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Supreme Court Tosses Out TV Station Caps

20 Feb, 2002 By: Brooks Boliek

In a ruling that promises to further shake up the media landscape, the federal appeals court in Washington, D.C. Tuesday threw out the FCC's regulation that prevents broadcast and cable operators from owning each other and sent back to the commission for reworking the regulation that effectively limits the number of television stations one company can own.

"We conclude that the commission's decision to retain the rules was arbitrary and capricious and contrary to law," a three-judge panel wrote. "We remand the national television-station ownership rule to the commission for further consideration, and we vacate the cable/broadcast cross-ownership rule because we think it unlikely the commission will be able on remand to justify retaining it."

The elimination of the FCC's ban on companies owning cable systems and broadcast TV stations in the same market eliminates the barriers to a cable behemoth like AOL Time Warner, which pressed the legal challenge to the rule, from acquiring a major broadcast station owner such as NBC or Tribune Co.

The court's decision to order the FCC to review its broadcast TV station ownership cap, meanwhile, is a victory for the major networks and is a blow to smaller broadcast outfits that fear the networks will squeeze them out of the marketplace.

Fox Television Stations Inc., National Broadcasting Co., Viacom Inc. and CBS Broadcasting Inc. challenged the rule that says one broadcast company can reach no more than 35% of the U.S. audience. The 35% cap effectively limits the number of stations one company can own. Through recent acquisitions, Viacom and News Corp. now each own stations that reach about 39% of the national audience.

The networks argued that both regulations are unconstitutional because they limit the number of people they can "speak to." While the court was unprepared to buy that argument wholesale, it found that the FCC has failed to justify why the cap is needed to satisfy the public interest, increase competition or ensure diversity in the marketplace.

"We agree with the networks that the commission has adduced not a single valid reason to believe the (35% cap) is necessary in the public interest, either to safeguard competition or to enhance diversity," the court wrote. "Although we agree with the commission that protecting diversity is a permissible policy, the commission did not provide an adequate basis for believing the rule would in fact further that cause."

The issue of retaining or abolishing the 35% cap has divided the broadcast industry because many of the big operators want it to be eliminated, but others see it as a critical check on the networks' power.

"The 35% television ownership cap has been critically important in preserving the network-affiliate relationship that has made the U.S. system of free, over-the-air broadcasting the envy of the world," National Association of Broadcasters chief Edward Fritts said. "This rule has been instrumental in promoting localism and diversity. The NAB will continue to build a solid record to convince the FCC, Congress and the courts to preserve the 35% cap."

Fritts expressed disappointment about the court's decision to overturn the cable/broadcast cross-ownership rule.

"We're also disappointed the court vacated the cable/broadcast cross-ownership rules, particularly given the absence of cable digital television carriage rules," he said.

But the networks and their parent companies contend that the current ownership rules do not make sense in the modern media marketplace.

"We believe strongly that the FCC should eliminate its archaic restrictions on broadcast ownership, rules that date back to the 1940s and are clearly an anachronism in today's world of ever-expanding media choices," Viacom said in a statement.

Fox parent News Corp. also argues that the cap is a relic.

"We have long believed that the national broadcast-ownership cap is outdated and no longer serves the public interest," the company said in a statement. "We are pleased the court agreed with our view and now look forward to a speedy resolution of this issue from the FCC."

While most observers believe that the FCC will ease the ownership cap, it might not do away with it altogether. FCC chairman Michael Powell has indicated that he is willing to take a critical look at the cap; in 2000, when the commission voted to retain the limit, Powell dissented, saying the commission had failed to justify its decision.

That decision "merely assumes a valid link between a national limit and local competition and diversity, despite fairly substantial evidence to the contrary," Powell wrote at the time. "And it fails to consider the public-interest harms that may flow from the rule. I believe there is more than enough on the record of this proceeding to call into question whether the public is being served by the 35% audience-reach cap, and I would have supported a (proceeding) to examine more thoroughly the possibility of its modification or repeal."

Supporters of the ownership rules said the court's decision Tuesday goes too far, effectively stripping the FCC of its power.

"The (D.C. Circuit) Court of Appeals continues its Sherman's march through the FCC rulebook, squashing congressional powers and the public's First Amendment access rights along the way," said Andrew Jay Schwartzman, an attorney who filed a brief on behalf of the Consumer Federation of America. "It says anybody who doesn't like any rule in the entire FCC rulebook can go to court every two years without having to go through a rulemaking (proceeding). It leaves the FCC with no control over its docket."

Blair Levin, an analyst at Legg Mason and a former FCC official, said the decision "is likely to lead to a dramatic change in the underlying economics and structure of the traditional mass media, with the large broadcast television networks and cable operators the primary beneficiaries. ... We believe the remand of the national broadcast-TV ownership rule will result in significant FCC relaxation of the current 35% cap, giving the major broadcast networks greater economic power over affiliates."

Because it had been widely expected on Wall Street, the appeals court's decision to send the 35% broadcast cap back to the FCC for reconsideration should lead to further consolidation among station owners, but not immediately, Kaufmann & Co. analyst Paul Kim said.

"Right now the potential sellers are asking too high a price, and the sellers are offering too little," Kim said. "That has to narrow before deals will get done. Over time, consolidation is a natural consequence of what's going on in the industry."

Of more far-reaching consequence may be the court's decision to throw out the ban on cable-broadcast cross-ownership, analysts said.

"Many expected that just to be remanded back to the FCC, so striking it down was a surprise -- what's amazing is the language," Bear Stearns analyst Victor Miller said, referring to judges' characterizing the cross-ownership ban as a "hopeless cause" of the FCC.

(Jesse Hiestand and Cynthia Littleton in Los Angeles contributed to this report.)

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