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.