Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of ) ) Review of the Commission's ) MM Docket No. 91-221 Regulations Governing Television ) Broadcasting ) COMMENTS OF THE NATIONAL TELECOMMUNICATIONS AND INFORMATION ADMINISTRATION Gregory F. Chapados Alden F. Abbott Assistant Secretary for Chief Counsel Communications and Information Thomas J. Sugrue Phyllis Hartsock Deputy Assistant Secretary for Deputy Chief Counsel Communications and Information William F. Maher, Jr., Associate Administrator Cheryl Glickfield Lisa Leidig Timothy Sloan Office of Policy Analysis and Development National Telecommunications and Information Administration U.S. Department of Commerce Room 4713 14th Street and Constitution Ave., N.W. Washington, D.C. 20230 (202) 377-1816 August 24, 1992 TABLE OF CONTENTS Section Page Summary i I. INTRODUCTION 1 II. THE NATIONAL TELEVISION MULTIPLE OWNERSHIP RULE 4 IS UNNECESSARY AND SHOULD BE ELIMINATED III. THE COMMISSION SHOULD MODIFY THE DUOPOLY RULE 15 TO ALLOW INCREASED COMMON OWNERSHIP OF TELEVISION STATIONS IN LOCAL MARKETS IV. THE COMMISSION SHOULD ELIMINATE THE RADIO-TELEVISION 24 CROSSOWNERSHIP RULE V. THE COMMISSION SHOULD MODIFY THE "DUAL NETWORK" RULE 27 VI. THE COMMISSION SHOULD REPEAL THE RULE BANNING 31 NETWORK OWNERSHIP OF TELEVISION STATIONS IN SMALLER MARKETS VII. CONCLUSION 35 SUMMARY NTIA supports the Commission's efforts to remove or modify some of its longstanding rules that have shaped the structure of the broadcast television industry. Most of these regulations were enacted when Americans had few viewing choices and broadcasters faced little competition. However, the domestic mass media marketplace has become complex and robust, with numerous different types of delivery systems and myriad sources of programming available to consumers. As a result, the concerns about undue economic concentration and diversity that provided the original bases for the rules have lessened substantially. The Commission should therefore revise its rules to reflect the current video marketplace and to enable broadcasters to compete more efficiently against each other, cable and other multichannel video providers, and other sources of video entertainment and information. With respect to the national multiple ownership rule, NTIA recommends that the Commission eliminate the rule entirely. Removal of the multiple ownership limits would permit broadcasters to realize economic efficiencies without jeopardizing competition or viewpoint diversity. If the Commission considers immediate elimination of the national multiple ownership rule too dramatic a change in its current regulation of the broadcast television industry, NTIA recommends that the Commission adopt a phased approach, and increase the limits every two years, after review of marketplace conditions. NTIA supports the Commission's proposal to change the duopoly rule in order to promote more efficient local broadcast operations. While conditions in some local markets may warrant elimination of the rule, we recommend, out of an abundance of caution, that the Commission narrow the rule but retain some limits. Rather than adopt any of the options set forth in the Notice, the Commission should base a narrowed rule on whether the combined audience share of the commonly-owned stations exceeds a maximum threshold. Such an approach, perhaps combined with a criterion based on the number of unaffiliated stations remaining in the market, would better address the Commission's competition and diversity concerns. NTIA supports the Commission's proposal to eliminate the radio-television crossownership rule. Because of the large number of additional programming outlets available in virtually all parts of the United States, the one-to-a-market rule is no longer necessary to promote diversity of programming in the local market. The local multiple ownership rules for broadcast television and radio are sufficient. NTIA also supports the Commission's proposal to modify the dual network rule to permit networks to provide multiple programming channels within their affiliates' existing channel assignments. This would allow networks to make more efficient use of their affiliates' distribution systems while permitting the broadcast industry to experiment with more innovative and highly-targeted programming services. Lastly, NTIA supports the Commission's proposal to eliminate the rule prohibiting a network from owning stations in smaller markets. This rule has become outdated due to the considerable growth in the number of programming sources, both broadcast and cable, since the rule's adoption. Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of ) ) Review of the Commission's ) MM Docket No. 91-221 Regulations Governing Television ) Broadcasting ) COMMENTS OF THE NATIONAL TELECOMMUNICATIONS AND INFORMATION ADMINISTRATION The National Telecommunications and Information Administration (NTIA), as the Executive branch agency principally responsible for the development and presentation of domestic and international telecommunications and information policy, respectfully files these comments in response to the Commission's Notice of Proposed Rulemaking in the above-captioned proceeding.[1] I. INTRODUCTION NTIA supports the Commission's initiative in this proceeding to recast its regulations applicable to the broadcast television industry. Most of these regulations -- the national multiple ownership rule, the local multiple ownership (or "duopoly") rule, the radio-television crossownership (or "one-to-a-market") rule, the dual network rule, and others -- were enacted when Americans had fewer viewing choices and broadcasters faced little competition. However, the domestic mass media marketplace has become complex and robust, with numerous types of delivery systems and an explosion of programming available to U.S. audiences. As a result, the concerns about economic concentration and diversity that provided the original bases for the rules have lessened substantially. In particular, because of today's highly competitive mass media marketplace, the present rules can be eliminated or substantially narrowed without causing undue concentration among television broadcasters. The antitrust laws, of course, remain available to guard against acquisitions that would result in an industry structure that could threaten competition. With certain limited exceptions, it is simply unnecessary for the Commission to impose a special set of structural rules on the television broadcast industry on grounds of safeguarding economic competition. Nor will elimination or substantial narrowing of the present structural rules impede realization of the Commission's diversity goals. Numerous viewpoints are already available to Americans through a wide variety of media in addition to broadcast television. Furthermore, as a practical matter, many of the Commission's current structural rules have little effect on the availability of diverse viewpoints within the television broadcast industry itself. Moreover in NTIA's view, most of the Commission's current rules are not only unnecessary, they are counterproductive. Given the fierce competition for programming and viewers among broadcasters and other media, extensive Commission regulation of this industry's structure and the permissible business relationships among broadcast entities can impair broadcasters' economic competitiveness. By handicapping the providers of free, over-the-air television, such regulation ill serves the viewing public. Also, to the extent that the current rules limit the efficiencies that broadcasters can realize in delivering information to American homes, the rules disserve the Commission's viewpoint diversity goals. In contrast, by revising its rules to reflect the current video marketplace, the Commission would enable broadcasters to compete more efficiently against each other, cable and other multichannel video providers, and other sources of video programming. A stronger, more competitive broadcast industry would be the likely result, an outcome that would further the Commission's public interest goals. As importantly, the Commission's structural rules should be viewed against the backdrop of the coming of advanced television (ATV). Some of the assumptions used to justify the current rules, such as the distinction between UHF and VHF broadcast stations, may no longer be as important in a video world moving toward ATV. The Commission's planned transition to ATV could result in television broadcasters incurring substantial costs that they could more easily bear if they are able to realize economic efficiencies that modification of these rules would permit. II. THE NATIONAL TELEVISION MULTIPLE OWNERSHIP RULE IS UNNECESSARY AND SHOULD BE ELIMINATED The Commission proposes to modify the national multiple ownership rule,[2] which generally prohibits a broadcaster from owning more than twelve television stations nationwide, or television stations with a combined national audience in excess of twenty-five percent.[3] Specifically, the Commission seeks comment on whether to increase the numerical cap from twelve to twenty, or twenty-four stations, while increasing the audience reach cap to thirty-five percent of the national audience; increase the numerical cap to eighteen stations with an audience reach limit of thirty percent; or increase the numerical limit alone, while retaining the twenty-five percent audience reach cap.[4] NTIA supports the Commission's efforts to liberalize the television multiple ownership rule. Indeed, we recommend that the Commission eliminate this rule. The original rationales underlying adoption of national ownership caps -- that such limits are necessary to prevent undue economic concentration and promote diversity of programming -- no longer apply in today's video marketplace. By traditional antitrust standards, the national television broadcast industry is extremely unconcentrated. In 1991, according to the National Association of Broadcasters (NAB), the Herfindahl-Hirshman Index (HHI) -- the antitrust guideline used by the Department of Justice (DOJ) to measure concentration when evaluating potential mergers within an industry -- was 187, based on audience share for the entire television industry.[5] In 1991, there were about 200 group owners of broadcast television stations in the United States.[6] Of these, only two (Home Shopping Network and Trinity Broadcasting Network) are at the current station ownership limit, although several are near the twenty-five percent national audience reach cap.[7] These national industry characteristics reinforce our belief that the antitrust laws are adequate to address competition concerns. As to the diversity effects of the national multiple ownership rules, we support the Commission's analysis performed in 1984, when it modified the predecessor to the current national ownership limits.[8] There, the Commission noted that each American obtains information from whatever media are available in his or her local community -- radio, broadcast television, cable television, newspapers, and magazines.[9] Although program production markets are national, and indeed increasingly international, broadcast television stations serve viewers in their localities. Ownership of more than twelve stations scattered across the country does nothing to affect program diversity in those individual local markets. We do not accept the argument that national ownership limits promote viewpoint diversity by preventing a single owner from speaking with the same voice in numerous local markets. The number of information sources in the United States has grown significantly since the rule was changed in 1984 from a seven station limit to its current form, making it extremely unlikely that any group owner could "homogenize" nationally the information that Americans receive. In 1984, there were 1,138 full power television stations (841 commercial and 297 educational),[10] 327 low power television stations,[11] and 8,864 radio stations (4,747 AM and 4,717 FM);[12] today, there are 1,500 full power television stations (1,140 commercial and 360 educational), 1,284 low power television stations, and 11,233 radio stations (4,969 AM and 6,264 FM).[13] In 1985, cable television systems passed seventy-six percent of the nation's homes and forty-three percent of households subscribed;[14] today, cable passes over ninety percent of U.S. households, and over sixty percent of all households subscribe.[15] In 1985, there were sixty-seven cable networks nationwide;[16] now, there are more than eighty national basic cable networks,[17] and, if regional ones are included, over one hundred networks.[18] In 1985, twenty-one percent of all households had a video cassette recorder (VCR); today, seventy-three percent do.[19] As a practical matter, group-owned stations have spoken with local voices, not as mouthpieces for a monolithic national voice. It appears to be industry practice that group-owned stations exercise local autonomy over local news and public affairs programming.[20] There is no reason to think that this practice will change. Moreover, network and group-owned stations are more likely to provide more local news and public affairs programming than independents.[21] Even as the concerns that first motivated adoption of the rule have diminished, the benefits of group ownership have become clearer, as documented by the Commission[22] and others.[23] For instance, group-owned stations realize efficiencies from consolidated management, financial, legal, and other administrative functions. Group-owned stations also realize efficiencies from group advertising sales and program purchases. These increased economies of scale permit the production of higher quality programming, which directly benefits American viewers. For group owners that also operate programming networks, the principal effect of the present national ownership rule is to limit effectively the extent to which those networks may engage in downstream vertical integration into local distribution outlets, by limiting the number of owned-and-operated stations that they may acquire. It has long been recognized that such vertical integration may create efficiencies by reducing transaction costs,[24] and is critical to operation of a viable broadcast network.[25] The national multiple ownership rule unnecessarily restrains networks and other group owners from realizing efficiencies that permit them to compete effectively against vertically integrated cable operators and networks, which are free from similar restrictions. Greater vertical integration between networks and affiliate broadcasters also may benefit broadcast stations and, through them, viewers of those stations. Networks have incentives to provide greater benefits to their owned-and-operated stations than they do their affiliates because the overall profitability of the owned-and-operated stations directly affects the networks.[26] For instance, CBS states that its owned-and- operated stations have enhanced access -- beyond that provided to non-owned CBS affiliates -- to CBS News materials, personnel, and technical facilities.[27] To the extent that vertical integration through ownership helps local stations remain viable and broadcast superior programming, viewpoint diversity is strengthened. Some might argue that the fact that only a few groups have reached, or are even close to reaching, the limits imposed by the current national television multiple ownership rule demonstrates that firms are unlikely to achieve greater efficiencies through repeal or further liberalization of the rule. However, there is no precise means to determine the "optimal" degree of vertical integration or horizontal concentration in the broadcast industry. It is possible that firms may not realize significant additional efficiencies by owning twelve stations as opposed to, say, nine stations. It may be as likely that firms would realize significantly greater efficiencies if they could own thirty stations, for instance, instead of twelve.[28] More importantly, regardless of the extent to which liberalization of the rule would result in groups growing beyond their current size, there is little reason to retain a rule that is no longer necessary.[29] For these reasons, we believe that the Commission should eliminate the multiple ownership rule immediately.[30] By repealing the national multiple ownership rule at this time, the Commission would respond most directly to the changed video marketplace that we have described, and would limit the longer-term negative consequences of retaining even a modified restriction. We recognize, however, that the Commission may conclude that immediate elimination of the rule is too dramatic a change in its regulation of the broadcast television industry. If that is the case, we suggest that the Commission take a phased approach, initially increasing the limits and then reviewing marketplace conditions every two years to further modify or eliminate the rule. As an initial change, raising the station ownership limit to twenty-four and the audience reach cap to forty percent would reasonably reflect current marketplace realities[31] and provide the potential for some benefits to the public prior to further review in two years of the need for the rule. III. THE COMMISSION SHOULD MODIFY THE DUOPOLY RULE TO ALLOW INCREASED COMMON OWNERSHIP OF TELEVISION STATIONS IN LOCAL MARKETS The duopoly rule prohibits ownership of cognizable interests in television stations with overlapping Grade B contours.[32] The original purpose of the rule was "to promote the dual goals of economic competition and diversity of program and service viewpoints."[33] The Commission proposes to relax the rule on the basis that common ownership of television stations in the same community allows the greatest possibility for economic efficiencies. It also states that because of increased levels of competition in local markets, the role of the duopoly rule in meeting diversity and competition concerns is diminished.[34] NTIA supports the Commission's assessment. As has been well documented, the number and variety of media sources in today's marketplace have grown sufficiently since the duopoly rule was adopted in 1964 to provide numerous diverse ways of meeting local demand for information.[35] In addition to broadcast television outlets, Americans can receive information from cable television, home satellite dishes, VCRs, and computer databases, as well as broadcast radio and print media. Even within the broadcast television industry, the number of information outlets has grown. The number of independent television broadcast stations has increased from ninety in 1971 to approximately 422 in 1991.[36] More than half (fifty-eight percent) of all households now receive at least ten over-the-air signals, compared to four percent in 1964.[37] Moreover, cable systems, with their carriage of cable networks, distant signals, and pay services, in addition to local broadcast signals, are becoming the primary means of transmitting television into American homes. As noted above, in 1991, cable systems provided service to over sixty percent of all television households.[38] In 1985, the average cable system could deliver nineteen channels to U.S. homes;[39] in 1990, the average household could receive thirty-three channels,[40] and, with the advent of video compression, systems have been proposed that will be able to offer 150 channels or more.[41] The greater number of channels and program service offerings has encouraged cable operators to offer "narrowcast" programming that is highly valued by discrete segments of the population, including sports (ESPN, regional sports networks, as well as much of the programming on USA Network and the various "superstations"), public affairs and news (C-Span, CNN), minority programming (Black Entertainment Television, Univision), educational programming (The Learning Channel, The Discovery Channel), health and medicine (Lifetime) and financial news (Dow Jones Cable News).[42] Moreover, cable operators in urban markets are increasingly producing local news.[43] Due to the introduction of new viewing options, local markets for programming are sufficiently diverse and the advertising market sufficiently unconcentrated, that the original justification for the duopoly rule is no longer as compelling. Narrowing the rule can benefit broadcasters and viewers alike. As the Commission points out, group ownership in the local market will permit economies of scale in administrative, newsgathering, and production functions, which may enable group owners to improve local service.[44] As the Broadcast Television Report indicates, many television broadcasters are experiencing financial difficulties.[45] Relaxing the rule would provide these stations greater flexibility to adapt to current market conditions. The efficiencies that greater group ownership would allow should also help broadcasters to convert efficiently to broadcast ATV technology.[46] If group owners are able to realize cost savings through consolidation, they should be able to more easily afford the costs of the transition to ATV. Another potential benefit of relaxation of the duopoly rules is that a single broadcaster owning more than one station in a local market might produce more diverse programming than several independently owned television stations. A group owner could have a greater incentive to differentiate the programming on its stations in order to maximize its audience share, and hence its profits.[47] For all of the reasons discussed above, NTIA concludes that the restrictions in the current duopoly rule should be narrowed. We believe that, in some markets, the degree of program diversity for viewers and the lack of concentration in local advertising markets appear to render the rule unnecessary and would support simply eliminating it. However, due to the importance of the structure of local television markets to these issues,[48] we propose that the Commission substantially modify the duopoly rule at this time. Such modification would permit the Commission to conform its rules to reflect more accurately the competitive realities of the current video marketplace, while at the same time recognizing that for at least some markets, a local (as opposed to a national) limitation on ownership could further the Commission's goals of preventing undue economic concentration and promoting programming diversity. The Commission presents various options for narrowing the rule: changing from Grade B to Grade A the signal contour used to determine whether a prohibited overlap occurs;[49] permitting common ownership only of UHF television stations with overlapping contours; permitting common ownership of a UHF and a VHF station, if a minimum number of separately owned stations remain after the proposed combination; and tying the number of stations one entity can own to the total number of stations in the market. NTIA believes that none of these options is fully adequate. First, changing the rule to prohibit common ownership of stations with overlapping Grade A contours preserves many of the problems of the current rule. This revision would continue to use radio signal contours as a surrogate for determining the effect of a station on competition and diversity. This approach is very imprecise. Contours provide only an indirect measure of the possible audience that a broadcaster can reach. They do not reflect the physical and geographical features of any market. Moreover, while the rule would seem to permit greater common ownership of stations in neighboring communities, it would appear not to permit common ownership of stations in the same community, where Grade A contours almost always overlap. Common ownership of stations in the same community presents opportunities for the greatest economic efficiencies. The Commission's second option, permitting common ownership only of UHF stations with overlapping contours, is intended to benefit UHF station owners. However, it would prevent mergers between strong VHFs and weak UHFs, which might be more effective in improving the service of local broadcasters, including UHFs. More fundamentally, we believe this option's apparent emphasis on the financial well-being of UHF station owners alone is misguided. The wiser course is to adopt rule changes that benefit all local broadcasters by permitting them a greater degree of flexibility to choose the business combinations that are suited to their markets. Moreover, with the continued growth of cable systems that carry both UHF and VHF stations, and the advent of ATV,[50] UHF/VHF distinctions may become less significant, so that perpetuating these distinctions unnecessarily in regulations could be shortsighted. The Commission's third option would allow a UHF/VHF station combination as long as a minimum number of separately owned stations remain in a market after the proposed combination. Like the preceding option, this option's emphasis on the UHF/VHF distinction may not provide local broadcasters with the broader flexibility that is justified. Finally, a rule modification that ties the number of local stations that one entity can own to the total number of stations in the market is inadequate because it does not consider the share of the viewing market that the broadcaster controls.[51] It treats all stations the same, regardless of their coverage areas or audience shares, even though the audience shares of individual stations are significant in determining a local broadcast market's concentration, which is important in analyzing the competitive and diversity effects of ownership.[52] NTIA proposes that the Commission use an audience share cap to determine how many local stations a broadcaster can own in a particular instance. Audience share is a better measure of a broadcast station owner's effect on diversity and competition than the number of stations owned.[53] Thus, NTIA recommends that an audience share cap, either alone or perhaps combined with a criterion based on the number of unaffiliated stations remaining in the market, be adopted to replace the current duopoly rule. The FCC should specify the audience share cap on the basis of the full record compiled in this proceeding.[54] If the record in this proceeding does not provide an adequate basis on which to determine an appropriate audience share cap, the Commission should issue a supplemental notice on this issue. IV. THE COMMISSION SHOULD ELIMINATE THE RADIO-TELEVISION CROSSOWNERSHIP RULE The radio-television crossownership (or "one-to-a-market") rule prohibits common ownership of radio and television stations in the same market.[55] The Commission's original reason for adopting this rule, like the duopoly rule, was to promote diversity of programming and competition in the local marketplace.[56] In 1989, the Commission revisited the radio- television crossownership rule,[57] adopting an expanded waiver policy and noting that "the communications industry is undergoing ... rapid change."[58] At that time, the Commission said that it was using "an incremental approach ... [i]n an abundance of caution ... in order to have a period of time in which to assess the ramifications of relaxing the ... prohibition."[59] NTIA believes that the time has come to eliminate the rule. The number of programming outlets has continued to increase. As we have stated,[60] more than half (fifty-eight percent) of all households now receive at least ten over-the-air broadcast television signals, compared to four percent in 1964.[61] The average listener now has access to a plethora of radio voices in the local market -- the average number of commercial radio stations in the top twenty-five radio markets is approximately fifty; the average number of stations in markets seventy-six to one hundred is approximately twenty-three; and for markets 176 to 200, there are at least nine commercial radio stations in each.[62] The Commission proposes the following options for changing the radio-television crossownership rule: eliminate the rule; remove the rule only for TV/AM combinations; modify the rule to permit ownership of one AM, one FM, and one television station in the same market; or expand the waiver criteria adopted in 1989 and apply them to any market, not just the top twenty-five markets, to allow cross-ownership if thirty independent voices remain after the combination.[63] Repeal of the crossownership rule would permit commonly-held radio and television broadcast operations to consolidate administrative functions, thus reducing costs, and could lead to more diverse and locally-targeted programming. Studies from the mid-1980s found that consolidation of radio and television stations can produce the same types of economic efficiencies as consolidation of only radio or only television stations might.[64] To the degree that concerns about local competition and diversity remain, the local ownership rules for radio stations[65] and the revised rules for local ownership of television stations we propose herein should be more than adequate to address them.[66] V. THE COMMISSION SHOULD MODIFY THE "DUAL NETWORK" RULE Section 73.658(g) of the Commission's rules precludes a television station from affiliating with a network that operates simultaneously more than one network in the same geographic area.[67] Viewed from the network perspective, the rule bars an entity from operating more than one network in a single broadcast market.[68] First promulgated for television in 1946,[69] this "dual network" rule was "intended to promote program diversity by ensuring that a single organization does not dominate the broadcast services in an area by the operation of [multiple] networks."[70] It was also designed to preserve competition in the advertising market.[71] The Commission was concerned that television broadcast networks could use their dominant position in these areas to insulate themselves from competition in the form of new broadcast networks and programming sources.[72] The Commission has in the recent past reexamined broadly the role of television networks in the mass media. For example, after a controversial and difficult proceeding on its financial interest and syndication rules, the Commission found in 1991 that although the television marketplace has been transformed over the past two decades, the emergence of additional programmers and distribution media has not eliminated the "continued, unique position" of broadcast networks -- especially the three largest national networks, ABC, CBS, and NBC -- in the television industry.[73] Although this conclusion is not incontrovertible, it does suggest that the Commission act cautiously in addressing the dual network rule. Accordingly, rather than rearguing the broad factual and legal issues regarding the national broadcast networks that the Commission has considered in other recent proceedings, NTIA proposes two specific changes to the dual network rule. First, the rule uses an exceedingly broad definition of the term "network," which includes "the simultaneous broadcasting of an identical program by two or more connected stations."[74] However, in the financial interest and syndication proceeding, the Commission's analysis of the competitive issues associated with the three national networks was predicated on their nationwide reach, the fact that ABC, CBS, and NBC are "available to virtually all (98%) American television households."[75] An entity providing programming to a smaller group of interconnected stations would have far less, if any, market power as a purchaser of programming or a seller of advertising. Consequently, NTIA recommends that the Commission restrict considerably the definition of "network" for purposes of the dual network rule, perhaps employing the same narrow definition that it uses in applying the financial interest and syndication rules.[76] Second, as the Commission points out, continued enforcement of the dual network rule may prevent network broadcasters from employing emerging technologies (e.g., video compression) to derive additional channels from their existing distribution systems.[77] This development would allow networks not only to make more efficient use of those distribution systems (including scarce radio spectrum), but also to experiment with innovative or more highly-targeted programming services.[78] NTIA agrees that to the extent the dual network restriction discourages such activities, it disserves viewers and should therefore be modified. We also believe, however, that the dual network rule should be modified in a way that will extend the promise of innovation beyond the networks to the "last mile" of the television distribution system -- the local broadcast stations that deliver programming to the home. The potential benefits of encouraging experimentation, efficiency, and innovation by broadcast networks will be realized many times over if broadcast stations can follow suit. NTIA is concerned that incentives for such innovation at the local level will be reduced, and inefficient spectrum use could occur, if a broadcast network can provide a second channel of programming merely by purchasing or affiliating with another group of local broadcast stations. On the other hand, if a network is permitted to offer its additional programming, if any, through its existing distribution system -- including its local affiliates -- the possible gains realized at the network level can also be reaped at the local level. Consequently, NTIA recommends that the Commission amend Section 73.658(g) to state that it shall not preclude a network from offering multiple channels of programming through a single television broadcast station in any television market. VI. THE COMMISSION SHOULD REPEAL THE RULE BANNING NETWORK OWNERSHIP OF TELEVISION STATIONS IN SMALLER MARKETS Section 73.658(f) of the Commission's rules precludes a network from owning television stations in areas where there are few television stations or the stations are of such unequal desirability that competition would be restrained by allowing such licensing.[79] The Commission adopted this rule for television in 1946[80] to prevent networks from "bottling up" the best broadcast facilities in small markets, thereby inhibiting the creation and growth of new networks and limiting the variety of network programming available to the viewers.[81] NTIA believes, however, that the dramatic changes in the television marketplace since 1946 have removed the rationale for the rule. Accordingly, its retention would not serve the public interest. The most compelling market change has been the explosion in local outlets. When the rule was first adopted in 1946, there were only six television stations in the entire United States.[82] Today, as the Commission points out, even in the smaller markets, numerous broadcast television outlets exist. In television markets between 126 and 150, there are, on average, six over-the-air television signals.[83] Accordingly, even if each of the three national networks and Fox Broadcasting were to purchase a station in every market, outlets would likely remain for the establishment of other broadcast networks. In addition, the proliferation of non-broadcast outlets has expanded opportunities for new networks and programming sources, addressing both competitive and diversity concerns. Cable television systems now provide numerous channels, carrying many of the more than 100 national and regional programming networks that are now available.[84] Opportunities for new programming will increase further, in both large and small markets, as the channel capacity of cable systems continues to grow and direct broadcast satellite service begins. The changes we propose to the dual networking rule can also provide opportunities for additional voices. In this environment, it is highly unlikely that repeal of Section 73.658(g) would hamper the growth of new networks or limit programming diversity. The existing rule both lacks a basis in policy and has limited utility in practice. As the Commission notes, Section 73.658(g) has never been applied to prevent a network purchase of a station.[85] Moreover, a network can readily avoid the rule's strictures by affiliating with a local station, even though the network can "bottle up" a desirable broadcast facility, in the sense the Commission seemed concerned about in 1946, about as effectively through affiliation as through acquisition. Because Section 73.658(f) has never been invoked, it is difficult to conclude that the rule's elimination will bring untoward consequences. On the other hand, repealing Section 73.658(f) would produce some important benefits. Increased competition in the video marketplace has substantially reduced both revenues and profits for television broadcasters. These financial effects weigh most heavily on stations in smaller markets. In 1991, the average small market station (an entity directly affected by Section 73.658(f)) lost an estimated $888,000.[86] Allowing networks to purchase stations in smaller markets could produce efficiencies in managerial, technical, and other operations that would improve the financial viability and competitiveness of those stations. Network ownership of small-market stations might also permit improvements in program quality, including locally-produced news and information programming. In these ways, repeal of Section 73.658(f) would clearly benefit the viewing public. VII. CONCLUSION NTIA supports the Commission's attempt to remove or modify unnecessary regulations applicable to the television broadcast industry. Accordingly, NTIA respectfully requests that the Commission adopt the recommendations contained in its comments in this proceeding. Respectfully submitted, ____________________ Gregory F. Chapados Alden F. Abbott Assistant Secretary for Chief Counsel Communications and Information Thomas J. Sugrue Phyllis Hartsock Deputy Assistant Secretary for Deputy Chief Counsel Communications and Information William F. Maher, Jr., Associate Administrator Cheryl Glickfield Lisa Leidig Timothy Sloan Office of Policy Analysis and Development National Telecommunications and Information Administration U.S. Department of Commerce Room 4713 14th Street and Constitution Ave., N.W. Washington, D.C. 20230 (202) 377-1816 August 24, 1992 ----------------------------------------------------------------------------- ENDNOTES [1] Review of the Commission's Regulations Governing Television Broadcasting, Notice of Proposed Rulemaking, 7 FCC Rcd 4111 (1992) (Notice). [2] 47 C.F.R.  73.3555(d) (1991). Under the FCC's attribution rules, any entity with a direct ownership interest in at least five percent of the outstanding voting stock of a corporate broadcast licensee generally is considered to have an attributable ownership interest. Reexamination of the Commission's Rules and Policies Regarding the Attribution of Ownership Interests in Broadcast, Cable Television and Newspaper Entities, 97 FCC 2d 997 (1984). [3] The rule seeks to promote minority ownership by allowing group owners to own up to 14 television stations, with an aggregate national audience share of up to 30%, so long as at least two of the stations are minority-controlled. Amendment of Section 73.3555 of the Commission's Relating to Multiple Ownership of AM, FM and Television Broadcast Stations, Memorandum Opinion and Order, 100 FCC 2d 74, 94 (1985). [4] Notice, 7 FCC Rcd at 4114. The Commission also seeks comment on whether it should retain an incentive for minority ownership, if it decides to modify the national ownership rule for the television service. Id. [5] Comments of the National Association of Broadcasters at 26 (filed Nov. 21, 1991) in Review of the Policy Implications of the Changing Video Marketplace, Notice of Inquiry, 6 FCC Rcd 4961 (1991) (Television NOI) (NAB Television Comments). The HHI is calculated by summing the squares of the market shares of the firms within a particular industry. According to DOJ, markets with an HHI below 1,000 are "unconcentrated," markets with an HHI between 1,000 and 1,800 are "moderately concentrated," and markets with an HHI over 1,800 are "highly concentrated." In 1983, when the Commission last considered modifying the national ownership rule, the Commission staff determined an HHI of 229 for the top twelve television groups, based on revenue share, and CBS calculated a HHI of 115 for all stations in the national television market based on audience share. Amendment of Section 73.3555 of the Commission's Rules Relating to Multiple Ownership of AM, FM and Television Broadcast Stations, Report and Order, 100 FCC 2d 17, 42 (1984) (1984 Multiple Ownership Report and Order). All of these indices are far below DOJ's threshold for even a moderately concentrated industry. [6] See 1992 Television & Cable Factbook, at A-1409 to A-1443; see also Group Ownership on the Rise, Broadcasting, Feb. 11, 1991, at 69, 71. [7] The top television group owners as of early 1992 were Capital Cities/ABC Inc. (seven VHF stations, one UHF station, 23.83% audience reach); CBS Inc. (seven VHF stations, 22.12% audience reach); National Broadcasting Company, Inc. (six VHF stations, 20.38% audience reach); Tribune Broadcasting (four VHF stations, three UHF stations, 19.50% audience reach); Home Shopping Network Communications (twelve UHF stations, 18.66% audience reach); and Trinity Broadcasting Network (twelve UHF stations). See Networks Still Tops in TV Group Ownership, Broadcasting, Mar. 30, 1992, at 47; 1992 Television & Cable Factbook, at A-1439. [8] 1984 Multiple Ownership Report and Order, 100 FCC 2d at 37, 54. [9] Id. at 27 ("[V]iewers in San Francisco, St. Louis and Philadelphia each judge viewpoint diversity by the extent of sources of ideas available to them, not by whether those same or other ideas are available in other broadcast markets."). [10] 1988 Television & Cable Factbook, at C-299. [11] Broadcasting Yearbook 1986, at C-81 to C-85. [12] 1984 Multiple Ownership Report and Order, at 27-28. [13] Broadcast Station Totals as of July 31, 1992, FCC News Release No. 24341 (Aug. 11, 1992). [14] F. Setzer & J. Levy, Broadcast Television in a Multichannel Marketplace, 6 FCC Rcd 3996, 4044, at Table 15 (FCC Office of Plans and Policy Working Paper #26, 1991) (Broadcast Television Report). [15] Revision of Radio Rules and Policies, Report and Order, 7 FCC Rcd 2755, 2757 (1992), recon. pending (Radio Report and Order); Comments of National Broadcasting Company, Inc. at 18 (filed Nov. 21, 1991) in Television NOI (NBC Television Comments). [16] Competition, Rate Deregulation and the Commission's Policies Relating to the Provision of Cable Television Service, 5 FCC Rcd 4962, 4966 (1990). [17] Radio Report and Order, 7 FCC Rcd at 2757-58. [18] See Notice, 7 FCC Rcd at 4112. [19] Broadcast Television Report, 6 FCC Rcd at 4066, at Table 20; NBC Television Comments, supra note 15, at 19. [20] Comments of CBS, Inc. at 16 (filed Nov. 21, 1991) in Television NOI (CBS Television Comments); see also NBC Television Comments, supra note 15, at 22-23 . [21] CBS Television Comments, supra note 20, at 16-17. [22] See Radio Report and Order, 7 FCC Rcd at 2766-67; 1984 Multiple Ownership Report and Order, 100 FCC 2d at 45; see also Amendment of Section 73.3555 of the Commission's Rules, the Broadcast Multiple Ownership Rules, Second Report and Order, 4 FCC Rcd 1741, 1746 (1989) (1989 Multiple Ownership Second Report) (efficiencies stemming from joint ownership in the same market). [23] See, e.g., 1 Final Report of the Network Inquiry Special Staff, New Television Networks: Entry, Jurisdiction, Ownership and Regulation 432 (1980) (Network Inquiry); NAB Television Comments, supra note 5, at 18- 30; NBC Television Comments, supra note 15, at 56-59; Comments of Capital Cities/ABC, Inc. at 20-25 (filed Nov. 21, 1991) in Television NOI (CapCities/ABC Television Comments); CBS Television Comments, supra note 20, at 19-22; Comments of Tribune Broadcasting Company at 13-14 (filed Nov. 21, 1991) in Television NOI. See also Groups Back FCC's Review of Ownership Caps, Broadcasting, May 6, 1991, at 34 (President of Heritage Media states that the rules prevent broadcasters from obtaining a "critical mass" of stations; Great American notes that in order to compete against cable, telcos, international organizations, and satellite- delivered services, "local broadcasters need to be able to get to a critical size that will allow them to operate successfully"). [24] See Network Inquiry, supra note 23, at 399. [25] See, e.g., Amendment of Sections 73.35, 73.240, and 73.636 of the Commission's Rules Relating to Multiple Ownership of AM, FM and Television Broadcast Stations, Notice of Proposed Rulemaking, 95 FCC 2d 360, 368 (1983) (1983 Multiple Ownership NPRM) (citing Amendment of Section 3.363 of the Commission's Rules and Regulations Relating to Multiple Ownership of Television Broadcast Stations, 43 FCC 2797, 2801-02 (1954)). [26] See Reply Comments of Capital Cities/ABC, Inc. at 4, n.4 (filed Apr. 7, 1992) in Amendment of Part 76, Subpart J, Section 76.501 of the Commission's Rules Relative to Elimination of the Prohibition on Common Ownership of Cable Television Systems and National Television Networks, Second Further Notice of Proposed Rulemaking, 7 FCC Rcd 586 (1991) (CapCities/ABC's eight owned stations "consistently produce by far the lion's share" of the company's operating profit each year); Media Ownership: Diversity and Concentration: Hearings Before the Subcomm. on Communications of the Senate Comm. on Commerce, Science, and Transportation, 101st Cong., 1st Sess. 139-40 (1989) (Media Ownership) (statement of NBC CEO Robert C. Wright) (profits of network owned-and-operated stations help support the company). [27] CBS Television Comments, supra note 20, at 19-22. [28] In 1991, a group of over 30 independent stations formed a consortium to acquire programming collectively from Warner Bros. Domestic Television Distribution. See McClellan, 'Kung Fu,' 'Time Trax' Set for 1993, Broadcasting, Feb. 17, 1992, at 26. The fact that these stations, including several station groups, have formed a consortium suggests that additional efficiencies may be obtained above the current limit. It may be the case that a number of those groups that currently fall shy of the 12 station limit for television would be interested in merging with another group, if the rule were relaxed or eliminated. [29] As we have shown, removal of the rule would not jeopardize competition or viewpoint diversity. Moreover, if the market, not the rule, is constraining the size of group owners, the rule serves no function. Repealing the rule would only affect the industry's structure to the extent that owning more than 12 stations would increase the efficiency of certain group owners' operations, and the rule is inhibiting those pro- efficiency ownership arrangements from taking place. [30] NTIA believes that the effect of Commission regulations on small businesses, particularly those owned by new entrants and minority firms, is an important consideration, and that increased minority ownership of broadcast and other communications is a major policy objective. NTIA has devoted substantial energy and resources to measuring U.S. progress in this area. Cf. A Statistical Analysis of Minority-Owned Commercial Broadcast Station Licenses in the United States in 1991, Minority Telecommunications Development Program, National Telecommunications and Information Administration (Oct. 1991) (1991 Statistics). However, the efficacy of the national multiple ownership rule in meeting the objective of increased minority ownership is speculative. It appears that minority ownership of broadcast television stations, while still very small, actually grew slightly from 1983, immediately before the limit on national ownership was changed from seven to twelve stations, through 1991. Compare National Association of Broadcasters, Minority Broadcasting Facts, Sept., 1986, at 8 (1.8% of all U.S. broadcast television stations in 1983 were owned by minorities) with 1991 Statistics, supra (2.8% of all commercial U.S. broadcast television stations in 1991 were owned by minorities). Moreover, we believe the rule must be evaluated in light of its overall effect on the television industry. As we have shown, the rule prevents broadcasters from realizing efficiencies that could benefit all viewers. In the long run, neither small business and minority broadcasters nor their viewers benefit from regulatory policies that impair the efficiency and competitiveness of over-the-air television stations. NTIA believes that the Commission should pursue less burdensome and more effective ways of attempting to pursue the goal of greater small business, and minority, broadcast ownership. In this regard, we agree with the Commission that the single greatest impediment to greater minority participation in the communications industry is lack of access to capital. See Radio Report and Order, 7 FCC Rcd at 2770. We are encouraged that the Commission has sought comment on actions it might take to foster the availability of capital in the broadcast industry. Review of the Commission's Regulations and Policies Affecting Investment in the Broadcast Industry, Notice of Proposed Rulemaking and Notice of Inquiry, 7 FCC Rcd 2654, 2659 (1992). We suggest that the Commission closely monitor the effect of its television rules on diversity and competition in the television broadcast industry. [31] According to 1991 Arbitron data, television broadcast stations in the top 24 television markets reach 45.363 million TV households, or 49.1% of the 92.455 million TV households in the United States. 1992 Television & Cable Factbook, at A-1 to A-4. [32] 47 C.F.R.  73.3555(a)(3) (1991). See supra note 2, for a definition of a cognizable interest. [33] Amendment of Section 73.3555 of the Commission's Rules, the Broadcast Multiple Ownership Rules, First Report and Order, 4 FCC Rcd 1723 (1989). [34] Notice, 7 FCC Rcd at 4115. [35] See supra at pp. 6-8. [36] 1992 INTV Census, at 3. Such stations include affiliates of the Fox Network, which, as the "fourth" broadcast television network, has adopted a strategy of focusing on younger viewers. [37] Notice, 7 FCC Rcd at 4115. [38] See, e.g., Broadcasting, Feb. 17, 1992, at 60 (approximately 61% homes passed); NBC Television Comments, supra note 15, at 18 (approximately 64% penetration). [39] NBC Television Comments, supra note 15, at 17. [40] Id. at 16-17. [41] Broadcast Television Report, supra note 14, 6 FCC Rcd at 4035; Moshavi, Time Warner Unveils 150 Channels, Broadcasting, Dec. 23, 1991, at 18. [42] 1991 Cable & Television Factbook, at C-58 to C-90. [43] News 12, a 24-hour local cable news channel, has been serving the Long Island market since 1987. Pearl, Local News Stymies Many Cable Firms, Wall St. J., June 18, 1991, at B1; Goldman, Broadcasters, Cable Enter 'Era of Blur', Wall St. J., Sept. 28, 1989, at B1. In Washington, D.C., Allnewsco Inc. started a 24-hour local cable news channel in October, 1991. Thompson, Time Warner Sets News Channel for NYC, Multichannel News, May 20, 1991, at 1. [44] Notice, 7 FCC Rcd at 4115. [45] Broadcast Television Report, supra note 14, at 4025-28; see also Foisie, Network Revenue Barely Budges, Broadcasting, Aug. 17, 1992, at 31; Foisie, TV Station Profitability: Half Full or Half in the Red?, Broadcasting, Aug. 10, 1992, at 32. [46] Under the Commission's pending proposal for ATV development, all broadcasters would appear to be required to convert to ATV at a specific date or forfeit their NTSC channels. Advanced Television Systems and Their Impact Upon the Existing Television Broadcast Service, Second Report and Order/Further Notice of Proposed Rulemaking, 7 FCC Rcd 3340 (1992) (ATV Second Report and Order/Further Notice). NTIA has recommended that broadcasters should be given a choice of offering NTSC or ATV service and surrendering the unwanted channel at any time up to an "election" deadline. Comments of the National Telecommunications and Information Administration at 10-13 (filed July 17, 1992) in ATV Second Report and Order/Further Notice. [47] Network Inquiry, supra note 23, at 366, n.129 (citing P. Steiner, Program Patterns and Preferences, and the Workability of Competition in Radio Broadcasting, Q. J. of Econ. 66 (1952); J. H. Beebe, Institutional Structure and Program Choices in Television Markets, Q. J. of Econ. 15, 18-19 (1977). [48] Because local television stations are the primary source of news to a majority of television viewers, we are particularly concerned about the effect of simply eliminating the rule on the diversity of sources of news and informational programming. [49] Although a variety of factors, such as terrain, antenna height, and strength determine the coverage of Grade A and B contours, very generally, the average distances to the Grade A and Grade B contours are approximately 35 miles and 55 miles, respectively. [50] The anticipated conversion to ATV broadcasting will likely eliminate many technical distinctions between UHF and VHF. [51] This criticism also applies to the third option discussed above. [52] See Network Inquiry, supra note 23, at 362-366. [53] In the recent radio ownership proceeding, some commenters criticized the Commission's proposal to rely on audience survey data in new local radio ownership rules. See Petition for Partial Reconsideration and Clarification of National Association of Broadcasters at 5, 17 (filed May 29, 1992) in Radio Report and Order; Joint Petition for Reconsideration and Clarification of Adventure Communications, Inc. et al at 2-11 (filed May 29, 1992) in Radio Report and Order. Although use of audience share caps might create some administrative burden, they are a more accurate measure of market activities, and potential market power, than the Grade A or Grade B contours. Moreover, many of the criticisms levelled against use of the caps in the radio proceeding are inapplicable with respect to television. Industry sources state that the determination of television markets by ratings services (Arbitron and Nielsen) are more representative of a television station's actual service area than Arbitron's radio market definitions. Comments of National Association of Broadcasters at 7-8 (filed Aug. 5, 1992) in Radio Report and Order. Thus, use of television audience survey data should more reliably indicate market share than would similar radio data. Even so, we encourage the Commission to carefully monitor the methodologies of ratings services used to implement a cap to ensure that the data they provide is accurate and impartial. [54] NTIA recommends that the Commission make clear that if a group owner of commonly owned local stations exceeds the audience share cap because of internal growth after acquisition of a station, divestiture of that station would not be required. [55] 47 C.F.R.  73.3555(b) (1991). In 1989, the Commission relaxed the rule by adopting a policy under which it grants waiver applications for common ownership of radio and television stations in the same market if (1) the request involves a station combination in one of the top 25 television markets and there will be at least 30 separately owned, operated, and controlled broadcast licensees after the merger, or (2) the request involves a "failed" station that has not been operated for a substantial period of time or that is involved in bankruptcy proceedings. [56] Amendment of Sections 73.35, 73.240 and 73.636 of the commission's Rules Relating to multiple Ownership of Standard, FM and Television Broadcast Stations, First Report and Order, 22 FCC 2d 306, 310 (1970), on recon., 29 FCC 2d 662 (1971). Indeed, the Commission viewed the rule as an extension of its duopoly rule. Id. [57] See 1989 Multiple Ownership Report, 4 FCC Rcd at 1741; Amendment of Section 73.3555 of the Commission's Broadcast Multiple Ownership Rules, Memorandum Opinion and Order, 4 FCC Rcd 6489 (1989). [58] 1989 Multiple Ownership Second Report, 4 FCC Rcd at 1754. [59] Id. at 1754. [60] See supra at p. 16. [61] Notice, 7 FCC Rcd at 4115. [62] Radio Report and Order, 7 FCC Rcd at 2773-74. [63] See Notice, 7 FCC Rcd at 4116- 17. [64] See, e.g., Harrison, Bond & Pecaro, Benefits from Joint Ownership of a Radio and Television Station in the Same Market (June 1987) (prepared for the National Association of Broadcasters). [65] National and Local Radio Ownership Rules Modified on Reconsideration (MM Dkt. No. 91-140), FCC News Release No. 24293 (Aug. 5, 1992). [66] In other words, we do not think that any combination of broadcast properties that would be permitted under the separate local limitations on radio and television ownership raise concerns about concentration or diversity that warrant an additional limitation on the basis of "cross-ownership." [67] See 47 C.F.R.  73.658(g) (1991). [68] The term "network" encompasses "any national or regional network and appears to include within its scope, . . . 'the simultaneous broadcasting of an identical program by two or more connected stations.'" The Applicability of 47 C.F.R.  73.658(g) and 47 C.F.R.  73.658(k) to Home Shopping Inc., Memorandum Opinion and Order, 4 FCC Rcd 2422 (1989) (Home Shopping). [69] Amendment of Part 3 of the Commission's Rules, 11 Fed. Reg. 33 (1946). The rule was adopted for radio in 1941. See Report on Chain Broadcasting, Dkt. No. 5060 (1941). It was then repealed in 1977. See Network Broadcasting by Standard AM and FM Stations, 63 FCC 2d 674 (1977). [70] Home Shopping, 4 FCC Rcd at 2423. [71] See id. [72] See Notice, 7 FCC Rcd at 4117. [73] See Evaluation of the Syndication and Financial Interest Rules, Report and Order, 6 FCC Rcd 3094, 3109 (1991) (Finsyn Report and Order). [74] Home Shopping, 4 FCC Rcd at 2422. [75] Finsyn Report and Order, 6 FCC Rcd at 3109. [76] For purposes of those rules, a "television network" is any person or corporation "providing on a regular basis more than fifteen (15) hours of prime time programming per week (exclusive of live coverage of bona fide news events of national importance) to interconnected affiliates that reach, in aggregate, at least seventy-five (75) percent of television households nationwide." Id. at 3166 (to be codified at 47 C.F.R.  73.662(i)). [77] Notice, 7 FCC Rcd at 4117. [78] See id at 4118. [79] 47 C.F.R.  73.658(f) (1991). [80] As with the dual network rule, this restriction was initially promulgated for radio in 1941. [81] Notice, 7 FCC Rcd at 4118. [82] See id. [83] Id. at 4116-17. [84] Id. at 4118. [85] See id. at 4118, n.62 (citing General-Times Television Corp., 13 Rad. Reg. 499 (1956); New Britain Broadcasting Co., 21 FCC 958 (1956); Hyman Rosenblum, 22 FCC 1432, 1441 (1957); St. Louis Telecast, Inc., 22 FCC 625, 738 (1957); Biscayne Television Corp., 22 FCC 1464, 1465 (1957); and National Broadcasting Co., Inc., 44 FCC 2098 (1960)). NTIA recognizes that this situation may be attributable, in part, to the national multiple ownership rule which, by limiting the number of stations a network could buy, reduced the number purchases that might trigger Section 73.658(f). [86] 50% of Independent Stations and 25% of Affiliates Posted Big 1991 Losses, Communications Daily, Aug. 7, 1992, at 1 (citing National Association of Broadcasters, 1992 Television Financial Report).