Back in September we reported on a Commission proposal to abandon the UHF discount aspect of the limitation on nationwide broadcast TV multiple ownership. (The Commission also suggested that it might be interested in establishing a VHF discount.) The Notice of Proposed Rulemaking has now made it into the Federal Register, which means that comments deadlines have now been established. If you have anything to say to the FCC about the proposal, you’ve got until December 16, 2013 to file comments and until January 13, 2014 to file reply comments.
Digital transition spurs rethinking of TV ownership cap discounts.
In one of the least surprising developments in recent memory, the FCC has proposed elimination of the “UHF discount” – but, in one of the more surprising developments, it has proposed adoption of a “VHF discount”. What a difference a DTV transition makes!
Before we can understand exactly what’s going on here, we need to understand the relevant regulatory context, and that context happens to be the multiple ownership rule governing broadcast television. The national TV ownership cap (contained in Section 73.3555(e), to be precise) currently prohibits any entity from owning or controlling a group of TV stations with “an aggregate national audience reach exceeding thirty-nine (39) percent.” The 39% level is thus the starting point from which the “UHF discount” is calculated.
The discount was first adopted back in the mid-1980s (simultaneously with the adoption of the national ownership cap), in recognition of the fact that UHF stations provided less coverage than their VHF counterparts. That disparity arose mainly from the characteristics of UHF frequencies transmitting analog signals. VHF frequencies tend to go a long way in the analog mode; UHF not so much. Because of the “coverage limitations of the UHF band”, the Commission decided that it would be appropriate, for national cap purposes, to attribute UHF stations with only 50% of the households in their respective markets. Theoretically, then, any particular licensee has been able to own more UHF stations than VHF stations.
Fast-forward to June, 2009, when the full-service TV industry converted from analog operation to digital.
The FCC and others had predicted that UHF would perform considerably better than VHF when it comes to digital operation. Sure enough, when the DTV transition occurred, it was apparent almost immediately that the traditional hierarchy of TV channels had been reversed. Now UHF rules while VHF struggles.
The reversal is so complete that the Commission has tentatively concluded that no further need exists for the UHF discount. Indeed, it’s now thinking about affording a VHF discount instead, to compensate for the limitations of VHF operation in the digital mode – essentially for same reasons that triggered the original UHF discount in the 1980s. This time around, though, the Commission asks (among other things) whether today such a discount may be “less important” because “many television consumers today receive local broadcast stations via an MVPD rather than over-the-air”. Apparently, the Commission is not yet inclined to attach much importance to the “cut-the-cord” movement in which viewers are relying on over-the-air reception combined with Internet-accessible video in place of cable or satellite TV.
Interestingly, the NPRM does not mention a consideration that would appear to weigh heavily in favor of a VHF discount. With the upcoming incentive auctions and consequent re-packing of the TV spectrum, we can expect major congestion in the UHF band. By contrast, the VHF band – and particularly the lower portion of the VHF band – is relatively vacant. To the extent that a VHF discount might serve as an incentive for some licensees to relocate to the VHF band, the Commission’s re-packing chores could be eased somewhat.
The Commission’s Notice of Proposed Rulemaking (NPRM) seeks comment on both the elimination of the UHF discount and the creation of a VHF discount. It also asks whether the Commission has the authority to mess with the UHF discount at all or alter the 39% national cap level. That question is particularly interesting because, over the last 15 years or so, both Congress and the courts have had a fair amount to say about those particular topics. (The NPRM provides a useful summary of the legislative, judicial and regulatory history of the discount and the cap.) To make a long story short, the Commission has now tentatively concluded that it does possess the authority to change either or both the cap and discount. But it is currently proposing to change only the discount.
The Commission was not unanimous in adopting the NPRM. Commissioner Pai dissented for two reasons.
First, he thinks it inappropriate for the Commission to alter the UHF discount without also addressing the correctness of the national cap. In his view, the elimination of the discount will have the logical effect of reducing the national cap. If the FCC is going to alter the cap from a de facto point of view, why not do it from a de jure perspective as well? He figures that, since the 39% level has not been formally addressed by the FCC in more than a decade, now would be a good time to do so. After all, as he correctly observes, “the media landscape has changed dramatically in the many years since” the 39% level was adopted.
Second, he objects to the grandfathering approach tentatively approved by his colleagues. According to the NPRM, existing ownership groups which (a) are currently in compliance with the national cap but (b) would be out of compliance if the UHF discount were to be eliminated would be permitted to retain their existing interests. The NPRM indicates that there are only a “small number” of licensees to whom this would likely apply.
Additionally, any station combinations for which FCC approval had already been sought and/or approved as of the adoption of the NPRM (i.e., by September 26, 2013) would also be grandfathered. But going forward from that date, no new proposals would be entitled to the discount, even though formal endorsement of the discount’s elimination is still many months away. Commissioner Pai is concerned that this approach effectively imposes the elimination of the UHF discount now, well before it has been officially adopted. To him, that’s straight out of Alice in Wonderland (“[S]aid the Queen. ‘Sentence first – verdict afterwards.’”).
It has been no secret for a couple of months that Chairman Clyburn appears committed to tossing the UHF discount, probably sooner rather than later. The NPRM makes that official. But because the discount is contained in the multiple ownership rule, the Administrative Procedure Act requires that the FCC undertake a rulemaking proceeding. As a result, the NPRM invites comments and reply comments on all of these points. Comments will be due 30 days after the NPRM is published in the Federal Register; reply comments 30 days after that. Check back here for updates on those due dates.
Depending on who’s doing the including, inclusion of a radio station in an Arbitron market may not be subject to a two-year waiting period for purposes of multiple ownership calculation.
While the heyday of radio consolidation is fading in the rearview, some opportunities still exist. As Cumulus Licensing LLC recently demonstrated, with a quick change in a station’s city of license, an otherwise impermissible ownership situation can become permissible – thanks to a helpful Audio Division interpretation of the contour overlap standard that has governed radio multiple ownership for nearly a decade.
Concentration of control in the radio world hasn’t been on many people’s radar for a while, so some background may be in order.
Since back in the 1990s, radio ownership in any particular market has been subject to caps depending on the number of other stations present in the particular market. In the ‘90s, the relevant “market” for any proposed acquisition depended on the particular contours of the particular stations owned and proposed to be owned by the buyer. That gave rise to considerable flexibility for buyers, who were able to some degree to manipulate the scope of the relevant market to their advantage.
That signal contour approach to market definition was largely tossed out in 2003, when the Commission adopted an Arbitron/geography-based approach. Under the “new” approach, radio ownership caps are determined by the number of stations located in (or “home to”) Arbitron-defined markets. By relying on the independent determination of Arbitron as to which (and, thus, how many) stations were in each market, the FCC theoretically reduced the flexibility the signal contour approach had afforded to inventive applicants.
But, as the Commission acknowledged, even the Arbitron approach was subject to manipulation.
Station licensees could persuade Arbitron to modify its market definitions to increase some markets to include particular stations, or decrease them to exclude particular stations. The result of such modifications: some deals that might not otherwise have met the FCC’s ownership caps could suddenly be acceptable. To discourage rampant, licensee-induced changes in the Arbitron market definitions, the Commission imposed a two-year waiting period before any such changes could be relied on to demonstrate compliance with the ownership caps.
Of course, some stations aren’t located in (or “home to”) any Arbitron-defined markets. Such stations are still subject to the signal contour method of determining local ownership caps.
So what happened with Cumulus?
Cumulus was looking to improve its position in the adjacent Mobile, Alabama and Pensacola, Florida Arbitron markets. No problem there. It entered into agreements with a couple of other licensees to acquire a total of three stations, one in the Mobile market, the others in the Pensacola market. The proposed acquisitions would, once granted, still leave Cumulus safely within the permissible caps for those markets.
But wait. As a petitioner to deny the deal pointed out, of the stations that Cumulus already owned in the Mobile market, one had just been the subject of a recent change-of-community application that brought it from scenic Atmore, Alabama to slightly more scenic (from a 307(b) perspective, anyway) Saraland, Alabama. That change just happened to bring the station from outside the geographical boundaries of Arbitron’s Mobile market to within those boundaries. According to the petitioner, if that change had not been made, Cumulus’s proposed acquisitions would have had to be assessed under the signal contour approach and (again according to the petitioner) those acquisitions would have exceeded the relevant ownership caps and the assignment applications would have to be rejected.
As the petitioner saw it, the change-of-community application was essentially the same as an effort to modify the Arbitron market definition; since (as noted above), such market modifications are subject to a two-year waiting period, Cumulus could not take advantage of the change for two years.
The Audio Division didn’t buy it.
According to the Division, the two-year waiting period applies only to market changes effected through Arbitron’s processes, i.e., changes in market boundaries (making a market bigger or smaller) or changing a particular station’s “home” designation for Arbitron purposes. Change-of-community applications, by contrast, are handled through the FCC’s own processes. The Commission can thus take into account the potential effect of such proposed changes on such regulatory considerations as multiple ownership and market size before deciding whether to grant the change. So the two-year holding period is irrelevant with respect to changes approved through the FCC’s processes.
In this case, the change-of-community application had already been granted before Cumulus filed its applications to acquire other stations in the market. Just before, as it turns out – the change-of-community application was granted on May 7, 2012, while the first of Cumulus’s assignment applications was filed two days later. That may, of course, have been purely coincidental; but – call us crazy – it seems to us that it’s a good bet that the filing of the assignment applications was timed to occur after Cumulus was successful in moving its existing station within the geographical boundaries of the Mobile market.
In any event, since the petitioner’s beef was really with the grant of the change-of-community application rather than with the follow-up assignment applications, the Division concluded that it was too late for the petitioner to raise the issue now.
Another point weighing against the petitioner: even before the change-of-community, that particular Cumulus station had already been counted by Arbitron as “home to” the Mobile market for more than eight years, so the move into Saraland did not affect the practical Arbitron status of the station. It seems to us that the Division could have avoided any discussion of the two-year waiting period by mentioning this, since the station’s status as “home to” Mobile had clearly been in place for well more than two years before the change-in-community. (It’s possible that the staff was concerned about the fact that formally moving the station from Atmore to Saraland meant that the Atmore market – not an Arbitron-defined market – would be losing a station, so Arbitron’s historical treatment of the station didn’t completely resolve all conceivable market-related questions. But that factor implicates Section 307(b) considerations more than multiple ownership concerns, at least as far as we can see.)
The Division opted instead to focus on the alternate rationale that FCC-granted changes potentially affecting a station’s market status are not subject to the waiting period. By doing so, the Division appears to have endorsed a way of circumventing the contour-overlap approach to the radio multiple ownership rules.
But don’t look for a boatload of applications trying to take advantage of what might be classified as a loophole. The limitations on “move-in” applications that take stations from outside a market to inside the market have been considerably tightened in recent years. As a result, it seems unlikely that very many folks will be able to take advantage of the Division’s decision. Nevertheless, licensees looking to max out their local ownership interests may want to consider whether an otherwise impermissible acquisition might be made possible through the change in one or another station’s community of license.
Regulators put the kibosh on effort to re-shuffle radio portfolio through parking trust mechanism
Townsquare Media (TM) thought it had a perfect, and perfectly legal, way to shuffle ownership of a bunch of radio stations in two small Washington state markets and finesse its way around the multiple ownership rules. But the only player at the table that really mattered – that would be the Media Bureau’s Audio Division – called a misdeal.
The result puts a new wrinkle in the use of “divestiture trusts”, a handy device used in large deals to address the occasional loose ownership end that does not fit comfortably within the Commission’s rules. Anyone contemplating the use of such a trust – sometimes known as a “parking” trust, because it permits the parties to “park” inconvenient stations with a trustee – should give this decision careful attention before moving forward.
As with any fancy card trick, this gets a little complicated, so keep your eyes peeled and stick with me.
New Northwest had accumulated stations in several Northwest markets, including six in the Yakima market and six in the adjacent Richland-Kennewick-Pasco (a/k/a/ “Tri-Cities”) market. But things didn’t go well financially and the company went into receivership. The Receiver was to sell the stations and pay off the creditors.
Enter TM. TM already had the maximum permissible number of radio stations in Yakima and lacked only an AM to hold a full house in the Tri-Cities. But New Northwest had a few stations that TM wanted for itself, and TM presumably wouldn’t mind getting its hooks into the rest of New Northwest’s holdings.
Time for a divestiture trust. The concept of a divestiture trust is not new. It’s been used mainly in BIG broadcast deals involving scores if not hundreds of stations. Occasionally, assignment of a very small handful of the stations in such a deal can’t be closed for various technical reasons – and the multiple ownership rules will not permit the proposed assignee to continue to hold those stations, incidental though they may be, and still acquire the additional stations proposed in the assignment. Rather than allow a huge deal to crater because of such technicalities, the Commission has permitted the problem stations to be dealt off to an independent trustee. Those stations are then beneficially owned by the buyer (even if that buyer could not own them directly under the ownership rules). If you hold beneficial ownership of a station, you still get the profits and cover the losses – but the trustee controls the operations, and is (at least theoretically) charged with selling the station off to some third party in due course.
TM sat down at the New Northwest table and agreed to take over all of New Northwest’s Yakima and Tri-Cities stations. Because of multiple ownership limits, TM would acquire in its own name only five of the stations. The other seven would be dropped into the divestiture trust along with four of TM’s less desirable stations. In other words, TM was looking to upgrade its hand from a near full house to a royal flush: TM was looking to own outright six cream-of-the-crop stations – the maximum under the rules – in each of the Yakima and Tri-Cities markets. Plus, through the divestiture trust, it would have the beneficial ownership of another six stations in Yakima and five in Tri-Cities. For those of you keeping score at home, that would give TM a stake in 23 of the 54 station in the two markets.
What a deal.
Or misdeal, as the Audio Division concluded. In the Division’s view, TM’s proposed use of a divestiture trust did not involve mere incidental aspects of a much larger transaction. Rather, TM itself was netting out, numerically, with only one more station than it started with. The trust was simply serving as a parking lot for the (presumably) less desirable New Northwest stations. Even though the court overseeing New Northwest receivership had approved the TM plan, the Division determined that the potential adverse effect of the deal on competition in the two markets was unacceptable. Accordingly, the Division eschewed the Commission’s normal policy of accommodating state court orders. The Division also noted that the proposed deal would not wrap up the receivership, since New Northwest’s Receiver would still have a herd of stations in Oregon and Alaska to dispose of. And the Division was not tickled pink with the fact that TM was using the trust to hold some of its own (again presumably) less desirable stations in order to allow TM to skim the cream from the New Northwest holdings.
And with that, the Division dismissed the various TM applications as “inadvertently accepted for filing”.
The bottom line is that a station owner will not be allowed to use a divestiture trust “to re-shuffle its radio station portfolio.” Where the line falls between (a) the permissible use of a divestiture trust to accommodate a deal and (b) impermissible re-shuffling of a station portfolio will have to be sorted out on a case-by-case basis. Parties looking to play the divestiture trust card should proceed with caution.
Does simulcasting a commonly-owned, out-of-market signal on an HD stream violate the rules? Mt. Wilson FM Broadcasters thinks so.
Digital (a/k/a “HD”) radio has yet to captivate the consuming public as much as its promoters might have hoped. Still, that technology has opened up some opportunities for creative broadcasters looking to achieve results that might not otherwise be achievable under existing FCC rules and policies. One example surfaced recently, brought to our attention (and the Commission’s) by an unhappy competitor.
It seems that Viacom, licensee of as many broadcast stations as any single licensee can own in the Los Angeles market , has been using one of the HD digital streams on its KTWV(FM) in that market to provide a country music format. No problem there, it would seem. But wait. The content for that country stream is apparently nothing more than a simulcast from a Viacom station in San Bernardino, a different market entirely. A country music competitor in LA – Mt. Wilson FM Broadcasters – sees a couple of problems with that, and has asked the Commission for a ruling declaring that Viacom’s arrangement violates both the FCC’s multiple ownership rules and its FM allocation scheme.
In adopting its HD Radio rules, the Commission recognized that the multi-stream nature of HD operation could potentially allow broadcasters to make an end-run around the ownership rules. (That could happen if, say, a licensee who had hit the ownership cap in a market were to arrange through, e.g., a brokerage deal, to secure one or more digital streams on stations owned by others in the market.) In an apparent attempt to prevent this, the Commission held that if a licensee (let’s call it Licensee A) of a station in a market were to broker a multicast stream from another licensee’s station in the same market, that brokered stream would count towards the local radio ownership cap for Licensee A. This would prevent a maxed-out licensee – such as Viacom – from programming using another licensee’s in-market multicast channels.
But the situation in Los Angeles isn’t quite that simple. According to Mount Wilson, Viacom is using a multicast stream on a station that Viacom already owns (KTWV) to simulcast the programming from another station that it owns in another market (i.e., KFRG in the nearby San Bernardino market). Mount Wilson is urging the Commission to declare that, when a licensee uses the multicast stream of a station it owns to simulcast the signal of an out-of-market station it also owns, the licensee should be charged with an additional attributable interest in the multicast market.
While Mount Wilson’s pique is understandable, its argument reduces to the odd and probably untenable notion that Viacom should be deemed to have multiple attributable interests in its own station. With the Commission’s oft-stated desire to encourage the expanded acceptance – by both the industry and the listening public – of HD Radio, it seems unlikely that the Commission will adopt such a novel and potentially far-reaching approach to attribution of multicast streams. Still, Mount Wilson’s request does raise some interesting questions, such as how the situation would differ if Viacom were to carry on its multicast stream either (a) the programming of an out-of-market station owned by an unaffiliated entity, or (b) the programming of a station it owns in a much more distant market, or (c) simply the same programming as on KFRG, but not to carry it as a simulcast.
Mount Wilson raises a second question about the geographic limits on use of an HD Radio multicast stream to simulcast another station. The Commission’s rules have long held that a commercial licensee cannot use a commonly owned FM translator to expand the service area of a commonly-owned full-power FM station beyond the limits of the full-power station’s 60 dBu contour. The rationale of that limitation on translator usage is based in significant part on the view that such use would undermine full-power FM service and the Commission’s allocation scheme.
Mount Wilson picks that ball up off the translator field and tries to score with it on the HD radio field. In Mount Wilson’s view, the simulcasting of a full-power FM station on the multicast stream of another outside the first’s 60 dBu contour is the same thing as using a translator for that purpose. Since such use in the translator context is prohibited, so too should the multicasting gambit be. Mount Wilson does not limit its requested prohibition to commonly-owned stations: it urges the Commission to adopt a prohibition on the use of an HD Radio multicast stream to expand the service area of any other FM station.
If adopted, Mount Wilson’s suggested prohibition would prevent an owner of multiple stations within a market from using the multicast streams of the strongest station to deliver the programming from a weaker station to a larger audience. Again, the FCC’s stated desire to encourage multicasting and adoption of HD Radio would suggest a reluctance to adopt such limits.
Our best guess is that the Commission is unlikely to impose the requested limitations, at least through a declaratory ruling. A (somewhat) more likely outcome would be inclusion of the issue in a future notice of proposed rulemaking in HD Radio proceeding. If and when that occurs – or if any other opportunity to chip in your two cents’ worth on the Mount Wilson proposal arises – we’ll let you know.