which would restrict
the station to dealing with only one network -- while being prevented by regulation from
seeking full programming exclusivity rights vis-a-vis the station's direct broadcast competitors. 


     56.  We ask commenters to address any other interactions between our proposal for the
network territorial exclusivity rule and those for the others.  For example, our proposal to
retain the second prong of the rule may have relevance to our proposals for the rules that
were designed to encourage the development of new networks -- the time option rule, the
exclusive affiliation rule and the dual network rule.  This is because a station would not, in
negotiations with a new network, be permitted to expand demands for exclusivity beyond the
station's market and thereby impede that network's ability to develop an adequate affiliate
base.  If this assessment is accurate, concern that other proposed changes in our rules will
reduce protection for new networks could be alleviated to some degree by our proposal to
retain the second prong of the network territorial exclusivity rule.

     57.  Finally, we welcome any additional comment regarding the cumulative effect of
our proposals on consumer welfare generally, and on the historical foci of the rules at issue
here -- i.e., the development of new broadcast networks and licensee control over station
operations.  With respect to consumer welfare, we note that there has been some discussion in
the academic literature that identifies a correlation between the types of restraints on
exclusivity and their cumulative effects on consumer welfare.  For example, one publication
asserts that, in certain settings, the ability to enter into exclusive dealing arrangements with
mutiple parties in the same market, coupled with the opportunity to reach territorial
exclusivity agreements, may reduce consumer welfare.  We ask commenters to address these
theories, as applied to the broadcasting industry.


                             VII.  CONCLUSION

     58.  We have attempted in this Notice to consider the practical effects of our
network/affiliate programming rules on the modern broadcast television industry and, in turn,
on the viewing public.  The rules under review in this proceeding were initially adopted when
families gathered around the radio and tuned in the local AM station for information and
entertainment.  Even the most forward-thinking FCC could not have imagined that viewers
would be afforded the multitude of video programming choices available today, let alone the
number of alternatives that may be available in the near term if and when new technologies
such as digital broadcasting become market realities.

     59.  To ensure that free, over-the-air television remains a viable programming source
in the years to come, we believe it imperative to review how we regulate the broadcasting
industry and to remove unnecessary regulatory restraints.  As we have discussed in this
Notice, it appears that some of the network/affiliate rules no longer serve the goals they were
intended to fulfill.  Indeed, some of the rules may now operate to inhibit development of new
broadcast networks and discourage innovation, which is the opposite effect than was intended
when the rules were adopted more than 50 years ago.  Further, it appears that some of the
rules increase the costs of networking.  This could significantly impair broadcasters' ability to
compete with non-broadcast media, thus limiting diversity by reducing programming choice. 

     60.  Nonetheless, the programming provided by the major broadcast networks
continues to attract a significant number of viewers.  Our regulations must therefore be
sufficiently fluid to serve the needs of the ever-changing video marketplace and at the same
time ensure that networks and affiliates do not enter into agreements that would threaten the
Commission's diversity and competition goals, which benefit the public interest.  We enlist
commenters' aid in achieving this balance.


                       VII.  ADMINISTRATIVE MATTERS

     61.  Ex Parte Rules -- Non-Restricted Proceeding.  This is a non-restricted notice and
comment rulemaking proceeding.  Ex parte presentations are permitted, except during the
Sunshine Agenda period, provided that they are disclosed as provided in the Commission's
Rules.  See 47 C.F.R.  1.1202, 1.1203, 1.1206.

     62.  Comment Information.  Pursuant to applicable procedures set forth in Sections
1.415 and 1.419 of the Commission's Rules, interested parties may file comments on or before
August 28, 1995, and reply comments on or before September 27, 1995.  All relevant and
timely comments will be considered by the Commission before final action is taken in this
proceeding.  To file formally in this proceeding, participants must file an original and four
copies of all comments, reply comments and supporting comments.  If participants want each
Commissioner to receive a personal copy of their comments, an original plus nine copies must
be filed.  Comments and reply comments should be sent to the Office of the Secretary,
Federal Communications Commission, Washington, D.C.  20554.  Comments and reply
comments will be available for public inspection during regular business hours in the FCC
Reference Center (Room 239) of the Federal Communications Commission, 1919 M Street,
N.W., Washington, D.C.  20554.

     63.  Initial Regulatory Flexibility Analysis.  See Appendix.

     64.  Additional Information.  For additional information regarding this proceeding,
contact Jane Hinckley Halprin at (202) 776-1653 or Robert Kieschnick at (202) 739-0764.

     
                         FEDERAL COMMUNICATIONS COMMISSION



                         William J. Caton
                         Acting Secretary
                                APPENDIX A
                  Initial Regulatory Flexibility Analysis

     I.  Reason for the Action:  This proceeding was initiated to review and update the
Commission's rules regarding network/affiliate relationships with respect to programming.

     II.  Objective of this Action:  The actions proposed in the Notice are intended to
eliminate or modify the network/affiliate rules regarding programming to enable broadcast
television networks and affiliates to better serve the public by enabling them to adjust to the
changing communications marketplace.

     III.  Legal Basis:  Authority for the actions proposed in this Notice may be found in
Sections 4 and 303 of the Communications Act of 1934, as amended, 47 U.S.C. Sections
154, 303.

     IV.  Reporting, Recordkeeping and Other Compliance Requirements Inherent in
the Proposed Rule:  None.

     V.  Federal Rules Which Overlap, Duplicate or Conflict with the Proposed Rule: 
None.

     VI.  Description, Potential Impact and Number of Small Entities Involved: 
Approximately 1,500 existing television broadcasters of all sizes may be affected by the
proposals contained in this Notice.

     VII.  Any Significant Alternatives Minimizing the Impact on Small Entities and
Consistent with the Stated Objectives:  The proposals contained in this Notice are meant to
simplify and ease the regulatory burden currently placed on broadcast television stations of all
sizes.

     As required by Section 603 of the Regulatory Flexibility Act, the Commission has
prepared an Initial Regulatory Flexibility Analysis (IRFA) of the expected impact on small
entities of the proposals suggested in this document.  Written public comments are requested
on the IRFA.  These comments must be filed in accordance with the same filing deadlines as
comments on the rest of the Notice, but they must have a separate and distinct heading
designating them as responses to the Regulatory Flexibility Analysis.  The Secretary shall
send a copy of this Notice of Proposed Rule Making, including the IRFA, to the Chief
Counsel for Advocacy of the Small Business Administration in accordance with paragraph
603(a) of the Regulatory Flexibility Act (Pub. L. No. 96-354, 94 Stat. 1164, 5 U.S.C.
Section 601 et seq. (1981)).
                                APPENDIX B
              Distribution of Commercial Television Stations
                         Across DMA Markets, 1994






Number of
Commercial
Stations, X
Number of DMA
Markets with X
Commercial VHF
Stations
Number of DMA
Markets with X 
 Commercial Stations


0
23
-


1
36
11


2
57
23


3
66
33


4
21
41


ò5
9
103


ò6
5
76


ò7
2
44


Source:  BIA, Investing in Television, 1995 Market Report, 1st Edition

                                APPENDIX C
     Number of Broadcast Television Stations Nationally, 1946 to 1994






VHF Stations
                    UHF Stations         
Total Stations


Year
Commercial
ETV
Commercial
ETV
Commercial
ETV


1946
6
0
0
0
6
0


1950
98
0
0
0
98
0


1955
297
8
114
3
411
11


1960
440
34
75
10
515
44


1965
481
58
88
41
569
99


1970
501
80
176
105
677
185


1975
514
95
192
152
706
247


1980
516
109
218
168
734
277


1985
520
121
363
193
883
314


1990
547
125
545
225
1092
350


1994
561
126
584
241
1145
367


Source:  Television & Cable Factbook, 1994