Speaker 1: US broadcasters have faced FCC media ownership limits for decades,
Speaker 1: and those rules have persisted even though broadcasters face a
Speaker 1: slew of new competition from the Internet. Broadcasters took aim
Speaker 1: at some key FCC ownership rules in a court hearing
Speaker 1: this week. Will those rules survive and what lies ahead?
Speaker 1: This is a Votes and Verdicts Brief.
Speaker 2: Hello, and welcome to the Votes and Verdicts podcast hosted
Speaker 2: by Bloomberg Intelligence, part of Bloomberg's Research department, with five
Speaker 2: hundred analysts and strategists working across all major world markets.
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Speaker 2: we talk about the intersection of business policy and law.
Speaker 2: My name is Jennifer Ree and I'm a senior litigation
Speaker 2: analyst with Bloomberg Intelligence covering antitrust.
Speaker 1: I'm Matt Schuttenhelm, an analysts covering US litigation and policy
Speaker 1: in the TMT space.
Speaker 2: Our Votes and Verdicts Brief series highlights one of our
Speaker 2: research reports on the Bloomberg terminal, giving you quick takeaways
Speaker 2: to help you grasp a key litigation or policy topic. Today,
Speaker 2: US broadcast ownership rules and the industries push to finally
Speaker 2: make them go away. Matt, let's get started. There is
Speaker 2: an important court hearing this week concerning broadcast ownership rules.
Speaker 2: As I mentioned, that's what our topic is today. But
Speaker 2: before we dive into what happened at the hearing, can
Speaker 2: you just briefly remind us what media ownership rules are
Speaker 2: currently enforced at the Federal Communications Commission and which companies
Speaker 2: do they affect?
Speaker 1: Sure, Jen, So, there are two main categories of rules
Speaker 1: at here at issue here, first of all, is a
Speaker 1: rule on how many TV households across the United States
Speaker 1: one company can serve, and under the FCC rule, no
Speaker 1: company may serve more than thirty nine percent of US households. Now,
Speaker 1: that's discounted a little bit for technical reasons for a
Speaker 1: certain class of stations, but effectively it's thirty nine percent
Speaker 1: with that discount added on. And so no internet video
Speaker 1: platforms face any sort of national limitation like that, whereas
Speaker 1: US broadcasters are limited to reaching a subset of the
Speaker 1: US population. A second set of FCC rules address local markets,
Speaker 1: the DMAs in New York and Chicago across the United States,
Speaker 1: and they say how many TV and radio stations one
Speaker 1: company can own in each of those local markets. And
Speaker 1: on the TV side, the important thing to know is
Speaker 1: that the FCC rule effectively prevents one company from owning
Speaker 1: two top four ranked stations in a local market. And
Speaker 1: broadcasters say they could benefit from significant economies of scale
Speaker 1: by owning multiple stations per market. But this FCC rule,
Speaker 1: which has been on the books for decades forbids that.
Speaker 1: So what companies are we talking about that are most
Speaker 1: impacted here? For TV broadcasters, we're talking about Nextstar, Tegna, Sinclair,
Speaker 1: scripts Gray, as well as some larger companies that also
Speaker 1: own the broadcast networks like Fox and Disney. They own
Speaker 1: TV stations in local markets as well. And on the
Speaker 1: radio side, it impacts companies like iHeartMedia and Cumulus.
Speaker 2: Okay, so you talked about the thirty nine percent rule
Speaker 2: and the local ownership rules. Let's focus on that first.
Speaker 2: The court hearing that I mentioned before and that I
Speaker 2: know you listened into, was March nineteenth and the Eighth
Speaker 2: Circuit Court of Appeals. So why was that particular hearing
Speaker 2: particularly important?
Speaker 1: Yes, so you're exactly right. So this was This was
Speaker 1: a court hearing just on the local market role, not
Speaker 1: the thirty nine percent national ownership cap. And how this
Speaker 1: was teed up is that Congress wrote to statutes that
Speaker 1: makes the FCC review that local rule every four years.
Speaker 1: It's called the quadrennial review, to confirm that that rule
Speaker 1: still makes sense in light of competition, in light of
Speaker 1: the public interest, and the FCC is supposed to remove
Speaker 1: the rules that don't pass that test anymore. And in
Speaker 1: twenty twenty three, the Biden FCC finished the late version
Speaker 1: of that mandated four year review and it said, yep,
Speaker 1: we're going to keep all of these broadcast rules, and
Speaker 1: we're even going to tighten some of them. And this
Speaker 1: court case was broadcaster's challenge to that Biden era order.
Speaker 1: And what's really fascinating about the case is that the
Speaker 1: broadcasters don't just ask the court to knock out that
Speaker 1: decision by the Biden FCC. They asked the court to
Speaker 1: go further and to wipe off the rules from the
Speaker 1: books entirely. And broadcasters have actually tried this strategy before,
Speaker 1: they've tried it in a number of times, but that
Speaker 1: litigation has been stuck before the same three judge panel
Speaker 1: in the Third Circuit in Philadelphia, and those three judges
Speaker 1: have basically kept everything in place in case after case
Speaker 1: after case. But in the most recent version of this
Speaker 1: four year year review, the US Supreme Court finally stepped in,
Speaker 1: and because of that, that broke this litigation free from
Speaker 1: that three judge panel in Philadelphia. And that's how we're
Speaker 1: in the Ace Circuit now, which is a court that's
Speaker 1: very different from the Third Circuit. It's dominated by Republicans,
Speaker 1: and the case that was argued this week was heard
Speaker 1: by three Republican appointed judges. Republican appointed judges tend to
Speaker 1: be more skeptical of regulation, tend to be more business friendly.
Speaker 1: So broadcasters are already starting in a better place than
Speaker 1: they've been with their litigation stuck in the Third Circuit
Speaker 1: for case after case. And so really this is about
Speaker 1: timing in terms of the importance of this litigation, because
Speaker 1: under Brendan Carr, the new chairman of the FCC under
Speaker 1: President Trump, the FCC I do think is likely to
Speaker 1: work to ease these broadcast ownership rules. But the important
Speaker 1: thing to know is that takes time. It's a slow process.
Speaker 1: Under the Administrative Procedure Act, you have to go through
Speaker 1: a full rule making to do that, and that can
Speaker 1: take six to nine months at best, sometimes much longer
Speaker 1: than that. But if the broadcasters won a big win
Speaker 1: in this court case, everything goes much faster. If this
Speaker 1: court takes the drastic step of saying, you know what, FCC,
Speaker 1: you were supposed to review these rules and strike them
Speaker 1: down every four years. You didn't do that, So we're
Speaker 1: going to throw out those rules ourselves. And if the
Speaker 1: court did that, that would speed up the deregulation that
Speaker 1: the broadcasters would see, make it all happen much faster.
Speaker 2: All right, So their outcome here could actually, you know,
Speaker 2: be pretty impactful for the broadcasters. You listen to the
Speaker 2: oral arguments, so what was your impression? How do you
Speaker 2: think they went? And also when do you think we're
Speaker 2: going to find out a result?
Speaker 1: Yeah, so if I were the broadcasters, I would not
Speaker 1: be pop being the champagne bottles. Yet, I thought this
Speaker 1: three judge panel yesterday, listening to their questions, which isn't
Speaker 1: always an indicator of how they're going to rule, but
Speaker 1: I thought they were surprisingly even handed and moderate in
Speaker 1: their questions. Both sides faced fairly difficult questions and I
Speaker 1: think most importantly, the judges asked no questions about remedy,
Speaker 1: the remedy of just striking these rules from the books,
Speaker 1: and I think if a judge was thinking about going there,
Speaker 1: you would have at least seen the judge explore that
Speaker 1: a little bit with questions. So I think the idea
Speaker 1: of a big broadcaster win the biggest broadcaster win is
Speaker 1: not likely. Will will the broadcasters still win this case?
Speaker 1: I think so. I think the court will fault the
Speaker 1: FCC's reasoning for hanging on to this rule, and also
Speaker 1: it's tightening of the rule in some respects, but I
Speaker 1: think the remedy will be pretty modest. It will the
Speaker 1: court is very likely to not take the step itself
Speaker 1: of striking down the rules. It's likely to throw this
Speaker 1: all back to the FCC for a do over. In
Speaker 1: terms of timing, when will we see this court decision,
Speaker 1: we don't know exactly, but typically federal appeals courts take
Speaker 1: three to six months to decide cases, so I would
Speaker 1: ballpark looking for it early this summer is when will
Speaker 1: likely see that decision.
Speaker 2: So if the case goes as you expect as you
Speaker 2: just outlined, what then is next for broadcasters that are
Speaker 2: really looking to try to get these rules ease.
Speaker 1: Yeah, So, assuming that this isn't a sweeping win for
Speaker 1: the broadcasters that just wipes the rules off the books immediately,
Speaker 1: we are back to the FCC needing to deregulate itself
Speaker 1: through the Administrative Procedures Act through a rule making. So
Speaker 1: the first step there will be the FCC will need
Speaker 1: to vote to release a notice of proposed rule making
Speaker 1: to unwind both these local market rules how many stations
Speaker 1: you can own in each market, as well as the
Speaker 1: thirty nine percent national ownership cap. And the important thing
Speaker 1: to know about that rulemaking process is not only that
Speaker 1: it takes time, but also that it's because it's controversial,
Speaker 1: the FCC can't start it until it has a majority
Speaker 1: of Republicans at the FCC. Democrats are likely to oppose
Speaker 1: this effort, and currently the commission is evenly divided. It
Speaker 1: has two Republican commissioners and two Democrat commissioner commissioners. So
Speaker 1: I don't think this action will start until either the
Speaker 1: Senate confirms President Trump's new Republican FCC nominee Olivia Trustee,
Speaker 1: she's awaiting a hearing at the Senate Commerce Committee, or
Speaker 1: one of the Democrat commissioners steps down. Just this week.
Speaker 1: Jeffrey Starks, one of those Democrats, said he would be
Speaker 1: resigning his position, but he left it sort of vague,
Speaker 1: he said in the spring, and so that may be
Speaker 1: a signal he's going to wait until Olivia trustee is
Speaker 1: confirmed so as not to let the Brendan Carr the
Speaker 1: Republicans start work on this any earlier. So that remains
Speaker 1: to be seen. But this is all going to play
Speaker 1: out in the rulemaking process, most likely again barring a surprising, big,
Speaker 1: big win for the broadcasters in this a circuit case.
Speaker 1: And really to close this out, Jet, I think it
Speaker 1: makes sense to kind of pivot over to your expertise
Speaker 1: on antitrust. I think the US broadcasters have a solid
Speaker 1: chance to ease these FCC rules either one way or
Speaker 1: or or another, either through this court case or through deregulation.
Speaker 1: But that's not the end of the story, because the
Speaker 1: companies not only need to get past the FCC, they
Speaker 1: need to get past antitrust review as well. Well, let's
Speaker 1: turn to you on that. How much of a risk
Speaker 1: do you see antitrust review on this topic?
Speaker 2: Yeah, well, thanks, Matt, I mean that's right, that's kind
Speaker 2: of step one if the broadcasters are really looking to
Speaker 2: expand their ownership in the way that you've described. The
Speaker 2: FCC is step one because they also if they're going
Speaker 2: to do a deal by another broadcaster own a lot
Speaker 2: more stations, they're going to have to also go through
Speaker 2: anti trust review at the Department of Justice. Now, unlike
Speaker 2: the FCC, the DOJ doesn't have these specific rules like
Speaker 2: the thirty nine percent rule you mentioned or the local
Speaker 2: ownership rules. They have a set of merger guidelines that
Speaker 2: they use to assess a deal in any industry, right,
Speaker 2: and so those guidelines also apply to broadcast TV deals.
Speaker 2: And the thing is, the way the transactions are analyzed
Speaker 2: generally makes it difficult for any broadcaster to owner operate
Speaker 2: any more than one TV station affiliated with the Big Four.
Speaker 2: And when I talk about the Big Four, I mean CBS, ABC, NBC,
Speaker 2: and Fox, And it's just the way the analysis works
Speaker 2: would really probably end up banning ownership of more than one.
Speaker 2: And that you know, that's aside from whatever the FCC
Speaker 2: rules say or whatever they do. And what I'm talking about, though,
Speaker 2: is how the DJ has historically analyzed broadcaster deals. There
Speaker 2: have been a lot so we have a big history,
Speaker 2: and the DOJ analysis has been very consistent, you know,
Speaker 2: through administrations Republican and democratic, it's kind of been the
Speaker 2: same analysis. Now I'm going to walk through what that
Speaker 2: is and why it's hard to own more than one
Speaker 2: of those Big four stations. But I do want to
Speaker 2: say that there is kind of a wild card right
Speaker 2: now with respect to future deals, because there's always possible
Speaker 2: way in or influenced by President Trump, and that could
Speaker 2: have some change in what has historically been the assessment
Speaker 2: of the deals. But let me just talk about these
Speaker 2: Big four stations. The DOJ views them as being in
Speaker 2: a class by themselves and having greater importance to consumers
Speaker 2: and advertisers and a broadcasters than any of the other
Speaker 2: stations I'm talking about other broadcast stations or cable network programming,
Speaker 2: because what the DOJ says is that Big Four content
Speaker 2: has special appeal to viewers. And that's really mostly because
Speaker 2: they carry the local sports and the local news. They
Speaker 2: carry sports, and the popular prime time programs they carry
Speaker 2: are those that are intended to have a mass broad
Speaker 2: appeal rather than just appeal to niche markets, and other
Speaker 2: stations largely don't have that kind of programming. And the
Speaker 2: other thing that they observe is that the Big Four
Speaker 2: or the highest rank in terms of audience share in
Speaker 2: ratings in each local area. Matt, you called those DMAs.
Speaker 2: That's what I'll go ahead and call these local areas DMAs.
Speaker 2: And that's based on Nielsen ratings. Now, because of this,
Speaker 2: because of this special appeal, the cable companies, light companies,
Speaker 2: fiber optic, TV, YouTube or Hulu, you know, any entity
Speaker 2: that offers up a package of stations for consumers to
Speaker 2: buy for a price, they regard the Big Four programming
Speaker 2: as it must have. They have to include those in
Speaker 2: packages they offer subscribers. Now, I'm going to call those
Speaker 2: companies MVPDs, and I'm referring to cable, satellite, fiber optic,
Speaker 2: and some of these over the top providers that package stations.
Speaker 2: So what that means is that when an MVPD and
Speaker 2: a broadcast station group have a contract and they're negotiating
Speaker 2: a retransmission fee at you know, the expiration of the
Speaker 2: agreement or at a new agreement, and they can't come
Speaker 2: to terms, the result can be a blackout. Right, We've
Speaker 2: all seen that. We've seen that in sports it's very
Speaker 2: frustrating when in your local area as station's blacked out,
Speaker 2: and if the broadcaster has just one Big four station,
Speaker 2: it doesn't really hurt the MVPD very much because viewers,
Speaker 2: if they're watching CBS it's blacked out, they can move
Speaker 2: over to NBC or ABC or to Fox, and that
Speaker 2: really limits a broadcasters of ability to extract higher fees
Speaker 2: from the MVPD. Now, if a transaction would give a
Speaker 2: broadcaster the ability to black out more than one of
Speaker 2: those Big four stations simultaneously, what that does is it
Speaker 2: increases their bargaining leverage with the MVPDs and that will
Speaker 2: likely lead to increased retransmission fees, and those fees generally
Speaker 2: or pass through to consumers. So it means the consumer's
Speaker 2: price goes up, and that's consumer arm and that's what
Speaker 2: the anti trust enforcers are trying to prevent. That's the
Speaker 2: main concern, the first concern the DJ has. They do
Speaker 2: have a second one, though, and that's in relation to
Speaker 2: the sale of broadcast television spot advertising. So these are
Speaker 2: local ads I'm talking about, not national commercials, And it's
Speaker 2: kind of the same analysis that I just walked through.
Speaker 2: If a broadcaster has control of more than one of
Speaker 2: these big four stations, it would result in higher prices
Speaker 2: to local businesses and other advertisers that are just trying
Speaker 2: to reach audiences in that DMA. And again it's because
Speaker 2: these stations are special for certain advertisers who want to
Speaker 2: target a broad audience in a local area, and the
Speaker 2: advertisers view these stations is more important to them than
Speaker 2: advertising on other stations. Now, I will say this, the
Speaker 2: advertising markets are changing a lot, and this second concern
Speaker 2: could fall to the wayside, you know, as viewing habits
Speaker 2: of consumers keep evolving and the advertising market continues to change.
Speaker 2: But even if that drops off as a concern of
Speaker 2: the DOJ, you still have this issue of the retransmission fees.
Speaker 2: And that's a big one because it translates directly into
Speaker 2: higher prices for people, and I don't see that when
Speaker 2: going away now, just to close this out, Matt, I
Speaker 2: did mention that there's kind of a wild card in
Speaker 2: that Recently, President Trump has sought to exert significant control
Speaker 2: of regulatory bodies executive branch agencies, and as part of
Speaker 2: kind of that, he may try to weigh in on
Speaker 2: specific deals and push his DOJ to reach his desired result,
Speaker 2: and of course that could lead to a change in
Speaker 2: this analysis that the DOJ's really implemented for years now.
Speaker 2: It remains to be seen whether this happens or not,
Speaker 2: whether if he tries to exert influence, whether his DJ
Speaker 2: will do his bidding, perhaps going against what the antitrust
Speaker 2: laws would say they should do. But I raised this
Speaker 2: because we did see a little bit of this pattern
Speaker 2: during Trump's first term, so it is possible. But you know,
Speaker 2: I'll say that the deals can still get done. But
Speaker 2: the difference is no matter what the FCC is done
Speaker 2: in relaxing their rules. If they do, the companies normally
Speaker 2: would have to agree to divest stations in order to
Speaker 2: get a deal done, where the overlaps result in this
Speaker 2: ownership of more than one of the big four broadcast
Speaker 2: TV stations in any DMA. So you know, I suspect
Speaker 2: that would be the case going forward. But with the
Speaker 2: caveat of the Trump.
Speaker 1: Wildcard, that's really helpful. Jen, Thank you so much, because
Speaker 1: that's an important piece of this story. Just getting past
Speaker 1: the FCC is not enough. You got to win an
Speaker 1: antitrust review as well. So with that, let's close it out.
Speaker 1: Thank you Jen for joining me today. That's today's Votes
Speaker 1: and Verdicts brief. For our full report on the topic
Speaker 1: and all of our research, please visit bi laws on
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