Media Bureau concedes Hawaii shared services arrangement is legal, but signals that that might not be enough for renewal

If you’re looking for evidence of the Commission’s ambivalence toward “shared services arrangements” involving TV operations, look no further than a Memorandum Opinion and Order and Notice of Apparent Liability for Forfeiture (MO&O) released by the Media Bureau the day after Thanksgiving. Although the Bureau acknowledged (as it had to) that such arrangements are not barred by any Commission rules and that the complained about three-station deal in Hawaii didn’t violate any laws, the Bureau couldn’t bring itself to fully bless the deal. 

Instead, it ominously hinted that, come renewal time, the parties to the shared services arrangements might run into some rough water. The agreements may technically be street legal, the Bureau sniffed, but they are still “clearly at odds with the purpose and intent of the duopoly rule”.

So just because those agreements might not violate any rules, the Bureau figures that the Bureau won’t be precluded “from considering whether this or similar transactions are consistent with the public interest within the context of individual licensing proceedings” come renewal time. How’s that for providing useful guidance to the folks who have already entered into, or who may be thinking about entering into, such arrangements? Sure, says the Bureau with its regulatory eyebrow raised to new heights, what you’re doing may be legal and all, but that doesn’t mean we won’t try to find a way to whack you anyway.

How did such shared services arrangements come about in the first place? The Commission’s multiple ownership rules constrain common ownership of multiple broadcast stations in a market. But for more than 20 years, the Commission has permitted licensees to enter into various types of contractual relationships that afford them many of the advantages of common ownership without actually crossing the formal “ownership” line. Such arrangements come in a variety of flavors. The earliest versions were dubbed “local marketing agreements”, or “LMAs”. Those often tended to be nothing more than “time brokerage agreements”, or “TBAs”, through which a licensee sold pretty much all of its broadcast air time to somebody else, often another broadcaster in town. 

The gist of all such arrangements was (and remains) that, even though the licensee might be selling off the lion’s share of its station’s time, that licensee nonetheless remains the station’s licensee and is ultimately responsible for its station’s operations. The three key factors:  the licensee must maintain control over the station’s programming, personnel and finances. 

In 1999 the Commission revised its ownership rules to permit some, but not all, TV duopolies (i.e., common ownership of more than one TV station in a given market).  A licensee of one station in a market could acquire another station in the same market so long as, at the time of acquisition, at least one of the stations was not ranked among the top four stations in the market.  Those rules were also revised to treat certain types of LMAs as “attributable” interests.  The combination of these changes meant that, in many cases, TV LMAs would be prohibited, thanks to the fact that the attributable interests arising from the LMA would put the licensees in question over the newly-revised multiple ownership limits.

But we all know that combining operations of separate stations can lead to substantial savings through the sharing of duplicative functions. That fact served as an incentive to TV licensees to come up with an alternative to LMAs that would still conform to the rules.

And so was born the shared services arrangement.

Your garden variety shared services arrangement generally consists of a bundle of separate agreements between two TV licensees in a market. Those agreements – often including a shared services agreement, a joint sales agreement, an equipment lease, possibly even an option – are carefully crafted not to create “attributable” interests while nevertheless providing most, if not all, of the economic benefits of an LMA. While the Commission has thus far not formally addressed shared services arrangements in its rules, it has had a number of opportunities to consider them in case-by-case situations. And in those cases, the Commission has generally concluded that such arrangements are permissible.

Despite that, a group calling itself Media Council Hawai’i (Media Council) complained that a shared services arrangement entered into by the licensees of three Honolulu TV stations went TOO FAR.

To be sure, this particular arrangement was extensive. Exchanges of a variety of “non-license assets” (including network affiliations, some non-network programming, call signs, some real property); a “term loan note”; an option; a studio lease. There was also a shared services agreement calling for one of the licensees (let’s call it the Main Mover) to: provide the other licensee (let’s call it the Other Guy) certain “back-office support”; produce local newscasts for the Other Guy; and collect from the Other Guy a monthly “performance fee” and 30% of the other’s cash flow. As a result of the swap of network affiliation agreements, the Main Mover became both the NBC and CBS affiliates in the Honolulu market (both in the top four in the market); the Other Guy got the MyNetworkTV. 

It may look like the Main Mover was driving the bus and the Other Guy was just along for the ride BUT, importantly, the Other Guy retained his license, and the bundle of agreements comprising the shared services arrangement reserved to the Other Guy the right to exercise editorial control over its station’s programming content.

In Media Council’s view, the shared services arrangement constituted a de facto transfer of control, violated the duopoly rules, harmed diversity, competition and the public interest. Media Council’s bottomline: revoke all the licenses! The licensees countered that deal was necessary to put each of the parties’ stations on a “less precarious economic footing”, thereby allowing them “to sustain and improve (not diminish) service to the community” (those emphases are the licensees’, not ours). 

Looking at the extensive record developed over two years’ worth of back-and-forth pleadings from the licensees and Media Council, the Bureau staff concluded the arrangement did leave the Other Guy with control over its programming and that the Other Guy had, in fact, exercised that control. The Main Mover supplies less than 15% of the Other Guy’s programming (a key parameter used by the FCC to determine whether the control over programming factor has been ceded). Additionally, the Other Guy retains financial control of its station, largely because the financial terms align “the profits arising from operation of the station with [the Other Guy’s] ownership and, thus, [the Other Guy] has had sufficient economic incentive to control programming” on its station. The Hawaii contracts were structured so that the Other Guy keeps 70% of the free cash flow from his station (another key benchmark considered by the Commission when evaluating deals like this one).

So the deal was consistent with Commission rules and precedent.  (The Bureau did slap the licensees’ wrists for some mundane public file violations.)  End of discussion, right?

Not so fast. The Bureau obviously had reservations. In its view, even if the deal is legal, the Bureau can still consider “the impact such [shared services] agreements have on competition and diversity may be relevant in determining whether license renewal for one or either of the stations that are the subject of the transaction would be consistent with the public interest.” Exactly how the Bureau might calculate that “impact” is far from clear. And why it might be appropriate for the Bureau to consider such questions at renewal time but not before is equally unclear.

The Bureau was clearly troubled that the Main Mover wound up as the licensee of two of the top four ranked stations in the Honolulu television market. Because the deal didn’t involve an assignment of licenses – just a swap of network affiliation agreements – the new duopoly rule wasn’t invoked because it applies only “[a]t the time of application to acquire” a station.  Licensees are not required to get FCC consent to change network affiliations; in such cases, licensees are required only to file copies of the affiliation agreements with the Commission.

For what it’s worth, the Bureau says it will include these issues in the ongoing 2010 quadrennial review of all media ownership limits.

Most troubling, though, is the Bureau’s explicit threat to yank one or more licenses at renewal time because of conduct which the Bureau expressly concedes is consistent with the rules and precedent. What are the two licensees in question – or any other licensee, for that matter – supposed to do now? Obviously, the Bureau’s threat seems designed to discourage shared services arrangements. But if such arrangements aren’t illegal, where does the Bureau get off making that threat? 

If the Bureau believes that shared services arrangements raise public interest problems, shouldn’t the Bureau address those problems squarely – perhaps in a stand-alone rulemaking, or a declaratory ruling, or maybe even a policy statement – and get them resolved so that all affected licensees can know what is expected of them. After all, aren’t folks who are required to comply with regulatory rules and policies entitled to know what those rules and policies are before they can be penalized for failing to comply with those rules and policies?