NEWS October 11, 1996 COMMISSIONER NESS UNDERSCORES FCC AND INDUSTRY CHALLENGES AS RADIO INDUSTRY EXPERIENCES UNPRECEDENTED CHANGE In her keynote address before the annual NAB Radio Show in Los Angeles, Commissioner Susan Ness underscored "at the heart of our public interest determination is the impact of a broadcast sale on the diversity of voices and competition in a local market." Ness said when reviewing station transactions she asks herself, "at what point does the market become so over-concentrated that small stations cannot realistically compete? And at what point does the loss from a reduction of voices and competition outweigh any benefits to the public from consolidation?" Ness went on to say that she believes further loosening of local ownership rules should be done in a measured way. "We may wish to wait and see how the enormous changes made by Congress are altering the competitive landscape, because approving transactions is a bit like scrambling eggs: If you change your policy, it s tough to unscramble the ownership omelet you cooked," she said. The Commissioner further stated that the Department of Justice and the Federal Trade Commission have responsibilities that complement the FCC s role, noting these agencies rule on combinations that may tend to lessen competition in a market. "Until now, these agencies have not had to review radio deals because the local and national ownership rules simply were so strict that no transaction could have adversely affected competition in the market," she commented. Ness went on to say that she generally prefers to change FCC policies through rulemakings, not through ad hoc determinations. "There we have the benefit of hearing from all who are interested, as well as from experts who have studied the topic. Often these commenters spot important consequences of a rule change," she said. Ness also supports changes in the FCC s "attribution" rules that define broadcast ownership. "Congress has set more liberal ownership limits and I believe it is time for the FCC to adopt more realistic attribution rules," she noted. The Commissioner then stated, "I firmly believe broadcasting is special -- TV is not a toaster with pictures, and radio is not a waffle iron with sound!" In her concluding remarks, Ness said, "radio sparkles due to its people" and that is the key to the radio industry "Meeting the Challenge of Change." - FCC - For more information contact Anita Wallgren at 202 418-2100. Remarks of Commissioner Susan Ness before the National Association of Broadcasters' Policymakers Breakfast Los Angeles October 11, 1996 (As prepared for delivery) "MEET ING THE CHALLENGE OF CHANGE" I am delighted to be with you again at the annual Radio Convention. As you may know, my communications roots are in radio. I spent 80% of undergraduate school time at my college radio station -- doing news and public affairs programming, as well as hosting a music show. Radio broadcasters love the medium -- and with good reason. Radio sparkles. It's up front and close. You compete aggressively in your markets. The response is immediate. You have your finger on the pulse of your audience. For most of you, localism is critical to your success. That is as true today as it was twenty years ago. What makes a radio station successful has not changed much. But, my, what huge changes we've seen in the radio ownership landscape! Only a few years ago, owners were limited to no more than one AM and one FM per market -- and a total of twelve stations nationwide. Then came duopolies and the ownership cap was raised to 40 stations. The Telecommunications Act of 1996 blew open broadcast ownership by eliminating the national limit and allowing groups to own up to eight stations in each of the largest local markets. Today, group owners are racing to consolidate holdings in targeted markets; cash flow multiples for radio properties are at record highs; and multi-billion dollar deals are being struck, including the $4 billion (give or take a few hundred million) for Westinghouse to acquire Infinity. Also, sadly, many broadcast entrepreneurs, whose lives have been dedicated to radio, have chosen to sell their holdings and exit the business rather than compete against mega-station groups. Let's explore together what these profound changes mean for radio, and how the Commission is "Meeting the Challenge of Change." More Work -- (Same Pay): The FCC is working to streamline the regulatory process and eliminate outdated regulations while preserving the benefits to the public from what is at the heart of our commercial broadcast system: local competition and diversity of voices. More Applications: The FCC handled a record number of transfer applications in 1995 -- 2,025. But in the first nine months of 1996 alone, we have reviewed and approved 2,700 transfers. Annualized, we will have approved 3,600 transfers -- a 75% increase over 1995! That's almost one in three stations -- and some have changed hands more than once in a year! Fast Processing: The Audio Services Division not only is keeping up with this torrent of applications, but has actually cut down the time it takes to review applications where there is no petition to deny filed, and where there are no waivers requested. The FCC generally is able to grant these transfers within 10 days after the Public Notice period closes. Some now complain that there isn't enough time to get financing in place! We are installing an electronic filing and processing system that will make it easier for you and your lawyers to file with the Commission. This system ultimately will save you time and money, and reduce our processing time even further. More Complicated Transactions: Not only has there been a record number of transfer applications, but the requests are also more complicated. Because of changes in the local and national ownership rules, radio deals frequently raise novel ownership and market concentration issues. It used to be that a "big" group owned perhaps fifteen radio stations and made a "big" deal by acquiring a couple of AM/FM combos in good sized markets for 50 or 60 million dollars. Today, while there are still plenty of those transactions going on, it is increasingly common for us to review a transaction where a company owning say, thirty radio stations and a few TV stations in six or seven markets, is buying another group of ten or fifteen stations -- many in the same markets they already serve. For example, the tiny Westinghouse acquisition of Infinity involves a mere 86 stations and 15 one-to-a-market waiver requests. Moreover, some deals are spiced with newspaper-broadcast cross-ownership waiver requests, or combine a collection of radio stations with two television stations in a market -- one owned directly, the other operated under a local marketing agreement. Obviously, these transactions take longer to sort out. So, the FCC is reviewing an unprecedented number of license transfers both rapidly and efficiently. Broadcasting Goals and Policies of the FCC: Turning now to the broadcasting policies and goals of the FCC... Last spring, as Congress directed, we lifted our radio ownership rules to eliminate the national cap and to increase the number of facilities an individual owner can acquire in a market. We now are examining several of our ownership rules to determine whether they still make sense in today's rapidly changing marketplace. Three policy issues are before us that significantly affect the radio industry: TV-Radio cross-ownership; newspaper-radio cross- ownership; and the attribution rules.  We are looking at whether to change the rule controlling TV and radio ownership in the same market. We are likely to issue a further notice of proposed rulemaking on this subject in light of the big changes in the radio rules.  Second, I recently voted in favor of asking for public comment on our rule banning common ownership of radio and newspapers in the same market. We last examined that issue when the rule was adopted in 1978, and it would be useful to have current data on this issue.  Third, we expect in the next few weeks to issue a further notice on our "attribution rules," the rules that define ownership. All three of these items cause me to wonder: At what point does the market become so over-concentrated that small stations cannot realistically compete? And at what point does the loss from a reduction of voices and competition outweigh any benefits to the public from consolidation? Your comments will help me to decide where the public interest lies, and I urge you to participate in these proceedings. I believe on balance, local duopolies and some super-duopolies have been good for radio. Where there have been several large groups competing, these combinations have resulted in greater format diversity and stability, and higher advertising dollars. But it would be unfortunate if everyone had to combine into multi-station groups to have a chance of competing successfully. To illustrate: How comfortable would you be -- the proud owner of an AM/FM combo in a top 25 market -- when suddenly one of your competitors amasses four of the strongest FM stations in the market, plus 2 or 3 AMs? What if the super-duopoly has a combined radio advertising share of 45%? What if the company also has joint sales agreements with two other FM's in the market for a total advertising market share of 55%? What if the company also wants to acquire a TV station in that market? And once it acquires a TV station, what if that station executes a local management agreement with another television station in the market? What if the company provides 100% of the equity in the form of non-voting stock or subordinated debt to finance a competitor in that same market? Now, what if the manager of that competitor is hired from the group owner providing the financing? At what point is a competitor kept from competing effectively? At what point does an advertiser have a hard time finding options? At what point does someone looking for a fresh, independent voice have a hard time finding one? Now, some would argue, "antitrust enforcement can take care of any problems" resulting from the dismantling of rules. And indeed, as the ownership rules were relaxed, we have seen the Department of Justice weigh in on concentration and anticompetitive practices in radio markets. Until recently, for most of you, the Washington alphabet soup was limited to FCC -- and maybe the IRS. Suddenly, the DOJ and FTC appear. Let's pause for a moment to focus on these different agencies. The Department of Justice and the Federal Trade Commission rule under the Clayton Act on combinations that lessen competition in a market. Cases are divided between the two agencies to avoid duplication. Alliances that violate the antitrust laws may be subject to fines for each day that they are in place. These agencies have actively monitored the cable and telecommunications industries for years. Until now, these agencies have not had to review radio deals because the local and national ownership rules simply were so strict that no transaction could have adversely affected competition in a market. But as the ownership rules are relaxed, antitrust enforcement comes into play. Antitrust, unfortunately, relies heavily on case-by-case analysis. So broadcasters who might have escaped the FCC frying pan may find themselves in the DOJ fire. The review that these agencies perform complements the FCC's review of a proposed license transfer. Of course, when either the Justice Department or the Federal Trade Commission has reviewed a transaction, we attach great weight to its analysis. But the FCC's mission is broader. In every case we ask whether the transfer serves the public interest. As the venerable broadcaster, Walter Cronkite said so well: "Stewardship of our free press is a public service and a heavy responsibility. It should not be treated the same as the manufacture of bobby pins or of automobiles." At the heart of a public interest determination is the impact of a transaction on the diversity of voices and competition in the local market. Our democracy is strongest when ownership of broadcast licenses is widely held. Only through a diversity of voices can we nurture our shared freedom, our common bonds, our local and national communities. And excessive consolidation of a local market can drive out competition, reducing the diversity of voices. A related by-product of consolidation is the obstacles created for new entrants, especially women and minorities who want to become broadcast owners. The FCC should do what we can to foster radio ownership by entrepreneurs, ownership by minorities, and ownership by women. To that end, we have a proceeding underway to try to remove regulatory barriers for small business operators, which includes many radio owners. The Small Business Administration has changed its rules so that radio stations are now eligible for loans. There's something you -- successful broadcasters -- can do to help: you can hire and train women and minorities in management track positions. It's just good business. I also believe that group owners, with super-duopolies, have an obligation to develop and promote women and minorities. You have more resources and more opportunities to set up "farm teams" to train less experienced people for station management. Another thing: when an acquisition requires that you spin off stations, why not consider minority and women buyers. The radio industry reflects the heart and soul of the country and the owners and managers of radio stations should reflect the diversity of the American people. Guiding Principles: Three principles guide my thinking as I grapple with broadcast ownership issues: First, I prefer to change FCC policies through rulemakings, not through ad hoc determinations. While we can and do modify policies by ruling on individual cases, it is not as open and fair a process as a rulemaking proceeding. There, we have the benefit of hearing from all who are interested, as well as from experts who have studied the topic. Often these commenters spot important consequences of a rule change. It's also clear when we complete a rulemaking what the rules of the game will be -- for everyone. Otherwise, communications lawyers and their clients have to guess at whether the FCC would approve their case, where the facts may be somewhat different. Second, I prefer to expand market opportunities by raising ownership limits as Congress has done, not through joint sales agreements and other unattributable interests. Again, everyone should use the same rulebook when counting ownership. In our attribution rulemaking, we ask for comment on the "single majority shareholder" rule which says that if a company has a single majority shareholder, the other owners are not attributable. Let's see how this one works: If someone owns 51% of the voting stock, I can own 49%, own the building that the station operates from, provide all of the debt, and suggest that my daughter be hired as program director ... yet I am not an "owner" of that station! Congress has set more liberal ownership limits and I believe it is time for the FCC to adopt more realistic attribution rules. Third, I believe we should move cautiously in further liberalizing local ownership. We may wish to wait and see how the enormous changes that have already taken place are altering the competitive landscape, because approving transactions is a bit like scrambling eggs: If you change your policy, it's tough to unscramble the ownership omelet you cooked. Conclusion In conclusion, we continue to license broadcasters in the "public interest, convenience, and necessity..." That's why broadcasters do not pay the government for the use of the spectrum. I firmly believe broadcasting is special -- TV is not a toaster with pictures, and radio is not a waffle iron with sound! Most of the 10,000 radio broadcasters in the country know and fully accept that you have a special function to perform with your business, beyond paying your employees, beyond the shareholder's return on investment and beyond the lenders' payoff. Each quarter, you review the issues of concern to your community and you are putting programs and PSAs on the air to respond to those issues. Radio stations also do a great deal of community and charitable events and promotion -- all of which vitally serve your communities. Today, I've described how the Commission is "Meeting the Challenge of Change." We're handling transactions and developing forward looking ownership policies. The challenges to the radio industry loom large. But as I said at the outset, "radio sparkles" due to its people, the people who are committed to their communities; the people who are competitive; and the people who are creative. I believe these are the people who are well-equipped to "Meet the Challenge of Change." Thank you.