FCC's sizeable shift

Crossownership rules and percentage caps seem headed for big changes
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Under pressure, the FCC appears to have scrapped its traditional mantra that the best way to promote a diversity of voices is to impose strict limits on a media company's size and reach or erect barriers between rival industries.

Instead, because of federal judges and the threat of lawsuits, the FCC appears to be moving toward the approach used by the Justice Department and the Federal Trade Commission, which review mergers on a case-by-case basis, applying formulas for measuring market power to determine whether a merger passes muster.

In proposals released two weeks ago, the FCC offered a glimpse of where it may go with cable-ownership limits and restrictions on same-market newspaper/broadcast crossownership.

The leading proposal on cable ownership is to replace the 30% limit on one company's share of pay-TV subscribers with what the FCC calls a "safe harbor." This would allow most deals to go through unimpeded, unless government economists determine that the merged company would have sufficient power to determine the prices of programming networks and competing video distributors.

The FCC has asked for comment on various market-power measurements that could be used. One under consideration is the Herfindahl-Hirschman Index, the most commonly used antitrust model, which estimates how changes in market share affect overall concentration in an industry. Other possible measurements would take into account companies' ability to influence prices and programming costs or whether they are earning what economists would consider "excessive" profits.

The cable industry, which rejoiced after a federal appeals court struck down the 30% cap in March, has generally supported a switch to some type of antitrust model, although no specific approach has been recommended. Public advocacy groups, on the other hand, say a strict ownership cap should be retained and that existing law requires one. With enough data from the cable industry, the FCC can address the court's objections to the current rule by providing a better justification for the 30% cap.

When it comes to newspaper crossownership, the FCC, which is reviewing it on its own dime, may eliminate the restriction entirely.

The rule, first imposed in 1975, grandfathered existing broadcast/newspaper combos, and roughly 40 remain today. Broadcasters and newspaper companies argue there has been no evidence of harm in these markets and the rule should be rescinded, especially in a world where the number of radio stations, weekly newspapers and Internet voices have proliferated.

Public advocates disagree. "The power and influence of over-the-air TV and daily newspapers is so great that other voices aren't comparable," says Andrew Schwartzman, president of Media Access Project. "I don't care how many weekly newspapers or radio stations there are, you decide who to vote for city council based on what you see on TV and read in the daily paper."

The best Schwartzman can hope for, probably, is preservation of a limited form of the ban.

For instance, the FCC may allow crossownership in markets with a certain threshold of separately owned media voices. Another approach may be to prevent the top-two broadcasters in a market from affiliating with a local major daily newspaper. The FCC is even considering a ban on cooperation between the editorial staffs of co-owned papers and stations.

The most difficult part of the FCC's job may be to collect the market data—such as advertising rates, revenue and market share—necessary to craft a rule that withstands a future court challenge. Public advocates complain that media companies are under no obligation to provide information largely considered trade secrets.

FCC Chairman Michael Powell insists the commission won't abandon its obligation to prevent a handful of companies from getting such a lock on major media that they can dictate what types of entertainment and news and political coverage that most American receive.

But his effort to craft a new regulatory approach could be cut short if the agency is forced to decide on a major merger deal before new rules are in place. AT&T Broadband is already up for sale and any new merger request could pre-empt the FCC efforts to revise cable ownership limits first.

"The FCC will find it very difficult to review mergers case by case before new rules are in place," says former FCC Commissioner Susan Ness, a Democrat who voted for the FCC's 30% cable limit.

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