Duopportunity knocks

Court ruling could open door to small-market combos
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TV operators in some small markets may soon be able to add a second station, bringing them the same one-two ad punch and back-office efficiencies major metro owners have enjoyed for three years.

Last week, the federal appeals court in Washington ordered the FCC to rewrite its "eight-voice" test, governing ownership of two stations in a market. The rule limits one company's ownership of two local TV stations to markets where eight separately owned stations remain.

Broadcasters say they need the economies of scale that duopolies create to profit and pay for the switch to DTV in markets too small to pass the voice test. Although the decision still faces the uncertainty of court appeals and an FCC remand, some companies are already champing at the bit.

"We'll be there in a heartbeat," said Gary Chapman, chief executive of LIN Television. LIN has been a TV-duopoly pioneer since launching local marketing agreements in the early '90s. Today, LIN operates five station pairings and aims to set up similar arrangement in more markets.

Relaxed rules could herald a new round of consolidation in small markets, as well as give a reprieve to more than a dozen local marketing agreements under orders to disband. LMAs allow an owner to operate another company's station, and most were established to get around what was once an outright ban on owning two stations in a market. The eight-voice test replaced the duopoly ban in 1999. LMAs also must comply with the voice test.

Without relief, pairs operated by Pappas Telecasting in Lincoln, Neb., Communications Corp. of America in several small Louisiana and Texas towns, and Sinclair Broadcasting in seven markets must unwind.

"The rules governing television ownership are outdated, without basis, and anticompetitive in today's media environment," said Sinclair CEO David Smith.

Coupled with other likely deregulatory moves, such as elimination of bans on crossownership of broadcast stations by local newspapers and cable systems and relaxation of limits on national broadcast TV-household reach, the stage could be set for the most massive round of consolidation since the concentration of radio following the 1996 Telecommunications Act.

"If you get real in-market duopoly, along with newspaper/TV crossownership," said John Chachas, a Merrill Lynch investment banker specializing in media deals, "you could see a handful or two handfuls of players spending capital to get bigger in their markets because it makes for a better business."

A three-judge panel of the federal appeals court in Washington called FCC rules limiting ownership of two local TV stations "arbitrary and capricious."

The court took particular aim at the inconsistency between the duopoly voice test, which counts only television stations in a market, and the threshold for permitting crossownership of local radio and TV stations. Under the radio/TV limit, ownership of two TVs and six radio stations is permitted if 20 separately owned radio, TV, newspaper and cable outlets remain. In those markets, one TV and seven radios also can be commonly owned. "The commission never explains why such diversity and competition should not also be reflected" in the duopoly rule, wrote Judge Judith Rogers.

Last week's ruling mirrors the court's February order that the FCC justify or rewrite the 35% cap on a broadcast company's national TV-household reach. The continuing court battle over the 35% cap is likely to decide the fate of duopoly rules, too, said one observer.

"To the extent the court rejected the FCC's duopoly rule, it relied heavily on its decision on the 35% cap," said Media Access Project President Andrew Schwartzman, an opponent of the media consolidation trend. "We're taking that one to the Supreme Court, and I feel good about our chances."

Last week, the National Association of Broadcasters, which wants duopoly relief but also wants to preserve the 35% cap, asked for a rehearing before the full complement of appeals judges on the District of Columbia circuit. The FCC, too, is expected to appeal the decision by April 19.

While it's too early for the parties to map out their strategy on the duopoly ruling, an NAB spokesman said the decision would be a boon to broadcasters if it "ultimately provides much needed relief in small markets."

In the meantime, the eight-voice threshold remains in force during the agency's rewrite.

Although duopoly relief is a top priority for the NAB, the case was brought individually by Baltimore's Sinclair, which operates pairs in 19 markets, seven of which have LMAs that would have to be divested unless the rules are substantially loosened.

Paxson Communications chief Lowell "Bud" Paxson predicted that the improved economics of duopolies will allow more small-market operators to resume or beef up local newscasts. "This is good for the industry," he said, "and good for the local broadcaster."

It's unclear how big a victory last week's ruling was for Sinclair because the judges also upheld a rule attributing LMAs toward a broadcaster's ownership tally and allowed the FCC to deny grandfathering rights to LMAs established after November 1996. Under that reasoning, Sinclair might still be forced to unwind LMAs in Columbus and Dayton, Ohio; Charleston, S.C.; and Charleston, W.Va.

Schwartzman predicted that "they will have to get rid of them."

But Sinclair attorney Barry Gottfried said no divestiture will be needed if the FCC establishes local ownership limits that are appropriate.

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