WEBVTT - Broadcasters Take Shot at FCC Media Limits

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<v Speaker 1>US broadcasters have faced FCC media ownership limits for decades,

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<v Speaker 1>and those rules have persisted even though broadcasters face a

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<v Speaker 1>slew of new competition from the Internet. Broadcasters took aim

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<v Speaker 1>at some key FCC ownership rules in a court hearing

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<v Speaker 1>this week. Will those rules survive and what lies ahead?

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<v Speaker 1>This is a Votes and Verdicts Brief.

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<v Speaker 2>Hello, and welcome to the Votes and Verdicts podcast hosted

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<v Speaker 2>by Bloomberg Intelligence, part of Bloomberg's Research department, with five

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<v Speaker 2>hundred analysts and strategists working across all major world markets.

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<v Speaker 2>Our coverage includes over two thousand equities and credits, as

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<v Speaker 2>well as outlooks on more than ninety industries and one

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<v Speaker 2>hundred market induses, currency, and commodities. In this podcast series,

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<v Speaker 2>we talk about the intersection of business policy and law.

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<v Speaker 2>My name is Jennifer Ree and I'm a senior litigation

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<v Speaker 2>analyst with Bloomberg Intelligence covering antitrust.

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<v Speaker 1>I'm Matt Schuttenhelm, an analysts covering US litigation and policy

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<v Speaker 1>in the TMT space.

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<v Speaker 2>Our Votes and Verdicts Brief series highlights one of our

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<v Speaker 2>research reports on the Bloomberg terminal, giving you quick takeaways

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<v Speaker 2>to help you grasp a key litigation or policy topic. Today,

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<v Speaker 2>US broadcast ownership rules and the industries push to finally

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<v Speaker 2>make them go away. Matt, let's get started. There is

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<v Speaker 2>an important court hearing this week concerning broadcast ownership rules.

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<v Speaker 2>As I mentioned, that's what our topic is today. But

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<v Speaker 2>before we dive into what happened at the hearing, can

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<v Speaker 2>you just briefly remind us what media ownership rules are

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<v Speaker 2>currently enforced at the Federal Communications Commission and which companies

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<v Speaker 2>do they affect?

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<v Speaker 1>Sure, Jen, So, there are two main categories of rules

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<v Speaker 1>at here at issue here, first of all, is a

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<v Speaker 1>rule on how many TV households across the United States

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<v Speaker 1>one company can serve, and under the FCC rule, no

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<v Speaker 1>company may serve more than thirty nine percent of US households. Now,

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<v Speaker 1>that's discounted a little bit for technical reasons for a

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<v Speaker 1>certain class of stations, but effectively it's thirty nine percent

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<v Speaker 1>with that discount added on. And so no internet video

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<v Speaker 1>platforms face any sort of national limitation like that, whereas

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<v Speaker 1>US broadcasters are limited to reaching a subset of the

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<v Speaker 1>US population. A second set of FCC rules address local markets,

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<v Speaker 1>the DMAs in New York and Chicago across the United States,

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<v Speaker 1>and they say how many TV and radio stations one

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<v Speaker 1>company can own in each of those local markets. And

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<v Speaker 1>on the TV side, the important thing to know is

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<v Speaker 1>that the FCC rule effectively prevents one company from owning

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<v Speaker 1>two top four ranked stations in a local market. And

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<v Speaker 1>broadcasters say they could benefit from significant economies of scale

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<v Speaker 1>by owning multiple stations per market. But this FCC rule,

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<v Speaker 1>which has been on the books for decades forbids that.

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<v Speaker 1>So what companies are we talking about that are most

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<v Speaker 1>impacted here? For TV broadcasters, we're talking about Nextstar, Tegna, Sinclair,

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<v Speaker 1>scripts Gray, as well as some larger companies that also

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<v Speaker 1>own the broadcast networks like Fox and Disney. They own

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<v Speaker 1>TV stations in local markets as well. And on the

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<v Speaker 1>radio side, it impacts companies like iHeartMedia and Cumulus.

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<v Speaker 2>Okay, so you talked about the thirty nine percent rule

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<v Speaker 2>and the local ownership rules. Let's focus on that first.

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<v Speaker 2>The court hearing that I mentioned before and that I

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<v Speaker 2>know you listened into, was March nineteenth and the Eighth

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<v Speaker 2>Circuit Court of Appeals. So why was that particular hearing

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<v Speaker 2>particularly important?

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<v Speaker 1>Yes, so you're exactly right. So this was This was

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<v Speaker 1>a court hearing just on the local market role, not

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<v Speaker 1>the thirty nine percent national ownership cap. And how this

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<v Speaker 1>was teed up is that Congress wrote to statutes that

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<v Speaker 1>makes the FCC review that local rule every four years.

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<v Speaker 1>It's called the quadrennial review, to confirm that that rule

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<v Speaker 1>still makes sense in light of competition, in light of

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<v Speaker 1>the public interest, and the FCC is supposed to remove

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<v Speaker 1>the rules that don't pass that test anymore. And in

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<v Speaker 1>twenty twenty three, the Biden FCC finished the late version

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<v Speaker 1>of that mandated four year review and it said, yep,

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<v Speaker 1>we're going to keep all of these broadcast rules, and

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<v Speaker 1>we're even going to tighten some of them. And this

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<v Speaker 1>court case was broadcaster's challenge to that Biden era order.

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<v Speaker 1>And what's really fascinating about the case is that the

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<v Speaker 1>broadcasters don't just ask the court to knock out that

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<v Speaker 1>decision by the Biden FCC. They asked the court to

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<v Speaker 1>go further and to wipe off the rules from the

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<v Speaker 1>books entirely. And broadcasters have actually tried this strategy before,

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<v Speaker 1>they've tried it in a number of times, but that

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<v Speaker 1>litigation has been stuck before the same three judge panel

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<v Speaker 1>in the Third Circuit in Philadelphia, and those three judges

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<v Speaker 1>have basically kept everything in place in case after case

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<v Speaker 1>after case. But in the most recent version of this

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<v Speaker 1>four year year review, the US Supreme Court finally stepped in,

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<v Speaker 1>and because of that, that broke this litigation free from

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<v Speaker 1>that three judge panel in Philadelphia. And that's how we're

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<v Speaker 1>in the Ace Circuit now, which is a court that's

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<v Speaker 1>very different from the Third Circuit. It's dominated by Republicans,

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<v Speaker 1>and the case that was argued this week was heard

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<v Speaker 1>by three Republican appointed judges. Republican appointed judges tend to

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<v Speaker 1>be more skeptical of regulation, tend to be more business friendly.

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<v Speaker 1>So broadcasters are already starting in a better place than

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<v Speaker 1>they've been with their litigation stuck in the Third Circuit

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<v Speaker 1>for case after case. And so really this is about

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<v Speaker 1>timing in terms of the importance of this litigation, because

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<v Speaker 1>under Brendan Carr, the new chairman of the FCC under

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<v Speaker 1>President Trump, the FCC I do think is likely to

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<v Speaker 1>work to ease these broadcast ownership rules. But the important

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<v Speaker 1>thing to know is that takes time. It's a slow process.

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<v Speaker 1>Under the Administrative Procedure Act, you have to go through

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<v Speaker 1>a full rule making to do that, and that can

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<v Speaker 1>take six to nine months at best, sometimes much longer

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<v Speaker 1>than that. But if the broadcasters won a big win

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<v Speaker 1>in this court case, everything goes much faster. If this

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<v Speaker 1>court takes the drastic step of saying, you know what, FCC,

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<v Speaker 1>you were supposed to review these rules and strike them

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<v Speaker 1>down every four years. You didn't do that, So we're

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<v Speaker 1>going to throw out those rules ourselves. And if the

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<v Speaker 1>court did that, that would speed up the deregulation that

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<v Speaker 1>the broadcasters would see, make it all happen much faster.

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<v Speaker 2>All right, So their outcome here could actually, you know,

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<v Speaker 2>be pretty impactful for the broadcasters. You listen to the

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<v Speaker 2>oral arguments, so what was your impression? How do you

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<v Speaker 2>think they went? And also when do you think we're

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<v Speaker 2>going to find out a result?

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<v Speaker 1>Yeah, so if I were the broadcasters, I would not

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<v Speaker 1>be pop being the champagne bottles. Yet, I thought this

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<v Speaker 1>three judge panel yesterday, listening to their questions, which isn't

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<v Speaker 1>always an indicator of how they're going to rule, but

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<v Speaker 1>I thought they were surprisingly even handed and moderate in

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<v Speaker 1>their questions. Both sides faced fairly difficult questions and I

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<v Speaker 1>think most importantly, the judges asked no questions about remedy,

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<v Speaker 1>the remedy of just striking these rules from the books,

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<v Speaker 1>and I think if a judge was thinking about going there,

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<v Speaker 1>you would have at least seen the judge explore that

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<v Speaker 1>a little bit with questions. So I think the idea

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<v Speaker 1>of a big broadcaster win the biggest broadcaster win is

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<v Speaker 1>not likely. Will will the broadcasters still win this case?

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<v Speaker 1>I think so. I think the court will fault the

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<v Speaker 1>FCC's reasoning for hanging on to this rule, and also

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<v Speaker 1>it's tightening of the rule in some respects, but I

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<v Speaker 1>think the remedy will be pretty modest. It will the

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<v Speaker 1>court is very likely to not take the step itself

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<v Speaker 1>of striking down the rules. It's likely to throw this

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<v Speaker 1>all back to the FCC for a do over. In

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<v Speaker 1>terms of timing, when will we see this court decision,

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<v Speaker 1>we don't know exactly, but typically federal appeals courts take

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<v Speaker 1>three to six months to decide cases, so I would

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<v Speaker 1>ballpark looking for it early this summer is when will

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<v Speaker 1>likely see that decision.

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<v Speaker 2>So if the case goes as you expect as you

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<v Speaker 2>just outlined, what then is next for broadcasters that are

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<v Speaker 2>really looking to try to get these rules ease.

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<v Speaker 1>Yeah, So, assuming that this isn't a sweeping win for

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<v Speaker 1>the broadcasters that just wipes the rules off the books immediately,

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<v Speaker 1>we are back to the FCC needing to deregulate itself

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<v Speaker 1>through the Administrative Procedures Act through a rule making. So

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<v Speaker 1>the first step there will be the FCC will need

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<v Speaker 1>to vote to release a notice of proposed rule making

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<v Speaker 1>to unwind both these local market rules how many stations

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<v Speaker 1>you can own in each market, as well as the

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<v Speaker 1>thirty nine percent national ownership cap. And the important thing

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<v Speaker 1>to know about that rulemaking process is not only that

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<v Speaker 1>it takes time, but also that it's because it's controversial,

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<v Speaker 1>the FCC can't start it until it has a majority

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<v Speaker 1>of Republicans at the FCC. Democrats are likely to oppose

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<v Speaker 1>this effort, and currently the commission is evenly divided. It

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<v Speaker 1>has two Republican commissioners and two Democrat commissioner commissioners. So

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<v Speaker 1>I don't think this action will start until either the

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<v Speaker 1>Senate confirms President Trump's new Republican FCC nominee Olivia Trustee,

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<v Speaker 1>she's awaiting a hearing at the Senate Commerce Committee, or

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<v Speaker 1>one of the Democrat commissioners steps down. Just this week.

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<v Speaker 1>Jeffrey Starks, one of those Democrats, said he would be

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<v Speaker 1>resigning his position, but he left it sort of vague,

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<v Speaker 1>he said in the spring, and so that may be

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<v Speaker 1>a signal he's going to wait until Olivia trustee is

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<v Speaker 1>confirmed so as not to let the Brendan Carr the

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<v Speaker 1>Republicans start work on this any earlier. So that remains

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<v Speaker 1>to be seen. But this is all going to play

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<v Speaker 1>out in the rulemaking process, most likely again barring a surprising, big,

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<v Speaker 1>big win for the broadcasters in this a circuit case.

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<v Speaker 1>And really to close this out, Jet, I think it

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<v Speaker 1>makes sense to kind of pivot over to your expertise

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<v Speaker 1>on antitrust. I think the US broadcasters have a solid

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<v Speaker 1>chance to ease these FCC rules either one way or

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<v Speaker 1>or or another, either through this court case or through deregulation.

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<v Speaker 1>But that's not the end of the story, because the

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<v Speaker 1>companies not only need to get past the FCC, they

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<v Speaker 1>need to get past antitrust review as well. Well, let's

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<v Speaker 1>turn to you on that. How much of a risk

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<v Speaker 1>do you see antitrust review on this topic?

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<v Speaker 2>Yeah, well, thanks, Matt, I mean that's right, that's kind

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<v Speaker 2>of step one if the broadcasters are really looking to

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<v Speaker 2>expand their ownership in the way that you've described. The

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<v Speaker 2>FCC is step one because they also if they're going

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<v Speaker 2>to do a deal by another broadcaster own a lot

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<v Speaker 2>more stations, they're going to have to also go through

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<v Speaker 2>anti trust review at the Department of Justice. Now, unlike

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<v Speaker 2>the FCC, the DOJ doesn't have these specific rules like

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<v Speaker 2>the thirty nine percent rule you mentioned or the local

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<v Speaker 2>ownership rules. They have a set of merger guidelines that

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<v Speaker 2>they use to assess a deal in any industry, right,

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<v Speaker 2>and so those guidelines also apply to broadcast TV deals.

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<v Speaker 2>And the thing is, the way the transactions are analyzed

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<v Speaker 2>generally makes it difficult for any broadcaster to owner operate

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<v Speaker 2>any more than one TV station affiliated with the Big Four.

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<v Speaker 2>And when I talk about the Big Four, I mean CBS, ABC, NBC,

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<v Speaker 2>and Fox, And it's just the way the analysis works

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<v Speaker 2>would really probably end up banning ownership of more than one.

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<v Speaker 2>And that you know, that's aside from whatever the FCC

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<v Speaker 2>rules say or whatever they do. And what I'm talking about, though,

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<v Speaker 2>is how the DJ has historically analyzed broadcaster deals. There

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<v Speaker 2>have been a lot so we have a big history,

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<v Speaker 2>and the DOJ analysis has been very consistent, you know,

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<v Speaker 2>through administrations Republican and democratic, it's kind of been the

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<v Speaker 2>same analysis. Now I'm going to walk through what that

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<v Speaker 2>is and why it's hard to own more than one

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<v Speaker 2>of those Big four stations. But I do want to

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<v Speaker 2>say that there is kind of a wild card right

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<v Speaker 2>now with respect to future deals, because there's always possible

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<v Speaker 2>way in or influenced by President Trump, and that could

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<v Speaker 2>have some change in what has historically been the assessment

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<v Speaker 2>of the deals. But let me just talk about these

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<v Speaker 2>Big four stations. The DOJ views them as being in

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<v Speaker 2>a class by themselves and having greater importance to consumers

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<v Speaker 2>and advertisers and a broadcasters than any of the other

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<v Speaker 2>stations I'm talking about other broadcast stations or cable network programming,

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<v Speaker 2>because what the DOJ says is that Big Four content

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<v Speaker 2>has special appeal to viewers. And that's really mostly because

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<v Speaker 2>they carry the local sports and the local news. They

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<v Speaker 2>carry sports, and the popular prime time programs they carry

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<v Speaker 2>are those that are intended to have a mass broad

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<v Speaker 2>appeal rather than just appeal to niche markets, and other

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<v Speaker 2>stations largely don't have that kind of programming. And the

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<v Speaker 2>other thing that they observe is that the Big Four

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<v Speaker 2>or the highest rank in terms of audience share in

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<v Speaker 2>ratings in each local area. Matt, you called those DMAs.

0:14:50.280 --> 0:14:53.200
<v Speaker 2>That's what I'll go ahead and call these local areas DMAs.

0:14:53.240 --> 0:14:56.600
<v Speaker 2>And that's based on Nielsen ratings. Now, because of this,

0:14:56.680 --> 0:15:00.800
<v Speaker 2>because of this special appeal, the cable companies, light companies,

0:15:00.800 --> 0:15:04.440
<v Speaker 2>fiber optic, TV, YouTube or Hulu, you know, any entity

0:15:04.480 --> 0:15:07.160
<v Speaker 2>that offers up a package of stations for consumers to

0:15:07.200 --> 0:15:10.360
<v Speaker 2>buy for a price, they regard the Big Four programming

0:15:10.360 --> 0:15:12.520
<v Speaker 2>as it must have. They have to include those in

0:15:12.600 --> 0:15:15.360
<v Speaker 2>packages they offer subscribers. Now, I'm going to call those

0:15:15.400 --> 0:15:19.880
<v Speaker 2>companies MVPDs, and I'm referring to cable, satellite, fiber optic,

0:15:19.960 --> 0:15:24.080
<v Speaker 2>and some of these over the top providers that package stations.

0:15:25.160 --> 0:15:28.720
<v Speaker 2>So what that means is that when an MVPD and

0:15:28.760 --> 0:15:32.120
<v Speaker 2>a broadcast station group have a contract and they're negotiating

0:15:32.120 --> 0:15:35.760
<v Speaker 2>a retransmission fee at you know, the expiration of the

0:15:35.800 --> 0:15:38.600
<v Speaker 2>agreement or at a new agreement, and they can't come

0:15:38.600 --> 0:15:40.960
<v Speaker 2>to terms, the result can be a blackout. Right, We've

0:15:40.960 --> 0:15:42.920
<v Speaker 2>all seen that. We've seen that in sports it's very

0:15:42.920 --> 0:15:45.840
<v Speaker 2>frustrating when in your local area as station's blacked out,

0:15:46.560 --> 0:15:49.320
<v Speaker 2>and if the broadcaster has just one Big four station,

0:15:49.680 --> 0:15:52.720
<v Speaker 2>it doesn't really hurt the MVPD very much because viewers,

0:15:52.720 --> 0:15:54.960
<v Speaker 2>if they're watching CBS it's blacked out, they can move

0:15:55.000 --> 0:15:58.440
<v Speaker 2>over to NBC or ABC or to Fox, and that

0:15:58.520 --> 0:16:01.560
<v Speaker 2>really limits a broadcasters of ability to extract higher fees

0:16:01.600 --> 0:16:04.720
<v Speaker 2>from the MVPD. Now, if a transaction would give a

0:16:04.760 --> 0:16:07.560
<v Speaker 2>broadcaster the ability to black out more than one of

0:16:07.600 --> 0:16:10.960
<v Speaker 2>those Big four stations simultaneously, what that does is it

0:16:11.000 --> 0:16:14.360
<v Speaker 2>increases their bargaining leverage with the MVPDs and that will

0:16:14.400 --> 0:16:18.720
<v Speaker 2>likely lead to increased retransmission fees, and those fees generally

0:16:18.800 --> 0:16:21.320
<v Speaker 2>or pass through to consumers. So it means the consumer's

0:16:21.360 --> 0:16:23.920
<v Speaker 2>price goes up, and that's consumer arm and that's what

0:16:23.960 --> 0:16:27.080
<v Speaker 2>the anti trust enforcers are trying to prevent. That's the

0:16:27.120 --> 0:16:29.920
<v Speaker 2>main concern, the first concern the DJ has. They do

0:16:30.000 --> 0:16:32.640
<v Speaker 2>have a second one, though, and that's in relation to

0:16:32.640 --> 0:16:35.840
<v Speaker 2>the sale of broadcast television spot advertising. So these are

0:16:35.920 --> 0:16:39.680
<v Speaker 2>local ads I'm talking about, not national commercials, And it's

0:16:39.760 --> 0:16:41.880
<v Speaker 2>kind of the same analysis that I just walked through.

0:16:41.960 --> 0:16:44.440
<v Speaker 2>If a broadcaster has control of more than one of

0:16:44.480 --> 0:16:47.760
<v Speaker 2>these big four stations, it would result in higher prices

0:16:47.800 --> 0:16:51.160
<v Speaker 2>to local businesses and other advertisers that are just trying

0:16:51.160 --> 0:16:54.600
<v Speaker 2>to reach audiences in that DMA. And again it's because

0:16:54.640 --> 0:16:58.040
<v Speaker 2>these stations are special for certain advertisers who want to

0:16:58.040 --> 0:17:01.760
<v Speaker 2>target a broad audience in a local area, and the

0:17:01.800 --> 0:17:05.240
<v Speaker 2>advertisers view these stations is more important to them than

0:17:05.280 --> 0:17:08.159
<v Speaker 2>advertising on other stations. Now, I will say this, the

0:17:08.240 --> 0:17:11.479
<v Speaker 2>advertising markets are changing a lot, and this second concern

0:17:11.600 --> 0:17:14.840
<v Speaker 2>could fall to the wayside, you know, as viewing habits

0:17:14.880 --> 0:17:18.920
<v Speaker 2>of consumers keep evolving and the advertising market continues to change.

0:17:19.040 --> 0:17:22.399
<v Speaker 2>But even if that drops off as a concern of

0:17:22.440 --> 0:17:25.360
<v Speaker 2>the DOJ, you still have this issue of the retransmission fees.

0:17:25.400 --> 0:17:27.880
<v Speaker 2>And that's a big one because it translates directly into

0:17:27.960 --> 0:17:31.000
<v Speaker 2>higher prices for people, and I don't see that when

0:17:31.000 --> 0:17:33.920
<v Speaker 2>going away now, just to close this out, Matt, I

0:17:34.000 --> 0:17:36.439
<v Speaker 2>did mention that there's kind of a wild card in

0:17:36.520 --> 0:17:40.560
<v Speaker 2>that Recently, President Trump has sought to exert significant control

0:17:41.000 --> 0:17:45.679
<v Speaker 2>of regulatory bodies executive branch agencies, and as part of

0:17:45.760 --> 0:17:48.119
<v Speaker 2>kind of that, he may try to weigh in on

0:17:48.200 --> 0:17:52.200
<v Speaker 2>specific deals and push his DOJ to reach his desired result,

0:17:52.760 --> 0:17:54.720
<v Speaker 2>and of course that could lead to a change in

0:17:54.760 --> 0:17:59.240
<v Speaker 2>this analysis that the DOJ's really implemented for years now.

0:17:59.280 --> 0:18:01.840
<v Speaker 2>It remains to be seen whether this happens or not,

0:18:02.359 --> 0:18:05.320
<v Speaker 2>whether if he tries to exert influence, whether his DJ

0:18:05.480 --> 0:18:09.200
<v Speaker 2>will do his bidding, perhaps going against what the antitrust

0:18:09.280 --> 0:18:12.600
<v Speaker 2>laws would say they should do. But I raised this

0:18:12.680 --> 0:18:14.639
<v Speaker 2>because we did see a little bit of this pattern

0:18:14.760 --> 0:18:17.480
<v Speaker 2>during Trump's first term, so it is possible. But you know,

0:18:17.480 --> 0:18:19.919
<v Speaker 2>I'll say that the deals can still get done. But

0:18:19.960 --> 0:18:22.359
<v Speaker 2>the difference is no matter what the FCC is done

0:18:22.359 --> 0:18:26.920
<v Speaker 2>in relaxing their rules. If they do, the companies normally

0:18:26.960 --> 0:18:29.879
<v Speaker 2>would have to agree to divest stations in order to

0:18:29.880 --> 0:18:33.320
<v Speaker 2>get a deal done, where the overlaps result in this

0:18:33.400 --> 0:18:36.040
<v Speaker 2>ownership of more than one of the big four broadcast

0:18:36.080 --> 0:18:39.800
<v Speaker 2>TV stations in any DMA. So you know, I suspect

0:18:39.800 --> 0:18:41.760
<v Speaker 2>that would be the case going forward. But with the

0:18:41.760 --> 0:18:43.399
<v Speaker 2>caveat of the Trump.

0:18:43.160 --> 0:18:47.120
<v Speaker 1>Wildcard, that's really helpful. Jen, Thank you so much, because

0:18:47.200 --> 0:18:50.040
<v Speaker 1>that's an important piece of this story. Just getting past

0:18:50.040 --> 0:18:53.840
<v Speaker 1>the FCC is not enough. You got to win an

0:18:54.240 --> 0:18:58.439
<v Speaker 1>antitrust review as well. So with that, let's close it out.

0:18:58.520 --> 0:19:01.800
<v Speaker 1>Thank you Jen for joining me today. That's today's Votes

0:19:01.840 --> 0:19:04.959
<v Speaker 1>and Verdicts brief. For our full report on the topic

0:19:05.040 --> 0:19:08.399
<v Speaker 1>and all of our research, please visit bi laws on

0:19:08.440 --> 0:19:11.720
<v Speaker 1>the Bloomberg terminal and thank you for tuning in to

0:19:11.880 --> 0:19:12.840
<v Speaker 1>Votes and Verdicts.